How value-based payment can help states maximize rural health funding

While healthcare leaders are enthusiastic about the historic $50 billion Rural Health Transformation (RHT) Program and its goal to modernize rural care, stakeholders are increasingly focused on how the Centers for Medicare & Medicaid Services (CMS) and states can sustain the program’s impact beyond its five-year federal funding period.  

As they pursue long-term reforms, some states are evaluating how value-based payment (VBP) strategies can enable a better future for rural hospitals and their patients by aligning reimbursement with cost, quality, and outcomes. CMS has identified innovative care as an RHT strategic goal, expressly permitting value-based care arrangements and alternative payment models under the program’s innovative care use of funds category.  

The move toward VBP models may offer states a way to strengthen rural providers’ ability to participate in value-based care while addressing concerns about how RHT resources reach hospitals and health systems.  

States that are pursuing alternative payment models will need to consider how they may factor into approved RHT plans, budgets, and award terms. Structuring these programs so that they support long-term RHT goals will require states to align payment design, provider readiness, operational capacity, and long-term sustainability. 

Phased development and implementation 

Moving from VBP strategy to implementation entails more than a single operational shift. It requires a sequence of phased actions from stakeholder alignment and model design to operational activation and ongoing monitoring and evaluation.  

Phase 1: Establish the foundation  

Successful VBP implementation begins with early alignment across stakeholders. State Medicaid agencies (SMAs) should convene an internal multidisciplinary working group that includes teams focused on finance, quality, provider relations and enrollment, legal, and managed care leadership, where applicable. These teams can help identify operational risks, support implementation activities, and align the proposed payment model with operational and financial considerations before detailed design begins.  

It’s also important for VBP strategies to align with broader RHT goals so that they’re not just developed as a stand-alone initiative. For example, if a state has chosen to focus on certain areas of care like behavioral or maternal health, or specific chronic conditions like diabetes or heart disease, VBP models should be leveraged to influence provider investment in these areas and drive better outcomes. States should incorporate relevant VBP metrics into the CMS quarterly and annual RHT reporting required for measurable outcomes. 

Engaging provider organizations early and often throughout the design and implementation process builds trust in a proposed model and helps confirm that performance expectations, financial incentives, and operational requirements are clearly understood before implementation. Provider feedback is critical in understanding the financial implications of VBP participation and refining patient attribution methodology, performance expectations, and reporting responsibilities.  

A key early consideration for states is identifying the federal authority that best supports their proposed payment approach. Depending on the state's Medicaid delivery system and program goals, implementation may occur through a state plan amendment, section 1115 demonstration, managed care authorities, or other applicable CMS authorities. Because each Medicaid pathway carries different approval, oversight, and reporting requirements, states should evaluate these considerations and engage CMS early to clarify policy expectations, identify operational needs, and reduce avoidable delays during its formal authority application review process.  

Phase 2: Design the model 

Once a state has identified the VBP model’s general framework, the design process can begin. This includes developing the payment methodology, defining how provider performance will be measured, and establishing how performance will be linked to payment. The design phase should be governed by the following best practices: 

• Focus on sustainable strategies: The proposed payment approach should support rural provider sustainability while aligning with existing funding mechanisms and allowing providers to participate at a pace consistent with their readiness and VBP experience. The primary goal for using a VBP model should be to support rural healthcare providers and maintain access to care for rural residents and communities while also aligning the quality goals of the SMA and RHT program initiatives.

• Consider provider and access burden: State leaders must consider how payment model design affects beneficiary access to care, particularly in rural communities with limited provider capacity. If providers lack the workforce, infrastructure, or technical capabilities needed to participate successfully, the model may be difficult to implement and unlikely to achieve its intended impact.

• Conduct a baseline analysis: Baseline analyses help states establish realistic performance expectations and benchmark targets. Leverage performance measures, attribution methodologies, and incentive structures to reinforce the state's Medicaid quality strategy while remaining meaningful, achievable, and actionable for participating rural providers.

• Align with existing models: Connect quality measures, reporting requirements, and payment standards to Medicaid, Medicare, and commercial payer programs wherever possible to reduce the administrative burden on providers.

• Confirm compliance: States will also need to confirm that their VBP strategies comply with RHT Program requirements and coordinate with CMS before pursuing alternative activities or making material changes to approved RHT work plans. Proposed expenditures should be classified based on their purpose and structure and mustn’t duplicate or supplant existing federal, state, local, tribal, or private funding. RHT funds can’t be used to replace payments for duplicative billable services, modify existing fee schedules, or provide enhanced payment rates for currently billable services without an outcome-based connection.

• Create reporting mechanisms: Successful implementation depends on reliable data, reporting, and performance monitoring capabilities. SMAs must establish processes for attribution, performance reporting, data validation, and provider review to support model confidence and minimize disputes.

As part of this design work, states should also determine how VBP-related costs will be treated under the RHT Program. Category B payments to providers for healthcare items or services are limited to 15% of a state’s award in each budget period. Other costs associated with designing or implementing a VBP initiative—such as technical assistance, data infrastructure, provider-readiness activities, and operational support—may be allowable under other applicable use-of-funds categories when they support an approved initiative and satisfy all applicable restrictions. These costs should be classified based on their purpose and structure, and leaders should confirm that proposed expenditures are allowable, nonduplicative, and consistent with the approved RHT work plan and award terms.  

Phase 3: Operationalize the model  

States need to prepare for implementation by finalizing operational processes and making sure that providers have the resources needed for a successful transition. Leaders may want to consider phased implementation or pilot testing before expanding statewide. Lessons learned during early implementation can help refine the model and improve long-term provider adoption. 

Before implementation, states should complete the operational activities needed to support successful execution, including: 

• Developing and testing provider reporting tools and processes
• Developing dashboards and monitoring tools for state oversight
• Finalizing provider agreements or agreement amendments
• Aligning reporting, contracting, and operational expectations with managed care organizations, if applicable
• Developing provider communications, education, and training materials  

Under most value-based arrangements, providers must take on additional data reporting and performance monitoring responsibilities, which can create new operational demands for rural organizations already facing financial and workforce pressures. States will need to balance program accountability with provider workforce capacity and data limitations. Recognizing these challenges early through provider engagement can help inform a more successful implementation strategy. 

Implementing VBP models can also create additional operational and administrative responsibilities for SMAs and, in some states, for managed care organizations. It’s important to consider the resources and processes needed to facilitate this additional work. For example, new reporting requirements may require a formal data collection process or provider contract amendments before implementation  

Phase 4: Monitor, evaluate, and improve  

States should establish an ongoing monitoring and evaluation strategy that supports both the proposed Medicaid VBP model and CMS reporting expectations for RHT Program oversight. While CMS doesn’t require states to complete formal evaluations of RHT initiatives, many are planning to do so to support continuous improvement over the program’s five-year funding period. 

As providers begin reporting under the VBP model and initial incentive payments are made, SMAs must remain proactive and responsive to provider feedback and early implementation challenges. Timely communication and issue resolution can strengthen provider confidence and encourage sustained participation. 

SMAs should also review early performance data to confirm that reporting is accurate, complete, and sufficient to assess payment model impact. If reporting requirements prove unnecessarily burdensome or data quality issues emerge, they’ll need to work with providers to address those challenges before they affect participation or program performance. 

Turning payment strategy into lasting impact 

Ultimately, successful VBP strategies don’t just change how providers are paid—they build the infrastructure, partnerships, and operational capabilities needed to sustain better outcomes over time. For many states, the RHT Program provides an opportunity to support transformation well beyond the program period through effective governance, infrastructure, and payment strategies.  

VBP should be viewed as a single but critical component of a broader strategy to improve quality, strengthen rural provider sustainability, and enhance access to care. Achieving those goals requires thoughtful planning, provider engagement, reliable data, and a commitment to continuous improvement. States that invest in these foundational capabilities will be better-positioned to sustain RHT goals long after federal funding has ended.