In a State Medicaid Director Letter issued on January 30, 2020, CMS released its long anticipated guidance to states on implementing block grants as a mechanism of Medicaid financing.  State Medicaid Director Letter 20-001 announced the “Healthy Adult Opportunity” initiative (“HAO”) that will allow states to receive block grant funding for non-disabled adults under the age of 65.  The letter describes that this opportunity will allow states “to potentially achieve new levels of flexibility in the administration and design of their Medicaid programs while providing federal taxpayers with greater budget certainty.”

CMS will permit states to accept their Medicaid funding as either a per-capita or aggregate payment through a section 1115 demonstration.  Section 1115  of the Social Security Act permits the Secretary of HHS to waive certain statutory requirements for an experimental, pilot, or demonstration project that is likely to assist in promoting the objectives of the Medicaid program.  Medicaid is a jointly funded federal-state program that is the nation’s largest coverage source.  Historically, section 1115 demonstration projects have been used to expand Medicaid coverage.  If implemented, this would be a significant change to the historically open-ended funding provided to states to finance coverage for their Medicaid populations.

In the SMD, CMS stated what they will be testing in the HAO:

The HAO initiative thus will allow CMS and states to test whether greater administrative flexibility will enable states to more efficiently run their Medicaid programs, while increasing state accountability, facilitating enrollment of eligible persons, ensuring timely beneficiary access to effective care, improving quality outcomes, and potentially freeing up resources for additional investment in coverage or benefits not offered under the state plan or other initiatives that advance the objectives of the Medicaid program.

A state may apply for an HAO demonstration for adult beneficiaries whose eligibility is not due to pregnancy, disability, or long-term care services and supports.  CMS provides that states may impose conditions of eligibility on coverage, such as community engagement requirements.  A state may also choose to not provide retroactive eligibility for individuals.  An often overlooked benefit, the Medicaid program has traditionally protected both beneficiaries and providers by retroactively covering medical bills for the three months prior to the individual’s application date.  Similarly, CMS would permit states to waive the requirement to operate Hospital Presumptive Eligibility, which allows a hospital to provide temporary coverage to individuals likely to qualify for Medicaid.  These are two consumer protective facets of the Medicaid program that assist not only individuals but help to ensure providers are not left with uncompensated care costs.

The funding caps permitted under an HAO demonstration will be required to be budget neutral, as CMS has required for section 1115 demonstrations.  A state may request to finance their Medicaid program through an “aggregate” or “per capita” cap.  States would be responsible for any costs that exceed the annual cap.  In order to determine the cap amount, CMS will use the most recently available eight consecutive quarters of expenditure data.  To ensure state maintenance of effort, a state will be required to spend at least 80 percent of the aggregate cap annually or it will be reduced in future years.  Notably, under an aggregate cap, the state would be eligible to share in any savings where the state’s annual expenditures are below the cap.  The state could use the shared savings for “reinvestment expenditures.”  CMS states that:

Earning federal share for investing in this program would free existing state resources that states could choose to reinvest in expanded services or benefits for other Medicaid enrollees, including mandatory state plan populations not covered under the demonstration.

States will be required, at a minimum, to cover the items and services of essential health benefits (EHB) provided in the Affordable Care Act.  The ten EHB categories are: (1) ambulatory patient services; (2) emergency services; (3) hospitalization; (4) maternity and newborn care; (5) mental health and substance use disorder services, including behavioral health treatment; (6) prescription drugs; (7) rehabilitative and habilitative services and devices; (8) laboratory services; (9) preventive and wellness services and chronic disease management; and (10) pediatric services, including oral and vision care.  States “will have broad flexibility to propose alternative premium and cost sharing structures” but the aggregate out-of-pocket costs for a beneficiary may not exceed five percent of household income.  CMS also “encourages” states to implement payment and delivery system reforms.

In what appears to be a notable policy reversal, SMD 20-001 permits states to have a closed drug formulary for certain beneficiaries similar to a managed care plan.  This policy reversal is significant because Massachusetts had previously requested the ability to have a closed formulary, which CMS denied.  Administrator Verma responded to criticism over twitter, noting that “the HAO demonstration is limited to certain optional adult beneficiaries.”  The Administrator similarly tweeted that the HAO would apply “to a working-age adult population that is optional to cover and wasn’t even eligible for Medicaid less than a decade ago.”   It is worth noting that while the Supreme Court in Sebelius v. NFIB (567 U.S. 519 (2012)) limited the ability of HHS to require states to expand their Medicaid program, the expansion population is still considered a mandatory population under the Medicaid statute.  Such a prioritization of the traditional population over the expansion population has been rejected by Judge James Boasberg of the U.S. Federal District Court for the District of Columbia in a challenge to the implementation of CMS’ policy permitting work and community engagement as a requirement of eligibility for Medicaid. See Stewart v. Azar (313 F.Supp.3d 237 (2018)).

Critics of the policy promptly raised concerns about the legality of the policy.  Nonetheless, the HAO demonstration aligns with the Trump Administration’s approach to restrain the growth of the Medicaid program and provide states with additional flexibility.

The Health Law Pulse will continue to follow the HAO as it is implemented.  Norton Rose Fulbright professionals are available to provide additional information and guidance regarding CMS implementation of the HAO.