CMS Approves Tennessee “Block Grant” Waiver: A Summary and Analysis from your Editors

For our discussion of the new “closed formulary” flexibility approved in Tennessee, you can read our follow-up post here


On Friday January 8th, in the final days of the Trump Administration, CMS announced approval of a first-in-the-nation waiver that would permit Tennessee to transition from Medicaid’s longstanding, open-ended financing model to a modified “block grant” model – a financing system under which the Federal government has agreed to commit a discrete amount of dollars to the state, adjusted only by enrollment growth and pre-established inflation factors. Within this “aggregate cap” approach, Tennessee would have greater reins to modify coverage, benefits, and payment outside of established Federal rules, and would also have the opportunity to share in savings with the Federal government if it underspends these pre-defined targets. Given that these defined funding amounts are based on the state’s “without waiver” costs and significantly exceed the state’s annual “with waiver” expenditures, Tennessee stands ready to earn significant savings under the approved waiver, even with new “safety valves” imposed by CMS under the waiver approval.

This news is close to my heart – both geographically and emotionally. As readers may know, while I am a resident Partner in our firm’s Washington, DC office, my home is here in Nashville, TN. I also regularly provide pro bono legal assistance to individuals enrolled in Tennessee’s Medicaid program (known as TennCare) and so know first-hand the potential dangers of a model that gives my home-state, which has historically under-funded its largest safety net programs, additional flexibilities to depart from longstanding Federal guardrails.

When the TennCare III waiver (as it is known) was first announced back in the Fall of 2019, I provided a detailed summary for our readers. My colleague, Tom Barker, has also previously raised doubts about the legal ability of the Federal government to approve such a waiver. As an interesting bit of recent history, the TennCare III wavier proposal actually pre-dates, by several months, the “Health Adult Opportunity” block grant guidance issued by CMS in early 2020 advising states on how to apply for a block grant waiver. At that time, we raised questions on this blog as to the extent to which the TennCare III waiver conformed with these subsequent guidelines, particularly given the fact that the HAO guidance was focused solely on the expansion population (and TennCare III applies to essentially the entire Medicaid-eligible population in the state). In the waiver approval documents, CMS has taken the position that the TennCare III waiver is neither a true block grant, nor does it fall within the confines of its block grant guidance.

Because the actual waiver approval is more than 200 pages long, we will spare you from reciting each and every detail in this post (although we will highlight key points). Given the current political dynamics, we would also be remiss not to call out Section 10 of the waiver’s Terms and Conditions which sets forth the authority for CMS to withdraw authority for this waiver:

Withdrawal of Waiver Authority. CMS reserves the right to withdraw waivers and/or expenditure authorities at any time it determines that continuing the waivers or expenditure authorities would no longer be in the public interest or promote the objectives of title XIX and XXI. CMS will promptly notify the state in writing of the determination and the reasons for the withdrawal, together with the effective date, and afford the state an opportunity to request a hearing to challenge CMS’ determination prior to the effective date. If a waiver or expenditure authority is withdrawn, FFP is limited to normal closeout costs associated with terminating the waiver or expenditure authority, including services, continued benefits as a result of beneficiary appeals, and administrative costs of disenrolling beneficiaries.

In less than two weeks, President-elect Joe Biden will take office and will undoubtedly give serious consideration (IHP/Paywall) to exercising this withdrawal authority. While my team and I are still researching historical waiver withdrawals, we believe such a practice is rare (and perhaps unprecedented).  Whereas CMS can fail to renew a waiver, terminating a waiver seems, to us, somewhat uncharted territory.  This means there is also a great deal of legal uncertainty with respect to the withdrawal process, and any rights Tennessee may have in challenging the withdrawal of such a waiver are largely untested. News reports indicating that CMS Administrator Seema Verma is working with states to add new language to waivers preventing their quick termination could add an additional wrench for the Biden Administration in trying to unravel this waiver.

Below we summarize the key points of the TennCare III waiver.

Effective Date

The waiver approval is effective January 8, 2021, further complicating potential efforts by the Biden Administration to unwind the demonstration. Still, a complete overhaul of a financing system that is more than 50 years old is a complex undertaking, and while the waiver is detailed, it requires a great deal of additional work from the state (including likely state legislative action). Tennessee is, by-and-large, a “managed care” state, with more than 90% of its eligible population receiving care through private, Medicaid managed care organizations (MCOs). These MCOs operate on regular contracting cycles, meaning that future programmatic changes will, at the very least, require time consuming re-contracting processes. While not entirely unprecedented (the Trump Administration, in its early days, announced a policy of lengthier 1115 waiver approvals), the TennCare waiver approval is effective through 2030.  By way of contrast, most Medicaid waivers last for between three and five years.  Note that in its waiver request, the state had requested indefinite approval for this financing model.

Promoting the Objectives of the Medicaid Program

The Trump Administration has suffered a string of legal setbacks over the last four years in approving controversial waivers, including so-called “work requirement” waivers, with Courts finding on multiple occasions that the Administration failed to properly consider, and show, that the waivers “promote the objective” of the Medicaid program. My colleagues Haider Andazola and Tom Barker have written about these legal battles in the past. In sum, the Trump Administration has historically been faulted for (1) failing to proper analyze how a waiver would promote the objective of the Medicaid program; and (2) failing to focus on what the Courts view as the key objective of the Medicaid program: to provide health insurance to low-income individuals. In some respects, the Trump Administration appears to have learned its lesson in light of courts’ rejection of other waiver approvals. The waiver approval begins with a lengthy discussion of how the TennCare III waiver approval promotes the objective of the Medicaid program:

  • The TennCare III waiver will result in savings to the state, permitting it to stretch scarce Federal resource and thereby provide coverage to a broader range of persons in need;
  • By giving Tennessee new tools to control healthcare costs and improve beneficiary health, the state will accrue savings that will ensure the long-term financial sustainability of the state’s Medicaid program.

Largely gone is the language from previous waiver approvals focused on promoting independence and self-reliance, goals targeted by the Trump Administration in its earliest days for the Medicaid program but viewed skeptically by reviewing Courts.

Still, as readily admitted to in the waiver approval, the “vast majority of comments CMS received opposed Tennessee’s proposed demonstration” and, having reviewed many of these comments, I can attest that they are by-and-large focused on the very real concern that the waiver will not increase access to coverage for low-income beneficiaries in the state. Any court reviewing the approved waiver is likely to view skeptically the claim that the state can simultaneously achieve significant health savings and maintain or increase access to healthcare coverage.

Financing Approach

 In both the Administrator’s prepared remarks and in the waiver approval itself, CMS goes to lengths to stress: this is not a block grant. And remember the Health Adult Opportunity guidance I mentioned above – this is not one of those, either. Instead, CMS stresses this is a “budget neutrality structure bound by an aggregate cap on demonstration funding based on established recent historical state costs and enrollment for most populations covered under the demonstration.” Sounds like a modified block grant to me, CMS, but ok! Let’s break down how this financing would actually work.

Recall, today, that Tennessee (like every other state in the nation) receives Federal funding from CMS in accordance with the state’s Federal Medicaid Assistance Percentage, or FMAP. Tennessee’s FMAP will be 66.1% in 2021 — meaning that the states receives 66.10 cents for every dollar the state incurs for medical assistance on behalf of Medicaid beneficiaries. In this way, Medicaid in Tennessee (and every other state) is an open-ended entitlement: while states may only receive Federal funding for mandatory and optional services included in the State’s Medicaid plan (called a State Plan Amendment) or in a CMS-approved waiver, there is no cap or limit on the amount of Federal funding a state can receive as long as the state puts up its share of the costs of medical assistance for every Tennessee residents who meets the state’s Medicaid eligibility criteria.

So – is the TennCare III waiver essentially just a lump sum payment to the state in lieu of this historical matching system? Not exactly.

In a previous blog post, Tom discussed the legal hurdles of a pure block grant approach and astutely noted that section 1115 does not allow the Secretary to waive requirements of the provision of the Social Security Act that mandates federal matching payments whenever a state incurs an expenditure for medical assistance. CMS addresses this legal hurdle head-on, going as far as to concede that a pure block grant approach (in which the state receives a lump sum of money) is simply not legally supported (even with a waiver).

Instead, under the approved TennCare III waiver, Tennessee will continue to receive Federal matching funds for expenditures under the waiver up to the “aggregate cap” amounts for five pre-specified eligibility groups (EGs): (1) disabled individuals; (2) children; (3) adults over 65; (4) adults under 65; and (5) dual-eligibles. In the first year of the waiver, this base block grant amount will be approximately $8.6 billion (taking the state’s expenditures for state Fiscal Year 2019 and trending forward).

These caps, calculated as projected per-member-per-month amounts based on amounts the Federal government projects the state would spend in the absence of its current TennCare Waiver (“without waiver” costs), will be adjusted during the lifetime of the waiver only by pre-specified “trend rates” (to account for inflation), and growth in enrollment. Because these caps are based on “without waiver” costs, and because the state has historically underspent compared to these costs, Tennessee stands to see immediate shared savings (discussed below), under the waiver. Importantly, and in response to concerns from some commenters, CMS has imposed two new and significant constraints on the state’s ability to earn savings by cutting benefits or enrollment. First, the enrollment growth will be bound by a two-sided risk corridor of a +/-1 percentage point change in enrollment, meaning that if enrollment increases or decreases by more than 1% in any EG, the state will be held harmless for any increase, and the Federal government will be held harmless for any decrease in enrollment. The waiver approval also prohibits the state from reducing benefits or coverage.

Unique in this waiver, Tennessee would be eligible to receive up to 55% of any saving achieved, in the form of additional federal matching funds, to invest in what the waiver refers to as “Designated Savings Investment Programs”, or DSIPs. The waiver defines these DSIPs to include state-programs, such as: community and faith-based clinics, the state’s behavioral health safety net, and education programs for school nurses, school psychologists, school social workers, and the state’s CoverRx prescription drug assistance program. Side note/Medicaid nerd alert: do these DSIPs sound familiar to any of my fellow Medicaid nerds out there? As we wrote back in 2018 on the blog, the Trump Administration has phase out the ability of states to claim matching dollars for Designated State Health Program (DSHP), which look a lot like DSIPs (and the waiver admits as such!). According to CMS, however, the 2020 block grant guidance permitted states to claim matching funds for certain DSHPs such to certain quality metrics, and the Tennessee waiver adopts a similar approach.

What about losses? Great question. Under the waiver, Tennessee would be at-risk for any expenditures exceeding the aggregate caps and per-member costs, subject only to the trend rates, enrollment risk corridor, and several minor exceptions.

Waiver Flexibilities

 The list of flexibilities granted to Tennessee in the waiver approval is, not surprisingly, quite long. In exchange for accepting an aggregate cap on expenditures, CMS is approving a broad range of new flexibilities for the state, including first-in-the-nation flexibilities for managing prescription drugs, which we address in this post. Other key flexibilities include:

  • The ability of the state to add benefits and coverage without seeking prior approval from CMS. Note: CMS is not approving the general authority of the state to reduce benefits or coverage, at this time, essentially imposing a “maintenance of effort” or MOE on the waiver.
  • The flexibility to modify its DSH funding methodology withoutprior CMS approval. We wrote about CMS’ interesting DSH history in our summary of the waiver proposal.
  • As noted above, Tennessee will now have the flexibility to use savings generated under the waiver to fund certain state programs (DSIPs) if it also meets certain quality metrics.
  • The authority to suspend Medicaid eligibility for individuals who have been convicted of Medicaid fraud in state or local courts for a period of up to 12 months.

Elements CMS Did Not Approve

 In response to comments and concerns, CMS did not approve some key elements of the TennCare III waiver request, in addition to the modified financing approach adopted in the waiver and discussed above:

  • While Tennessee had requested permanent approval of the waiver (without the need for future waiver approvals), CMS approved the waiver for a period of 10 years.
  • Tennessee had requested to be exempt from any future Federal mandates regarding eligibility or benefits (for example, think of the recent requirements around coverage for COVID-19 testing and vaccines for Medicaid individuals). CMS denied this request – in exchange, however, the costs of any new benefits or eligibility changes will be incorporated into the aggregate caps on a prospective basis using an amended budget-neutrality process.
  • As discussed in our summary of the waiver proposal, Tennessee had sought flexibilities with respect to Medicaid managed care and the IMD exclusion. Tennessee withdrew the request for these flexibilities.

What’s Next

Shortly after the waiver approval was released, our clients began asking “what’s next” in light of the likely opposition to the waiver by the Biden Administration, which takes office in less than two weeks.

First, putting aside any future opposition by the Biden Administration, litigation is highly likely. In the event the Biden Administration does not withdraw the waiver, we expect lawsuits will be filed by advocates (and perhaps even pharmaceutical manufacturers) challenging the legal authority of CMS to approve this new funding mechanism, to approve commercial-style formularies in the Medicaid program, and on the basis that the waiver does not promote the objective of the Medicaid program. And if the Biden Administration does withdraw the waiver, as highlighted above, we anticipate Tennessee will thoroughly examine all legal remedies (although, as we noted, these are largely untested). As reported by the New York Times on January 8th and highlighted above, CMS is apparently circulating new contracts to states with waivers that would require any withdraw occur over a nine month period, further muddying the waters for the incoming Biden Administration to simply withdraw the rule.

Will the Biden Administration withdraw the waiver? Your author tends to think – yes. Even with the threat of some vague legal challenge by Tennessee, the waiver clearly contemplated the ability of CMS to withdraw the waiver, and keeping the waiver in place also keeps in place some very negative precedents from the world-view of the incoming Administration.  While we do believe there may be a future place for a major overhaul of Medicaid financing principles (we discuss those prospects here), we simply think Tennessee is the wrong candidate for this “test case” given the very different political positions of its senior leadership and those who are likely to serve in the Biden Administration.[1] With a long (and also recent) history of benefit and eligibility cuts, we expect those in the incoming Administration will view skeptically any claims that coverage will expand, and not contract, under the waiver.

And what are the next steps for Tennessee? According an FAQ released by the state, “Per Public Chapter 481, the agreement must be approved by the General Assembly prior to implementation. Governor Lee will present a joint resolution authorizing implementation for the legislature’s immediate consideration. The agreement will be implemented by TennCare upon approval. If not approved, the state must negotiate a new waiver renewal with the federal government, as the existing TennCare waiver expires on June 30, 2021.”

As always, we will update here on the blog, as updates come in.

[1] It is worth noting that 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. 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.

One thought on “CMS Approves Tennessee “Block Grant” Waiver: A Summary and Analysis from your Editors

  1. Thanks for the great summary and analysis. Looking forward to Part 2.

    I remember when the original medicaid TennCare program was implemented in the late 1990s, and the state developed its own very restrictive formulary – including only covering 2 drugs to treat TB even though the clinical guidelines for treating drug resistant TB called for 3 or 4 drug regimen. Given the medicaid coverage population, the ability to treat drug resistant TB was critically important, which led to a lot of “discussion.”

    Keep up the good work.

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