CMS clears block grants for states' Medicaid expansion

MICHAEL BRADY  January 30, 2020

The CMS on Thursday unveiled an optional demonstration that would allow states to extend Medicaid coverage to adults that don't qualify otherwise in exchange for capped funding.

Under the Healthy Adult Opportunity initiative, states could share cost savings with the federal government and extend Medicaid coverage to more residents in exchange for taking on more financial risk.

"While available funding will be capped in the aggregate, states will not have the ability to cap enrollment and still receive the enhanced federal match rate available to the expansion population," a CMS factsheet on the initiative said.

Oklahoma governor Kevin Stitt, a Republican, on Thursday said his state would apply for a Healthy Adult Opportunity waiver during an event showcasing the initiative. He said the state's application would likely include cost-sharing premiums and a work requirement, as well as higher payments for rural providers, telehealth services and greater access to opioid treatment.

But Stitt will have to win support from the state Legislature to move forward with the waiver application.

All states are eligible to participate in the initiative, which would allow states to extend Medicaid coverage to adults under 65 years old who don't qualify for Medicaid because of disability, long-term care needs or who don't qualify for a state plan. The CMS would allow participating states to change cost-sharing requirements, align benefits and drug formularies with what commercial payers offer, make program changes with less federal oversight and waive retroactive coverage and hospital presumptive eligibility requirements.

"By incentivizing value, this approach won't simply result in higher quality care for beneficiaries in the present, but will also safeguard quality care for future beneficiaries by putting the program on a sustainable path," CMS Administrator Seema Verma said on a press call Thursday.

The capped funding would be calculated by looking at a state's costs for a prior year, population and the demonstration's benefits. Federal contributions in future years would not be altered for Medicaid enrollment changes.

Families USA executive director Frederick Isasi immediately criticized the Trump administration guidance Thursday, warning that it could wreak havoc on Medicaid beneficiaries and state budgets.

"With state budgets already stretched thin, accepting Medicaid block grants could likely amount to willful fiscal malpractice and blatant disregard for the needs and interests of states and families," he said.

States don't have strong incentives to apply for a Healthy Adult Opportunity waiver because they would take on more financial risk for the expanded population without receiving much additional flexibility. Most of the flexibility afforded to states under the plan is already available under Medicaid 1115 waivers, including the ability to institute a work requirement, adjust cost-sharing or eliminate retroactive coverage.

"The notable thing is that there isn't that much new flexibility for states," said Jocelyn Guyer, managing director at Manatt Health. "At the end of the day, it's largely 'do you want to take a cap on your federal Medicaid funds.'"

Under the total expense model, states would have to spend 80% or more of the target amount on health services. If states generate savings without reducing quality or access, the federal government would share the savings with them. But states would have to give up matching federal funds in order to receive cost savings. So most state Medicaid programs would be in a worse financial position than if they went forward with a conventional Medicaid expansion.

"The state doesn't get to keep all of the savings, so you have to wonder how strong of an incentive that is," said Joseph Antos, a resident fellow at the American Enterprise Institute.

Red states could see the demonstration as a conservative approach to Medicaid expansion, but the initiative prohibits enrollment caps and partial expansions, two policy tools that many experts think would be important to making capped Medicaid funding work by containing costs.

"I think it's particularly risky for a state like Oklahoma to pursue an expansion under this kind of authority given that they're stuck with a limited amount of federal funding," Guyer said. "It's putting yourself in a very tight spot."

Most non-expansion states haven't expanded their Medicaid programs for political or ideological reasons, rather than financial ones.

"I don't see this as doing much to help a state that is feeling fiscal pressure," Antos said. "To get real savings calls for healthcare delivery reform ... it's delivery reform that's the hard part"

Hospitals and other providers are unlikely to change how they deliver healthcare because of the new demonstration because the affected population is too small for it to make an impact, he said.

The Healthy Adult Opportunity initiative isn't a traditional block grant, which isn't permitted under the CMS' waiver authority. It does little to address conservatives' concerns about Medicaid's fiscal integrity, which largely stem from improper supplemental payments.

"There's nothing in (the initiative) that's going to change that," Antos said.

Under the current system, the federal government matches state Medicaid funding dollar for dollar.

The Trump administration withdrew its proposed guidance to states on Medicaid block grants from regulatory review in November without an explanation. At the time, several experts speculated that the instructions could be long delayed or put on permanent hiatus, especially if the administration believed the proposal would increase federal spending.

"The failure to update the Medicaid program is something that this administration has felt has needed to be addressed for a long time. Absent Congressional action, Administrator Verma has vigorously worked to improve this program through administrative action," said Joe Grogan, assistant to President Donald Trump and director of the Domestic Policy Council.

Many legal experts think that the Trump administration can't use the Section 1115 waiver process to waive Medicaid's matching funds system and expect that any such effort will lead to a battle in the courts.

"I think that any state that takes this up is walking itself right into a lawsuit," Guyer said.

Politicians in Alaska, Oklahoma and Tennessee had expressed interest in converting their state Medicaid programs to a block grant. Last fall, Tennessee submitted a block grant proposal to the CMS that would allow it to receive an inflation-adjusted block grant that could be adjusted upward on a per capita basis if enrollment grows. Tennessee's request includes a broader population than what's allowed under the new guidance so the CMS is considering it separately, Verma said. The waiver is pending approval.

Tennessee will continue with its existing waiver application, but the state's Medicaid program is supportive of the new approach.

"We are excited about CMS' recognition that the misaligned incentives of Medicaid financing do not necessarily drive quality, value, or fiscal sustainability," TennCare said in a statement. "Specifically, it is encouraging that CMS recognizes that states should have the opportunity to earn shared savings through quality-based performance that can then be reinvested in their Medicaid programs and the health (not just health care) of their Medicaid members."

Conservative policymakers have previously supported replacing Medicaid's open-ended funding with block grants because they think it will incentivize states to spend Medicaid funds more judiciously and reduce federal healthcare spending. They also argue that it would give states more flexibility to respond to their unique healthcare challenges.

But many healthcare experts worry that under a block grant, states might have to slash their Medicaid rolls or payments to disproportionate-share hospitals to get program spending under control. That could lead to significant coverage losses and reduce access to care for some of the most vulne rable populations. It could also hurt doctors and hospitals by increasing the amount of uncompensated care that they provide.

In September 2017, Sens. Lindsey Graham (R-S.C.) and Bill Cassidy (R-La.) floated a bill that would have changed Medicaid to a block-grant program. The bill would have ended the enhanced matching rate for the Medicaid expansion and replaced it with a lump sum far below existing federal funding. It would have also instituted a per capita spending cap to replace the current system of matching funds.

The Senate never voted on it thanks to political blowback after the Congressional Budget Office said that millions of people would lose coverage if the package went into effect.

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