Section 1115 of the Social Security Act permits states to waive certain Medicaid statutory requirements through demonstration projects that advance state policy priorities and test innovations in their Medicaid programs. Demonstration approvals are at the discretion of the Secretary of Health and Human Services, who must determine the demonstration “furthers the goals of the Medicaid program” and is budget neutral to the federal government. Historically, states have used 1115 waiver authority to implement a range of demonstrations, including Medicaid managed care programs, delivery system and payment reform initiatives, eligibility expansions to new populations, and modifications to coverage features or benefit design. Given the broad range of possible flexibilities, presidential administrations frequently advance their Medicaid policy goals through 1115 waivers.
Over the last four years, the Trump Administration has advanced three primary policy priorities for 1115 demonstrations:
- Conditioning Medicaid eligibility on work and community engagement and other “personal responsibility” requirements;
- Instituting caps on federal Medicaid spending through new “Healthy Adult Opportunity” (HAO) demonstrations; and
- Expanding states’ ability to address substance use disorders (SUD) and serious mental illness (SMI) through waivers of the institution for mental diseases (IMD) exclusion.1
In addition to these priorities, the Trump Administration has instituted a number of changes to policies that impact the financing of 1115 demonstrations. For example, it issued guidance that precludes states from claiming federal Medicaid matching funds for spending on designated state health programs (DSHPs). (States have historically used state savings generated through federal match on DSHPs to finance other delivery system reform initiatives.) It also released a proposed fiscal accountability rule that would have far-reaching implications for how states finance the non-federal share for waivers. In addition, the Trump Administration has issued guidance on budget neutrality that in large part memorialized long-standing policies requiring that waivers cost no more to the federal government than the Medicaid program would have cost, absent the waiver. But the guidance also formalized a 2016 policy change that prevents states from carrying forward waiver savings, as they have previously, in order to reinvest in Medicaid program initiatives.
As the Administration nears the end of its current term, and as the COVID-19 pandemic continues unabated in the United States, the pace of state waiver submissions and Centers for Medicare & Medicaid Services (CMS) approvals of demonstration requests and renewals has slowed. This Manatt on Health: Medicaid Edition newsletter provides an assessment of the current administration’s progress in advancing its waiver priorities, and looks ahead to how waiver priorities may change in a new administration.
Waivers to Impose Work and Community Engagement Requirements and Other Coverage Conditions
Legal challenges have been a major barrier to implementation of CMS-approved state demonstrations imposing work and community engagement requirements as a condition of Medicaid eligibility. Citing significant coverage losses in Arkansas,2 the first state to implement work and community engagement requirements, plaintiffs in five of the ten states with approved work and community engagement requirements waivers have challenged the legality of CMS’s approval of the requirements, arguing they fail to advance the objectives of the Medicaid program. To date, the U.S. District Court for the District of Columbia has vacated CMS’s approvals of work requirements in four of these states—Arkansas, Kentucky, Michigan and New Hampshire—and litigation is ongoing in Indiana.3 In each of these cases, the district court held that CMS had failed to adequately consider the impact work requirements would have on access to Medicaid coverage, a stated objective of the Medicaid program, when approving the waivers. As a result of the litigation and operational challenges, Indiana and the five other states with approved work and community engagement waivers (none of which are facing litigation at this time)—Arizona, Ohio, South Carolina, Utah and Wisconsin—have not yet implemented penalties associated with the policy. On July 14, the Trump Administration asked the Supreme Court to overturn the ruling in Arkansas to allow the state to resume implementation of work and community engagement requirements—signaling its commitment to advancing the policy. If the Court decides to hear the case, it will not be resolved by November’s presidential election.
Outside of work and community engagement requirements, the Trump Administration has granted states approval to use 1115 waivers to implement other types of conditions that restrict eligibility and coverage, such as requiring premium payments, implementing lockouts from coverage for failure to submit timely redetermination paperwork and requiring health risk assessments. A number of states, including Indiana, Michigan and Wisconsin, have instituted these types of policies.
However, through at least the end of the federal public health emergency, these states have paused implementation of the penalties related to coverage and eligibility restrictions. This is because, as part of the Families First Coronavirus Response Act (FFCRA), Congress tied a 6.2 percentage point increase in a state’s Federal Medical Assistance Percentage during the federal public health emergency to requirements promoting coverage.4 States may not disenroll individuals from Medicaid through the end of the emergency period unless an individual voluntarily terminates her or his eligibility or ceases to be a resident of the state. In addition, FFCRA imposes a maintenance of effort requirement, prohibiting states from making their eligibility standards, methodologies or procedures more restrictive than those in place on January 1, 2020, and from charging higher premiums than those in effect on that date.
Since the beginning of the federal public health emergency, no state has submitted a new 1115 waiver request for work and community engagement requirements or other restrictions on coverage. However, several coverage-limiting demonstration applications or renewals are pending before CMS, including requests from nine states seeking to implement work and community engagement requirements and Indiana’s request for a ten-year extension of its demonstration that includes several eligibility conditions.
The Trump Administration’s HAO policy was released in January, just before the COVID-19 crisis consumed the country. The HAO demonstration guidance allows states to choose between two types of arrangements that would cap their federal Medicaid funding: a per capita cap or an aggregate cap (i.e., a block grant). While other states have submitted capped funding demonstration requests that have not been approved,5 only one state, Oklahoma, had done so under the HAO guidance. On August 11, Oklahoma withdrew its application due to the state’s passage of a Medicaid expansion ballot initiative that likely prohibits voluntary caps on federal funding.6
The ongoing COVID-19 crisis is likely discouraging other states from submitting requests to implement capped funding, as the pandemic’s health and economic consequences heighten awareness of the state financial risks of such waivers. Under an HAO demonstration, states would be responsible for any costs beyond the federal funding cap, meaning states would be responsible for all unanticipated cost increases, including those tied to an economic downturn or public health crisis. With COVID-19, states are simultaneously experiencing public health crises and economic downturns; they face projected Medicaid enrollment increases of over 6% for the last three quarters of 2020 while also experiencing meaningful decreases in tax revenue that could result in reduced Medicaid budgets. While the HAO guidance allows states to request to renegotiate the demonstration’s terms and conditions to account for unforeseen circumstances outside the state’s control, the funding uncertainty will likely deter states from pursuing capped funding for the duration of the pandemic. Regardless, any federal approval of a capped funding demonstration would likely face legal challenges.
SUD and SMI Waivers
In contrast to other priorities advanced by the Trump Administration, SUD and SMI waivers are being widely pursued and implemented across the nation. Under the SUD and SMI waiver opportunities, states can obtain a waiver of the IMD exclusion if they meet a series of conditions targeted toward improving access to and quality of SUD and mental health care, including increasing access to a full continuum of services, strengthening provider qualifications, requiring states and providers to institute evidence-based practices, and improving care coordination and transitions to community-based care. Given Medicaid’s role as a significant source of funding for behavioral health, covering up to 26% of adults with SMI and 17% of adults with SUD, these demonstrations have the potential to be instrumental in states’ efforts to address mental illness and the ongoing opioid epidemic. Since 2017, CMS has approved or renewed SUD waivers in 27 states and SMI waivers in four states (including the District of Columbia for both types of waivers).7
Given the COVID-19 pandemic, the upcoming election, and the realities of ongoing and potential new litigation, we foresee a continued downturn in submission and approval of waivers that advance the Trump Administration’s more controversial priorities. While historically, states with priorities that align with the federal administration seek 1115 waiver approval prior to presidential elections, COVID-19 has changed states’ calculus. States are currently resource-constrained and focused on responding to the pandemic. Waivers with eligibility and coverage restrictions conflict with requirements to obtain the enhanced federal matching rate available during the emergency; HAO waivers may be far less appealing to states in light of financial risks tied to the pandemic.
Some states with waivers up for renewal may also modulate their approaches to CMS. At least five states—Arizona, California, New York, Vermont and Washington—have large, complex 1115 demonstrations that were approved during the later years of the Obama Administration that are set to expire in the next 18 months. All of these demonstrations include delivery system reform incentive payment (DSRIP) or DSRIP-like programs. The Trump Administration has required other states to phase down their DSRIP programs, but a potential Biden Administration may take a different approach. Election outcome uncertainty combined with state budget challenges has resulted in states, most recently California and New York, seeking short-term extensions of their current demonstration for up to 12 months rather than full five-year renewals.
The one Trump CMS priority that will likely see ongoing activity is the advancement of SUD and SMI waivers. The COVID-19 pandemic has increased levels of mental health issues and rates of SUD overdoses, while simultaneously exacerbating mental health and SUD access challenges and disparities. Since these waivers also offer states a new source of federal match for services delivered to individuals residing in IMDs, states will likely be driven to seek these waivers to improve access to behavioral health care, while generating additional federal dollars.
The Trump Administration has sought to permanently transform the Medicaid program by giving states the option through 1115 demonstrations to impose new eligibility conditions and cap federal Medicaid funding—fundamentally seeking to end Medicaid as the entitlement program it is today. The November election will determine whether these policies continue, and if President Trump is re-elected, the fate of these policies may well rest with the courts. A new Biden Administration would take a different approach to 1115 waivers, likely ending its predecessor’s coverage-limiting waivers and establishing new waiver policy priorities that remain to be seen.