Price and Verma to State Governors: Just Come and Ask Us for Flexibility – What Providers & Drug Manufacturers Could Expect

The last several weeks have been nothing short of enthralling, like an episode of House of Cards. After seven years of campaigning on the repeal of the Affordable Care Act (ACA), Republicans were ultimately unable to create consensus for their highly anticipated repeal-and-replace legislation known as the American Health Care Act (AHCA).  But as the drama on the Hill comes to an end (at least until tax reform is picked up), it goes without saying that Medicaid (and Medicaid reform) will continue to press forward.  Absent legislative change, the new leadership has already begun the process of reshaping Medicaid through regulatory levers.

Recently, Secretary of Health and Human Services Tom Price and CMS Administrator Seema Verma penned a letter addressed to state governors across the country wherein they promised governors a commitment to “ushering in a new era for the federal and state Medicaid partnership where states have more freedom to design programs that meet the spectrum of diverse needs of their Medicaid population.”

What The Letter Said

The tone and substance of the letter is very consistent with previous Republican declarations about the need for reform in the Medicaid program.  It begins by stating that the Federal framework for Medicaid has been unduly restrictive and has not allowed for sufficient state adaptation to keep up with the times.  The letter also criticizes the enhanced federal match rate (FMAP) for the Medicaid expansion population, arguing that not only is it fiscally unsustainable, but it also incentives states to deprioritize their “truly” vulnerable populations because the federal government does not pay as well for them.

In light of these issues, CMS propose extending greater flexibility to states so they can tailor more responsive Medicaid programs that will ensure state accountability for patient outcomes and the long-term sustainability of state and Federal budgets.  Specifically, the letter offers opportunities for federal-state collaborations, particularly through Section 1115 waivers.  Some of the key areas of focus that the letter highlights are:

  • Streamlined Program Management. This involves making the State Plan Amendment process more transparent and efficient, “fast tracking” the approval of waiver and demonstration project extensions, and consistently evaluating waiver proposals that have already received prior approval in other states.
  • Employment and Community Engagement Requirements. The letter asserts that it is CMS’ intent to use Section 1115 waivers to promote state efforts that “build on the human dignity that comes with training, employment, and independence.”
  • Alignment with Commercial Insurance. The letter suggests to states that they should consider aligning Medicaid design and benefit structures applicable to able-bodied adults with those of commercial insurance.  The letter goes as far as to offer specific examples of what states could do, such as encouraging Health Savings Accounts (HSAs), waiving enrollment and eligibility procedures that are inconsistent with continuous coverage, monthly premium requirements, etc.
  • Increased Collaboration and Time to Comply with HCBS Rule. The letter promises to extend the time that states will have to comply with the January 16, 2014 Home and Community-Based Services rule, along with promising to improve Federal engagement with states on the rule’s implementation.
  • Opioid Epidemic. The letter promises that CMS will explore further opportunities for states to provide improved and increased substance abuse treatment services through Section 1115 waivers.

Breaking Down the Letter

To health policy experts and regular readers of this blog, the Price/Verma letter should not come as much of a surprise.  In a previous blog post, we predicted that under the new leadership, CMS may be much more flexible in approving Section 1115 waivers with atypical requirements.  Indeed, the Price/Verma letter’s suggestions borrow quite heavily from the Healthy Indiana Plan (HIP) that Verma served as the chief architect in designing.  Below are some high-level thoughts of how we believe the various sectors of the health care industry would be affected by the changes proposed in the letter.


Providers may find themselves providing more uncompensated care if Medicaid beneficiaries are unable to comply with work and community engagement requirements.  Research has indicated that most able-bodied adults are currently working, seeking work, or are in school.  Therefore, the addition of a work/community engagement requirement may not be a big deal for this specific demographic.  However, there is a small fraction (roughly 15%) of beneficiaries that would potentially not satisfy a work requirement and could consequently be dis-enrolled from their state’s Medicaid program.  Under existing law, this would leave them with no coverage at all (although the AHCA as currently written would extend to these individuals a given amount of tax credits depending on their age) and in case of emergencies, would shift the cost of care to providers.

Another factor that may contribute to rising levels of uncompensated care are premium and lock-out requirements, although research on this requirement is still in its early stages.  That said, early data seems to suggest that premium payments could be designed in such a way as to minimize drops from coverage.

On the other hand, the consumer-oriented approaches that the Price/Verma letter suggests could also provide unique opportunities for providers to collaborate with states on innovative methods of delivering care, such as offering to be a hub that provides services and resources above and beyond simply the provision of health care.  This could be of special interest in light of the letter’s explicit support for exploring additional opportunities to combat the opioid epidemic.

Drug Manufacturers

Although drug manufacturers do not have to worry about uncompensated care like providers do, the letter’s promise to states that they will enjoy enhanced flexibility under the statute opens the doors to tiered plan designs that may affect the demand for a brand manufacturer’s drug.  For example, Indiana’s Section 1115 waiver HIP 2.0 creates a tiered benefit design where the more generous plan eliminates co-payments for drugs while the “lower” plan retains co-payments that are separated between “preferred” and “non-preferred” drugs.  Although the co-payments are relatively modest, Medicaid beneficiaries by definition do not have much disposable income and their lower income may prompt them to select cheaper generic options, thereby reducing demand for branded drugs in competitive markets.

Relatedly, enhanced state flexibility to create programs that include tiered benefit designs could place pressure on drug manufacturers to offer more generous rebates with the hope of achieving “preferred” status within these tiered designs.  Alternatively, the enhanced flexibility could present drug manufacturers with more opportunities to collaborate with the state on innovative purchasing models.


The Price/Verma letter promises to states to restore greater local control over their Medicaid programs—if they only come and ask for it.  Given Verma’s extensive experience with conservative Section 1115 waivers, we could expect unprecedented consumer-oriented waiver approvals from CMS.  Depending on their design and implementation, they could present particular challenges, and novel opportunities, for providers and drug manufacturers.



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