Medicaid Block Grants: The Tipping Point in the State-Federal Partnership?

Five Questions States Should Ask Themselves Before Calling CMS…


By Marie Zimmerman, Vice President, Medicaid Transformation and Financing, Jennifer Ryan, Executive Vice President, Stacie Weeks, Principal, Medicaid Policy, and Julia Smith, Associate Director, Medicaid Policy

On January 30, 2020, the federal Centers for Medicare & Medicaid Services (CMS) released a long-anticipated letter to state Medicaid directors outlining a new Section 1115 waiver—the Healthy Adult Opportunity (HAO) waiver. This waiver, according to CMS, will allow states to “provide cost-effective coverage using flexible benefit designs,” but such a design will involve a block grant or per-capita cap on their Medicaid programs. There are many considerations states will need to weigh before deciding to enter into such a financing arrangement with the federal government. While the HOA waiver appears to give states additional flexibility to manage their programs as they see fit, the real purpose of the HOA waiver is to shift the balance of financial responsibility for the Medicaid program to the states. The flexibility is secondary.

Typically, when a new federal opportunity like this arises, state Medicaid directors evaluate the proposal from several different angles to understand the practical impact for their state. Because Medicaid continues to be the largest source of federal funding for states, officials must weigh the expected benefits of the new opportunity against the potential risks to the state’s budget, economy, and health care system. The Medicaid program acts as an important stabilizer for states and their health care systems, especially in times of public health or economic crises.

As a former State Medicaid Director and a former federal Medicaid official, we understand the considerations Medicaid directors must take into account when weighing the efficacy of the HAO waiver. On its face, the HAO waiver may appear as an opportunity to contain Medicaid costs by leveraging renewed flexibility for states to reduce coverage, restrict access, limit eligibility, and cap spending levels. However, the trade-offs ultimately may come at a cost to state leaders, who will face difficult choices about where to make cuts to ensure spending stays below the cap. The costs and risks associated with the changes required under this waiver should not be taken lightly.

Will this waiver help states contain their Medicaid costs?

Medicaid is the nation’s largest health insurance program, covering more than 71 million Americans. Not surprisingly, the program spends billions in state and federal dollars each year to provide coverage to people who otherwise could not afford it. Together, the federal government and states share in the cost of the program. Over the last several years, Medicaid directors have sought to preserve this longstanding principle of shared responsibility and reward.

Unfortunately, this principle is upended under the HAO waiver. While states would have more flexibility in how they cover adults in Medicaid, it will come at a cost. While the cap would only apply to adults considered part of the Affordable Care Act’s Medicaid expansion population and other “optional” non-elderly, non-disabled adults covered by Medicaid, it does not limit spending or offer flexibility in coverage of services for seniors and people with disabilities. Long-term care is by far the largest cost driver in the program. In fact, the non-elderly, non-disabled adult population only accounts for 19 percent of spending in Medicaid. Whereas, the elderly and people with disabilities, particularly those receiving long-term services and supports, account for 61 percent of overall spending.

Once the block grant is set, the state alone is on the hook for any spending above the cap. And yet, if the state spends less than the cap, the waiver limits the savings the state can receive. For example, in the first year, if spending falls below the cap, the savings will go to the federal government. In years two and three, the state can share in 25 percent and 37.5 percent of any savings achieved, respectively. This creates a significant imbalance of risk versus reward for states. The waiver also removes the ability for states to carry savings forward at the time of a waiver renewal; this is a significant divergence from longstanding federal policy. Without being able to carry over savings, states risk that their baseline for determining the spending cap will reduce future opportunities for shared savings and eliminate any margin for years when the costs for the waiver population unexpectedly rise. Finally, if the state does not spend up to 80% of the aggregate cap each year, the block grant amount will be reduced over time. This is a thinly veiled move to cut federal spending on Medicaid.

What is the potential impact of the new managed care flexibility?

One goal of the waiver is to provide “federal taxpayers” with greater budget certainty—a very different goal than trying to help control health care costs or improve the quality of care provided in the Medicaid program. The reality is that the most Medicaid spending is not on the adult expansion population targeted for this waiver.

The purported flexibility from the HAO waiver for managed care may create perverse incentives for health plans and again shift more financial risk and costs to the state. For example, in exchange for not requiring federal approval of managed care rates under the waiver, health plans will be required to pay the state and federal government if they spend less than 85 percent of their individual revenues on medical costs for enrollees under the waiver. Sounds reasonable, right? Not when you consider that, if a health plan spends 95 percent or more of its revenue on medical costs for the waiver population because costs were higher than expected or the plan did a poor job of managing costs, the state must pay back the health plan. Moreover, the state must do so with 100 percent state funds for any expenditures that cause the state to exceed its spending cap.

This type of arrangement for managed care undercuts the fundamental purpose of purchasing a fully-insured, risk-based product from a health plan—which is to shift the risk of higher-than-expected costs from the state to the plan and gain greater budget predictability for the program. Additionally, it undermines states’ negotiating power with their contracted health plans and potentially provides a financial incentive for plans to not manage costs effectively because states, not the plans, bear the risk.

This risk is exacerbated with the establishment of the cap in advance by CMS, revealing the “upper bound” or maximum capitation rates paid to health plans. This provides health plans with new leverage in negotiations with states. Typically, states negotiate with health plans to set a fair and competitive rate to cover the estimated costs of the population. However, the cap provides health plans the opportunity to argue that the state can draw down federal dollars up to that maximum amount, and that this amount represents a fair estimation of necessary expenditures. This creates a dynamic that could result in states agreeing to excessive capitation rates, increasing Medicaid payments to health plans.

Will the new flexibility reduce the administrative burden for state Medicaid agencies?

Medicaid directors are all too aware of the additional administrative burden and costs associated with implementing program, system, and financing changes. Although CMS would eliminate some administrative requirements in connection with the HAO waiver, the waiver would ultimately increase administrative complexity for states that have worked hard to simplify their systems over the past decade. The HAO waiver establishes a new coverage program, subject to different eligibility and enrollment rules, benefits, cost-sharing requirements, and fiscal constraints that do not apply to the rest of the Medicaid population.

Moreover, states would be subject to new reporting requirements. These include a requirement to submit quarterly and annual reports addressing 25 quality and access measures, among other metrics; report quarterly results on 13 continuous performance indicators; and submit all financial information needed to assess spending against the cap. The substantial scope of these requirements suggests that CMS itself understands that capped funding demonstrations create fiscal pressures that may result in coverage losses, cuts in services, and reductions in provider rates, all to the detriment of beneficiaries.

Will the HAO waiver help states achieve better value and improve health outcomes for beneficiaries?

Many states have implemented some form of a value-based purchasing approach in Medicaid intended to pay for value over volume and improve health outcomes, while also reducing program costs. CMS encourages states seeking to participate in the HAO waiver to design payment and delivery system models for the waiver population(s) that align with states’ plans for the non-waiver populations. This encouragement is good and important.

However, establishing a new and different coverage system for the adult population through the HAO waiver will disrupt alignment and coordination across the program and across payers. This undermines state efforts to drive payment and delivery system reforms intended to improve access and quality and control costs. Moreover, the structure and flexibilities offered under this waiver run counter to many of the foundational elements of a strong value-based program and would harm state efforts by:

  • Decreasing program alignment in benefits and payment and with other payers;
  • Reducing providers’ and states’ ability to spread risk in their value-based programs by potentially reducing the number of people enrolled in state Medicaid programs and creating a separate program, with its own payment and delivery mechanisms, that may restrict coverage and access to care;
  • Limiting the feasibility of provider investments in system-wide changes; and
  • Reducing opportunities for multi-payer efforts that encourage broader transformation of states’ health care systems.

Is the HAO waiver a way to solve the Gordian Knot or just an ideological device?

It is important for states to ask whether the HAO waiver is a true solution to the actual problems states are grappling with in their Medicaid programs, or something else entirely. It is true that health care is complicated, but fixing it is less about trying to untie a Gordian Knot and more about giving states real tools that allow them to run cost-effective programs, not declaring ‘mission accomplished’ through the delivery of an ideological device.

If we are trying to contain costs, let’s look at where the largest drivers of spending really exist and talk about how we manage those costs responsibly and in partnership with the federal government. If we are really trying to create a sustainable system for the future, let’s help states invest more upfront in local health care systems that can bring more value to Medicaid and, ultimately, a better deal for the taxpayer. If we are committed to promoting the objectives of the Medicaid program, let’s expand coverage without adding barriers for people who are trying to access care. For these reasons, we hope states will carefully analyze, thoughtfully discuss, and ultimately weigh the future costs and real risks of the HAO waiver.