In 1977, many rural communities were facing a disconnect between their health care delivery systems and Medicare and Medicaid, the nation’s primary health insurance programs for the elderly and the poor. Many isolated rural communities that had not been able to attract or retain a physician had come to rely on clinics that did not follow the traditional model of physician delivery of medical services. These rural clinics were staffed by specially trained nurse practitioners and physician assistants who acted as either the primary care provider or assistants to overworked sole physicians. However, services rendered by these nonphysician providers were not covered by Medicare unless they were under the immediate supervision of a physician, and coverage under Medicaid was at the state’s discretion. As a result of this and other factors, some rural clinics were confronted with serious financial problems. The Congress became concerned that without Medicare reimbursement, many of these clinics could never become self-sufficient and would be forced to close, leaving many areas without primary health care services. Therefore, Public Law 95-210 authorized Medicare and Medicaid reimbursement to nonphysician primary care practitioners in RHCs. The RHC program is one of the few federal programs that is able to address underservice in small communities that do not have a traditional health care system in place. Other assistance programs, such as the National Health Service Corps, which places providers in underserved areas, generally require that such a system be present. With their nontraditional approach, RHCs can provide care in areas where a traditional system is not financially viable. Appendix II shows where RHCs were located throughout the nation near the end of 1995. The RHC program is administered by HCFA, which must certify as RHCs all primary care providers requesting this status if they practice in a rural and underserved area and meet the conditions of participation for the Medicare program as determined by the state’s survey agency. An RHC may be operated as an independent clinic or as part of a larger facility, such as a hospital. Medicare and Medicaid pay independent and facility-based RHCs differently, but both generally reimburse RHCs on the basis of the actual costs of providing services. This practice continued in the 1980s, when the Medicare program established maximum fees for services that would be paid to most other providers. These new payment systems were developed because paying for services on the basis of costs or charges created incentives for inefficiency and cost escalation. However, RHCs continue to receive cost-based reimbursement out of recognition that some clinics might not be financially viable under a fee schedule approach. The RHC program has grown rapidly since 1990, but not in those locations where Medicare and Medicaid populations are having difficulty obtaining primary care. At many of the locations that we were able to analyze in depth, primary care was already available to the Medicare and Medicaid population, and certifying an RHC appeared to have little or no effect on the availability of care for any remaining underserved segments of the population. RHCs are increasingly being certified in areas with substantial populations rather than in remote rural areas. The program was designed to primarily benefit areas where population densities are insufficient to attract and support a physician-run clinic. The National Health Service Corps’ benchmark for the minimum number of people needed to place a full-time primary care physician is 2,000, according to the Chief of Site Development and Placement; however, as of November 1995, only 5 percent of all RHCs were in areas with fewer than 2,000 people living within 15 miles (see fig. 1). Even adjusting this benchmark upward to 10,000 people would account for less than 25 percent of RHCs. In contrast, 19 percent of RHCs had 50,000 or more people living within 15 miles of them, and this trend is increasing. As figure 2 shows, the percentage of RHCs certified each year in areas with 50,000 or more people increased from almost 9 percent to 22 percent from 1991 to 1995, while the percentage for areas with populations of 10,000 or fewer decreased from 34 percent to 11 percent. Appendix III provides more detailed information on where RHCs are located in our four sample states. Our analysis indicates that many of the areas in which RHCs are being certified are not only well-populated but also have existing—and extensive—primary health care systems. We performed a more detailed review of communities in Alabama, Kansas, New Hampshire, and Washington, where 144 RHCs had been certified. Of these locations, 75 percent had primary care available to Medicare and Medicaid beneficiaries before an RHC was certified. The main reason for this was that over 65 percent of the 144 RHCs were conversions of existing physician practices in the community that had been reimbursed by Medicare and Medicaid for years. For example, physicians in New Hampshire had been practicing an average of over 18 years before converting their practices to RHCs, while those in Kansas and Alabama had been practicing an average of over 15 years. Moreover, most communities also had additional health resources available before RHC certification, indicating the presence of a well- developed health care delivery system. For example, at the time the RHC was certified in Moses Lake, Washington, this community—with a surrounding population of 25,000—had 17 practices with primary care providers, a number of specialty practices, one hospital, two skilled nursing facilities, a mental health facility, a hospice, and a home health agency. Of the 144 RHCs in the four states reviewed, 57 percent had anywhere from 2 to 18 primary care practice sites already in place, as well as a combination of other specialized health care providers and facilities. Sparsely populated, underserved communities still exist, and efforts to establish RHCs in such locations appear minimal. For the four states in our analysis, we noted that many communities with fewer than 5,000 people had no Medicare or Medicaid primary care provider. Neither HCFA nor the state rural health offices were aware of any efforts to actively target and establish RHCs in these locations. Instead, many RHCs were certified in the same city where existing RHCs or other federally funded clinics were already in place. Nationwide, 37 percent of the 2,599 RHCs certified near the end of fiscal year 1995 were located in the same community as other RHCs or federally qualified health centers (FQHC), with 74 cities having 3 to 6 RHCs. For example: 31 percent of the 144 RHCs in our four-state sample were in cities having 1 to 3 other RHCs or FQHCs and the city of Marianna, Florida, now has 7 RHCs for the 30,000 people living within 15 miles, and 4 additional RHCs are 20 miles away in Chipley, Florida, a community of 3,800. While the RHC program was created to develop or expand the availability of health care in local communities, we did not find indications that the growing number of clinics were decreasing the distance that beneficiaries traveled for care. Our review of Medicare and Medicaid claims data for 119 clinics in our four-state sample showed that the availability of care within communities did not change appreciably for at least 90 percent of Medicare and Medicaid beneficiaries after the RHC was certified. At least 73 percent of the more than 42,000 Medicare and Medicaid beneficiaries using RHCs in our sample had previously obtained care from a primary care provider in the same city in which they lived or the same city in which the RHC was. For example, of 203 Medicare and Medicaid beneficiaries currently obtaining primary care at an RHC serving a surrounding community of nearly 60,000 in Hutchinson, Kansas, only 15 were traveling more than 15 miles for care before the RHC was certified. Claims data were not available to identify the increased access to care that the RHC program provided for populations other than Medicare and Medicaid beneficiaries; however, RHCs are not required to address underservice in the community. While many RHCs qualify for the program because the overall population is designated as underserved, less than half of the 76 RHCs we surveyed said that they used the program to expand their staff or increase the number of patients they see. Even when certified for areas underserved only for specific population groups, 86 percent of the RHCs said that the program had not influenced the type of patients they serve in the community. Regardless of how the underserved area is defined, most RHCs believe that the uninsured poor make up the majority of underserved people in their community; however, only 16 RHCs offered services on a sliding fee scale based on the patient’s ability to pay for care.One RHC said that some of its physicians would not accept Medicaid beneficiaries as patients unless they were in the state’s managed care program. Despite the lack of clear program effect in most locations, we did find instances in which the RHC program improved access to care for Medicare and Medicaid beneficiaries. About 3,500 of the 42,500 Medicare and Medicaid beneficiaries in our four-state sample reduced the distance that they had to travel for care by a median of 20 miles (to fewer than 15 miles) by using the RHC. Those RHCs most successful in improving access tended to locate in communities without Medicare or Medicaid providers or in areas having a population of fewer than 5,000 within a 15-mile radius. Following are some examples: Wadley, Alabama, a community of just over 500, was unable to support a primary care practice until a nearby hospital set up an RHC staffed by a part-time nurse practitioner. Distance to care was reduced by a median of 18 miles for 46 of the 118 Medicare beneficiaries using this clinic in 1994. A hospital district in eastern Washington uses three family physicians and two physician assistants to run an RHC in Ritzville and two satellite clinics, about 15 and 30 miles away, respectively. Distance to care was reduced by a median of 48 miles for at least 80 of the 507 Medicare beneficiaries using these clinics in 1994.