On January 29, 2020, at an event titled “Transforming Medicaid: A New Opportunity for Better Health,” CMS Administrator Seema Verma unveiled the administration’s “Healthy Adult Opportunity” (HAO) initiative, with details described in a State Medicaid Directors Letter. Because the state invitation to participate in the HAO experiment is laid out in a policy letter rather than through a proposed rule, there is no opportunity for formal public comment before the terms of the initiative become final.
HAO becomes the newest chapter in the long history of Section 1115 of the Social Security Act, which empowers the HHS Secretary to approve state social welfare experiments involving programs authorized under the Act that, “in the judgment of the Secretary, [are] likely to assist in promoting the objectives of” the program that is the subject of the experiment. For decades, Section 1115 has served as a source of federal agency authority by which the Secretary and the states can undertake experiments to test changes in federal Medicaid policy that fulfill the program’s statutory objective–to provide medical assistance to eligible people who cannot afford the cost of necessary health care. Many of the reforms tested under Section 1115 have become core features of the statute. Examples include expanded eligibility for low-income adults, transformation of long-term services and supports, and the program’s transition from its original fee-for-service structure to a system largely dominated by managed care.
Testing An Experimental Approach To Medicaid Eligibility
HAO’s arrival has been long hinted at; indeed, many of its features trace back to the March 2017 letter from then-HHS Secretary Tom Price and CMS Administrator Seema Verma, which promised states many of the new program flexibilities found in the HAO demonstration. But while HAO does represent a major shift in Medicaid policy, its focus is narrow–to test a new Medicaid eligibility pathway for low-income, working-age adults whose entitlement to coverage was established under the Affordable Care Act (ACA) and who are not already eligible under traditional program rules. Thus, HAO is not simply an invitation to replace traditional Medicaid with a block grant. To the contrary, CMS explicitly states that the initiative is for adults under age 65 who are not eligible for Medicaid under a traditional category and that “[o]ther low-income adults, children, pregnant women, elderly adults, and people with disabilities will not be directly affected.” The initiative is aimed at states that have not yet adopted the ACA Medicaid expansion, although the letter practically begs states already operating Medicaid expansions under Section 1115 waivers to close out these demonstrations and reestablish them as HAO experiments. It’s also worth pointing out that because Medicaid expansion was rendered optional by the United States Supreme Court in 2012, states that have expanded Medicaid via the state plan amendment process could decide to opt out and apply for waivers to become HAO states instead.
A Complicated Model
Whether any state that already has expanded Medicaid would want to participate in the HAO experiment is a separate policy question. The number of states that convert to HAO status is likely to be extremely limited, since the initiative is exceptionally complicated. These complications show up in two ways. First, CMS is clearly interested in testing a “suite of prepackaged waiver authorities” (an HAO Fact Sheet term)–a sort of fever dream of every idea promoted over the past three years to scale back Medicaid, beginning with the March 2017 letter: eliminating the program’s safety-net eligibility features; capping enrollment; increasing premiums and cost sharing and imposing lock-out periods for non-payment; narrowing benefits (including prescription drugs); establishing “community engagement” work rules; and eliminating Medicaid managed care access and provider network adequacy standards. Under HAO, Medicaid for the poorest adults without ties to the traditional program will be reborn as coverage that follows commercial principles, with premiums, substantial cost sharing, and narrower benefits. Eligibility will be subject to a host of restrictions; benefits will be thinner; and out-of-pocket burdens will be higher. These changes will not only narrow coverage but also add to the administrative burden states experience in ensuring compliance. It is not clear whether CMS will require HAO states to be “all in,” or whether, instead, the agency will allow them to select from the menu of program design elements offered.
Second, HAO experimental states will be required to operate under strict federal funding caps, either a per capita cap or eventually (after a two-year baseline trial period), if the state chooses, an aggregate cap that operates like a fixed annual pool to be drawn from. Nothing about the complicated nature of the current flow of funds between the federal and state governments will change under the HAO demonstration. Indeed, CMS emphasizes that Medicaid funding under HAO “will continue to flow to states as it does today; nothing in this letter changes the need for states to submit claims reflecting actual state expenditures to obtain federal matching funds.” In other words, HAO states will be running a complicated federal Medicaid redesign experiment under tight funding strictures that leave them on the hook for costs that run ahead of the experimental budget. Of course, all Medicaid Section 1115 experiments run on principles of “budget neutrality” that hold overall experimental spending to a fixed sum, but historically the computing and adjusting of this amount offer flexibility for demonstrations to operate with quite generous budgets. CMS effectively does away with this flexibility.
Limited Replacement Coverage For The Demonstration Population
At first glance, HAO may appear to be in the tradition of Medicaid block grants that have been the subject of debate over many decades and periodically have been the focus of intense legislative activity, most recently in 2017. But HAO is better understood as a means of testing a far more limited coverage model for the ACA adult Medicaid expansion population, that is, low-income, working-age adults who are ineligible for Medicaid under traditional program rules. Ultimately, of course, the model also may test an aggregate Medicaid spending cap. But even if the President is elected to a second term, the HAO demonstration is unlikely to serve as a bigger launch pad. Healthy adults, who are the focus of the experiment, account for just 19 percent of total Medicaid expenditures. The most expensive part of Medicaid involves care for beneficiaries who are elderly or people living with disabilities and who are not subject to the experiment. Medicaid block grant proposals consistently are met with enormous skepticism and resistance because Medicaid per capita spending already is low; thus there is little room for cost reduction without cutting coverage or access. Medicaid is a large budget item not because of out-of-control per capita costs, but because of the large array of safety-net functions it fills, such as payment for long-term care and support for hospitals and clinics serving the poorest communities. Above all, Medicaid is large because of the sheer number of people enrolled—over 70 million between Medicaid and the Children’s Health Insurance Program.
State Interest In Pursuing HAO
It appears that a few states may be interested moving forward with the demonstration. Oklahoma Governor Kevin Stitt, who appeared alongside Verma at the event announcing HAO, said his state will be the first to pursue the new brand of Medicaid expansion under this guidance. Tennessee submitted a block grant waiver application in November, in anticipation of the Administration’s policy shift. Alaska also has expressed interest in an alternative, capped approach to Medicaid expansion. Other states that might be interested are those that stand to lose a considerable amount of federal revenue if the administration’s recently proposed rule on Medicaid financing is implemented. The rule would place significant new constraints on federal financing by limiting the funding sources states can use to pay their share of program costs while also restricting states’ use of supplemental payments to safety-net hospitals and other institutions that disproportionately care for the poor and uninsured. If states lose the ability to finance care for the poor through indirect payment methods, or if their ability to do so is scaled back dramatically, presumably states with large uninsured populations, such as Florida and Texas, might be interested in pursuing an HAO demonstration.
Enabling States To Change Core Elements Of Medicaid
The HAO initiative would allow states to fundamentally change core elements of Medicaid. The letter includes a six-page table listing over 40 provisions of federal Medicaid law that can be waived in order to effect these changes.
Eligibility And Enrollment
A New Experimental Coverage Option. HAO is “focused on coverage provided to adults under age 65 who qualify for Medicaid on a basis other than disability or need for long-term services and supports and who are not covered under the state plan.” In other words, the initiative is intended to add a new experimental coverage option open both to states that have expanded Medicaid through the normal state plan option and who elect to replace the regular expansion with an HAO demonstration, as well as states that already have 1115 eligibility expansion demonstrations and wish to convert to the HAO option. HAO states that opt to cover the entire ACA adult Medicaid expansion group (adults 18-64 with incomes up to 138 percent of the federal poverty level who do not qualify for Medicaid under traditional rules) would qualify for a 90 percent federal match, even if they limit enrollment by requiring beneficiaries to pay premiums and/or work. States that elect to include only a portion of adults (e.g., adults with incomes up to only 100 percent federal poverty level, low-income parents, and adults with certain health conditions such as opioid addiction or HIV/AIDS), will qualify for federal funding only at the traditional federal payment rate (i.e., between 50 percent and 77.76 percent). According to the HAO Fact Sheet accompanying the letter, states choosing to cover less than the entire ACA Medicaid expansion population will have the freedom to use variable income eligibility rules for specified subpopulations (such as adults with opioid addition or HIV/AIDS) and impose enrollment caps, an option not available to states that want the 90/10 Medicaid payment rate.
An Abundance of Permissible Eligibility Restrictions. Other permissible eligibility restrictions abound and in fact are encouraged in the letter. HAO states can eliminate a core Medicaid safety-net feature—the ability to enroll individuals at the point of application—and impose a waiting period by pushing the effective date of eligibility to the first full month after approval of coverage. HAO states can opt not to provide another Medicaid safety net-eligibility protection—retroactive eligibility up to three months prior to the date of application. Many states currently waive retroactive eligibility, although recently several have reversed course and reinstated retroactive coverage for at least some populations. CMS also notes that states can waive the ACA hospital presumptive eligibility requirement, which ensures at least a temporary eligibility to cover hospital care. Additionally, while HAO states will be expected to comply with Medicaid’s timely eligibility determination requirements, they will be allowed to replace the 12-month renewal system with more frequent redeterminations in order to monitor eligibility more closely.
Benefits
A Commercial Insurance Model. The HAO benefit design aims to substitute a commercial insurance model for traditional Medicaid benefits, which cover a full range of preventive, acute, and long-term care needs. HAO coverage will be linked to the ACA Essential Health Benefit (EHB) standard governing the individual and small-group markets. As with essential health benefits generally, states will have flexibility to determine the details of coverage as long as they cover the 10 EHB benefit classes and follow very basic EHB rules. States also can specify coverage limits more restrictive than those currently permitted in Medicaid. CMS indicates that it will waive the requirement to provide non-emergency transportation coverage as well as early and periodic screening and diagnosis and treatment (EPSDT) for 19 and 20-year olds, which provides comprehensive coverage for physical and mental health conditions, along with complete vision, dental, and hearing care, for young adults. The EHB package falls well short of EPSDT. HAO states will remain subject to federal mental health parity requirements, however, since 1115 does not authorize the HHS Secretary to waive civil rights laws when conducting Section 1115 experiments.
Prescription Drugs. A major focus of the benefits component of the HAO experiment, and one to which the agency devotes a considerable amount of discussion, is prescription drug coverage. HAO states will be allowed to use a “commercial health insurance market” approach to coverage, which may include restrictive formularies rather than Medicaid’s open formulary approach. Yet CMS will require manufacturers whose drugs are selected for the restrictive formulary to continue to pay the rebates required under federal Medicaid rebate law. This combination—a narrow prescription drug formulary coupled with the continuing obligation to comply with the Medicaid statutory rebate requirement—is essentially the approach that CMS declined to allow in the Massachusetts Section 1115 demonstration program. Since the pharmaceutical industry historically has argued that the policy justification for Medicaid rebates is its statutory link to unfettered access to the Medicaid market, one can assume that this aspect of the HAO initiative will generate controversy on its own. CMS indicates that HAO states will be expected to cover “substantially all” drugs for the treatment of mental health conditions and substance abuse disorders, as well as antiretroviral drugs, but the term “substantially all” is not defined.
Permission to Eliminate FQHC Coverage and Special Payment Rules. HAO states will not be obligated to cover services provided by federally qualified health centers (FQHCs), which currently serve one in six Medicaid beneficiaries. Under the Medicaid statute, the FQHC payment methodology utilizes an encounter-based “Prospective Payment Rate (PPS)” approach, and in a number of states, health centers and state agencies have developed alternative payment models that incorporate value-based approaches such as global payments and performance incentives. HAO states will be allowed to adopt an alternative FQHC payment strategy without negotiating with FQHCs as is required under current law. This change will allow states to move to an alternative payment structure at their discretion without consulting affected providers; thus, FQHCs could effectively lose the ability to have a formal voice in efforts to alter the structure of their single largest revenue source.
Premiums And Cost Sharing
Removal of Current Limits. For the HAO initiative, as in other Section 1115 demonstrations, CMS waives statutory limits on Medicaid premiums and cost sharing, up to a 5 percent cap on out-of-pocket costs tied to household income, calculated on a monthly or quarterly basis. Individuals subject to increased premium and cost-sharing requirements can be suspended from the Medicaid program for failure to pay. Beneficiaries who are members of tribal nations, as well as beneficiaries who require substance use disorder treatment or who are living with HIV, will be exempt from heightened premiums and cost-sharing.
Managed Care
Alternative Safeguards for Network Adequacy and Access. CMS encourages HAO states to waive existing regulatory safeguards for Medicaid managed care access and provider network adequacy, and instead pursue “alternative approaches to network adequacy, access to care, and availability of services” that rely on “reasonable evidence of enrollee access to care and satisfaction.” CMS’s discussion of what these alternatives might be is vague; the agency suggests use of “direct measures of access” that are “meeting state established standards.” HAO states also will be free to amend managed care contracts without advance federal oversight.
Alternative Private-Sector Delivery Systems. HAO states can “propose an alternative approach to their delivery system that leverages the private insurance markets or coverage programs designed under an applicable complementary 1332 waiver.” The reference to 1332 waivers likely signals CMS’s willingness to allow states to use Medicaid funds to purchase private insurance plans, much as Arkansas does, but presumably without coverage wrap-around rules specific to the Arkansas demonstration for specified services not offered by private plans.
Quality Reporting and Actuarial Soundness. HAO states will be required to report the Adult Core Set of performance measures and undertake “quarterly reporting of continuous performance indicators selected by CMS (including indicators relating to access),” along with “evidence demonstrating beneficiary’s [sic] health care experiences including timely access and barriers to care.” CMS also waives the requirement for prospective review of payment rates for actuarial soundness, and allows the demonstration states to substitute “alternative approaches to ensuring actuarially sound rates.” According to the guidance, the alternative to independent federal review is an approach that includes an actuary’s certification that rates align with the CMS Rate Development guide and publication of rates prior to the beginning of the rating period.
Fair Hearings
Unspecified Changes to Due Process Safeguards. Medicaid’s statutory fair hearing rights have a constitutional basis, first set forth in the 1970 landmark case Goldberg v Kelly. These rights include advance notice of action and a timely fair hearing with due process safeguards such as an impartial officer, the right to see and present evidence, and protection against loss of benefits until a final decision is made. Within these broad parameters, HAO states may submit requests for waivers to “improve upon these processes.” The guidance does not elaborate on what these alternative processes might be.
Financing And Shared Savings
Matters grow especially complicated in the financing section of the guidance.
Beyond Budget Neutrality
CMS begins by reiterating that all 1115 demonstrations are governed by budget neutrality principles set forth in previous CMS guidance. But where HAO completely departs from current policy is that it requires states to operate, over the life of the demonstration, well below the amount of federal expenditures they would incur were they simply to adopt the Medicaid expansion as laid out in statute. Pursuant to the HAO guidance, other than in the case of “annual savings offsets” that states can earn if they agree to an aggregate cap, “[s]tates with demonstrations approved utilizing an annual aggregate or per capita cap approach [must] manage their programs under these caps and assume risk for costs exceeding the annual cap.”
In setting the “annual budget neutrality cap,” CMS lays out an approach that will sound familiar to those who follow the ongoing block grant debate. The agency will use the most recent available eight quarters of expenditure data to determine a base year amount. This amount will be trended forward for each demonstration year, consistent with the agency’s Trend Rate Calculation methodology. For states operating on a per capita cap basis, the annual growth factor will be based on the lesser of the growth rate in the state’s Medicaid program over the previous five years or the medical Consumer Price Index (CPI-M). For states willing to take on an aggregate cap, the trend rate calculation will be slightly more generous–the lower of the state’s historical five-year growth rate or CPI-M + 0.5 percent. CMS stresses, however, that states operating under an aggregate cap will receive no payment adjustments for increased enrollment; as discussed below, enrollment adjustment will be subject to negotiation.
Aggregate Caps And Shared Savings
HAO states will be required to spend a “minimum” of 80 percent of the aggregate cap” annually or experience a reduction in subsequent year cap budgets. Thus, the CMS guidance notes that a state operating under a $50 million cap will need to spend $40 million or experience a cap reduction. A state that spends in excess of the allowed federal contribution amount will be on the hook for the difference.
As an incentive for states to move to aggregate spending caps, CMS offers shared savings. But verging on the absurd are (1) the methodology for figuring out whether a state qualifies for payments; (2) the limits CMS imposes on how shared savings can be spent; and (3) the amount that states will be required to spend from their own funds in order to qualify for shared savings. To be eligible for any shared savings, states will have to produce data showing that access and quality remain at or above the level established in the baseline year, along with evidence of performance improvement. States that maintain their performance will receive 25 percent of the federal savings; states that show performance attainment at the 75th percentile or a 3 percent improvement in seven out of 12 required performance measures will also qualify for an additional 12.5 percent in shared savings. States showing even greater improvement can qualify for up to a maximum of 50 percent of the federal savings.
CMS will maintain oversight on how HAO states spend their shared savings and will condition payment on a state’s expenditure at rate that normally applies to state expenditures for medical assistance. For example, if a state’s normal federal medical assistance percentage (FMAP) is 50 percent, then 50 percent of total state expenditures on the approved activity will have to come from the state itself, using approved sources of funding. HAO states also will be permitted to bank their shared savings against future cost overruns for up to three years.
The hypothetical example CMS provides to explain the shared savings provisions makes clear just how limited the offer is. Under the hypothetical, a state covers the whole expansion population under an aggregate annual spending cap of $60 million (and therefore qualifies for federal payment at the 90 percent matching rate). That year, however, the state spends only $50 million. Savings thus total $10 million, of which $9 million belongs to the federal government and $1 million, the state. The state potentially could qualify for $4.5 million (50 percent of the total federal savings) depending on its performance as measured by the CMS formula. To actually receive these funds (which would qualify for federal matching only at the state’s traditional FMAP),a state whose normal federal match is 60 percent still would need to put up $3 million. In other words, a state can claim shared savings for reinvestments approved by CMS only if it pays its share of the new activity in accordance with the normal FMAP, not the enhanced 90 percent federal match provided for coverage of the ACA Medicaid expansion population. Furthermore, in order to qualify for shared savings, the state would have to keep outlays even lower than permitted under the restrictive federal funding cap, which is computed at an annual growth rate that could fall well below the state’s actual experience and without regard to enrollment changes.
Moreover, extensive data on HAO demonstration expenditures and performance must be provided for CMS to determine whether a state is eligible for shared savings. This information is not available instantaneously. It could take years before CMS and the state have the data needed to compare spending against a state’s performance on measures of access and quality; thus HAO states may not realize any shared savings until after their demonstrations conclude. A state nearing the end of its first HAO demonstration likely would not have sufficient data to make an informed decision regarding possible renewal or adjustment. The delay associated with the required information-gathering would negate the demonstration’s experimental value.
Per Capita Caps
States operating under a per capita cap will not qualify to participate in shared savings. Separate per capita caps will be computed for each eligibility group by dividing the total amount of prior year expenditures for each group by the actual number of enrolled individuals for that group for the period. The overall per capita cap is determined using a base amount trended forward to the demonstration year, multiplying each trended base amount by the number of enrollees for the applicable demonstration year and then adding each population group’s amounts. Per capita spending in excess of the cap will not qualify for federal funding.
State Data Requirements
States seeking to participate in HAO must demonstrate that they have reliable data related to Medicaid eligibility, enrollment, and claims. If a state cannot do so, CMS will provide technical support to address data deficiencies and will maintain oversight of data accuracy throughout the demonstration. As with previous block grant discussions, CMS explains which types of spending will and will not be included in calculating the value of the federal cap. For example, state payments made under Medicaid’s “disproportionate share” hospital payment program (DSH) will be excluded. However, other types of supplemental provider payments, including pass-through payments that the state directs its managed care contractors to make to certain parts of the provider network, will be included in the calculation to the extent that these payments can be apportioned to the demonstration population. “Temporary” payment supplements approved by CMS under existing demonstration authorities such as Medicaid delivery system reform demonstrations launched under President Obama, will be excluded. CMS also allows for “special circumstances” payment adjustments to account for “the dynamic health care landscape” in which state Medicaid programs function. Therefore, the agency “will provide states with the opportunity to provide updates to an approved HAO demonstration to account for any changes to projected expenditures or enrollment in the current demonstration year due to unforeseen circumstances out of the state’s control, such as a public health crisis or major economic event.” How quickly CMS will receive such information and make such adjustments is unstated; whether or not, in the face of an emergency, the agency will be ready to make real-time adjustments to the cap goes unaddressed.
Federal Oversight
While HAO states will have significant flexibility to operate outside normal Medicaid rules relating to eligibility, coverage, and state oversight of access to care, they also will be subject to heightened scrutiny and robust oversight. Specifically, each HAO state will be expected to participate in program integrity efforts, develop and implement what the agency calls a quality strategy, and design and conduct interim and summative evaluations of the demonstration.
Program Integrity
To protect the fiscal integrity of the Medicaid program, CMS expects states seeking approval of HAO demonstrations to document compliance with recent CMS Program Integrity policies governing eligibility, payment, provider participation, and other matters. The CMS guidance particularly emphasizes the importance of making accurate eligibility determinations for HAO demonstration populations for whom program expenditures will qualify for the 90 percent federal match. In other words, CMS underscores that the vast machinery of policing state Medicaid expenditures against federal standards marches on, even if states can relax certain program requirements in ways aimed at reining in eligibility, coverage, and spending. Ironically, many of the changes intended to provide state flexibility— such as differential financial eligibility rules for different eligibility sub-groups, added premium and cost-sharing payment requirements, and new limits on coverage—could make the demonstrations more complex to run, a fact frequently noted in the context of the Medicaid work experiments.
Quality Monitoring And Evaluation
Quality incentives are a major theme running through the HAO guidance. Incentives are intended to ensure that states do not use their new-found flexibility to restrict enrollee access and reduce quality of care, as well as to determine states’ portion of any shared savings. Quality performance monitoring will apply to all HAO states, whether the demonstrations operate within fee-for-service or managed care systems. States participating in HAO demonstrations will be expected to develop and maintain written strategies related to access, quality of care, and health outcomes for demonstration enrollees.
CMS also expects HAO states to report on a set of continuous performance indicators comprised of 13 metrics, which states will be expected to report to the agency and post on its website on a quarterly basis. According to the guidance, this reporting is necessary “to know as soon as possible if beneficiary access to care is being adversely affected by one or more elements of the demonstration … so that needed adjustments can be made.” These indicators fall into one of four categories: enrollment; retention; access to care; and financial management.
Evaluation is a core component of HAO demonstrations, as required by statute. However, as with the work experiments, CMS does not indicate that approval of an HAO demonstration will be conditioned on an evaluation design with a baseline against which to measure change over time.
Encouraging States To Transition Their Existing 1115 Demonstrations
Following approvals in compliance with statutory notice and comment periods, HAO demonstrations can operate initially for five years, with the possibility for renewal at the expiration of the demonstration, should a state so choose. Consistent with current 1115 waiver policy, states must submit implementation plans within 90 days of approval. As noted, CMS is encouraging states that already operate separate Section 1115 demonstrations covering HAO populations to undertake an “orderly close-out” and transition to HAO. Whether CMS will actively pressure states to do so (for example, by not approving renewals or modifications of existing demonstrations unless a state switches to the HAO model) remains to be seen. CMS appears to encourage switching, noting that within some parameters– which the guidance leaves unclear–it may allow states to alter certain aspects of their demonstrations without prior approval. The only clearly stated guardrail with respect to experimental modifications without CMS approval appears to be the requirement that a state consult with CMS and provide public notice in the case of modifications that have the potential to “substantially impact enrollment.” The term “substantially impact” is not defined. CMS also notes that if a modification is likely to impact enrollment (without saying how an assessment might be made or what factors would be considered), it will work with the state to “determine whether an adjustment in the aggregate or per capita cap initially approved may be required” or if new authority is needed. Changes that could impact beneficiaries, plans, providers or other stakeholders are subject to at least 60 days advance public notice and “meaningful opportunity to comment.” The specifics of the comment process are not defined.
A Host Of Questions
The HAO demonstration guidance raises a host of legal, policy, and implementation questions. Here are some of the most important:
Does CMS have legal authority to waive Medicaid entitlement and allow enrollment caps using 1115(a)(2) authority?
Can CMS alter the basic legal entitlement to Medicaid and allow states that do not pursue the full ACA eligibility expansion to impose enrollment caps? The agency may believe that by framing its approval powers in a slightly new way, it has the authority to do so. As Andy Schneider has observed, CMS cites Section (a)(2) of the 1115 statute as the legal basis for HAO demonstrations. This subsection authorizes the HHS Secretary to spend federal Medicaid funds on projects that otherwise would not be permissible activities because they are not being undertaken pursuant to the Medicaid state plan. The CMS guidance emphasizes that HAO experiments operate as demonstrations outside the scope of a participating state’s state Medicaid plan, and thus in effect, are entirely new programs with requirements that depart from Medicaid in certain fundamental ways. CMS appears to be trying to portray HAO experiments as something other than Medicaid–essentially shadow programs that may run alongside Medicaid and are not simply modifications of HAO states’ Medicaid plans.
The problem with this reasoning is that expressly relying on spending authority under 1115(a)(2) nevertheless does not permit the HHS Secretary to spend federal funds in ways that depart from Medicaid’s core objectives, which provide the ironclad standard applicable to any 1115 demonstration. Whatever its form, an 1115 Medicaid demonstration cannot go forward unless the Secretary determines that it promotes Medicaid’s core purpose–to provide medical assistance to eligible populations. In order to justify the use of spending caps, CMS argues for recognition of another core purpose – helping state Medicaid programs achieve financial sustainability. Yet arbitrarily capping the federal contribution may have the opposite effect; indeed, fixed per capita or aggregate caps that hold annual growth rates below the amount of funding needed to make a Medicaid program viable may directly threaten sustainability.
To strengthen its justification for departing in such a fundamental way from Medicaid program and financing rules, the guidance attempts to differentiate people eligible for Medicaid through HAO from those eligible for traditional Medicaid under state plans. CMS effectively attempts to argue that HAO is not Medicaid and thus can operate with completely different funding and programmatic structures, one of which is a cap on enrollment that ends the entitlement to coverage among eligible people.
There are two clear problems with this effort to differentiate HAO from Medicaid. First, if a state HAO demonstration runs into a major funding shortfall, the reverberations could be felt across the entire covered population, whether eligible under the state plan or HAO. Second, HAO is hardly walled off from a state’s traditional program; indeed, CMS makes clear that state Medicaid agencies will operate HAO demonstrations using state and federal Medicaid administrative financing to support program operations. The two systems run alongside one another and are inextricably intertwined from an operational point of view.
Indeed, the real “tell” here may be that CMS exempts state Medicaid administrative expenditures from the HAO cap, which underscores the point that HAO is actually a Medicaid program operating under demonstration parameters. In short, it is not clear that calling this an 1115(a)(2) demonstration rather than one carried out under 1115(a)(1) makes any difference in terms of the legality of the experiment. The terms of the statute seem to suggest that the HHS Secretary is empowered to spend money under 1115(a)(2) only for experiments for which waivers have been granted under 1115(a)(1). Nothing about citing 1115(a)(2) as the basis for federal action can reinvent a Medicaid demonstration as something else entirely, and nothing about relying on 1115(a)(2) excuses the Secretary from having to satisfy the overall requirements of Section 1115.
Thus, although CMS argues that it somehow acquires additional powers to alter federal Medicaid law by treating the experimental population as legally separate, in fact, HAO remains a modification of federal Medicaid requirements, with basic program features waived under the authority of 1115(a)(1). Indeed, 1115(a)(1) and (a)(2) are joined together by the word “and;” that is, Section 1115 empowers the Secretary to waive Medicaid program rules and allow a state to claim federal funding for a demonstration that departs from normal rules. From a legal perspective, it is not clear what CMS gains by citing its spending authority under 1115(a)(2) rather than its power to modify normal program requirements under 1115(a)(1). The demonstration must still further Medicaid objectives.
Can CMS cap federal Medicaid spending?
The guidance allows states to convert Medicaid funding for certain populations from an open-ended entitlement to an aggregate or per capita cap. This change also triggers legal questions that have yet to be resolved. Rachel Sachs and Nicole Huberfeld have argued that using Section 1115 to establish an aggregate cap would require waiving section 1903 of the Medicaid statute. Section 1903 covers the federal government’s obligation to pay a percentage of a state’s Medicaid spending, i.e., the FMAP rate. However, Section 1115 (a)(1) does not include the power to waive Section 1903, and even assuming that the administration proceeds under Section 1115(a)(2), it is nonetheless inviting states to operate experiments using the same machinery they use to run Medicaid. Thus, the Secretary simply may lack the power to impose an arbitrary spending cap that is unrelated to actual or projected state experience.
How will the HAO demonstration’s benefits be weighed against the risks?
Before a state takes up the administration’s offer to extend Medicaid to new populations—and subject them to premiums, increased cost sharing, enrollment caps, the loss of retroactive and presumptive eligibility, waiting periods for coverage, reduced benefits, and the loss of access safeguards—principles of statutory and administrative law compel the Secretary to weigh the benefits against the risks. The risk here is that beneficiaries could gain health coverage in name only, under an experimental design that appears to offer medical assistance when in fact it does not. There is a real question, therefore, about when an experiment may be so restrictive and may have eliminated so many of Medicaid’s essential eligibility, benefit and coverage features that it can no longer be said to promote Medicaid’s core purpose of extending “medical assistance” to eligible populations. The concept of medical assistance, as defined under federal Medicaid law, has real meaning – comprehensive coverage with only nominal cost-sharing for people whose poverty and health vulnerability necessitate the added protections of a true safety-net insurer. Does the HAO experiment so fundamentally depart from Medicaid principles that it no longer can be considered a legitimate use of demonstration powers? On the other hand, to the extent that states that have not adopted the ACA Medicaid expansion use HAO to extend at least limited Medicaid coverage under restrictive eligibility rules, HAO arguably could be viewed as promoting program objectives.
Concluding Thoughts
The HAO demonstration opens a new phase in Section 1115 experimentation, one that appears to push 1115 beyond previous flexibility and innovation limits. The design of the demonstration raises the question of whether, under its terms, the poor will gain enough to make it a valid use of Section 1115 powers. To the extent that states that until now have refused to expand Medicaid decide to participate in HAO, the demonstration could mitigate the terrible impact of being uninsured. Only time will tell if states pursue the HAO option and if so, what results they achieve. Absolutely crucial will be strong evaluations of how HAO demonstrations perform for the people they serve compared to Medicaid’s performance in the areas of eligibility, coverage, and access under normal program conditions.