Abstract
Medicare makes urban or rural location a critical variable, using it to group skilled nursing facilities (SNFs) to set ceilings for payment. Cost function analysis reveals that urban and rural SNF costs do, indeed, exhibit different responses to various cost factors, although urban and rural Medicare cost ceilings have been only pennies apart in recent years. The cost functions also show that marginal cost of caring for a Medicare patient is significantly greater than average cost, and larger for rural nursing homes. Most SNFs are underpaid when they receive their average cost for care provided to Medicare beneficiaries, but the differential is greater for rural SNFs. This is likely to have implications for Medicare beneficiaries' access to care in free-standing SNFs in rural areas.