Last week, Tennessee proposed to the Centers of Medicare and Medicaid Services (“CMS”) the first of its kind Medicaid block grant program, which would constitute a fundamental restructuring of the Tennessee Medicaid program. The proposal is intended to implement Tennessee House Bill 1280, enacted in May of 2019, which directed the governor to request CMS to approve the block grant through a Section 1115 waiver amendment.

Tennessee currently operates its Medicaid program (“TennCare”) through a Section 1115 waiver approved by CMS. Under the proposed amendment, the state would receive a block grant in an amount calculated using the federal government’s projections for the state’s Medicaid program costs, calculated as if the state were not currently participating under a 1115 demonstration waiver. In years in which the state spends less than the block grant, the state and the federal government would evenly share in the resulting savings.

As part of the proposal, Tennessee has asked for significant exemptions from federal Medicaid managed care laws. Among other things, the state has asked for flexibility to spend block grant funds on items and services not otherwise covered under Medicaid; to adopt a commercial-style closed formulary; to make changes to its benefit packages without CMS approval; to vary benefit packages for members based on medical factors or other considerations; and to be relieved from compliance with Part 438 of Title 42 of the Code of Federal Regulations, including provisions requiring federal approval for pursuit of healthcare delivery system reform initiatives, managed care contracts, and actuarially certified capitation rates paid to managed care contractors. The state believes that the proposal would “appropriately recognize[] the state’s efforts to contain costs and improve program quality, while providing a meaningful incentive to continue building on those efforts to make TennCare a stronger and more effective program.”

Tennessee’s proposal for the block grant requires consideration and approval by CMS to become effective. While CMS has not provided public input on the proposal, the Trump administration proposed to give states more flexibility over their Medicaid programs in its FY 2020 budget earlier this year, and specifically suggested “putting States on equal footing with the Federal Government to implement comprehensive Medicaid financing reform through a per capita cap or block grant.”

In order to approve the proposal under Section 1115, CMS must make a threshold determination that the program is “likely to assist in promoting the objectives” of the Medicaid laws. CMS has defended litigation challenging whether it acted within this statutory authority in approving Section 1115 waivers in other states. In March, for example, the District Court for the District of Columbia vacated CMS’s approvals of Arkansas and Kentucky demonstration waivers, on the basis that work requirements included in the waivers were inconsistent with Medicaid program objectives and exceeded the agency’s authority under the waiver statute. Approval of Tennessee’s proposal would likely trigger similar litigation against CMS.