CMS Invites States to Innovate With Fixed Medicaid Funding

February 6, 2020

CMS Invites States to Innovate With Fixed Medicaid Funding

Reprinted with AIS Health permission from the February 6, 2020, issue of RADAR on Medicare Advantage

After months of languishing at the Office of Management and Budget, CMS’s long-awaited state Medicaid director letter addressing so-called block grants appeared on Jan. 30. But the revised 56-page “Healthy Adult Opportunity” guidance made no mention of block grants — which Democrats have long argued are harmful and illegal if applied in entitlement programs — and instead presented states with two options for covering a subset of Medicaid enrollees via a fixed budget with additional program flexibilities. Safety net insurers and Medicaid advocates worry that if implemented, such options could restrict certain “able-bodied” adults from maintaining coverage, while analysts predict such coverage losses would be minimal.

CMS in June had submitted the guidance under the name “State Medicaid Director Letter: Medicaid Value and Accountability Demonstration Opportunity” but pulled that version in November and replaced it with a letter extending a new Section 1115 waiver opportunity to “provide cost-effective coverage using flexible benefit designs under either an aggregate or per-capita cap financing model for certain populations.”

During a grand “Transforming Medicaid” event held at HHS headquarters on Jan. 30, CMS Administrator Seema Verma explained that the initiative is aimed at non-disabled adults under the age of 65 who do not qualify for long-term care services and supports through Medicaid and are not eligible under a state plan — essentially adults that fall into the Affordable Care Act (ACA) Medicaid expansion category. “Spending growth rates in this population are forecast to be higher than in others, and our most recent round of audits demonstrated that many states’ practices for verifying eligibility are far too lax,” she told a full audience. “We shouldn’t have to tell someone with a disability to get on a waitlist for services because we’re diverting precious resources to cover someone who potentially doesn’t qualify.”

Both Verma and HHS Secretary Alex Azar, who introduced Verma at the event, stressed that the initiative is voluntary and not a mandate.

States that do apply to restructure their Medicaid financing through the waiver opportunity would be able to test many flexibilities that have already been granted in other 1115 waivers, such as providing populations in the defined “adult group” with Essential Health Benefits (EHBs) similar to those offered through the exchanges, the ability to pay for non-medical services that address social determinants of health and imposing limited premiums and cost sharing. CMS also offered several new approaches such as designing a closed formulary for non-exempt adults and making certain administrative changes without the need for demonstration or state plan amendments that require CMS approval. Verma stressed that states taking CMS up on this opportunity would be subject to increased transparency and accountability requirements.



Additionally, states that agree to the aggregate cap or “total expense” financing model and fall below their spending target would be able to share in a portion of the savings — an amount that is dependent on meeting certain performance criteria — and must reinvest that in their Medicaid programs. The spending target for either model would be based on states’ historical costs for that population and a growth rate factor; the target could be adjusted in the case of unforeseen circumstances such as a natural disaster or public health emergency, Verma explained.

Such proposals are likely to be pursued by Republican-led states that have historically resisted expanding Medicaid under the ACA but may be more willing to do so with some conservative principles such as work requirements. However, Verma made clear during a press conference held after the event that states cannot seek to partially expand Medicaid and receive enhanced federal funding. A state could instead seek waiver authority to cover a “limited or more targeted population” of adults, such as those who are homeless or of a certain income level, she said.

Oklahoma, for one, will look to overhaul its Medicaid program and extend eligibility up to 138% of the Federal Poverty Level by pursuing a state plan amendment in combination with an HAO waiver that would allow for “maximum flexibility for use of more than $1.1 billion additional federal Medicaid funds,” according to a press release from Republican Gov. Kevin Stitt’s office. Stitt also spoke at the event and said that flexibility would allow for greater “cost containment,” expanded treatment for opioid addiction and substance abuse, and the ability to impose work requirements and “moderate premiums” on the adult expansion population.

Verma added during her public remarks that the initiative is in no way “permission for states to strip benefits or to limit eligibility.” But the guidance noted that states could use a HAO demonstration to “impose additional conditions of eligibility” that do not generally apply to Medicaid coverage under state plans. When asked by AIS Health how this is not limiting eligibility, Verma emphasized that these are conditions states are already implementing and have been approved by CMS, i.e., flexibilities such as community engagement and cost sharing that “already exist in the program today.”

Margaret Scott, associate principal with Avalere Health, says one of most significant changes contained in the guidance is the opportunity to manage prescription drugs by developing closed formularies while still receiving full manufacturer rebates, thus allowing states to “limit drug coverage for [the adult] group in a way that they have not been able to do in the past.”

Instead, states could follow EHB rules by implementing closed drug formularies and cover the greater of either: at least one drug per class or the same number of drugs in each category and class as a selected EHB benchmark plan. This includes special protections for HIV and behavioral health agents.

The guidance also presents the opportunity for a streamlined waiver application process, basically featuring a menu of “up-front flexibilities” that states could select when applying (although CMS emphasizes in the letter that such flexibilities will not automatically be granted, and approval will depend on whether details provided support the goals of the demonstration and are likely to promote the objectives of the Medicaid program). However, for states that already have waivers in place that would overlap with what they’re requesting under the HAO, they would have to scrap their existing waiver and transition to the new one once it is approved. But CMS points out in the guidance that “it is focused on streamlining moving existing waiver provisions into new waivers as well as transitions for all the beneficiaries that are affected,” says Scott.

States that pursue the HAO would also have some flexibility when it comes to complying with statutory managed care provisions. These include: adopting alternative approaches to network adequacy; avoiding the typically required prospective CMS review that determines whether states’ payment rates to managed care organizations are actuarially sound; and making managed care contract amendments without CMS approval.

Despite the fixed funds being reserved for the expansion group (and exempting very low-income parents, children, pregnant woman, etc.), Medicaid advocates fear that the waivers still present an opportunity to scale back coverage and eligibility for a vulnerable population who may have difficulty complying with certain provisions.

“Read the fine print,” says Jerry Vitti, founder and CEO of Healthcare Financial, Inc., a company that connects low-income, elderly and disabled populations with public benefit programs. “Community engagement, work requirements…are another way to get at lower enrollment, and the folks that are subject to the work requirements are childless adults who have a large spectrum of conditions…and are near disabled.” He points out that the guidance also contains flexibility for states to conduct more frequent redeterminations and subject Medicaid applicants to an asset test — both of which could also lead to people getting kicked off the program when they may still qualify.

Nevertheless, one silver lining Vitti observed in the document is the potential to restructure payments to federally qualified health centers (FQHCs) as part of a state’s value-based payment reform efforts. “I like the idea of giving incentives and better reimbursement to [FQHCs]; I think you’ll get quality of care at a lower price and support the social service network,” he says. The possibility of investing demonstration money in social determinants of health is also a positive, although with finite funds, Vitti questions just how impactful that would be.

In a statement released Jan. 30, Association for Community Affiliated Plans (ACAP) CEO Margaret Murray said the group of 67 safety net health plans recognizes that some aspects of the HAO “represent genuine steps forward for Medicaid,” such as an option to offer continuous eligibility for enrollees for up to 12 months. ACAP also applauded CMS for requiring that state demonstrations are tied to certain quality measures.


ACAP: Caps Create Budget Uncertainty

Setting aside those components, however, ACAP argued that the key flaw in spending caps is their potential to create more budget uncertainty. “Since any state that exceeds its capped Federal allotment will have to cover the excess costs from state taxpayer revenues, HAO will inject more uncertainty into state budgets. This uncertainty would leave people vulnerable to significant cuts in the event of a natural disaster, high-cost medical innovations, or an unanticipated event such as the recent outbreak of coronavirus,” said Murray. Moreover, she warned against allowing states to “walk away from actuarial soundness provisions.”

“Using block grants would not allow states to weather pressures on spending at the state level or to adequately account for economic and population changes,” echoed Ceci Connolly, president and CEO of the Alliance for Community Health Plans (ACHP), in a statement posted Jan. 30. “Current financing provides needed stability and allows states the flexibility to innovate to address the social needs of residents and improve health outcomes in the long run.”

She added: “ACHP member plans are leaders in delivering integrated value-based care models in the Medicaid program. As a result of possible spending changes, the significant investments by ACHP member plans to improve coordinated care for Medicaid recipients could be lost.”

Meanwhile, securities analysts at press time did not appear overly concerned with the potential impact to the publicly traded MCOs. In a Feb. 3 report from Citi Research, analyst Ralph Giacobbe suggested it’s highly likely that the HAO initiative will be challenged in court and eventually deemed illegal, while the implementation of any state demonstrations would be on hold, similar to what’s happened with ongoing challenges to work requirements. And with the HAO targeting expansion adults and not the traditional Medicaid population, the potential impact to enrollment would be minimal, he wrote. Citi estimates that only about 4% of the total Medicaid population is at risk for block grants.



“Block grants, when instituted, are likely to push states to shift any remaining fee-for-service beneficiaries into managed care. Alternatively, block grants are also likely to slow the growth of Medicaid spending in the respective states,” Credit Suisse analyst A.J. Rice wrote on Jan. 30. “A piecemeal approach via the Medicaid waiver program would likely take a long time to implement on state-by-state basis (with only a few states stepping forward) and not have a near-term impact on our outlook for public MCOs.”

Contact Giacobbe at, Rice at, Scott via Anna Thomas at, Vitti via Joe Reblando at


By Lauren Flynn Kelly