States bet big on rural health startups, with a Silicon Valley twist

When Louisiana's chief innovation officer, Josh Fleig, learned that his state had allocated $20 million annually for five years to invest in rural health care startups, he expressed excitement. Rural America often suffers from poor health outcomes and inadequate access to care, making the infusion of funds a welcome relief. The economic development office in Fleig's state uses this financial boost to fund various corporate launches, spanning from software startups to shipbuilders.

Several states have set aside money from their portion of the $50 billion federal Rural Health Transformation Program to swiftly invest in new technologies, echoing private industry practices. This initiative seeks to address the shortfall in Medicaid spending, projected to exceed $900 billion over the next decade due to tax and spending changes under the 2025 Republican law.

However, rather than merely compensating for this budget gap, the primary focus of this program is to innovate and revitalize rural communities where healthcare professionals are scarce, and hospitals have been downsizing or closing.

Federal funds were initially distributed to states this year, with allocations ranging from $147 million in New Jersey to $281 million in Texas. A key aspect of the federal program is to modernize technology infrastructure, reflecting the administration's strategy to rapidly experiment with untested technologies, akin to the "move fast and break things" approach popular in Silicon Valley.

Instead of causing chaos, the goal is to "move fast, fast-fail, innovate quickly, and move towards sustainability," as per Aaron Bujnowski, a managing director at the health care industry group at the consultancy Alvarez & Marsal.

Tens of states are competing for a share of these funds in the five-year rural health program. States must submit progress reports by the end of August, detailing how they will utilize the initial funds. The Centers for Medicare & Medicaid Services (CMS) has not made these reports publicly available but plans to publish a comprehensive annual report on state progress.

Daniel X. O'Neil, a technology consultant who advocates for open data, has created a state tracker and analyzed the original state applications. He noted that dozens of applications mention the catalyst awards and technology funds, looking forward to the intense scrutiny and decision-making process that lies ahead. CMS has imposed strict requirements, including compliance with federal privacy, security, interoperability, and patient safety guidelines.

Companies applying for funding must be less than 10 years old and have raised less than $50 million in early funding. Winners must meet predetermined milestones, and federal officials will conduct targeted reviews as needed.