Vermont is one of ten states that don’t use risk-based Medicaid managed care. It’s not that Vermont isn’t interested in risk-based managed care. The state is very interested—so long as it is the managed care organization (MCO). The state made its case to CMS in its application to extend its section 1115 demonstration beyond June 30. CMS didn’t buy it. Here’s what happened, and what it means for the single payer debate.
Vermont has been operating a section 1115 demonstration, “Global Commitment to Health,” since 2005. The demonstration has gone through a number of iterations, the most recent of which was scheduled to end this June 30. Last year, Vermont applied for a five-year extension. The application led off with a request that CMS approve “transitioning the Department of Vermont Health Access (DVHA), Vermont’s Medicaid delivery system, into a public, state-run, risk-bearing Medicaid managed care plan that will enable Vermont to continue to innovate.” This transition, the application stressed, was “at the core of Vermont’s vision and goals” for the demonstration.
DVHA is one of six Departments within Vermont’s Agency for Human Services (AHS). DVHA operates both the state’s Medicaid program and Vermont’s state-based Marketplace. AHS is the “Single State Agency” which, under federal law, is responsible for administering Vermont’s Medicaid program. The previous extension of the 1115 demonstration, which was approved in 2016, authorized the delivery of services through a “managed care-like model.” Under this model, AHS acted as the state agency, making per member per month payments to DVHA, which was designated a “non-risk prepaid inpatient health plan (PIHP).”
The key is the term “non-risk.” Per federal regulations, a PIHP is an entity that provides inpatient hospital or other institutional services to its enrollees under a contract with the state Medicaid agency that is not a comprehensive risk contract. That means that, although the PIHP may be paid on a per member per month basis, the PIHP is not at financial risk for changes in utilization or for costs incurred. If at the end of the contract period the PIHP has incurred more costs than anticipated by the per member per month payments, the state Medicaid agency reimburses it for some or all of those additional incurred costs.
In contrast, under a risk contract, an MCO assumes the financial risk of the cost of services furnished. If the cost of furnishing the services exceeds the per member per month payments made to the MCO under the contract the MCO incurs a loss; if the cost is less than the capitation payments, the MCO keeps the profit (within limits). In most if not all of the states that use MCOs as their Medicaid delivery system, the MCOs are able to realize profits under their risk contracts with the state Medicaid agency. As a result, there is intense competition in the Medicaid managed care market among large publicly-traded companies that recognize a business opportunity when they see one.
Vermont may have been taking note. This time around, the state asked to convert DVHA from a non-risk PIHP to a full-risk MCO. As such, “DVHA would be at risk for managing under a capitation rate the entire Medicaid population and all Medicaid services…” This risk-based arrangement, the state argued, would incentivize it “to deliver value for federal and State Medicaid spending by continuing to develop more innovative care models, improving care coordination, and strengthening DVHA’s population health management capabilities.” More specifically, as a risk-based MCO, DVHA would “have the ability to use plan profits to pay for value-added services and other health-related services that will address the needs of all Vermonters, including those who are not enrolled in Medicaid…and… to cover investments that cannot be covered as medical services, care management, or quality improvement initiatives.”
On June 30, CMS approved Vermont’s request for a five-year extension of its demonstration, including the ability to claim federal Medicaid matching funds on spending for 13 public health, health care, and health-related “investments.” CMS did not, however, grant the state’s request to convert DVHA into a full-risk MCO: “CMS is not approving this request, and instead, the state will maintain the current managed care-like model that was approved in the 2016 demonstration extension.” CMS did not give a reason for its decision.
So, what has all this got to do with the single-payer debate?
In 2019, the California Legislature established the Healthy California for All Commission (HCFA, not to be confused with CMS’s predecessor, the Health Care Financing Administration). The commission’s charge was to “develop a plan that includes options for advancing progress toward a health care delivery system in California that provides coverage and access through a unified financing system, including, but not limited to, a single-payer financing system, for all Californians.” Among the commissioners was William Hsiao, a Harvard economics professor (emeritus) who in 2010 was engaged by the state of Vermont to develop a single-payer health system. (Vermont’s former Governor, Peter Shumlin, made a presentation to the commission in July of 2021 on the lessons learned from that effort).
The commission began its work early in 2020 and issued its final report this past April. (This author was a member of the commission and supported its recommendations). The current fragmented financing system includes, in addition to employer-sponsored insurance, three federal insurance programs: Medicare, Medicaid, and the ACA Marketplaces. To unify these three funding streams in California, the cooperation of the federal government would obviously be needed. A key issue for the commission was whether the Secretary of HHS has the authority to redirect those funding streams to the state in such a way that they could be integrated into a unified financing system, or whether the state would have to seek legislation from the U.S. Congress.
To help answer that question the commission engaged outside counsel. Their memo, Appendix C of the commission’s final report, reviewed the federal statutes undergirding each of the programs, including section 1115. On that point, they wrote: “While Section 1115 does not allow HHS to alter the standard Medicaid funding structure, it can potentially be used to support a state-based comprehensive health care delivery system in which the State establishes itself as the single Medicaid managed care organization (MCO). Under this scenario, Medi-Cal would pay a capitated amount to the State-based MCO, which is then at-risk for paying providers for services furnished to Medi-Cal beneficiaries.”
The emphasis here is on “potentially.” At the time the memo was written, CMS had not made its decision to reject Vermont’s request to convert DVHA into a full-risk MCO. But we now know that CMS—under a progressive management team with clear health equity goals shared by the state of Vermont—will not use section 1115 authority to allow a state to establish itself as a single Medicaid MCO and pay itself on a risk basis. Whether CMS believes it doesn’t have that authority, or whether as a matter of policy it doesn’t want to support a single state-run MCO, even from a state with a strong single-payer track record like Vermont, is an open question.
What is no longer in doubt is that section 1115 is not a single-payer magic wand. In theory, Congress could give the Secretary the authority that would allow a state to unify all three federal funding streams as part of a state-run single-payer system—subject, of course, to a Supreme Court determination of constitutionality. In practice, persuading Congress to enact such legislation would be a high-degree-of-difficulty exercise. Nonetheless, it is on Congress, not the HHS Secretary, where single-payer advocates need to focus their efforts.
