States jostle over $50 billion health fund as Medicaid cuts trigger scramble

Washington — Nationwide, states are racing to win their share of a new $50 billion rural health fund. But helping rural hospitals, as originally envisioned, is quickly becoming a quaint idea.

Rather, states should submit applications that "rebuild and reshape" how health care is delivered in rural communities, Centers for Medicare & Medicaid Services official Abe Sutton said late last month during a daylong meeting at D.C.'s Watergate Hotel. Simply changing the way government pays hospitals has been tried and has failed, Sutton told the audience of more than 40 governors' office staffers and state health agency leaders — some from as far away as Hawaii.

"This isn't a backfill of operating budgets," said Sutton, CMS' innovation director. "We've been really clear on that."

Rural hospitals and clinics nationwide face a looming financial catastrophe, with President Trump's massive tax-and-spending law expected to slash federal Medicaid spending on health care in rural areas by $137 billion over 10 years. Congressional Republicans added the one-time, five-year Rural Health Transformation Program as a last-minute sweetener to win the support of conservative holdouts who worried about the bill's financial fallout for rural hospitals.

Yet, the words used by CMS Administrator Mehmet Oz and his agency's leaders to describe the new pot of cash are generating tension between legacy hospital and clinic providers and new technology-focused companies stepping in to offer new ways to deliver health care.

It's "what I would call incumbents versus insurgents in the rural space," said Kody Kinsley, a senior policy adviser at the Institute for Policy Solutions at the Johns Hopkins School of Nursing.

Applications are due Nov. 5. The money will be awarded to states by the end of the year and distributed over five years.

Half of the $50 billion will be divided equally among all states with an approved application; the other half will go to states that win points. Of the second half, $12.5 billion will be allotted based on a formula that calculates each state's rurality. The remaining $12.5 billion will go to states that score well on initiatives and policies that mirror the Trump administration's "Make America Healthy Again" objectives.

The application identifies specific policy goals such as implementing the Presidential Fitness Test and restrictions to food assistance, as well as broader investment strategies around remote care services, data infrastructure, and consumer-facing technology tools, which CMS identified as "symptom checkers and AI chatbots."

In September, after CMS officials released the application, Republican members of Congress from states with Democratic governors called for fairness, concerned their states might direct the money to urban areas. In a letter to Oz and Health and Human Services Secretary Robert F. Kennedy Jr., they said the money "will serve as a lifeline for rural and at-risk hospitals in our communities that are already struggling to keep their doors open."

Smaller hospitals fear they will get "a tiny little slice" of each state's share, said Emily Felder, who leads the health care practice at Brownstein Hyatt Farber Schreck, a law firm whose clients include rural hospital systems.

"There's a lot of frustration," Felder said.

But Kinsley, who was previously North Carolina's secretary of health and human services, said using this money only to shore up a balance sheet "is really just throwing good money after bad." In contrast, he said, insurgents such as technology-driven startups can offer new strategies.

One of those companies vying for funding is Homeward Health, a Silicon Valley-based company that contracts with Medicare managed care insurers. Using artificial intelligence analytics, Homeward helps patients get care in their home and with local providers.

The company manages the health of 100,000 rural Michigan patients enrolled in insurance, said Homeward co-founder and chief executive Jennifer Schneider. The company was a sponsor for the Watergate summit. It also has ongoing meetings with Oz and his team, Schneider said.

"They're doing their job, and they're talking to a lot of people in the ecosystem and really eager to learn from those of us that have been in the system," Schneider said. "We're one of many in that position."

KFF Health News requested an interview with Alina Czekai, director of the newly created Office of Rural Health Transformation. CMS spokesperson Alexx Pons said the agency was "unable to accommodate facilitation of any interview."

Instead, CMS provided an emailed statement from Oz saying the program "will help states and communities reimagine what's possible for rural healthcare."

Brock Slabach, chief operations officer of the National Rural Health Association, the largest organization representing rural hospitals and clinics, said the money would best be used to help pay for transformation that isn't "sexy" or "revolutionary."

"If what we end up with is we have a wearable for every rural patient, I don't think that's transformational," Slabach said, referring to digital health monitors such as fitness-tracking watches.

Slabach, a onetime small-hospital chief executive and an unofficial adviser to hundreds of rural facilities nationwide, named a few ideas for the money — including paying for capital improvements such as electronic health records or equipment, loan repayment programs to aid workforce development, and creating "SWAT" teams that rescue rural hospitals on the brink of closure.

More than 150 rural hospitals have closed nationwide since 2010 — a statistic cited by CMS' Sutton that is well known among industry watchers. The Sheps Center at the University of North Carolina, which compiles the closure data, also released a guide to help states calculate how rural they are for their applications.

State applications will be reviewed by a panel, with some reviewers from within the government but others outside it, said Kate Sapra, acting deputy director of the Office of Rural Health Transformation, speaking at the Watergate.

"We will train them in the scoring criteria," Sapra said, adding that the panelists will not be coming from "your state" and will need to fill out conflict-of-interest forms. A portion of money each state gets will be reevaluated annually based on the progress it makes on its goals and priorities, according to CMS.

States are creating stakeholder groups, asking for public comment, and working with their health agencies. Some, such as Mississippi and New Mexico, are hiring consultants.

In Montana, a collection of health providers and associations proposed a list of ideas for the cash, including creating a loan repayment fund for rural clinicians to try to ease worker shortages.

"It's one-time money, and it's a little bit of money," said David Mark, a doctor who is the CEO of One Health, which has clinics dotted across eastern Montana and Wyoming. A state could receive a minimum of $100 million a year for five years if all 50 states have applications approved.

"How do you accomplish goals of a health care system transformation with an infusion of money like that?" Mark said.

Neither Montana nor Wyoming — vast, rural states — sent leaders to the Watergate summit, according to a copy of the attendees list. In the afternoon, attendees could rotate among planning tables and meet with corporate sponsors such as the electronic health records behemoth Epic and the emergency services company Global Medical Response.

Wyoming Department of Health Deputy Director Franz Fuchs confirmed his state did not send representatives to the event, because they were "stretched with other commitments." Montana, Wyoming, and other states submitted an optional letter of intent signaling they will apply for the funds. CMS did not respond to questions about how many and which states have submitted letters.

During the Watergate event, hints of brewing competition among states began to surface.

"I think Arkansas' application is going to be better than yours," seasoned political adviser Jack Sisson said with a smile during a morning panel.

The audience laughed. Sisson, who recently left his job as health adviser for Arkansas Gov. Sarah Sanders, had interrupted Michael Hendrix, policy adviser to another Republican governor, Tennessee's Bill Lee.

"See, this is the kind of friendly competition that CMS is hoping for," Hendrix said. He grinned, thanked Sisson, and added, "I look forward to us both winning."

KFF Health News Montana correspondent Katheryn Houghton contributed to this report.

KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF — the independent source for health policy research, polling, and journalism.