The Impact of Tennessee’s Medicaid Block Grant

In January of 2021, the Trump Administration approved what was positioned as the first Medicaid block grant for the state of Tennessee’s Medicaid program. In return for more flexibility in administering their Medicaid program, the state agreed to operate its program under a spending cap — called a budget neutrality cap. The arrangement was the first of its kind.

In this post, we’ll examine the history of Medicaid, Medicaid funding, Medicaid block grants, and what the Tennessee Medicaid program means to the future of federal Medicaid funding.

What is Medicaid?

Lyndon Johnson’s Great Society set of domestic programs aimed to eliminate poverty and racial injustice. Medicaid is one of those programs. It is a federal and state program that serves as a public health insurance program for those with low income. Medicaid provides free or low-cost health coverage. Enacted in 1965, Medicaid today covers nearly 20% of Americans. The federal Centers for Medicare and Medicaid Services (CMS) is responsible for implementing Medicaid.

Federal standards guide Medicaid and states administer the program. States have some latitude in their programs. They may determine covered populations and services, health care delivery models, and how they’ll pay health care providers. Section 1115 waivers also enable them to test ideas that are outside federal regulations but still within the bounds of the aims of the Medicaid program.

Medicaid has evolved throughout the years. Recently, the Affordable Care Act (ACA) expanded Medicaid to include those whose income was up to 138 percent of the federal poverty level. The federal government covers 90% of costs for states who implement the new eligibility threshold.

How does Medicaid pay for expenses?

States generally have a large impact on the cost of Medicaid because the federal government contributes at least $1 for every $1 that a state spends. The actual amount contributed by the federal government is determined by something called the Federal Medical Assistance Percentage (FMAP).  The FMAP is based on a formula that looks at state per capita income. The lower a state’s per capita income the higher the state’s FMAP.

States also set eligibility requirements to determine what services they’ll cover and what they’ll pay for covered services. As a result, states play a large role in the total cost of Medicaid even though they only paid about 35% of the total costs in the fiscal year of 2019.

What is a Medicaid Block Grant?

As we’ve seen, Medicaid costs don’t have a lot of safeguards to limit federal spending. Federal dollars are based on programs designed by states. As Medicaid costs have grown through the years — from millions of dollars annually to hundreds of billions — fiscally conservative members of Congress and Presidents have pushed the concept of block grants to help rein in the costs of the Medicaid program.

The federal government funds a number of programs through grant programs. They deliver a fixed amount of money to those programs, potentially with a predictable, formulaic increase year-over-year. The Medicaid block grant has a long history, but the most recent Trump administration proposal — named the Healthy Adult Opportunity (HAO) Medicaid demonstration – enabled states to opt-out of the current federal payment program and seek a fixed payment in exchange for more flexibility in administering their Medicaid program.

What is the history of Medicaid Block Grants?

Medicaid block grants have a long history. In 1981, the Reagan administration tried to turn Medicaid into a block grant program. Though he successfully transitioned many federal programs into block grants, a restructure of Medicaid wasn’t in the cards.

The 1990s also saw entitlement reforms, including President Clinton signed into law a welfare reform act that repealed the Aid to Families with Dependent Children (AFDC) program and replaced it with a state block grant program called Temporary Assistance to Needy Families (TANF). In 1995, Congress passed legislation to cap Medicaid payments to states, but President Clinton vetoed the bill. President Bush included a Medicaid block grant plan in his budget in 2004, but Congress failed to act on it. In 2011 and 2012, the House approved a block grant plan, but the Senate didn’t act on that bill.

 What impact would Medicaid Block Grants have on federal spending?

Most block grant proposals aim to trim the cost of Medicaid. The exact amount relies on each specific plan and enrollment assumptions. Analysis by the Commonwealth Fund found that states accepting the Trump administration’s HAO block grant would see funding reduced by 5.7% in the fiscal year 2021, almost 15% in the fiscal year 2025, and more than 10% in the five year period from 2021 through 2025. Most of the reduction in spending would accrue to the federal government. Keep in mind that the HAO demonstrations can only apply to people covered under the ACA’s Medicaid expansion as well as pregnant women and parents or caretaker relatives covered at a state’s option. These populations represent about 20% of Medicaid expenditures. So any future expansions of populations covered by block grants could significantly reduce federal spending.

Is Tennessee’s waiver a true block grant?

What’s been positioned as Tennessee’s Medicaid block grant is designed to help the state deliver high-quality and cost-effective services in its Medicaid program. However, it’s not a true block grant. The 10-year agreement sets a budget neutrality cap. That cap is based on the state’s base year, the fiscal year 2019, historical spending on its Medicaid program. CMS then trends forward the dollar value each year using trends from the President’s budget. If expenditures are below the cap, the state will be able to access approximately 50% of the savings if they meet certain quality metrics.

Budget neutrality caps aren’t new to Medicaid. Any state that applies for a Section 1115 Medicaid waiver must prove that the program wouldn’t cost more with the waiver than if the state-administered a traditional Medicaid program. If state spending exceeds that cap, the state pays for every dollar above the cap.

If Tennessee exceeds the budget cap, they’ll use savings earned in prior years of the Tennessee Medicaid waiver program to pay for the excess. Also, unlike a block grant, Tennessee’s arrangement will be adjusted for enrollment changes. If the state’s Medicaid population increases by more than 1%, the state’s cap will be adjusted accordingly. CMS can also adjust the cap downward should enrollment decrease by more than 1%.

The state has been clear that the block grant approval is not a pathway to limit populations that can access Medicaid. Nor will it limit the services offered. It should also not result in quality degradation or limited access to care. To access the shared savings amount, Tennessee must meet certain performance and quality metrics. However, Tennessee has yet to define those metrics, though they will be selected from CMS’ Core Measure Set.

We mentioned that Tennessee gained additional flexibility in administering its Medicaid program. Those include:

  1. Better address Medicaid fraud by suspending eligibility for individuals convicted of Medicaid fraud.
  2. Add new populations or benefits without prior federal approval
  3. Deliver care to members by structuring different benefit packages to new populations
  4. Add commercial insurance pharmacy management tools to lower prescription drug costs
  5. Invest in health rather than simply health care.

Though many positioned Tennesee’s Medicaid waiver as a block grant, it isn’t. Largely that’s because the Social Security Act governing how Medicaid is financed doesn’t actually allow block grant financing. So CMS and the state worked within the existing Medicaid waiver financing framework of budget neutrality caps.

What will the Biden administration do?

The Tennessee Medicaid waiver required ratification by the Tennessee legislature, which occurred just a week after CMS approval. Though it’s unknown what the Biden administration will do, CMS does have the ability to withdraw Medicaid waivers if they deem them to no longer be in the public interest or promote the objectives of the program. To do so, CMS must notify the state in writing, indicate the reasons for the withdrawal, and offer the state a hearing to challenge the determination.

What’s the future of Medicaid block grants?

With the Biden Presidential victory, it’s unlikely that Medicaid block grants will gain traction within the US in at least the coming four years. In reality, though the Tennessee Medicaid waiver has been positioned as a block grant, it’s not a true block grant. A true block grant seems unlikely to gain traction for Medicaid programs soon.

Certifi helps states with Section 1115 Medicaid waivers bill and collect payments thanks to a premium billing and collections module that is CMS-certified for Medicaid.


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