On July 4, President Donald Trump signed into law H.R. 1, commonly known as the “One Big Beautiful Bill,” or OBBB. The bill is a sweeping package that includes an estimated $1 trillion in cuts to Medicaid. These cuts include significant reforms to provider taxes and state-directed payments, raising widespread concern among rural and safety-net health care providers that rely heavily on Medicaid and are already facing hospital closures and workforce shortages.
In response to mounting pressure from stakeholders alarmed by the bill’s potential impacts, lawmakers, led by Sens. Lisa Murkowski (R-AK) and Susan Collins (R-ME), included section 71401 to establish a $50 billion fund—called the Rural Health Transformation Program—to support the delivery of health care in rural communities in order to mitigate the financial blow of the Medicaid cuts. The fund was touted by Congress and many Republican holdouts late in the bill process as the solution to the health disparities within rural communities that potentially could result from those cuts.
Below is a detailed explanation of this new program.
Program Overview
To mitigate the OBBB Medicaid cuts, the Rural Health Transformation Program (the “Program”) will allot $10 billion to states for each of the fiscal years 2026 through 2030, for a total of $50 billion for the five years. (The District of Columbia and the U.S. territories are not eligible for the Program.) For each of these fiscal years, 50% of the Program funds will be equally divided among the 50 states, but the Centers for Medicare and Medicaid Services (CMS) will have substantial discretion as to the amount each state receives from the other 50%.
Program funds received for a fiscal year remain available for expenditure until the end of the following fiscal year.
A state must submit an application in order to receive Program funds. The Program states that the “application submission period” must end not later than Dec. 31, 2025; however, it also states that CMS must approve or deny all applications by that same date. It therefore seems likely that the agency will establish an application deadline well in advance of Dec. 31 in order to have sufficient time to review the applications.
States that receive Program funds must submit to CMS annual reports on the use of the funds, and if a state misuses the funds, the agency can reclaim the funds.
Allotments
Allotments (i.e., grants) under the Program are only for states with approved applications. For purposes of this document, it is assumed that all 50 states will submit applications for the 2026 funds and that all the applications will be approved. Once that 2026 application for a state is approved, the Program does not require the state to submit any additional applications for Program funds.
For each of the fiscal years 2026 through 2030, 50% of the Program funds for the year ($5 billion) will be equally allotted among the 50 states. This means that each state will receive approximately $100 million for each of those years. As to the other 50% for each of those years, that portion of the Program funds is referred to below in this alert as “Tier 2 funds.”
CMS will have substantial discretion in allotting Tier 2 funds. The Program states that CMS must “ensure that not less than ¼” of the states receive these funds. Importantly, this means that all the Tier 2 funds potentially could go to 13 states, with the other 37 states receiving nothing. Of course, excluding 37 states would be politically risky for the Trump administration.
Beyond this issue of the apparent authority to deny Tier 2 funds to 37 states, the Program has three objective factors that are relevant in allotting these funds. The agency must “consider” the following:
- The percentage of the state population that is located in a rural census tract of a metropolitan statistical area.
- The proportion of rural health facilities in the state relative to the number of rural health facilities nationwide.
- The situation of hospitals in the state.
There is a fourth factor, which is somewhat less objective: “any other factor that [CMS] determines appropriate.”
As noted, one of the Tier 2 objective factors concerns the number of rural health facilities in the state. The Program’s definition of “health care facility” includes hospitals that are (1) located in a rural area; (2) treated as being in a rural area; or (3) are in a rural census tract of a metropolitan statistical area.
It further states that a “rural health facility” includes a critical access hospital (CAH); sole community hospital; Medicare-dependent, small rural hospital; low-volume hospital (LVH), rural emergency hospital (REH); rural health clinic; federally qualified health center (FQHC); community mental health center; opioid treatment program; health center receiving a grant under section 330 of the Public Health Service Act; and/or certified community behavioral health clinic located in a rural census tract.
Note that FQHCs, community mental health centers, and grantees under section 330 of the Public Health Service Act are not necessarily rural, as they can also be located in urban or suburban areas.
The following chart shows the overall flow of funds under the Program:
Requirements for a State Rural Health Transformation Plan; Requirements for Use of Funds
For a state’s Program application to be approved, it must include a “detailed rural health transformation plan”. This plan, however, does not totally govern how Program funds must be expended. There are separate requirements on the use of funds, and a plan specific to those separate requirements is required. This raises the question of the relation between the required eight components of the transformation plan and the separate plan for the 10 “use of funds” categories.
It may be that CMS will take the approach that the use-of-funds categories must further one or more of the transformation plan components. Perhaps the agency will somehow combine all of these provisions into a single list of authorized uses. CMS may issue guidance on these issues. The agency presumably will focus on the statement at the beginning of the Program that the appropriation of funds is “for purposes of carrying out [the use-of-funds categories]”.
The components of the rural health transformation plan are the following:
- Improve access to hospitals or other health care providers and services for rural residents;
- Improve health care outcomes of rural residents;
- Prioritize the use of new and emerging technologies, emphasizing the prevention and management of chronic disease;
- Initiate and strengthen local and regional strategic partnerships between rural hospitals and other health care providers to promote quality improvement, financial stability and share best practices;
- Enhance economic opportunity and supply of health care providers through enhanced recruitment and training;
- Prioritize data and technology-driven solutions that help rural hospitals and providers deliver high-quality services, as close to a patient’s home;
- Outline strategies to manage long-term financial solvency and operating models of rural hospitals; and
- Identify causes driving the accelerating rate of stand-alone rural hospitals becoming at risk of closure, service reduction or conversion.
A state must use Program funds for three or more of the use-of-funds categories. The categories are the following:
- Promoting evidence-based interventions to improve prevention and chronic disease management;
- Providing payments to health care providers for health care items or services;
- Promoting consumer-facing and technology-driven solutions for the prevention and management of chronic disease;
- Providing training and assistance for the development and adoption of technology-enabled solutions in rural hospitals, like remote monitoring, artificial intelligence (AI) or robotics;
- Recruiting and retaining clinical workforce talent in rural areas for at least five years;
- Providing assistance for informational technology to enhance cybersecurity and improve patient health outcomes or efficiency;
- Assisting rural communities to “right-size” their health care delivery systems;
- Supporting access to opioid use disorder treatment services and mental health services;
- Developing innovative models of care, including value-based care arrangements or alternative payment models; and
- Additional uses designed to promote sustainable access to high-quality health care services.
Relation to Children’s Health Insurance Program (CHIP)
The Program was enacted as an amendment to the CHIP statute, although the Program is almost completely written as a separate program. The relation between the Program and the traditional CHIP statute is not clear at this point. Presumably, CMS will issue guidance on this issue.
“Chevron” Issues With respect to the authority of CMS to implement the Program, there may be a question as to the relevance of the decision of the U.S. Supreme Court last year to overturn the “Chevron” doctrine. Under that doctrine, courts traditionally deferred to federal agencies’ reasonable interpretations of ambiguous statutes passed by Congress. Chevron deference, however, did not apply to grant programs. It applied when it appeared that Congress delegated authority to an agency generally to make rules carrying the force of law. Under the Administrative Procedure Act, agency policy statements concerning grant programs do not have the force of law; therefore, the demise of the Chevron doctrine is not really relevant to the Program. In addition, it seems likely that if CMS issues policy statements on the implementation of the Program, they will be in the form of guidance documents, not regulations. Courts generally will not review guidance documents.
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