The Tennessee Medicaid agency has posted a proposal to convert a portion of its federal funding to a “block grant.”  The proposal, which responds to a directive from the Tennessee State Legislature, takes the form of an amendment to the state’s current section 1115 demonstration, which expires at the end of June 2021.

The state will hold public hearings on the proposal next week and accept comments through October 18 with the intent of submitting it to CMS in November.

There’s no shortage of items to comment on.  Consider the breathtaking request (for a 100% managed care state like Tennessee) for the “flexibility” to “operate a managed care program that does not comply with [federal managed care regulations],” or the equally breathtaking request for “flexibility” to “modify enrollment processes, service delivery system and comparable program elements” without federal approval.  There’s also the proposal for “flexibility” to exclude new drugs from coverage until the state determines that “market prices are consistent with prudent fiscal administration” or “sufficient data exist regarding the cost effectiveness of the drug.”

This blog is going to focus on perhaps the most problematic feature of the proposal: how it “reimagines the Medicaid financing structure.”  The state is proposing (1)  that, for most beneficiaries and for most services, the federal government continues to match the state’s Medicaid spending (at its current 65% rate) up to a “block grant amount;” (2) that if enrollment exceeds projections it continues to receive federal matching funds for the cost of those additional enrollees; and (3) that it split 50-50 with the federal government any of the federal “savings” resulting from its cost containment efforts using its current and new “flexibilities.”  Tennessee emphasizes that the “shared savings component” is “a key feature and a necessary component of the state’s proposal.”

This is imaginative but illegal.  Here’s why.

For over fifty years, Medicaid has been financed through a federal-state matching arrangement.  If a state spends money on behalf of eligible individuals to pay for covered services, the federal government will match that state spending at a rate set by a statutory formula.  In Tennessee’s case, the matching rate this year is 65.87%; that is, the federal government pays for two-thirds of the cost of Tennessee’s Medicaid program.

The federal matching is open-ended, reflecting the policy underlying the matching arrangement:  the federal government will share in all of the risks of a program that provides health and long-term care services for a state’s low-income citizens, including enrollment growth, health care inflation, public health epidemics, etc.

The key fact about a federal-state matching program is, well, that it’s a matching program.  The federal government only makes payments when a state spends money on behalf of eligible individuals for covered services.  If a state decides not to cover a particular population—in the case of Tennessee, the Medicaid adult expansion population—then the federal government will not match—at a 90% rate—the cost of covering the population. The federal government isn’t “saving” money on the cost of care; Tennessee is leaving money on the table (and leaving 300,000 low-income Tennesseans uninsured).  Similarly, when the state disenrolls 61,700 children (7%) from its Medicaid program over a 16-month period, it no longer pays for their coverage, and the federal government no longer pays for 65 percent of those costs. Finally, if CMS approves Tennessee’s spending work requirements waiver, the state will no longer pay for Medicaid coverage for thousands of low-income parents who will lose coverage due to red tape, but there will not be any federal “savings,” just matching payments not made.

This basic open-ended matching arrangement is codified in sections 1903 and 1905 of the Social Security Act.  The reason this matters is because, under section 1115 of the Social Security Act, the Secretary’s waiver authority is limited to provisions of section 1902 (let’s not even get started with whether the “flexibilities” in the proposal are likely to assist in promoting the objectives of” the Medicaid program).  The Secretary does not have the authority to waive sections 1903 or 1905, full stop.  Only the Congress, not the Secretary or the state of Tennessee, has the authority to “reimagine” the “traditional Medicaid financing model.”

Here’s where the state’s imagination truly runs wild:  its proposal to take 50% of  imaginary federal “savings” under its section 1115 demonstration.  Under long-standing federal policy, section 1115 demonstrations must be budget-neutral to the federal government; that is, over the 5-year period of the demonstration, the federal government can spend no more than it estimates that it would have spent in the absence of the demonstration.  In 1115-speak, the “with waiver” spending cannot exceed the “without waiver” baseline.  What Tennessee is proposing is that the federal government pay it half of the difference between (1) its actual spending under the demonstration as amended by this proposal and (2) the “without waiver” spending projected by CMS under its current demonstration, without any requirement that the state spend money that these federal funds would match.

Since the current demonstration has been in effect since July 1, 2016, there is a financial track record on the difference between the state’s actual spending and the “without waiver” baseline projected by CMS.   For the 11 quarters for which state reports are posted (October-December 2016 through January-March 2019), the difference between the state’s spending under the demonstration (“Total net quarterly expenditures”) and the “without waiver” baseline projected by CMS (“budget neutrality”) was $16.6 billion.  The federal share was $10.8 billion.  Fifty percent of the federal share is $5.4 billion.  And under Tennessee’s proposal, its share would be $0.

These numbers reflect the current demonstration, not the new proposal, but give you a sense of the order of magnitude involved.  Given these numbers, one can certainly understand why the state would propose to “reimagine the Medicaid financing structure.”  And given CMS Administrator Seema Verma’s open enthusiasm for “reframing” Medicaid as a block grant, it’s also understandable why the state would try to game the section 1115 budget neutrality rules in fashioning a “block grant” proposal.  What’s much harder to understand is why the Office of Management and Budget (OMB), which is currently reviewing a draft State Medicaid Director letter from on block grants, would tolerate such a blatant raid on the federal treasury.

Can you even imagine?