What Could Go Wrong: Inside the First Year of the Rural Health Transformation Program

The Centers for Medicare & Medicaid Services’ (CMS’s) $50 billion Rural Health Transformation Program was designed by the Trump Administration to reshape healthcare delivery in rural America. But as the first year of funding rolls out, tensions are surfacing among state leaders, lawmakers, and rural providers over how the money should be spent – and whether it will truly stabilize struggling hospitals.

Created as part of last year’s One Big Beautiful Bill Act (OBBBA), the five-year program distributes $10 billion annually to states. CMS awarded first-year allocations in late December, averaging roughly $200 million per state. And while the public may see this as help for rural hospitals, the Administration intends the funds less as help for struggling providers, and more as an award for states that rethink healthcare in rural areas.

As CMS Administrator Mehmet Oz noted in January: the goal “is not just to pay the bills but to right-size rural healthcare and invest in new purchasing arrangements, IT systems, and access to care.”

In fact, states may use only up to 15 percent of their awards to pay providers for patient care – a detail that has fueled criticism from lawmakers and hospital associations who fear the funding won’t offset looming Medicaid cuts. The OBBBA is expected to reduce Medicaid spending by nearly $1 trillion over a decade, and Medicaid covers nearly one in four rural residents, making rural providers especially vulnerable.

Instead of helping with hospital funding, most states are channeling funds into value-based care and alternative payment models. According to one recent analysis, 42 states plan to build on or establish new alternative payment models under the program, with many transitioning hospitals to new payment tools and primary care capitation payments.

States are also prioritizing telehealth, digital health, and workforce programs. Most states are investing in telehealth and digital health arrangements, while all states included workforce proposals such as scope-of-practice changes and expanded provider roles.

Supporters of the rural transformation fund argue that these investments could create lasting change. Yet, converting “transformation” into something tangible is a challenge, especially under tight timelines. States must allocate their first-year funds by the end of September, and CMS plans to begin assessing progress in late summer.

Some states have been slow to set up ways for their hospitals to apply for the funds. For small hospitals with limited administrative abilities, that presents a major hurdle. In Michigan, for example, 62 percent of rural hospitals report that they have never applied for a state grant before, causing leaders to worry that rushed applications could backfire, as CMS can claw back funds if states abandon approved plans or miss deadlines.

Tensions extend beyond hospital executives. In Ohio, lawmakers have urged the governor to use that maximum allowable 15 percent of funds for direct hospital support. Legislators in other states have raised concerns about whether funds will truly reach the most remote communities.

Some hospital associations argue that their input was overlooked during state planning processes, while others fear competitive funding programs will disadvantage the facilities most in need.

Meanwhile, early examples show what the program could allow. Iowa moved quickly to award funds, including $3.3 million to one hospital for a new PET/CT scanner and physician recruitment efforts. Leaders there say such investments could keep care local, improve outcomes, and strengthen revenue streams.

Ultimately, the Rural Health Transformation Program reflects policy at a crossroads. It’s neither a traditional bailout, nor a simple grant program. It’s a bet that shifting payment models, investing in technology, and better building out the workforce can create lasting improvements in rural healthcare. Whether that bet pays off will depend not only on federal oversight, but also on how effectively states balance innovation with immediate financial realities.

So, stay tuned – time will tell how this plays out.

References:

1. Rural hospital race clock for $50 billion transformation fund – Modern Healthcare
2. Lawmakers, Health Groups Resist Their States’ Rural Health Fund Plans – KFF Health News
3. Report: Most states to invest in VBC with rural health funds