CMS Releases Block Grant Guidance: Answers to your FAQs

On January 30, 2020, the Centers for Medicare & Medicaid Services (CMS) issued its long awaited and highly anticipated State Medicaid Director Letter (SMD Letter) announcing the “Healthy Adult Opportunity” (HAO) initiative that will allow states to carry out demonstrations to implement either an aggregate or per-capita cap financing model for certain Medicaid populations.  We’ve previously previewed and highlighted some of the key expectations for this long-awaited guidance. Rather than summarizing the entire proposal here (although we have – feel free to send me an email for our full summary), we thought it would be more useful (and fun!) to highlight answers to some of the key questions we have received (and some questions we haven’t received, but have thought of ourselves!)

So, without further ado, here are answers to your 10 most interesting questions on the block grant/HAO guidance.

  1. Do we expect that CMS will be sued as a result of the guidance?

It is hard to see how litigation challenging the guidance alone would be successful.  CMS repeatedly makes clear that the guidance does not bind CMS to a particular course of action.  We think that, instead, it will only be after a state applies for a waiver under the new flexibilities announced in the letter and the waiver is approved that a state may be sued for implementing the waiver or CMS sued for approving it.  In this sense, any lawsuit involving this guidance will likely follow the model of the lawsuits challenging the approved community engagement waivers.

  1. A couple of years ago, you wrote that Massachusetts proposed a restrictive formulary for prescription drug coverage in 2017 as part of a Medicaid waiver request, but that the waiver proposal was rejected by CMS. Doesn’t the new guidance allow states to do the exact same thing?  Why is CMS allowing a restrictive formulary now after it rejected the Massachusetts waiver?

This is a good question, and CMS is very nuanced in its explanation of why the restrictive formulary proposal is permissible under this guidance.  According to CMS, the legal basis for approval of any waiver under the guidance is section 1115(a)(2) of the Social Security Act.  Because, under the waiver, drug coverage would not be made available under the state plan (under which the open formulary requirements of the Medicaid program are applicable), “but instead would be covered under section 1115(a)(2) expenditure authority…[t]his means that the open formulary requirements in section 1927 … do not apply.”  Nevertheless, manufacturers are still required to pay rebates if their drugs are dispensed to Medicaid enrollees in the state that receives a waiver under the guidance.  Predictably, this policy decision by CMS was not greeted with open arms by the pharmaceutical industry.

  1. One of the biggest criticisms of block grant/per capita cap proposals is that there is no way to account for changed circumstances; after all, that’s why Medicaid is an entitlement.  Under the proposal, is there any way out of the caps? 

It seems like CMS is sensitive to the criticisms that were made under the legislation passed by the House of Representatives in 2017 to repeal the Affordable Care Act.  That legislation would have adopted a cap on Medicaid spending similar to the proposal announced by CMS in the guidance.  One of the objections to the House bill was that, if it had been enacted, states would have had limited flexibility to act in the case of an economic downturn or a natural disaster.

Medicaid is an entitlement program.  Section 1902(a)(10)(A)(i) of the Social Security Act says that a state plan for medical assistance must “mak[e] medical assistance available to all individuals” who qualify.  It does not say “make medical assistance available as long as there is enough money.”  If funding to a state is capped under a waiver issued pursuant to the guidance, there is a chance that a state will not be able to “make medical assistance available to all individuals” who qualify.

CMS addresses this in two ways.  First, the agency stated in the letter that the agency “will provide states with the opportunity to propose updates to a proposed HAO demonstration to account for any changes … due to unforeseen circumstances out of the state’s control, such as a public health crisis or major economic event.”  The guidance states that CMS may, in such circumstances, renegotiate the special terms and conditions of the waiver with the state.  In addition, for states adopting the per capita model, CMS will allow those states to use a trend model that takes into account the lesser of the average growth rate in the state’s program over the prior five years or the medical care component of the consumer price index.

  1. Why did CMS limit this policy to states that want to cover adults not otherwise eligible under the state’s plan?

It may be that converting a state’s entire Medicaid state plan to an aggregate or per capita cap model might have been too much of a political lift for CMS.  The HHS Office of General Counsel may have also raised legal concerns with such a broad proposal.  Applying the policy to adults not otherwise eligible under the state’s plan generally limits the policy to the ACA expansion population in those states that have not adopted the ACA expansion to date.  Because that population is optional due to the Supreme Court’s decision in National Federation of Independent Businesses v. Sebelius, 567 U.S. 519 (2012), CMS likely felt that it had more flexibility in benefit design for this population.  The irony, of course, is that a state that expands Medicaid using a waiver issued under the guidance has adopted “Obamacare” with the blessing of an Administration that took office promising to repeal “Obamacare.”

  1. The CMS guidance authorizes spending for states that use either an aggregate expenditure or per capita cap. But the proposal applies in large part to adults who are not eligible for coverage under the state plan.  How will the caps be calculated for these enrollees when there is no historical data? 

This, to us, had been one of the great mysteries of the reported policy before we saw the guidance.  Generally, one would expect that a cap on spending would have some basis in historical expenditures:  but since the guidance is targeted at coverage of individuals who are not already covered under the state’s plan, CMS has to have some basis to calculate the cap.  CMS addresses this on page 23 of the guidance.  The agency states that it will use three factors to establish a cap:

    • The national average for population and services;
    • Geographic specific factors; and
    • Other information necessary to ensure the accuracy of the estimate.

CMS then states that it will consider re-basing the cap after two years (waivers under the guidance are available for five years) if actual state expenditures are more than 3% above or below the cap (or, in the case of states using managed care, if the medical loss ratio is outside required parameters).

  1. Do you expect many states to pursue an HAO demonstration? Which states and how likely are they to adopt such a model?

Governor Stitt of Oklahoma has already announced his intentions to file immediately for a waiver under the HAO demonstration to expand Medicaid to able-bodied, working adults and to block grant those funds. In addition, many speculate that Tennessee’s pending block grant waiver with CMS already falls well within the bounds outlined by the CMS Administrator for the HAO demonstration. Alaska and Utah have previously expressed interest in a block grant-type proposal. So, yes, we expect a number of “red” states to seriously consider filing a waiver under the new HAO demonstration authority. Still, and similar to the community engagement waiver process, we also expect most states to sit on the sidelines for now, given the likelihood that any state filing for and receiving waiver approval will likely face lengthy and costly lawsuits.

While some have speculated that some “blue” states could be lured by the prospect of establishing closed formularies and driving down prescription costs in their state Medicaid programs, we think it is unlikely that any Democrat-governed state will seriously consider the new demonstration authority anytime soon.

  1. Given that the HAO demonstration is focused, in part, on new flexibilities for the Medicaid expansion population, why would non-expansion states like Oklahoma be interested? Are these states planning to expand Medicaid?

In many cases, we expect states like Oklahoma will, in fact, expand Medicaid up to 133% of FPL in order to take advantage of the new block grant authority. As the HAO demonstration is limited to those Medicaid populations that are not categorically eligible (able-bodied, non-pregnant adults between the ages of 18-65), absent expanding Medicaid, many states would not have much of a population to include in a block grant. For example, Oklahoma currently provides only very limited coverage to non-categorically eligible Medicaid populations: Oklahoma currently offers no Medicaid coverage for able-bodied, single adults and offers coverage only up to 42% of FPL for parents (in a family of three). While the block grant guidance does make clear that there are populations other than the expansion population that could be included in the HAO demonstration, for many states these populations are fairly limited.

  1. What does the release of the HAO guidance mean for Tennessee’s pending block grant waiver?

Great question! It is our expectation that there has been some communication between CMS and Tennessee throughout this process. While we doubt Tennessee had a copy of the new guidance in its hands in advance of submitting its waiver request, we fully expect that CMS officials provided ongoing feedback to Tennessee throughout the process (expecting the guidance release imminently). Still, there are several pieces of the Tennessee waiver (as submitted) that do not conform to the HAO guidance. Perhaps most importantly, the Tennessee block grant would apply to Tennessee’s core Medicaid population, and not just able-bodied adults. As such, it remains to be seen how CMS will handle approval of the Tennessee waiver in a way consistent with its recently release HAO guidance.

  1. How does the HAO guidance interplay with other pending and recent Medicaid rules? Is there an interplay between, for example, the Medicaid fiscal accountability rule and this guidance?

As noted in our previous post, a number of expected Medicaid rules are still pending, including CMS’s final Medicaid managed care rule which should be coming out soon, as well as a proposed rule to encourage value based purchasing arrangements for prescription drugs in the Medicaid program. The comment period is also currently open for CMS’ highly controversial fiscal accountability regulation. The latter of these (the fiscal accountability rule) is already resulting in significant pushback [paywall] as state Medicaid agencies and providers face the prospect of millions of dollars in cuts. While the new HAO guidance is not directly connected to any of these rules, we do believe that the fiscal accountability rule, in particular, could force states already facing budget pressures to take advantage of a “pressure valve” by block granting their expansion population. To the extent CMS finalizes the fiscal accountability rules and states face renewed budget pressures, there may be an opportunity to relieve some of this fiscal stress through a block grant financing mechanism.

  1. What do you expect are the long-term implications of the HAO demonstration? Is there a possibility that “block grants” are the next managed care?

A client recently asked us this question and we think it is a good one. If you recall, back in the 1990s the issue of managed care in Medicaid was also largely considered a “toxic” and “political” issue. Yet, today, Medicaid managed care is largely both apolitical (both red and blue states equally have converted their Medicaid programs to managed care) and widespread (there are 283 Medicaid MCOs providing care to what amounts to more than 70% of all Medicaid enrollees). Could block grant financing be the next managed care?

First, we think it is far too early to tell. For the time being, block grants are inherently tied to President Trump, a highly polarizing figure. We don’t expect that anytime soon we will see the kind of bipartisan legislation that led to Medicaid managed care becoming widespread across the nation (as the Balanced Budget Act did in 1997).

Still, down the road, we do think it is at least possible that more and more states could be tempted by the flexibility offered by a block grant. While block grants today are generally viewed within the lens of Medicaid cuts, recall that “blue” states like Rhode Island have in the past dabbled with such financing mechanisms (and yes, we agree CBPP, it was very different than what was proposed last week). To the extent states are looking for more flexibility and are particularly attracted by the allure of a commercial style formulary (as noted above, it was “blue” Massachusetts that first raised this issue with CMS), perhaps in 5-10 years we could see block grants become a bi-partisan issue.

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