Medicaid Work Requirements and Beyond: CMS Administrator Tries a New Work-Around

For the past 3 years, CMS Administrator Seema Verma has been on a crusade to convert Medicaid from health insurance to a welfare program.  The spear at the point of this attack has been work requirements, which, under the guise of “demonstrations,” she has sought to impose as a condition of eligibility for Medicaid coverage.  To date, the federal courts have been unsympathetic.

Last month, the Administrator unveiled what appears to be a new litigation strategy based on an obscure provision in section 1115 of the Social Security Act known by Medicaid wonks as CNOM (rhymes with “phenom”).  Here’s a basic explainer on how the Administrator is trying to abuse the authority in this provision in order to rewrite the Medicaid program without going to Congress or getting blocked by the Courts.

Under section 1115, the Secretary of HHS has two authorities.  The purpose of both is to allow states to conduct demonstration projects that are “likely to assist in promoting the objectives of” the Medicaid statute.  The first, section 1115(a)(1), authorizes the Secretary to waive compliance with provisions of section 1902 of the Medicaid statute as necessary to enable a state to carry out an approvable demonstration project.  The second, section 1115(a)(2), authorizes the Secretary to approve federal matching funds for state spending on costs not otherwise matchable (CNOM) under section 1903 of the Medicaid statute, which permits federal matching payments only for “medical assistance” and specified administrative expenses.

The (a)(1) waiver authority is what the Administrator, through the Secretary, has used to approve the purported “demonstration” of work requirements—these are thinly-veiled policy changes—in Arkansas, Indiana, Kentucky, Michigan, and New Hampshire, as well as Arizona and Wisconsin (which have not implemented work requirements).  A federal District Court judge, James Boasberg, has ruled that the Secretary’s approval of three of these “demonstrations”—Arkansas, Kentucky, and New Hampshire—was arbitrary and capricious under the Administrative Procedure Act and therefore invalid.  The Secretary has challenged the District Court’s rulings before the D.C. Circuit Court of Appeals; a decision is expected soon.

The (a)(2) expenditure authority is less well known.  Its purpose is to make federal Medicaid funds available to match states spending under a demonstration project even though, under normal Medicaid rules, federal matching funds would not be allowed.  For example, there is a long-standing prohibition against the use of federal Medicaid funds to match the costs of services to Medicaid beneficiaries in residential treatment facilities with more than 16 beds.  This prohibition makes it difficult for Medicaid beneficiaries with substance use disorder (SUD) to access needed residential treatment., which is particularly unfortunate in the context of a national opioid epidemic.

To address this, the Secretary has approved section 1115 demonstration projects in 27 states using the (a)(2) expenditure authority to match the costs of short-term residential treatment services that would not otherwise be matchable as part of a continuum of care.

These are actual, legitimate demonstrations. They promote the objectives of the Medicaid program by using coverage to expand beneficiary access to needed services, and the costs of the residential treatment services that the demonstrations match would not, without the demonstration, be matchable.  The evaluations will examine the costs and effectiveness of this coverage in addressing opioid use disorder and other SUD.  The (a)(2) expenditure authority is opened ended—i.e., there is no limit on the amount of federal funds the Secretary can approve.  And although there is no requirement in section 1115 that the demonstrations be budget neutral to the federal government, CMS and OMB have imposed such a requirement administratively.   CMS has also acknowledged that (a)(2) does not authorize the Secretary to change a state’s matching rate.

In mid-December, the Secretary approved a work requirement “demonstration” in South Carolina using only the (a)(2) expenditure authority, not the (a)(1) waiver authority.  This was followed ten days later by an approval of the Utah work requirements “demonstration” using only (a)(2) authority, and today by the issuance, with great fanfare, of a  “Healthy Adult Opportunity (HAO) initiative grounded entirely on (a)(2) authority   There seems to be a pattern developing. What’s going on here?

South Carolina is a case in point.  The Secretary approved two work requirements “demonstrations” simultaneously.  The first, “Healthy Connections Works,” applies work requirements to the mandatory parents group, which in South Carolina is parents with incomes under 66% of the Federal Poverty Level, or $1,195 per month for a family of 3.   The approval uses the (a)(1) waiver authority to waive section 1902(a)(8)(reasonable promptness) and 1902(a)(10)(eligibility) in order to allow the state to condition Medicaid eligibility on meeting work requirements.  Since the state itself estimates that the imposition of work requirements will result in 7,100 beneficiaries losing Medicaid coverage, and since those beneficiaries are mandatorily eligible under current law, the Secretary’s approval is clearly inconsistent with a central objective of the Medicaid statute; it is hard to imagine that, if challenged, this approval would not be found “arbitrary and capricious”.

The second “demonstration,” titled “Palmetto Pathways to Independence,” applies work requirements as a condition of eligibility to parents with incomes between 67% and 100% of FPL.  As noted, the state does not currently cover parents with incomes above 67% FPL; this separate “demonstration” makes them eligible.  The Secretary approved this “demonstration” using the (a)(2) expenditure authority, not the (a)(1) waiver authority.  Under the expenditure authority, the requirements of section 1902(a)(8)(reasonable promptness) and 1902(a)(10)(eligibility) are not waived; instead, they are treated as “not applicable” to the parents made eligible under the “demonstration.”  In either case—a waiver under (a)(1) or “not applicable” under (a)(2)—the result is the same:  work requirements become a condition of eligibility not found in the Medicaid statute.  And in both cases, the “demonstration” must be “likely to promote the objectives” of the Medicaid statute, which work requirements do not.

But here’s where things get a little muddy.  Unlike “Healthy Connections Works,” which the state estimates will result in the loss of coverage by 7,100 beneficiaries, “Palmetto Pathways to Independence” will, according to the state’s projections, result in coverage for 45,100 individuals, including 31,100 parents, who are not currently eligible.  If the Secretary’s approval of “Palmetto Pathways” is challenged in court, how will the courts view it?  Will they find that the demonstration “is likely to promote the objectives of” the Medicaid statute because on net it increases coverage?  Or will they determine that the use of (a)(2) expenditure authority in work requirements “demonstrations” is simply an effort to evade previous court rulings invalidating these “demonstrations”—i.e., that the use of (a)(2) expenditure authority in order to impose work requirements as a condition of eligibility is no less “arbitrary and capricious” than the use of (a)(1) waiver authority to impose work requirements?

How the courts—and the Congress in its oversight capacity—view this issue will matter.  A lot.  It is clear that Administrator Verma is using  the (a)(2) expenditure authority as part of her broader crusade to “transform” the Medicaid program—a crusade that includes not just imposing work requirements, but also disrupting funding sources that states use to pay for their share of Medicaid and limiting federal payments to states through block grants and per capita caps  Earlier this month, Administrator Verma approved a 1115 “demonstration” using (a)(2) expenditure authority to allow Texas to exclude Planned Parenthood from providing services to its Medicaid beneficiaries.  And today the Administrator announced an initiative called the Health Adult Opportunity (HAO) to approve, under (a)(2) expenditure authority, “demonstrations” to provide coverage under aggregate or per capita caps.

The job of the Congress is to write the laws.  The job of Executive Branch officials like Administrator Verma is to carry out the laws that Congress writes.  The job of the federal courts is to make sure that Executive branch agencies don’t overreach by making up and implementing their own version of the law.  That’s what the courts have done in the work requirements cases so far.  Administrator Verma is trying an end run using (a)(2).   There’s a word for this, and it’s not “humility.”

Andy Schneider is a Research Professor at the Georgetown University McCourt School of Public Policy.