Algona, Iowa ? Dr. Stephen Richards’ smile vanishes after his patients have left and the conversation turns to the realities of running a small, farm-town hospital.

Last fiscal year, the 40-bed Kossuth Regional Health Center had a $3 million budget and finished $680,000 in the red — the biggest deficit in Richards’ quarter-century on its staff.

“We’re able to keep the system running because we’ve tightened screws, become more efficient and held costs down, but how much more can we keep doing that?” Richards said.

Some relief may be just over the horizon.

House and Senate versions of Medicare prescription drug legislation would provide $25 billion to $28 billion over the next decade to reduce the gap in Medicare reimbursement rates between urban hospitals and rural ones.

Under a complex formula developed more than 20 years ago, hospitals in San Francisco and New York get an average of 1.6 percent more for the same procedures than those in Iowa, Kansas or Montana.

A separate formula that factors in malpractice premiums and regional cost and wage differences also reimburses urban doctors at a higher rate than rural ones.

For example, Medicare now pays a hospital in Bismarck, N.D., $3,988 for a heart failure procedure. For the same procedure, a hospital in New York is paid $6,460, according to Rep. Earl Pomeroy, D-N.D.

The differential is based on assumptions that it is cheaper to provide health care in small towns than bigger cites.

Dr. Stephen Richards, left, talks with patient Don Theesfeld at the Kossuth Regional Health Center in Algona, Iowa. House and Senate versions of a Medicare bill passed last month contain 5 billion in new Medicare money that will be used to help rural hospitals like the Kossuth Regional Health Center.

Lawmakers, health experts and Medicare officials differ on whether those assumptions are still valid.

Aggravating the problem are the much more rapidly aging populations of rural states. Many young people are leaving the countryside for higher-paying jobs in the cities, and rural hospitals are increasingly reliant on Medicare patients.

In 2000, more than 50 percent of the nation’s 2,200 rural hospitals reported that Medicare made up more than half of their gross revenue, compared with 31 percent of urban hospitals, according to the AHA.

Across Iowa, Medicare patients represent about 16 percent of the population, a figure matched by Maine, North Dakota, South Dakota, Arkansas, Alabama and Pennsylvania. Only Florida and West Virginia have more at 17 percent.

“We are dependent on Medicare, and that makes us vulnerable,” said Scott Curtis, administrator at Kossuth Regional, where more than 60 percent of the patients last year were Medicare beneficiaries.