Purpose: This study examines the current status of meaningful use of health information technology (IT) in Critical Access Hospitals (CAHs), other rural, and urban US hospitals, and it discusses the potential role of Medicare payment incentives and disincentives in encouraging CAHs and other rural hospitals to achieve meaningful use. Methods: Data from the American Hospital Association (AHA) Annual Survey IT Supplement were analyzed, using t tests and probit regressions to assess whether implementation rates in CAHs and other rural hospitals are significantly different from rates in urban hospitals. Findings: Of the many measures we examined, only 4 have been met by a majority of rural hospitals: electronic recording of patient demographics and electronic access to lab reports, radiology reports, and radiology images. Meaningful use is even less prevalent among CAHs. We also find that rural hospitals lag behind urban institutions in nearly every measure of meaningful use. These differences are particularly large and significant for CAHs. Conclusion: The meaningful use incentive system creates many challenges for CAHs. First, investments are evaluated and subsidies determined after adoption. Thus, CAHs must accept financial risk when adopting health IT; this may be particularly important for large expenditures. Second, the subsidies may be low for relatively small expenditures. Third, since the subsidies are based on observable costs, CAHs will receive no support for their intangible costs (eg, workflow disruption). A variety of policies may be used to address these problems of financial risk, uncertain returns in a rural setting, and limited resources.