The Rural Health Transformation Fund: What States and Providers Need to Know (and Do) Now
States could get substantial funding to support their rural providers. It’s a fraction of what they’ll lose from H.R.1.
Authors: Patti Boozang, Jocelyn Guyer, and Anne O’Hagen Karl
Editor: Amanda Eisenberg
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tl;dr
To offset deep cuts to federal Medicaid funding in H.R.1., Congress made a late addition to the final budget reconciliation legislation: a $50 billion Rural Health Transformation Fund to be distributed to states during fiscal years 2026-2030.
Half of the rural transformation funds will be distributed equally among all states with approved transformation plans; the Centers for Medicare and Medicaid Services (CMS) has discretion over both plan approvals and how to distribute the second half of the funding.
Even if every penny of the $50 billion, which states must spend in full by Oct. 1, 2032, were directed to rural hospitals, it would not be enough to fill the $70 billion funding gap created by H.R.1. Further, there are no guarantees that all those dollars will go to rural providers, much less rural hospitals.
Forthcoming CMS guidance and its approach to allocating federal funds to states are crucial to states and their rural providers. States are working quickly to secure their share of the $50 billion and to develop plans to use the funds as strategically as possible to mitigate the impact of H.R.1 on rural communities.
The 80 Million Impact
The Rural Health Transformation Fund (Rural Fund) was one of the last H.R.1. provisions agreed upon by Congress during the budget reconciliation process, added by the Senate after the House passed its version of the bill and doubled from $25 billion to $50 billion in the final hours prior to Senate passage. The Rural Fund entered onto the scene when states, members of Congress, and providers warned of the devastating impacts of the proposed budget reconciliation legislation on rural hospitals and the communities they serve. According to a recent report by the National Rural Hospital Association, nearly half of all children and one in five adults in rural areas rely on Medicaid or CHIP for their health insurance, and Medicaid covers half of all births in these communities — and H.R.1. cuts to Medicaid funding will strip $70 billion from rural hospitals serving these communities.
Because the Rural Fund evolved rapidly during the waning hours of reconciliation negotiations, there is a sense that “promises were made” regarding funding distribution to specific states to help secure votes for H.R.1. Indeed, U.S. Sens. Britt (R-AL), Husted (R-OH) and Cassidy (R-LA) took to social media after the bill's passage to tout the specific amounts their states were set to receive from the fund. In a letter issued on July 25, Senate Democrats decried the Rural Fund as a “slush fund” and pressed CMS to answer outstanding questions including:
When will CMS provide guidance to states on criteria for an application?
Will the agency commit to clearly defined criteria before distributing these funds and an appeals process related to funding award decisions?
Will CMS prioritize rural providers receiving these funding awards?
How will CMS define proper versus improper use of funds and accountability for how CMS will hold states accountable for improper use?
What states or districts has the Trump administration already promised funding to?
For now, what we know about the Rural Fund based on statute (and what we are hearing in the ether) follows.
The Rural Fund will be distributed to states in $10 billion annual allotments from 2026 to 2030. The law requires that 50% of the funding be distributed equally among states with CMS approved transformation plans. The other 50% of the fund will be distributed largely at CMS Administrator Oz’s discretion. Pursuant to statute, to receive any dollars from the fund, states will need to submit a detailed state transformation plan for CMS approval and CMS must approve (or deny) state plans by the end of this year. We understand that Administrator Oz’s office is very engaged in the roll-out of the fund, and that the CMS Innovation Center (aka CMMI) may be responsible for administering the application and grant process.
The statute articulates at a high-level rural transformation plan components (e.g., how the plan will improve access to rural providers and outcomes for rural residents) and activities eligible for funding (e.g., supporting access to behavioral health treatment.) But much of what states need to demonstrate in their plans and the allowable uses of the fund depends on the forthcoming guidance from CMS.
Given the statutory timeline for CMS approval or denial of state plans (Dec. 31, 2025), states are already working to draft transformation plans for the submission deadline, which we expect will be sometime in the early fall. CMS guidance can’t come soon enough for states, including on application process and timing, as well CMS interpretation of statutory requirements for the transformation plans and allowable activities for funding. These details will influence state planning, as will state engagement with providers, localities, and state/local entities charged with rural health planning — such as rural health and public health offices.
States are also beginning to engage with CMS on the federal funding distribution approach, even as they begin to hash out their own funding distribution approaches as part of transformation plan development. CMS’ approach to funding distribution and decisions on transformation plan approvals will be critical to states. For instance, if CMS were to distribute the “first 50%” of the fund in equal allotments to each of the 50 states (assuming all states will apply — which we believe they will — and all states receive transformation plan approval) some states would receive funding that covers significantly more than their expected share of Medicaid cuts to rural hospitals. Others would receive funding that falls significantly short of filling the hole H.R.1. leaves for their rural hospitals.
The statute gives a lengthy list of providers that are included in the definition of “rural health entities,” which will inform CMS’s consideration of the number of rural facilities in a state when determining funding allocations, as required by statute. The law defines all Medicaid and Medicare providers as eligible for funding and would appear, subject to CMS guidance, to give states discretion on how to distribute awarded dollars. Although the funds must support rural health transformation, H.R.1. does not require the funding to go solely to rural health providers. For example, an urban children’s hospital that treats large numbers of kids from rural part of the state will likely argue it should receive funding. Likewise, states could allocate funding to infrastructure development including technology solutions that are part of a state’s rural transformation plan related to eligible funding activities like chronic disease management and telehealth expansion and mental health.
The Bottom Line
CMS guidance and funding allocation decisions, and states’ approaches to distributing funding will be critical to how far the Rural Fund goes to fill the $70 billion funding chasm for rural hospitals created by H.R.1., especially because there is no guarantee in the statute that states must send their share of the $50 billion to rural hospitals or even rural providers. Also, the funding isn’t permanent — it sunsets by Oct. 1, 2032, creating a funding cliff for rural providers that is just around the corner.
Since the Rural Fund is nowhere near large enough to cover the impact on rural America of H.R.1. Medicaid cuts, it will be extremely important for states to be smart and strategic, working in partnership with rural communities to mitigate the impacts of the law. And making it equally important that rural communities and providers invest the dollars strategically and with longer-term sustainability in mind.
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