At the Helm

Our 4 biggest takeaways from CMS' new Medicaid block grant guidance

by Yulan Egan

Despite both consternation and excitement (depending on who you are) that the Trump administration was slated to unveil plans to overhaul the Medicaid financing structure, the block grant guidance released Thursday represents a much more limited—if still notable—step in that direction.

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Rather than overhauling the entirety of the Medicaid program, CMS ultimately chose to focus its efforts on able-bodied adults covered by Medicaid: the Affordable Care Act's expansion population. Through existing Medicaid Section 1115 waivers, CMS intends to grant states the option to implement either a block grant funding model or a per capita cap model for that portion of the Medicaid population.

Understanding the potential implications

While the legality of this approach is still unclear (more on that in a moment), the guidance issued by CMS raises two overarching questions for the health care industry.

1. How could this plan impact Medicaid enrollment nationally?

Critics of block grants have long argued that caps on Medicaid spending would lead states to make drastic cuts to Medicaid enrollment. But the focus on the ACA's expansion population raises the potential for increases in Medicaid enrollment, should even a subset of the 14 states that did not expand Medicaid under the ACA pursue expansion. About 2 million people in non-expansion states could theoretically be eligible under the criteria CMS outlined.

The governor of Oklahoma (a non-expansion state) has already indicated an intent to apply for participation, and other non-expansion states have previously expressed interest in either partial expansion (Utah) or block grants (Tennessee and Alaska). Expansion in any of these states, even under a block grant or per capita cap, could lead to net increases in Medicaid enrollment nationwide. Importantly, the new guidance does not appear to shift the administration's position on partial expansion. While states may choose to expand Medicaid to only a subset of the ACA's target expansion population, only those states who fully expand would be eligible to receive the ACA's enhanced match.

States that previously expanded Medicaid could technically apply for a waiver as well (or tweak existing waivers to include a block grant or per-capita cap). Although CMS noted that it would not allow states to set explicit limits on enrollment, some of the waiver flexibilities mentioned—such as making eligibility contingent on premium payments or limiting retroactive eligibility—could lead to declines in enrollment if adopted for existing expansion populations. Importantly, many of those flexibilities are already available to states through other types of 1115 waivers; they are not unique to this guidance.

2. What levers could states pull to keep spending below target, and how would that impact health care organizations?

In addition to enrollment, states theoretically have two other major levers to pull when it comes to managing Medicaid spending: benefits and payment rates.

This guidance notes that states must cover Essential Health Benefits and will be expected to align benefits structures with those available in the individual insurance markets. In other words, they will likely not have flexibility to pare benefits back beyond what is required under the ACA. What is most notable, however, is CMS' indication that it will allow states to adopt closed prescription drug formularies—i.e. to set explicit limits around which prescription drugs Medicaid beneficiaries have access to—without losing Medicaid's mandatory rebates on brand name drugs. Unlike the aforementioned flexibilities related to eligibility and cost-sharing, this represents a new step by CMS, one that would have negative ramifications for pharmaceutical companies and is sure to invite pushback from that segment of the industry. 

The guidance also indicates a willingness to grant states additional flexibilities that could impact payment rates, most notably by eliminating the need for CMS to review payments from states to managed care organizations in order to ensure actuarial soundness, and by giving states greater authority in determining network adequacy. Such changes could lead to reductions in reimbursement for both plans and providers.

What to watch for

Here's what we'll be watching for moving forward:

1. In the short term: Legal challenges likely to follow any state action on block grant waivers

While the Trump administration appears to have taken deliberate steps to pre-empt legal challenges—issuing waiver guidance as opposed to a new regulation and limiting the scope of that guidance to the Medicaid expansion population—it's likely that any state that moves forward could expect immediate legal challenge.

We expect those legal challenges will center around whether the demonstration aligns with the core goals of Medicaid (as we've seen with Medicaid work requirement challenges) and the matching structure behind Medicaid financing. And while Oklahoma seems poised to be the first state to pursue a block grant waiver, CMS noted that states must adhere to the normal transparency and public notice requirements, meaning the legal questions could drag out until the November elections, the results of which will also play a critical role in determining whether or not block grants ultimately come to fruition.

2. In the long term: Could these waivers encourage more far-reaching Medicaid spending caps down the line?

Assuming that President Trump remains in the White House and that states move forward with these waivers and overcome the legal challenges: What happens then? If the demonstrations are deemed successful in reducing Medicaid spending while providing similar levels of coverage to the eligible population, it could encourage more far-reaching spending cap proposals down the line.

We'll be watching closely to see how this all plays out in the coming months.                     

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