Ten Things to Watch for in the Forthcoming Block Grant Guidance (UPDATED)

UPDATED: It’s out! The much anticipated guidance, entitled the “Healthy Adult Opportunity” (HAO), from CMS introducing ways to revamp Medicaid financing has been out for nearly a week and we have had some time to review the guidance in more detail. We’ve update our questions below with answers based on our review of the guidance document.

As previously reported here on the blog, it has long been rumored that the Trump Administration intends to issue guidance to state Medicaid agencies on the ability to request a section 1115 waiver to block grant their Federal Medicaid funding. Most recently we discussed this topic with regard to the current request from the state of Tennessee to block grant their Medicaid funding. While a guidance document that many suspected was the block grant guidance was withdrawn from OMB in November, last week the Wall Street Journal (Paywall) reported that the block grant guidance will be released this coming Thursday, January 30th, as part of an event entitled “Transforming Medicaid: New Opportunity for Better Health” at the Humphrey Building (note that rumors abound that there will be other important Medicaid announcements as well at the event.) Several other publications have now confirmed the news.

In anticipation of what will certainly be 2020’s biggest Medicaid breaking news, we at Medicaid and the Law have been thinking a lot about all of the possibilities and questions that the forthcoming guidance raises.  Because we are not shy to overshare here, we thought our readers might enjoy a look inside the questions rumbling through our minds prior to the guidance release.  So here they are, ten things to watch for in the upcoming block grant guidance.

1. What is the legal justification for the waiver? As previously discussed on the blog, while waiver authority is broad, the law only permits waivers in two instances: (1) to dispense with any of the operational requirements on states under the Medicaid program; and (2) to treat a cost as medical assistance even though the law does not allow it to be treated so. But under a block grant, a state is not asking to treat a cost as medical assistance, but rather is asking to treat a cost that is medical assistance as not constituting medical assistance. This begs the question, upon what legal theory is CMS basing this new waiver authority, if any at all?

UpdatedCMS asserts that the HAO initiative will involve relying on section 1115(a)(2) of the Act to allow states to provide coverage to individuals not eligible under the state plan, while affording states maximum flexibility to administer their Medicaid programs for such individuals. CMS states that section 1115(a)(2) of the Act allows it to not apply many federal requirements that would otherwise apply in order to enable states to “test new or existing ways to deliver and pay for health care services”.  CMS appears to draw a distinction between section 1115(a)(1) and 1115(a)(2) of the Act, characterizing the former as allowing CMS to “waive” requirements while the latter “expenditure authority” allows CMS to “not apply” normally applicable requirements for states to provide coverage to individuals not eligible under the state plan. CMS states that this “can offer significantly more flexibility without the need for individual section 1115 waivers” (emphasis added). In other words, CMS is characterizing HAO demonstrations under section 1115(a)(2) as not necessarily “waiving” provisions of title XIX, but rather redesignating what expenditures will be treated as expenditures under the Medicaid state plan more broadly than “individual” waivers.  It’s an interesting legal theory, but it’s unclear how it would hold up in court, which leads us into our next question.

2. How likely is a legal challenge, and what will a legal challenge mean for states hoping to take advantage of the new guidance? Related to our first question, your editors are highly confident that a legal challenge to the waiver will be imminent following its release. Even the Trump Administration expects to get sued. But the prospect of one or more legal challenges raises a number of complex challenges. Can a plaintiff challenge the guidance upon its release, or must they wait until a state has actually requested a block grant waiver under the guidance? Who will be the plaintiff in any litigation and on what grounds will they have standing? Will the prospect of likely litigation keep many states on the sidelines? Is a nationwide injunction likely? These are all key questions and many are unknowable at this time (although we are looking at the work requirement litigation as helpful precedent).

: As we said in our prior post, your editors are highly confident that a legal challenge to the waiver will be imminent following its release. But we noted whether it was even possible for a plaintiff to challenge the guidance upon its release, or whether they had to wait until a state has actually requested a block grant waiver under the guidance?  And who would be the plaintiff in any litigation and on what grounds would they have standing? Would a nationwide injunction likely?

Although we don’t have all the answers to these questions, we can speculate.  First, CMS states in the guidance several times that the guidance does not impose any requirements on states and does not bind CMS to approve any state’s application for a HAO demonstration.  Consequently, in our view the guidance is unlikely to be viewed as “final agency action” that can be challenged under the Administrative Procedure Act (APA); thus, litigation at this stage is unlikely.  But there are several Republican states that have expressed interest in pursuing block grants, including Oklahoma, Tennessee, and Alaska.  To the extent that those states pursue and receive CMS approval for a HAO demonstration, we anticipate litigation to block the demonstration to be highly likely.

Second, it is unclear who the plaintiff would be in a legal challenge to an approved HAO demonstration would be, but the Kentucky litigation regarding work requirements is instructive.  There, the plaintiffs were individual Medicaid beneficiaries who lost coverage as a result of the implementation of Kentucky’s work requirements.  In the case of an HAO demonstration, we would also expect individual Medicaid beneficiaries to lead a potential legal challenge arguing that the state’s HAO demonstration is inconsistent with the purpose of the Medicaid program, citing specific provisions of a state’s HAO demonstration such as the state restricting access to coverage to certain benefits or the state providing inadequate payments to providers to ensure timely access to covered health care services.

Finally, although there may be at least one federal district court that would grant a nationwide injunction (although even this we think unlikely given how specific HAO demonstrations would be), we anticipate that the Trump Administration would hurriedly seek to appeal the case to the Supreme Court and seek a stay of the injunction to allow the HAO demonstration to go into effect.  As we wrote about previously, the Supreme Court recently stayed a nationwide injunction of a controversial immigration rule referred to as the “Public Charge” rule, thereby allowing the Trump Administration to begin enforcing the rule everywhere except Illinois.  Notably, Justice Gorsuch wrote a concurring opinion strongly criticizing the practice of issuing nationwide injunctions, stating that “when a court goes further than [ordering the government not to enforce the rule against the plaintiff], ordering the government to take (or not take) some action with respect to those who are strangers to the suit, it is hard to see how the court could still be acting in the judicial role of resolving cases and controversies.”  Thus, were litigation involving an HAO demonstration to reach the Supreme Court, the Supreme Court could similarly stay a nationwide injunction until the case is resolved on the merits.

3. What does the guidance mean for Tennessee’s pending block grant request? As discussed here previously, Tennessee currently has a waiver request pending before CMS that would convert a majority of the state’s Federal Medicaid funding to a quasi-block grant (the Tennessee proposal is indexed to inflation and population increases). The public comments in response to the Tennessee proposal were overwhelming negative. Assuming the Tennessee waiver request does not fall within the four square walls of the upcoming guidance, will the request be outright rejected, or will CMS work with the state to modify the proposal?

Updated:  The HAO guidance shares notable features with Tennessee’s quasi-block grant request, such as a per-capita cap financing option and a shared-savings component (although only for the aggregate cap option).  CMS HAO guidance is likely to inform its review of the Tennessee proposal, and it may require Tennessee to align its proposal with the aggregate cap financing model discussed in the guidance in order for Tennessee to share in savings with the government.

4. Will the waiver authority be limited to Expansion states? Some news outlets are currently reporting that, according to senior administration officials, the block grant authority will be specifically reserved for the Medicaid expansion populations, meaning that only those states that have expanded Medicaid will be able to take advantage of this new flexibility. As of January 2, 2020, 37 states (including DC) have expanded Medicaid, while 14 (predominantly Republican states) have not. Two of the three states currently considering block grants (Oklahoma and Tennessee) are among those states that have not expanded Medicaid (Alaska is also considering a block grant and has expanded Medicaid).

Updated: No, CMS makes clear that HAO demonstrations would be open to all states as a mechanism to cover populations “not covered under their state plan”.  CMS states that “[t]he HAO initiative is focused on coverage provided to adults under age 65 who qualify for Medicaid on a basis other than disability or need for long-term care services and supports and who are not covered in the state plan, including individuals described in the new adult group at section 1902(a)(10)(A)(i)(VIII) of the Act and 42 CFR 435.119.”

Our preliminary interpretation of this  language is that although the focus of the HAO initiative is generally on the expansion population, there may be other optional groups that are not covered under a states’ “state plan” that may be included in a HAO demonstration.  In other words, various mandatory eligibility groups under traditional Medicaid, such as children under the age of 19 would not be included in the HAO demonstration because they are “covered in the state plan” under section 1902(a)(10)(A)(i)(III).  Because the expansion population was determined to be an optional eligibility group by the Supreme Court in NFIB V. Sebelius, 567 U.S. 519 (2012), it is technically not an eligibility group that must be included in a Medicaid state plan.

5. Will the new block grant authority entice some non-expansion states to take up the Medicaid expansion? Related to the above question, if in fact the guidance is limited to expansion states, might this be the straw that broke the camel’s back on those states that have held off on expanding Medicaid? For these predominantly GOP-governed states, would the ability to block grant Medicaid funding be enticing enough to swallow what most have previously viewed as the growth of an open-ended entitlement and one intrinsically linked to the Affordable Care Act? Relatedly, would this represent a major policy pivot for the Trump Administation with regard to the Medicaid expansion?

Updated: Yes, we think so.  Oklahoma has already publicly declared that it intends to pursue a block grant financing model for its Medicaid program in light of the HAO guidance.  We anticipate that other states may also pursue a Medicaid expansion given that they could couch the expansion as an initiative consistent with long-standing conservative principles.

6. Will the guidance allow for a true block grant or something more akin to per-capita-caps? The term “block grant” can get thrown around loosely and in its most pure form, would mean a complete end to any open-ended financing. In other words, Federal Medicaid payments to a state would be tied to neither medical inflation nor population increase. Does CMS intend to hold states to a block grant in its strictest form, or instead allow greater flexibility?

Updated: CMS provides two options under its HAO guidance: an “aggregate cap” financing option that functions more closely to a traditional block grant that does not account for enrollment changes, and a “per-capita cap” financing option that does account for enrollment changes.  But as alluded to above, only the aggregate cap model allows the state to share in any savings it achieves—we also note that the aggregate cap model would require states to spend at least 80% of their annual cap or they will have their aggregate cap reduced for subsequent years, and states would only be eligible for savings if they achieve certain performance benchmarks established by CMS.

7. What does a block grant mean for vulnerable populations? Will states be able to include all Medicaid sub-populations in their block grant? While a block grant financing mechanism threatens access for all Medicaid enrollees, those critical populations that depend the most on the program (i.e. the elderly and developmentally disabled) are arguably the most at risk. Will CMS require these vulnerable populations be excluded, or will block grants apply across a state’s entire Medicaid population?

Updated: As discussed in question 4 above, the HAO guidance is focused on coverage provided to adults under age 65 who qualify for Medicaid on a basis other than disability or need for long-term care services and supports and “who are not covered in the state plan.”  One could argue that mandatory eligibility groups are covered under a state plan by definition because they are mandatory.  Thus, children, disabled groups, pregnant women, etc. would all be excluded from an HAO demonstration.

8. Will the Administration reconsider new flexibilities for outpatient prescription drugs? We’ve previously reported on the past efforts of some states, including Massachusetts, to seek new flexibilities with regard to compliance with the Medicaid drug rebate or program. In particular, Massachusetts sought permission to implement a closed, commercial-style formulary in the state (and CMS denied this request). As part of its block grant waiver request predating the upcoming guidance, Tennessee similarly sought flexibilities with regard to coverage of prescription drugs. While manufacturers have long held that new flexibilities would be a betrayal of the “grand bargain” of the drug rebate program, could a block grant be a way for CMS to allow states some new flexibilities to control prescription drug costs?

Updated: Yes, the HAO guidance certainly does. In an apparent about-face reversal, CMS would allow states with an HAO demonstration to adopt closed formularies under Medicaid while retaining statutory-entitlement to rebates under the Medicaid Drug Rebate Program (MDRP).  CMS rejected a similar proposal from Massachusetts in 2018 that requested flexibility to adopt a closed formulary and the agency indicated that Massachusetts would have to forego statutorily-mandated rebates in order to adopt a closed formulary. HAO demonstrations would allow states to implement formularies like those provided in commercial health insurance markets and Medicare Part D, consistent with Essential Health Benefit (EHB) requirements.

According to CMS, states can do this because prescription drug coverage would not be covered under the state plan, but rather would be covered under section 1115(a)(2) expenditure authority for HAO individuals.  As a result, CMS states that the formulary requirements in section 1927 (the Medicaid Drug Rebate Program) do not apply because those requirements only apply to state plan drug coverage.  At the same time, however, CMS asserts that drug manufacturers would continue to be obligated to provide rebates, even if their drugs would not be covered by that state’s Medicaid program because payment for such drugs are considered “expenditures under the state plan.”  Arguably, this statement is inconsistent with guidance that CMS gave to the state of Massachusetts when it requested similar waiver authority in 2018.

In short, CMS logic is as follows:

  • Section 1115(a)(2) of the Act provides that expenditures made under its authority are to be “regarded as expenditures under the State plan.”
  • HAO demonstrations are authorized under section 1115(a)(2) of the Act.
  • Prescription drugs may be covered under a HAO demonstration, making expenditures for such drugs as “expenditures under the State plan”.
  • Section 1927(b) requires drug manufacturers to pay rebates on drugs “for which payment was made under the State plan”.
  • Thus, 1927(b) requires drug manufacturers to pay rebates on drugs under a HAO demonstration because payment for such drugs under such a demonstration is authorized under section 1115(a)(2).

Implicit in this logic is that nothing in section 1927(b) requires states to cover the drugs of manufacturers for which “payment was made under the state plan”.  Also implicit is that states can negotiate deeper supplemental rebates for drugs given their leverage to adopt closed formularies.

If states choose to establish formularies, CMS expects states to comply with Essential Health Benefit (EHB) requirements, and to provide coverage of (1) substantially all drugs for mental health (that is, antipsychotics and antidepressants) consistent with Medicare Part D coverage; (2) substantially all antiretroviral drugs (including PrEP) consistent with Medicare Part D coverage, and (3) all forms, formulations, and delivery mechanisms for drugs approved by the Food and Drug Administration (FDA) to treat opioid use disorders for which there are rebate agreements in place with the manufacturers.  Furthermore, since the prescription drug coverage component of EHBs require coverage of at least one drug in each category or class established by the USP, the USP’s classification system will gain increased importance as they could now influence new state Medicaid formularies.  CMS states that it may negotiate additional coverage requirements with states, and CMS expects states to comply with drug utilization review, state reporting, and program integrity requirements consistent with section 1927.

9. How will various stakeholders respond? While the block grant guidance will be directed at state Medicaid agencies, it will have far-reaching implications for other stakeholders, including: the Medicaid managed care plans that currently manage benefits for more than 2/3rds of all Medicaid recipients nationally, the health care providers serving what amounts to the single largest source of health insurance coverage in the country, and the more than 56 million Medicaid recipients nationally. Will CMS offer these stakeholders an opportunity for comment, and what issues will they raise in response (either positive, or more likely, negative).

Updated: Shortly after its release, many stakeholders (Families USA, National Association of Community Health Centers, PhRMA) issued statements condemning the guidance as being inconsistent with the purpose of the Medicaid program.  Only very few openly supported the guidance.  We note that intense opposition and publicly lacking support also characterized the public comments regarding the Tennessee quasi-block grant proposal.

10. Where are the other Medicaid rules we’ve all been waiting for?  In addition to the block grant guidance, we know that CMS’s final Medicaid managed care rule should be coming out soon, as well as a proposed rule to encourage value based purchasing arrangements for prescription drugs in the Medicaid program.  Where are those rules?  When will they be released?

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