States jostle for piece of $50 billion rural hospital fund amid Medicaid uncertainty

Aaron Schwartz/Bloomberg

All 50 states have submitted their proposals for a slice of a $50 billion rural health fund created as part of the One Big Beautiful Bill Act to blunt the impact of OBBBA's looming Medicaid cuts.

Republicans established the Rural Health Transformation Program to address concerns, including among some Republicans, that OBBBA's estimated $911 billion in Medicaid cuts would disproportionately hurt already suffering rural providers.

Under the new law, federal Medicaid spending in rural areas is estimated to decline by $137 billion, KFF said in a July report.

The Centers for Medicare & Medicaid Services will announce the awards by Dec. 31. CMS released the Notice of Funding Opportunity in mid-September, giving states about seven weeks to prepare their applications. Washington, D.C. and U.S. territories are not eligible for the fund.

"Seeing all 50 states come forward to reimagine the future of rural health is an extraordinary moment," said CMS Administrator Mehmet Oz in a statement. "Every state with an approved application will receive funding so it can design what works best for its communities."

States should use the money for "long-term, sustainable improvements," CMS said. The funds are not allowed to go toward capital budgets or construction, supplant existing state or local funds or "perpetual ongoing operating expenses with no path to sustainability."

The law calls for the money to be allocated to approved states over five years, with $10 billion available each year beginning in federal fiscal year 2026 through 2030. Half of the funding will be evenly distributed to all states with an approved application. The other half will be awarded to approved states based on a variety of factors including rural population, the proportion of rural health facilities, the fiscal situation of certain hospitals.

It remains to be seen whether every state gets a portion of the funds and how CMS allocates the $12.5 billion of discretionary dollars. If states distribute 80% of the $50 billion fund directly to rural hospitals, it would solve for 70% of the Medicaid cuts they are facing over the next 10 years, according to an analysis by the National Rural Health Association and Manatt Health.

The impact of the GOP's healthcare policies on rural hospitals was a key issue during OBBBA negotiations and a debate over expiring enhanced Affordable Care Act insurance subsidies became a major sticking point in negotiations during the record-long government shutdown that ended Wednesday. Letting the ACA enhanced subsidies expire would disproportionately hurt rural residents and providers, according to the National Rural Health Association.

Tax-exempt hospital bonds make up roughly 10% of the $4 trillion municipal market and investors have been skittish since the OBBBA cuts were passed. Spreads widened amid the uncertainty but have tightened in recent weeks.

Yields on hospital bonds were 38bps over the AAA index as of Nov. 7, according to CreditSights. That's down from +43 on Sept. 30 and +50 on August 30. They started the year at +17, according to CreditSights.

The S&P Municipal Bond Hospital Index shows yields at 3.95% as of Wednesday, down from a year-high of 4.76% in early April as Congress was crafting the OBBBA.

There are nearly 1,800 rural hospitals across the country, according to the American Hospital Association. They tend to have lower operating margins than urban providers, and 44% have negative operating margins, according to healthcare policy group KFF.

The Medicaid cuts and reforms will be phased in through 2028, giving states and providers time to prepare. The first Medicaid changes, which are eligibility checks, will take effect by December 2026. New Medicaid work requirements will be implemented starting in January 2027. In fiscal 2028, Medicaid provider taxes will be phased down in so-called expansion states as well as state-directed payments.