Federal health officials are tightening their financial scrutiny of Medicaid waivers that allow states to pursue innovative health strategies, a policy shift that stands to make it harder for states to secure funding for those services.
The Centers for Medicare & Medicaid Services informed states this month that it will take additional steps to ensure their Medicaid pilot programs, called Section 1115 waivers for the part of the Social Security Act that authorized them, are budget-neutral. States will now be required to furnish more data to verify the actuarial soundness of their cost projections, which some analysts say risks upending existing and future Medicaid services.
“Budget neutrality in the 1115s have always been more of an art than a science and a way for states (who make the savviest pitch) to get additional federal dollars to meet agreed-upon policy goals,” said Matt Salo, former executive director of the National Association of Medicaid Directors and now founder and president of Salo Health Strategies. “This is going to try to move it more into a science. It will assuredly be frustrating for states where it may mean less flexibility and fewer dollars.”
Federal law currently requires all Medicaid programs to cover a standard suite of healthcare benefits such as hospital and clinical care, medical screenings, family planning services, and medically necessary home health services. While the federal government sets the floor for coverage, states often elect to offer supplemental services through the Medicaid Section 1115 waivers.
These waivers cover services ranging from temporary housing support and medically tailored meals to mental health treatments and eligibility expansions.
The CMS has historically allowed states to submit waivers with a bundle of services that, when analyzed holistically, generate net savings, said Brett Friedman, a Ropes & Gray partner and former New York state Medicaid Director. Some critics say, however, that this method of approving waivers has the potential to increase federal spending on the Medicaid program.
As part of the Trump administration’s efforts to rein in federal spending on health programs, the new policy instructs the agency to evaluate each program under a state’s waiver for its individual financial impact.
Although it’s unclear how the guidance will ultimately restrict how states build their demonstrations, Georgetown Research Professor Leonardo Cuello says that it could reduce the ability of states to build innovative healthcare investments as well as complex demonstrations with multiple initiatives within them.
“Say you’re doing a mental health screening at a homeless shelter,” said Cuello. “Under this guidance, that would get intense scrutiny. Now the state has a much harder time justifying that service, even if the state has good reason to believe that that service is going to save a hundred ER admissions and therefore save a lot of money.”
“The state is going to have to basically do a lot of documentation to prove that to an actuary, and it’s just a much higher barrier to entry for the state to get that done.”
Roadblock for States
The new policy shift comes in response to budget neutrality requirements ushered in under last summer’s Republican tax and spending bill. Beginning Jan. 1, all Medicaid waivers will be screened for sound “actuarial principles,” which the agency says will allow the CMS to significantly reduce federal spending on these pilot programs.
According to Cuello, the new approach would likely change the way waivers are reviewed in a way that will make it harder to get approved.
“How you define normal Medicaid costs is really important. If you define it generously, then a lot of demonstrations will pass the test. If you define it super narrowly, then every demonstration is going to exceed normal Medicaid costs,” Cuello said.
“And what this regulation does is it takes a much more restrictive view on what normal baseline Medicaid costs are, and therefore a lot of demonstrations move from the safe zone into the unsafe zone,” he added.
The changes also come at a time when the CMS is requiring states to enforce stricter work and eligibility requirements and refine their internal Medicaid financing arrangements, said Salo.
Adding additional administrative workload while states are stretched thin by other changes could create roadblocks for getting waivers out the door, added Jacey Cooper, senior adviser to Health Management Associates and former director of the CMS’ State Demonstrations Group.
California told Bloomberg Law in a statement that the state was closely reviewing the guidance and is committed to meeting federal requirements while protecting access to care.
Compliance will mean states, such as California, will need need to do a lot of implementation planning upfront and a lot more reporting, Cooper said.
“It will be way more rigorous for states. It will be a lot more to manage,” she said.
