Focus on New Federal Guidance of Alternative Medicaid Financing, Including Block Grants

February 3, 2020

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Craig Wilson, JD, MPA
Director, Health Policy

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In much-anticipated guidance published Jan. 30, the Centers for Medicare and Medicaid Services (CMS) announced to state Medicaid directors that it would welcome proposals by states to cap Medicaid funding for their programs either in the aggregate (block grant) or on a per-capita basis (per population in a Medicaid eligibility group).

In return for agreeing to a funding cap, a state could seek a waiver of state compliance from CMS on a host of Medicaid statutory provisions designed to protect beneficiaries of the program. Shared savings may be available for states that propose block grants, but states proposing block grants or per-capita caps would be at risk and responsible for expenditures in excess of the cap.

We have previously written about the pros and cons of block grants and per-capita caps in this explainer. This blog will instead highlight some of the most noteworthy aspects of what the CMS guidance calls the Healthy Adult Opportunity (HAO) initiative.

CMS proposes to limit the populations that may be covered under the HAO waivers to non-elderly adults who are not disabled, pregnant, or eligible under the state Medicaid plan. This means that the population targeted by HAO waivers is the Medicaid expansion population as authorized under the Affordable Care Act (ACA). In Arkansas, the majority of this population is currently covered by Arkansas Works, a demonstration waiver set to expire at the end of 2021.

Highlights of the guidance include flexibility for states to:

  • Impose additional conditions of eligibility, such as work and community engagement requirements (currently the subject of litigation in federal court).
  • Provide coverage through an individual premium assistance model (such as Arkansas Works and its predecessor, the Health Care Independence Program) and elect an essential health benefit (EHB) package from a number of options, including the EHB benchmark adopted by another state.
  • Provide coverage and services in addition to the EHB, including services that address social determinants of health.
  • Eliminate retroactive eligibility (up to 90 days in many states).
  • Establish prospective dates of coverage effectiveness (e.g., eligible on the 20th of the month but coverage effective on the first day of the following month).
  • Conduct more frequent eligibility checks.
  • Eliminate non-emergency medical transportation and EPSDT (early and periodic screening, diagnostic, and treatment) services for 19- and 20-year-olds.
  • Offer a closed drug formulary similar to those offered in the private insurance market.
  • Establish alternate payment mechanisms for federally qualified health centers (currently, the centers receive prospective payments).
  • Cap income eligibility at an amount lower than 133% of the federal poverty level and require asset tests (if a state is willing to forego the enhanced federal funding set by the ACA).
  • Establish premium and cost-sharing obligations at any income level up to the statutory limit of 5% of household income and permit suspension of coverage for failure to pay premiums (except for certain populations).
  • Adopt new delivery and payment models, including any combination of fee-for-service and managed care.
  • Without CMS approval, make programmatic modifications such as changes to benefits, premiums, or cost sharing, or make administrative modifications such as changes to provider payment rates during the waiver, unless a modification has the potential to substantially impact enrollment.

The guidance indicates that funding caps would increase annually at the lesser of the growth rate in the state Medicaid program over the past five years or, for block grants, the rate of medical inflation, or, for per-capita caps, medical inflation plus 0.5%.

This approach locks in a lower growth rate for states with historically lower spending – either due to good management strategies or reimbursement rate suppression – while locking in a higher growth rate for states with historically higher spending – either due to poor program stewardship or higher provider reimbursement rates.

In addition, the base year rate calculation methodology in the guidance (the most recently available eight consecutive quarters of expenditure data) locks in expenditure variation for similar eligibility categories among states. For example, for non-disabled adults under 65, Montana spends $9,135 per beneficiary, and Arkansas spends $1,657 per beneficiary, so Montana would have a significantly higher base rate than Arkansas.

Which state will be the first to propose an HAO waiver is uncertain. Tennessee’s proposed block grant waiver, which sought capped funding to provide coverage for disabled enrollees, low-income children and adults, and the elderly, is likely to undergo a major overhaul based on the new guidance. Arkansas Gov. Asa Hutchinson has signaled interest, and Arkansas law requires the governor to pursue a block grant “as soon as practical if the federal law or regulations change to allow the approval of a block grant.” In the absence of changes to federal statute or regulations, mere federal guidance would appear not to trigger this requirement.

As was the case with work and community engagement requirements, litigation is expected. Legal experts have argued that block grants do not assist in promoting Medicaid’s primary objective: providing medical assistance. They have also argued that block grants would require CMS to waive the statutory method used to pay each state (a federal-state match rate), which is not specifically authorized by the Medicaid statute. Finally, they have said that the CMS guidance is procedurally flawed, arguing that it creates new law versus interpret an existing law that the agency administers.

CMS has pointed to the Children’s Health Insurance Program (CHIP) established by the Balanced Budget Act of 1997 as an example of a block grant program that has functioned well. The funding formula for CHIP – which was established by statute – accounts for a state’s actual use of CHIP funds, medical inflation, and child population growth. In addition, states can respond to unanticipated events such as economic downturns by accessing additional federal funding through child enrollment contingency funds and allotment increases, thus maintaining the countercyclical financial protections for states provided in Medicaid.

The availability of capped funding for the Medicaid program through a waiver is an option that states should consider very carefully, weighing the expansive regulatory flexibility with the significant risk of foregoing the financial protection that the current funding method provides.

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