This study seeks to understand the impact of the Rural Hospital Flexibility Grant Program (hereafter, "Flex") on rural hospital care and outcomes. The Flex program, established by Congress in 1997, has as its goal to financially stabilize rural hospitals thereby improving access and the quality of medical care for the rural population. The Flex program enables hospitals to reconfigure themselves into Critical Access Hospitals (CAH) where they receive more generous inpatient and outpatient cost-based reimbursements from Medicare. In order to qualify for CAH status hospitals face restrictions on their capacity (currently 25 beds or less), must limit the average length-of-stay on an inpatient stay and institute linkages with other institutions to foster quality improvements. The program has affected the cost and delivery of rural hospital care. In the years since the program was established, over 1,300 rural hospitals (more than 25 percent of all U.S. hospitals) have converted to CAH status. During this period, and likely as a consequence, rural hospitals, on average, have become drastically smaller: in 1997, 15% of rural hospitals had 25 beds or less, while that figure rose to 45% in 2004. The program has also been costly: government estimates predicted that CAH hospitals would have received $5 billion in cost-reimbursements in 2006, $1.3 billion more than their revenues under PPS (see MedPAC, 2005). The large scale of the Flex program, its costliness and the contemporaneous change in capacity among rural hospitals all suggest that an evaluation of the consequences of this program is important. As a result of the increase in federal reimbursements received by CAH hospitals, the Flex program potentially maintained rural residents'access to hospital care by forestalling closure and improved the quality of rural hospitals. However, the program's restrictions also dramatically reduced the average hospital size and may have affected hospital service offerings. These potential impacts imply that CAHs may have a reduced ability to achieve scale economies, and hence CAH conversion may reduce the value that patients receive from being treated at the hospital. In this project we seek to assess the magnitude of the impact of the Flex program on each of these categories. Currently, Congress is considering modifying the program along several dimensions. Thus, the analysis we propose should provide policymakers with important information to help formulate an overall assessment of the program and to guide potential modifications to improve the program's efficacy. This project has five objectives that seek to shed light on the impact of the Flex program on hospital care for rural residents. First, understanding how conversion to CAH status has affected the demand for hospital services for patients with different types of conditions. Second, understanding how CAH status has affected the quality of hospital care for rural residents with different diagnoses, as measured by risk-adjusted mortality and patient safety. Third, understanding the extent to which CAH hospitals are capacity constrained and through this to examine the importance of the bed size limitations. Fourth, evaluating how the Flex program has affected the welfare and location of the inpatient care of rural residents. Fifth, evaluating the extent to which alternate policies for rural hospitals, including different bed size limits and lump-sum transfers, can affect the care for rural residents. PUBLIC HEALTH RELEVANCE: This study seeks to understand the impact of the Rural Hospital Flexibility Grant Program (hereafter, "Flex"). Established by Congress in 1997, a primary goal of the Flex program is to financially stabilize rural hospitals thereby improving the access and quality of hospital care for the rural population. The Flex program enables hospitals to reconfigure themselves into Critical Access Hospitals (CAH) where they receive more generous inpatient and outpatient cost-based reimbursements from Medicare. The Flex program is an important government policy that has potentially had a large impact on patient care for rural residents. This study helps evaluate the extent to which the current policy and potential changes to the policy have affected healthcare for rural residents.