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Tennessee's test of Medicaid block grant could cross a regulatory red line

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Tennessee's state legislature passed a bill May 2 directing Republican Gov. Bill Lee to develop and submit a Medicaid block grant proposal to the federal government.
Source: The Associated Press

As Tennessee attempts to become the first state to have a Medicaid block grant waiver approved by the Trump administration, legal experts expect the proposal to become locked up in court before it is ever implemented.

The state's proposal, which was released Sept. 17, would cap federal funding for Medicaid and grant the state extra flexibility to operate its program with little interference from the federal government. While the Trump administration has signaled support for block grant waivers, legal and policy experts question if the Centers for Medicare and Medicaid Services have the authority to make such dramatic changes to Medicaid through the waiver system.

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Medicaid is the joint federal and state health insurance program that mainly covers people with low incomes, a wide population including children and the elderly. States' programs are paid for by both the state and federal government, with the federal government contributing a set percentage of total costs for each state.

A block grant system would place a cap on federal funding provided to states, and states would be required to cover 100% of spending above the cap. In exchange for taking on that risk, states would be given the flexibility to alter their program how they see fit.

Supporters see Medicaid block grants as a way to rein in federal spending, while critics claim that they incentivize states to cut benefits and limit enrollment to generate savings.

Tennessee said its proposal will not reduce benefits and eligibility. However, Sarah Rosenbaum, a health law professor at the George Washington University School of Public Health, told S&P Global Market Intelligence that the state wants "to turn [Medicaid] into the healthcare equivalent of a poor house."

Rosenbaum said changes requested in the proposal like tailoring coverage for specific groups and requesting permission to possibly eliminate certain benefits without federal approval are red flags that the state plans to make changes that could harm Medicaid beneficiaries.

Tennessee's proposal is telling the federal government to "just give us a block of money and go away," according to Rosenbaum, who expects the proposal to be challenged in court if it is ultimately approved.

James Capretta, a resident fellow with the American Enterprise Institute, agrees that the proposal is likely to face litigation, but does not believe that the state is trying to cut benefits or reduce eligibility to save money. Capretta said in an interview that approval from CMS is not guaranteed.

Tennessee is seeking an annual spending cap of approximately $7.86 billion. The cap would increase each year based on certain inflation and enrollment criteria, and any savings would be equally split with the federal government.

Capretta said Tennessee is not taking on enough risk because federal spending is not strictly capped in the proposal. If Medicaid enrollment exceeds the average annual rate projected by the state, the proposal asks the federal government to switch to a per-person payment system to cover the increase in enrollment.

Crossing a 'red line'

Tennessee is requesting the change through what is called a section 1115 waiver, which allows states to implement experimental or pilot programs and policies. Changes under these waivers can be significant; however, they must uphold the principles of Medicaid, including expanding coverage or benefits.

SNL ImageThe Centers for Medicare and Medicaid Services, led by Administrator Seema Verma, has signaled support for Medicaid block grant waivers.
Source: The Associated Press

States have recently used section 1115 waivers to implement Medicaid work requirements, a controversial policy that requires recipients to work a set number of hours each month in exchange for eligibility. While CMS has approved multiple work requirement waivers, a federal judge has struck down states' waivers on four separate occasions.

Nicholas Bagley, a professor of law at the University of Michigan Law School, said that section 1115 waivers can allow for broad changes to Medicaid, but changing the financial structure of the program is "one of the red lines you can't cross."

Waivers cannot change how the federal government pays its contribution to a state, which is set out in federal statute, according to Bagley.

"I just don't understand how Tennessee thinks its got the authority to do this," he said.

The state's proposal was released about eight months after it was reported that CMS is working on Medicaid block grant guidance for states, which the agency has not yet released.

Sarah Tanksley, deputy director of communications and employee relations for the Division of TennCare, Tennessee's Medicaid program, said in a Sept. 23 emailed statement that the state has had "high level" talks with CMS, but the federal agency did not help Tennessee develop its proposal.

"The very fact that the government has indicated that it is interested in block grant experiments indicates that they're willing to approve things that don't seem in any remote way to promote the objectives of the Medicaid program," Rosenbaum said.

Tennessee's proposal will be submitted to CMS after a 30-day public comment period, which goes through Oct. 18.