CMS Greenlights Tennessee’s Closed Medicaid Formulary Demo

January 27, 2021

CMS Greenlights Tennessee’s Closed Medicaid Formulary Demo

CMS Greenlights Tennessee’s Closed Medicaid Formulary Demo

Reprinted with AIS Health permission from the Jan. 14, 2021, issue of Radar on Drug Benefits

When CMS on Jan. 8 approved Tennessee’s Section 1115 Medicaid waiver — making it the first state to try an “aggregate cap” approach to Medicaid financing — the agency also took the unprecedented step of authorizing Tennessee to set up a “commercial-style” closed drug formulary while still receiving statutory Medicaid drug rebates for covered drugs.

“I think this piece will be particularly controversial and potentially quite ripe for litigation,” says Jocelyn Guyer, a managing director with Manatt Health. “It’s a foundational change that we’ve never seen before in a Medicaid waiver.”

Typically, state Medicaid programs agree to cover nearly all drugs approved by the FDA in order to participate in the Medicaid Drug Rebate Program. That circa-1990 program requires drug manufacturers to rebate a set portion of what Medicaid pays for any given drug to states, which then share those rebates with the federal government.

Under Tennessee’s newly approved waiver, however, the state will be allowed to decline coverage for certain medications “when there is at least one drug available per therapeutic class under essential health benefit rules” with the exception of certain protected drug classes, according to CMS. The state will also be able to exclude certain new drugs from its Medicaid formulary, with an exceptions process for specialty drugs.

“With this approval, Tennessee will have greater ability to negotiate other supplemental rebates directly with drug manufacturers,” the agency stated.

Tennessee first unveiled its proposal to cap Medicaid funding and set up a closed formulary in 2019, saying that it would only agree to include outpatient drugs in its new financing demonstration if allowed the flexibility to decline coverage for certain drugs (RDB 9/26/19, p. 4).

At the time, some experts expressed skepticism that the Trump administration would approve such a request, since it denied a very similar waiver proposal from Massachusetts in 2018.

Indeed, “that was a little bit why it was so surprising that the Trump administration would approve this now, even as part of a larger initiative that clearly lines up with some of their ideological interests in capped funding,” Guyer tells AIS Health.

Still, as part of the “Healthy Adult Opportunity” guidance CMS issued last January outlining how states should structure potential fixed-funding Medicaid waivers, the agency also invited states to set up a closed Medicaid formulary (RDB 2/13/20, p. 1).

Guyer suggests that Tennessee’s closed-formulary demonstration is likely to draw plenty of attention — but may not end up setting much of a precedent.

“There’s a lot of interest in controlling pharmaceutical costs across the country, so I think people will be watching it closely,” she says. “My guess is that many states are aware that this is litigation bait, and they may want to see how it plays out in Tennessee before they put a lot of resources and effort into trying to follow suit.”

Even if the waiver isn’t challenged in court, Guyer adds, the Biden administration is likely to “have some deep concern” about key elements of the program, which is slated to last 10 years. However, the outgoing Trump administration is trying to stymie its successor from rolling back some of its more controversial waivers. CMS Administrator Seema Verma on Jan. 4 sent a letter to state Medicaid directors asking them to quickly sign a “letter of agreement” that sets up a new, lengthier procedure CMS must follow in order to withdraw approved waivers, according to blog post from the law firm Foley Hoag LLP. “Certainly this throws a wrench into the Biden Administration’s likely preference to scrap the Tennessee waiver immediately upon taking office,” the post stated. “Of course, this process would still permit a withdrawal, albeit over an extended timeframe.”

Waiver Could Still Be Rolled Back

The new administration is likely to face pressure from both beneficiary advocates and drug manufacturers to roll back the waiver, as both have reasons to be concerned about the implications of allowing closed Medicaid formularies, Guyer says.

Jerry Vitti, founder and CEO of Healthcare Financial, Inc., suggests that Medicaid beneficiaries may object to seeing their drug coverage options tighten.

“It may very well keep drug costs down, but what are the human costs?” he says of Tennessee’s move. “That is my concern. Will members have access to the medications that they need?”

Vitti also echoes Guyer’s point about other states hesitating to follow in Tennessee’s footsteps.

“It could create a precedent, but that is questionable in that it was done in the 11th hour of the administration,” he tells AIS Health. “Closing the formulary to achieve cost savings is something I agree with if the savings generated cover other program expenses and if access is not jeopardized. Given TennCare’s history, neither is a given.”

In addition to the closed-formulary aspect, Tennessee’s newly approved waiver — dubbed TennCare III — calls for the state to work with CMS on creating a fixed Medicaid spending target that “will increase at a reasonable growth rate over time.” In exchange, the state will receive a range of flexibilities regarding how to administer its Medicaid program. Tennessee will also be able access up to 55% of the annual savings generated when the state’s Medicaid spending falls below the aggregate cap and when it meets quality targets.

CMS also says the plan includes a “safety value” that would enhance funding to account for unexpected increases in enrollment.

“The program is a test of the theory that with clear accountability, beneficiary protections, and more appropriate financial incentives, states can deliver better outcomes for beneficiaries and value for taxpayers,” Verma said during a Jan. 8 press call.

Read more about the waiver approval at and, and find the letter to Medicaid directors at Contact Vitti via Joe Reblando at and Guyer via Sam Eisele at

by Leslie Small