Minnesota’s rural hospitals are in real trouble, with many operating on razor-thin margins and at risk of closure or major service cuts. Minnesota will receive its share of the Trump Administration’s Rural Health Transformation dollars, but lawmakers should act now to fix the broken system that is threatening rural hospitals.
A key driver is their heavy dependence on low-reimbursing Medicare and Medicaid programs, which often pay below the actual cost of care (Medicaid at roughly 69 cents per dollar). According to the Minnesota Hospital Association, “Minnesota’s nonprofit hospitals and health systems are facing a financial crisis unlike anything in recent memory with thirty-one hospitals across the state currently meet formal financial distress criteria.” Noting “Some are unable to make payroll.”
This leaves rural facilities with limited ability to secure stronger revenue from private and commercial payers due to lower patient volumes and weaker negotiating power.
While legislators review bailout packages for struggling urban hospitals, those representing Minnesota’s rural areas are ringing alarm bells for their districts.
Minnesota’s progressive health care policies have made things more difficult for rural hospitals and now doubling down on them is unlikely to fix what’s broken for rural hospitals. Instead, lawmakers should follow other states in freeing up health care in rural America to improve the bottom line.
Construction bans make care harder to get and don’t save money
Minnesota’s hospital construction moratorium, in place since 1984, makes things worse by preventing the market from providing medical services where they are needed. This Soviet-style law requires special approvals for modernization or growth, limiting competition, innovation, and the ability of rural hospitals and surgical centers to adapt services or attract more privately insured patients. American Experiment analyses show that states without similar certificate-of-need-style restrictions maintain more rural hospitals and ambulatory surgery centers per capita, with better access and lower costs overall. Lifting the moratorium would promote market-driven flexibility, allowing rural providers to modernize, compete, and improve their payer balance through expanded services and economic growth in Greater Minnesota
Minnesota’s sick tax
Research from the Paragon Health Institute further demonstrates that provider taxes (sometimes referred to as a “sick tax”) were sold as a solution to rural hospital distress but have failed to deliver anything but more costs. States with hospital provider taxes from 2005–2024 experienced 21 rural closures, compared to just one in states without such taxes, with population-adjusted closures over three times higher. These taxes often function as corporate welfare that primarily benefits large hospital systems rather than supporting small rural facilities, and they can coincide with declining rural hospital employment.
When the Affordable Care Act (Obamacare) expanded in Minnesota, supporters promised it would allow the state to eliminate the health care provider tax (often called the “sick tax,”) a surcharge on hospitals and providers that helps fund Medical Assistance/Medicaid and MinnesotaCare), save rural hospitals by lowering uncompensated care through a sharp drop in the uninsured rate, and make health insurance more affordable overall.
Today, the sick tax remains in place despite DFL Governor Mark Dayton’s signature on legislation to kill it in 2011. Nationally, health care costs have more than doubled since President Obama signed Obamacare, and that care is harder to get for rural Minnesotans squeezed in consolidating markets that force them to drive greater distances to pay more to see doctors they don’t know.
Moving middle-class Minnesotans from Medicaid to private health insurance
Insurance reforms that allow more people access to private insurance will improve rural hospitals. Rural facilities are particularly vulnerable due to higher shares of public coverage tied to older and lower-income demographics. Rural hospitals are a vital organ in a small town, yet the liberal policies enacted in Minnesota for the past 30 years have consistently replaced people in the private insurance market with those on public programs.
Instead, Medicaid (Medical Assistance) enrollment has grown significantly to roughly 1.2 million people on average in recent fiscal years. Moreover, Much of the growth in Medicaid has been spent through nonprofit vendors through the state’s Medicaid system. Expansive public program fraud in the state of up to $9 billion has caused the Trump Administration to threaten up to $250 million in payments.
There are three ways that legislators can work with the Trump administration to make sure the federal dollars continue to flow and that we have more flexibility in how they are used.
- Enhance eligibility checks to move able-bodied, working-age Medicaid patients into private health insurance to meet and surpass the mandates of HR1.
- Expand allowable insurance options to make them more affordable
- Work with the administration to tailor existing waivers and find new ones to deliver better value to Minnesota patients
Additional reforms include expanding telehealth and scope-of-practice rules for greater operational agility, promoting price transparency to strengthen consumer choice and private-payer dynamics, and pursuing economic development to grow employer-sponsored commercial coverage.
Without greater flexibility, competition, and private-market stabilization, closures will accelerate, harming patient access and local economies. Long-term sustainability for Minnesota’s rural hospitals requires moving beyond distorted incentives toward deregulation and patient-centered approaches.
Expanding the sick tax, promoting policies that enable fraud, or continuing to shovel unaccounted dollars into an opaque financing scheme will only mask the pain.
