What to Make of the $50 Billion Rural Hospital Grants Program
Will the new $50 billion rural hospital grant program in the big Republican tax and spending law just amount to a bunch of ribbon cutting and big check ceremonies, or will it help rural hospitals offset coming Medicaid cuts, help them in general, or all of the above?
Early in my career, when I was working in the administrator’s office of Health Care Financing Administration (now CMS), an agency that President George H.W. Bush later asked me to run just before I came out to California to start KFF, I was assigned to a large-scale initiative to bail out financially distressed hospitals. At that time, a significant number of mostly urban safety net hospitals were struggling because of large uninsured populations, and the administration was under pressure from governors, mayors, influential leaders in the Black community and prominent hospital CEOs to address the problem. We put together a Medicaid waiver program for them ostensibly intended to demonstrate that if we covered their uninsured patients and provided access to primary care rather than ERs, costs would come down. But the real purpose was to funnel money to critical safety net hospitals to try to keep them afloat. Because Medicaid waivers run through the states, the proposals had to come from their states, and among other things, something called “statewideness” had to be waived so new federal Medicaid funds could be targeted only to specific hospitals. And yes, this was during a Democratic administration (Jimmy Carter), and the waivers were mostly going to favored institutions, but it wasn’t outright pork. These were America’s safety net hospitals and providing assistance to them was considered laudable.
At one point, as I recall ( it was a very long time ago), there were more than 50 sites involved. As the Iran hostage crisis dragged on and the Carter presidency waned, OMB slapped a hold on the waivers as top staff there sought to curry favor with the incoming team for President Reagan. The move was leaked to Senator Ted Kennedy, who within hours was in the office of Health and Human Services Secretary Patricia Harris. I was not privy to what transpired next but quickly, and on the second to last day of his presidency, Carter ordered the waivers released to some, but far from all, of the states and hospitals, presumably the ones the White House felt were most deserving or may have made promises to. They were all both legitimately needy and political friends.
Cut to present day, and the $50 billion rural hospital fund that was included in the tax and budget bill to soften the blow of the Medicaid cuts and provide political cover so that key Republican senators who were concerned about the cuts could vote for it. This time, the struggling hospitals are rural hospitals with clout, particularly with Republicans. These hospitals too have legitimate needs. But there are similar questions about how the grant program may mix purpose and politics. We recently put out a brief describing how it works (A Closer Look at the $50 Billion Rural Health Fund in the New Reconciliation Law | KFF ). Here are a few of the things to watch for as it unfolds.
Will the fund really help the hospitals absorb the Medicaid cuts or will it mostly play out as political favoritism and pork? There are 1,800 rural hospitals in the country and almost half operate with negative margins in rural areas that stand to lose $155 billion in Medicaid funding over the next 10 years under the law. That’s not counting cuts to federal spending for the ACA Marketplaces, or the full amount of revenue losses stemming from the increased number of people who will be uninsured due to Medicaid and ACA cuts.
Tellingly, most of the grant funds will be distributed before the Medicaid payment cuts hit. That means hospitals receiving them, as any organization would, will mainly use them for one-time costs like capital expenditures or training, or filling temporary shortfalls, but will be careful not to use them in ways that build up their base budgets such as hiring staff, only to then have to fire the staff when the cuts hit. Of course, if the cuts are delayed or repealed, a hospital gambling on that would experience a windfall, but that’s a big gamble. The law specifies that rural health fund dollars will first be available for fiscal year 2026, with $10 billion dollars available per year over five years through fiscal year 2030, with all funds spent by October 1, 2032. Crucially however, most of the spending reductions are backloaded and occur after fiscal year 2030. Based on KFF’s preliminary analysis, 63% of the 10-year reductions in federal Medicaid would occur after fiscal year 2030.
Senator Hawley has now submitted legislation to raise the grant funding to $100 billion and extend it over 10 years. The proposal reflects the senator’s personal political positioning, but it’s also a recognition that the grant program falls short of filling the need and of the timing glitch.
Nothing in the legislation directs the funds to hospitals with a disproportionate share of Medicaid beneficiaries or the uninsured. The grants are divided into two buckets: Twenty-five billion is to be distributed by CMS to the states—it appears equally—regardless of how many rural hospitals a state has, in a kind of rural hospital state revenue sharing program. While the amount provided falls far short of the amounts that will be cut, it’s still a lot of money and rural hospitals can certainly make use of the money. Expect a lot of big check ceremonies in rural America for worthy purposes. States must have “approved applications,” and it does not appear that CMS is obligated to fund every state or even every rural state, so the funding choices made by the administration (as in my own experience) are something to watch.
The other $25 billion will be distributed by CMS to states to support a range of sensible rural health initiatives, such as strengthening prevention efforts, reducing chronic illness, or “right-sizing” rural delivery systems. There is no reason CMS can’t do a fine job administering grant funds for these purposes, which are not new. CMS has operated other rural health initiatives. But the history of taking anything away from rural hospitals—often called “right sizing”—is mixed, community opposition is often severe. Initiatives that promote health also take a long time to pay off and don’t help hospitals cope with Medicaid reimbursement cuts or serve uninsured people. It’s long forgotten (I wrote a book about it), but the country once had a national health planning program to “rationalize” (aka “right size”) the health system in similar ways with substantial local community input (The National Health Planning and Resources Development Act). It was repealed.
While the $50 billion program was framed in Congress as relief for rural hospitals, it is not technically limited to hospitals. And for a grant program, it’s a substantial new pot of funding. My experience in state government suggests that there will be some competition between rural hospitals, state health departments and other state agencies, counties, and community organizations to divvy up the funds, diluting the benefit to rural hospitals, although not necessarily to rural health care. There will be pressure on states both with regard to the processes they use to put their proposals together and as to who gets what.
Another question is what will happen if Democrats take control of the House following the midterms. That will certainly bring oversight of the rural hospital grants program, reducing the freedom CMS has to implement it under the law.
The program for financially distressed safety net hospitals I worked on way back when was a mix of worthy purposes, politics and political largesse. It’s entirely likely that the new grant program will include all of that, too. It will be hard not to accomplish more than a little good with 50 billion new dollars for rural health, however much politics is mixed in. Yet, with most of the money distributed before the bulk of the Medicaid cuts hit and the uninsured population swells, it doesn’t seem destined to cushion much of the blow from the Medicaid cuts, which was its intended purpose.