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Our Take: New CMS demonstration caps Medicaid funding, allows states to cover fewer drugs and omit some benefits

Feb 03, 2020

Last Thursday, CMS announced the Healthy Adult Opportunity (HAO), a new demonstration program open to states that want to set up a block grant for their Medicaid program, although the agency was careful not to use the term “block grant” in its fact sheet.

The initiative offers greater flexibility in Medicaid program parameters — including who is eligible for coverage and what benefits are provided — but it also caps matching federal funds. Currently, there is no such limit on how much states can receive in federal funding for their Medicaid programs.

Specifically, HAO will affect the population that became eligible for Medicaid under the Affordable Care Act (ACA): adults younger than 65 who meet low-income thresholds and who are not eligible for Medicaid because of a disability, pregnancy, or the need for long-term care.

States participating in the HAO program will still have to provide Medicaid beneficiaries a minimum level of coverage based on the ACA’s essential health benefits, but they will be freer to decide who receives coverage and will have the option to omit certain traditional Medicaid benefits, such as long-term care and retroactive coverage. They can also impose premiums and out-of-pocket costs on designated beneficiaries, not to exceed 5% of household income.

Of note, HAO will permit states to use a closed drug formulary similar to those in commercial health plans available on the health insurance exchanges. That means states will be allowed to exclude drugs from coverage and implement tools such as prior authorization and step therapy. CMS contends that states will be able to achieve savings by steering beneficiaries into more cost-effective treatments and by securing deeper discounts on drug prices.

States will be able to choose from two funding models: one based on total expenses or one based on the number of enrollees. Either way, states will have to predetermine their annual Medicare budget. If their spending exceeds their block grant, they cannot receive additional federal funding — but if they spend less than their projected budget, they can keep part of the difference, as long as they meet certain performance measures. HAO does allow for adjustments to be made under certain circumstances, such as a recession or new drug approvals that increase coverage costs.

The HAO program is open to all states, including those that have already expanded Medicaid under the ACA. For the 14 states that haven’t, the program could be a way to expand coverage on their own terms, without actually extending the entitlement. Waivers will be approved for a five-year period and can be renewed for up to 10 years.

CMS said it is offering the initiative in an effort to ensure that Medicaid stays solvent and sustainable, so that those who are most vulnerable can continue to receive needed care.

Our Take:

We’re not surprised that CMS is doing this. After all, conservatives have been calling for cuts in Medicaid spending for decades, and the current administration has been trying to reduce Medicaid coverage for the last three years. What we are surprised by is the timing.

As a presidential candidate in 2016, Donald Trump promised not to cut Medicare, Medicaid, or Social Security. And, based on polls, Medicaid appears to be a popular public program. So why, then, is the Trump administration attempting to implement changes to the Medicaid program now, with the election just a little over nine months away?

It’s a virtual certainty that this program — just like the work requirements that some states have tried to implement through other waivers — will be challenged in court. And like the work requirements, there’s a good chance that the courts will rule against the Health Adult Opportunity, or portions of it, and the administration will then appeal the ruling(s).

Democrats will surely seize on HAO as yet another attempt to deny health care to the poor. And that may very well be the end result in some instances.

Republicans will applaud it as a means of reining in wasteful spending because states that are approved for the HAO waivers will take steps to make their Medicaid programs as efficient as possible — they won’t be able to “milk the system” to gain more federal funds. In some cases, that also may be true.

Depending on the source you use, somewhere between 71 million and 75 million people were enrolled in Medicaid in 2018, or more than 1 in 5 Americans. Spending for the program accounted for 9.5% of the federal budget in 2018, or roughly $1 out of every $6 spent on health care, according to a Kaiser Family Foundation brief.

We won’t argue with those who say the program could benefit from certain reforms, including better oversight. But, we’re not convinced that this is the best way to go about it.

At any rate, it’ll likely be at least several months before any state can implement an HAO waiver. And ultimately, it’s possible that the election in November could make it all a moot point anyway.

What else you need to know

Four hospitals on Chicago’s South Side will merge: Advocate Trinity Hospital, Mercy Hospital & Medical Center, South Shore Hospital, and St. Bernard Hospital. They’ve signed a nonbinding merger agreement to form an independent, integrated health care system and plan to invest an estimated $1.1 billion to build at least one new hospital and community health centers for the system. The decision to merge stems from financial challenges the hospitals have been experiencing, along with a desire to address the significantly lower life expectancy a recent study found among South Side residents as compared with those in other parts of the city. In announcing the merger, the hospitals asked for input from the community and said they expect to sign a definitive agreement by midyear.

Geisinger is taking legal action against AtlantiCare for trying to leave the health system, The Philadelphia Inquirer reported on Jan. 25. According to the report, Danville, Pa.-based Geisinger filed a federal lawsuit earlier this month in which it accused Atlantic City, N.J.-based AtlantiCare of violating the merger agreement they signed in 2014; the merger was completed in October 2015. AtlantiCare’s board of directors voted last September to separate from Geisinger, but the reason for the board’s decision has not been made public.

CommonSpirit Health has chosen Premier as its only group purchasing organization (GPO), the 137-hospital health system announced Tuesday. Premier will be tasked with helping to integrate CommonSpirit’s supply chain as the health system attempts to produce savings of $2 billion over the course of four years. Before the merger that resulted in CommonSpirit, Dignity Health primarily used Premier, but Catholic Health Initiatives predominantly used HealthTrust Purchasing Group.

Philips plans to sell its consumer appliances business unit and will focus on the company’s “future as a health technology leader,” according to a press statement. The company, based in Amsterdam, has already spun off its lighting and consumer electronics divisions. It anticipates divesting the appliances business line — which includes small kitchen appliances, air purifiers, and vacuum cleaners — within the next 12 to 18 months. In a Reuters report, an ING analyst valued the unit at approximately $3.3 billion. Moving forward, Philips will concentrate on its connected care and data management businesses.

Ascension St. Vincent’s and the University of Alabama at Birmingham Health System (UABHS) entered into a new strategic alliance intended to “address health disparities, mental and behavioral health, and diabetes, with an emphasis on expanded access for poor, vulnerable, and rural populations.” The alliance builds on a long-standing relationship between the two organizations and will include eight hospitals, as well as medical groups, freestanding emergency departments, and clinics. The press release announcing the alliance noted that it still needs to be approved by the University of Alabama System Board of Trustees.

What we’re reading

A New Model for Crowdsourcing Innovation. Harvard Business Review, 1.31.20


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