Introduction by Trish Riley, NASHP Executive Director
For decades, the proposal to convert the Medicaid program from an open-ended entitlement to capped funding as a “block grant” has been a fiercely argued policy, legal and ideological debate. Opponents contend that capped financing violates the foundation of Medicaid as an entitlement and would severely impair states’ abilities to address needs because there is no provision to adjust for medical and prescription drug cost increases nor to accommodate natural disasters or economic downturns that cause more people to need Medicaid’s protections.
Proponents argue that a block grant, much like the Children’s Health Insurance Program, provides more flexibility to states to design their programs and constrain cost growth. Here, the Trump Administration takes a new tact, using the Section 1115 waiver authority, to test the viability of a block grant concept on a subset of Medicaid enrollees.
The proposal does not address rising health care costs but does contain a “special circumstances adjustment” that could address unforeseen circumstances that are out of a state’s control. The guidance could encourage those states that have not expanded Medicaid eligibility to childless adults eligible under the ACA to do so. It could also allow states that have expanded eligibility to roll back current levels of coverage.
Because Section 1115 waivers are designed to test innovation in the Medicaid program, the Administration proposes a means to test the efficacy of a block grant, limiting its reach to a subset of Medicaid enrollees. NASHP’s Anita Cardwell walks us through what CMS’ new rules are proposing and notes that legal challenges are inevitable. Should the Administration succeed in approving these waivers, rigorous, independent evaluation will be critical for policymakers to assess its impact.
New guidance from the Centers for Medicare & Medicaid Services (CMS) would allow states to receive part of their federal Medicaid funding through a capped financing model. Through CMS’ Healthy Adult Opportunity (HAO) option, states would be able to seek approval through a Section 1115 waiver to accept a set amount of federal Medicaid funding for certain eligible adults.
While the option is limited to a specific portion of the Medicaid-eligible population, this is a significant change from Medicaid’s current structure in which the program operates as an open-ended entitlement and states receive federal matching payments based on their Medicaid program spending without a predetermined funding limit. The following describes some of the key elements of the HAO model.
The HAO model targets adults under age 65 who are not eligible for Medicaid due to:
- Disability or need for long-term care services and supports,
- Eligibility under a state plan designation.
States could use the model to cover adults who would be eligible through the Affordable Care Act’s (ACA) Medicaid expansion, but states will also be permitted to use the initiative to cover other groups of individuals. For example, states could use the HAO demonstration to provide coverage for:
- Individuals with severe mental illness;
- Those needing substance use disorder treatment; or
- Individuals with HIV/AIDS.
States will also be allowed to set the income eligibility standard under the demonstration, and the guidance permits states to require an asset test for individuals seeking coverage under the HAO model. However, for states to receive the enhanced federal match available for the ACA Medicaid expansion population, states will need to have an income standard of at least 133 percent of the federal poverty level, will not be able to apply an asset test, and will not have the ability to cap enrollment. But the guidance does not explicitly indicate that enrollment cannot be capped if a state agrees to accept a lower match rate.
States that pursue this new option will receive a capped amount of federal Medicaid funding for the populations covered under the HAO model. States’ spending would be matched by the federal government, but only up to a certain limit, and states would assume the risk for any expenditures for the demonstration population that exceed the defined amount. CMS is providing states with two financing options to select — an aggregate cap model or a per capita cap model.
States that cover new populations that they lack data for, such as the expansion population, will initially need to use the per capita cap model. CMS will calculate a per enrollee base amount for each eligibility group that is included in the demonstration using previous year expenditures, or if those are not available then it will be based on national and regional expenditures. CMS will trend the base amount for each group forward to the demonstration year, multiply each of these amounts by the number of enrollees for that year to account for changes in enrollment, and then total them to establish an overall per capita cap.
Under the aggregate cap model, CMS will determine a base year amount using prior expenditures based on the populations and services included in the demonstration, and will trend this amount forward to each demonstration year, but without consideration of enrollment changes. If a state would like to pursue the aggregate cap option for a population that has not been covered previously, they must first operate their HAO demonstration under the per capita cap model for at least two years. The guidance requires states using the aggregate cap model to annually spend at least 80 percent of their aggregate cap amount on health services.
Unlike the per capita cap model, states that use the aggregate cap approach that are able to keep costs below their annual cap and meet certain reporting and performance criteria may be eligible to reinvest a part of the savings into their Medicaid programs. These reinvestments must be determined to be likely to promote Medicaid program objectives and could include providing Medicaid services for groups not covered by the state plan, paying for services that are not in the state plan – such as pre-vocational services, initiatives to improve care quality and access, and allowable benefits and services designed to address certain social determinants of health.
In some cases, states could use the shared savings to support existing state-funded programs, such as a statewide tobacco cessation program. CMS also notes that states can use any annual savings to offset expenditures that exceed the cap for the subsequent three demonstration years. Also, while the guidance indicates that CMS will make changes to the base amount or annual caps to “adjust for state flexibilities that could significantly affect enrollment to ensure that states do not achieve savings from disenrolling individuals,” it does not provide further details about how this type of adjustment would be implemented.
Rather than the traditional Medicaid benefit package, states that opt to pursue the HAO initiative will be able to structure a benefit package that aligns with private market coverage, although they will need to include at a minimum the benefits in the Essential Health Benefit (EHB) package. This means that states will not be required to provide services such as non-emergency medical transportation (NEMT) and coverage of early and periodic screening, diagnostic and treatment services (EPSDT) for individuals ages 19 to 20 included in an HAO demonstration. However, states could opt to provide these services, along with others, in addition to EHBs.
Prescription Drugs and Medicaid Drug Rebate Program
To address prescription drug costs, the HAO option will permit states to have a closed drug formulary that aligns with formularies provided through exchange coverage in the commercial health insurance market. The guidance stipulates that states provide coverage of certain drugs for individuals with HIV or behavioral health conditions.
However, although states would be allowed to omit coverage of certain prescription drugs, states would still be able to receive rebates through the Medicaid Drug Rebate Program. States could also make arrangements with manufacturers for supplemental rebates by including the manufacturers’ drugs on the state formulary.
Other Key Elements of the HAO Model
In its guidance, CMS indicates that it is “offering flexibilities currently available to states in a comprehensive suite of pre-packaged waiver authorities.” CMS notes that although its intent is to provide states with a “menu” of program design options, each demonstration will be approved on a case-by-case basis. States will be able to implement program elements to the populations covered by the demonstration, such as:
- Charging higher premiums and cost-sharing requirements not allowed under traditional Medicaid for most individuals in the HAO model (individuals’ aggregate out-of-pocket costs could not be more than 5 percent of income, measured on a monthly or quarterly basis), and suspending enrollment for nonpayment;
- Including conditions on eligibility, such as work requirements;
- Choosing to waive retroactive coverage and hospital presumptive eligibility requirements; and
- Conducting eligibility renewals before the standard 12-month renewal period to align with the open enrollment period of exchanges.
States operating under an HAO demonstration will also be allowed to implement certain changes without additional federal approval, unless the change has the potential to “substantially” impact enrollment. These could include programmatic changes to benefits, premiums, and copayments, or certain administrative modifications, such as changes in provider payment rates.
States that already have an approved 1115 waiver to cover populations that would be eligible for coverage through the HAO model would be permitted to transition those waivers into HAO demonstrations – for example, a state with an existing waiver to provide coverage to the Medicaid expansion population group.
Delivery Systems, Payment Models, and Managed Care
States seeking to participate in the HAO demonstration will be encouraged to implement payment and delivery system reforms to “improve the effectiveness of coverage, improve health outcomes and reduce the cost of care.” To align with Medicare and commercial payers, CMS suggests that states consider incorporating arrangements and strategies like ones established through the Center for Medicare & Medicaid Innovation (CMMI) that have demonstrated promising outcomes.
States will generally be allowed to use any mix of fee-for-service and managed care delivery systems, and as long as certain guidelines are met states will have the ability to modify these arrangements during the demonstration. If states are serving the HAO demonstration population through managed care, they will generally have to comply with specified statutory requirements related to beneficiary protections and decision making, access to services, and assessing program administration and delivery system quality. But states will be allowed to suggest their own strategies for ensuring network adequacy, access to care, and availability of services, and will also not have to request prior federal approval of managed care rates.
Monitoring and Evaluation
States participating in the HAO demonstration will be required to have a written strategy to evaluate care access and quality, and the health outcomes of enrollees, using measures from the CMS Adult Core Set. CMS is also expecting HAO demonstration states to report on certain performance measures related to enrollment, retention, access to care, and financial management on a quarterly basis. Also, participating states are expected to have an independent assessor provide suggestions for changes that could be made during the demonstration period.
Legal challenges are expected because, as noted by many analysts and highlighted in a recent letter from some House Democrats, there are questions about whether CMS has the ability to use the 1115 authority to change Medicaid’s financing in this way. The HAO demonstration model may also be challenged on the grounds that it does not promote the overall objectives of the Medicaid program.
States considering the model will need to carefully weigh the potential implications, because choosing to accept limits on federal Medicaid funding — even for only a portion of the program’s eligible individuals — introduces financial risk for states. For example, state Medicaid program spending regularly fluctuates as economic shifts occur, new treatments become available, or states experience public health emergencies or natural disasters. While the guidance does contain a “special circumstances adjustment” that would allow states to propose updates to address these types of situations, this would require states to undertake additional negotiations with CMS.
The HAO model could be appealing to the 14 states that have not implemented Medicaid expansion because it would provide them with greater flexibility to manage their Medicaid program benefits and impose certain enrollee requirements. If these states do pursue the HAO initiative to expand Medicaid, while more individuals would gain health coverage and it would meet EHB standards, the coverage provided would be less robust than that provided to traditional Medicaid expansion enrollees and individuals would likely face other enrollment restrictions. One of the 14 non-expansion states that has expressed interest in this approach is Oklahoma, whose governor announced his intention to pursue the concept to expand Medicaid with the inclusion of work requirements and premiums. However, his proposal could be in conflict with Oklahoma voters’ views, if they pass an initiative on the ballot this year to implement traditional Medicaid expansion. Another state, Tennessee, already has a proposal pending with CMS that requests to implement a “modified block grant” model that would allow for federal funding increases if enrollment rises, along with requests for certain program flexibilities. However, Tennessee’s plan differs from the recent guidance as it does not propose to implement the ACA’s Medicaid expansion, and instead would apply the block grant funding model to enrollees who are low-income parents, children, and individuals with disabilities.
The governor of Alaska – a state that has already implemented expansion – has indicated interest in seeking a block grant financing model and commissioned a study on the issue, so there may be interest in the HAO demonstration among policymakers there.
NASHP will continue to track and report on state activity related to the HAO model in the coming months.