Cutter said she wants to fix that by turning Island Health into a “critical access” hospital, a federal designation that would allow for cost-based reimbursements.

Currently, the hospital is operated on a prospective payment system, meaning it’s reimbursed based on a fixed fee schedule.

Earlier this month, Gov. Bob Ferguson signed a bill that will allow Island Health to be fully reimbursed for caring for the state’s Medicaid, or Apple Health, patients.

However, that won’t kick in until the hospital secures critical access status through the U.S. Centers for Medicare and Medicaid Services, which requires, among other things, that critical access hospitals be 35 miles or farther from their nearest counterpart.

“We’re too close to the hospitals around us,” Cutter said. “That’s really the barrier for us now. Otherwise, we meet the requirements.”

The nearest hospital, Skagit Valley Hospital, is about 17 miles away via Highway 20.

U.S. Reps. Dan Newhouse, a republican from Sunnyside, and Rick Larsen, a democrat from Arlington, are working to get Island Health a legislative exemption to that rule.

Last fall, Newhouse and Larsen pushed to include an amendment in a defense spending bill that would have allowed Island Health to be eligible for critical access status regardless of the distance rule.

That legislation, which ultimately failed to move forward, would have allowed the Anacortes hospital to qualify based on the share of patients it serves who use TRICARE, a government-sponsored health insurance for active-duty military members and their dependents.

Some 78% of Island Health’s roughly 44,000 patients use government-sponsored insurance. About 55% use Medicare, about 13% use TRICARE and about 10% use Medicaid, according to the hospital.

Newhouse and Larsen are now working to turn that amendment into a standalone bill.

“Rural hospitals like IH (Island Health) are under attack because of President Trump’s Medicaid cuts,” Larsen said in a statement, referring to H.R. 1, also known as the One Big Beautiful Bill Act.

“IH serves a significant number of local servicemembers,” he said, “and I will keep fighting to protect it so it can keep providing exceptional services.”

If Newhouse and Larsen are successful, Island Health will be able to apply for critical access status in 2027, which is also when about 30% of Medicaid recipients are expected to lose coverage as a result of H.R. 1.

“We expect to have more uncompensated care, more people uninsured,” Cutter said.

“For those that remain insured, critical access status would ensure that we have a cost-based reimbursement payment for them. It would help us protect against some of those negative impacts coming at the state and federal level.”

State Sen. Liz Lovelett, a democrat from Anacortes who sponsored the recently signed bill along with three others, said she and her colleagues felt a sense of urgency due to the uncertainty around health care posed by the federal government.

“This legislation was a priority for me because this redesignation will help Island Health avoid cuts to vital care that people in our region rely on,” Lovelett said in a statement.

SB 5923 passed unanimously in both the state House and Senate.

Lovelett credited the bill’s primary sponsor — state Sen. Ron Muzzall, a republican from Oak Harbor — for his work as a ranking member of the Health and Long-Term Care Committee and as a member of the Ways and Means Committee.

“Our 40th District delegation is doing everything we can to protect access to health care and other essential services being cut by the federal government,” Lovelett said.

“It’s also important to acknowledge — especially in these troubled times — that bipartisan collaboration can indeed happen and is in fact crucial to preserving our Democracy.”

Cutter expressed gratitude for all the state lawmakers who helped to get the bill to the governor’s desk.

“It was quite a feat in a year with a lot of other priorities in the Legislature,” Cutter said.

Last November, Island Health’s board of directors passed an “ambitious” 2026 budget that could allow the public hospital district to end the year with a surplus for the first time in at least 10 years.

Cutter said achieving critical access status is just one part of Island Health’s four-pronged, multiyear effort to get its operating budget back into the black.

The hospital has made cuts in an effort to operate more efficiently, added new outpatient service lines based on the community’s needs and increased its property tax levy thanks to voter support, she said, not to mention financial contributions from the Island Health Foundation.

“We have to do all those to combat what we know is coming, whether it’s H.R. 1 or some other cuts at the state and federal level,” Cutter said.

Still, seeking critical access status is important, she said, because Island Health receives less reimbursement from Medicare than any of its neighboring hospitals.

“Island Health is what’s known as a ‘tweener,” she said. “We’re too big or too close to fit nicely into any of these designations. That means we don’t have any enhancements in payments from the federal government.”

Despite being about 17 miles from Skagit Valley Hospital, Cutter argues Island Health should be considered rural based on the communities it serves, including north Whidbey Island, La Conner and a host of neighboring islands beyond Fidalgo.

It even operates a primary care clinic on Orcas Island.

“This 35-mile rule is only one way to look at rural,” Cutter said. “When you look at the demographics of the people that we serve and the geography that we serve, it’s pretty clear that we are a rural hospital.”