The Centers for Medicare & Medicaid Services (CMS) issued a long-anticipated State Medicaid Director Letter (SMDL)1 on January 30, 2020 inviting states to apply for Section 1115 demonstration projects that would impose caps on federal Medicaid funding for the adult expansion and some other adult populations in exchange for new programmatic flexibility. Referred to as “Healthy Adult Opportunity” by CMS, these demonstrations would allow states to choose between two types of capped funding arrangements: a per capita cap or an aggregate cap (i.e., a block grant). CMS also released with the SMDL an application template2 for use by states interested in requesting a capped funding demonstration.
The SMDL is a major shift from Medicaid’s current structure as a statutory entitlement, in which the federal government matches all eligible state expenditures without any cap. Previous proposals to shift Medicaid federal funding models to a cap were included in the repeal and replace legislation of 2017, which were not passed by Congress. Those bills would have replaced traditional Medicaid spending for all states with a per capita cap, and some would have imposed a block grant for Affordable Care Act (ACA) expansion groups. Under CMS’ new guidance, each state may decide for itself whether to apply for a Section 1115 demonstration that would cap federal financial participation (FFP) for certain Medicaid populations, subject to the parameters set out in the guidance.