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Abstract
The Critical Access Hospital (CAH) program, established under the Balanced Budget Act of 1997, provides cost-based Medicare reimbursement to small rural hospitals in exchange for limits on inpatient capacity and service scope. We estimate the effects of CAH designation on hospital finances, capacity, and organizational outcomes using a synthetic difference-in-differences design that exploits the staggered 1999–2002 rollout of state-level CAH availability. We find no evidence that CAH designation meaningfully improves operating margins, with net patient revenue and total operating expenses both declining by similar magnitudes, consistent with proportional financial contraction as hospitals downsize to meet eligibility requirements. The primary effect is a reduction in operational scale, with significant declines in total beds, obstetric capacity, and nursing staff. At the same time, CAH designation reduces hospital closures, with no meaningful effect on mergers. These results point to a ``survival versus scale’’ tradeoff wherein designation-based subsidies preserve hospital presence, but primarily through continued operation at a smaller scale rather than by maintaining pre-designation capacity.