What can states do to change key parameters of Medicaid?

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DISCLAIMER: The views and opinions expressed are those of the interviewees and are not necessarily those of McKinsey & Company. The views expressed herein are not for the purpose of providing legal advice and should not be considered legal advice.

Stephanie Carlton: Ken and Tom, thank you so much for doing this and sharing your expertise. There's a lot of discussion about changes to the Affordable Care Act through the legislative route, as well as, through options that the Department of HHS has to work through different waiver authorities.

1115 waivers enable the change of key parameters to the Medicaid program. And 1332 waivers enable the change of key parameters to federal regulations of the individual insurance market.

We would love to hear from both of you on what the possibilities are for the use of both waivers in ways that you would sign off on, were you still serving in a general counsel role at the Department of Health and Human Services.

Ken Choe: In response to your question, under Section 1115 and Section 1332, Congress clearly gave the Secretary broad discretion to test innovative alternatives, both in the Medicaid context and in the commercial health insurance coverage context, but these waiver authorities are not limitless.                       

Tom Barker: It's important to emphasize, waivers, whether we're talking about 1115 waivers or 1332 waivers, waivers are at the state option. So, the federal government, the Trump administration could not say, "Here is our policy with respect to a particular provision of the ACA or a particular provision of Medicaid. And nationwide, we are going to adopt a quote unquote 'waiver' to apply this new interpretation."

That is not the way waivers work. The way that waivers work is that states have to apply for them. And a waiver only applies within that particular state. There have been examples where prior administrations have tried to encourage states to adopt waivers. But at the end of the day, waivers have to happen on a state-by-state basis.

Ken Choe: This is often used to test propositions in the Medicaid context. And here, the Secretary has broad authority under the statute to test propositions. The standard in a statute is a demonstration project that, in the judgment of the Secretary, is likely to assist in promoting the objectives of Medicaid. So, as you can see, that is a very broad standard.

That is not to say that there are no standards. There are, only certain provisions of the Medicaid Act that can be waived in support of a demonstration project. Most of the key ones can be waived, but there are some that cannot by statute.                      

Tom Barker: I agree with everything that Ken said. The only thing that I would add is that, there are really only, under the statute, two provisions of Medicaid that can be waived. Of course, they're very, very big provisions.

Section 1902, which contains all of the operational rules of the Medicaid program, there are since the enactment of the ACA, 84 provisions of the act that Medicaid plans have to comply with. And generally speaking, the Secretary can waive all of those. In addition, 1115 waivers permit the Secretary to allow funding for services that are not otherwise payable or not otherwise matchable.                

Ken Choe: So, as mentioned, Section 1115 is not standardless. The demonstration project must be characterized as a true demonstration project.

There must be an evaluation period and an evaluation. This is not a high bar to clear, but the activity undertaken must be fairly characterized as a demonstration project. Another limitation is that by convention, but not by law, Section 1115 demonstration projects are budget-neutral.

This is in the discretion of the department, and the administration, but by historical convention, Section 1115 waivers are judged, in addition, by whether they will be budget-neutral. One key flexibility of Section 1115 is that in addition to waiving provisions of the Medicaid Act and allowing states to take alternative approaches, is that it allows for costs that are not otherwise matchable, under the Medicaid program, to be matched with federal dollars. So, in other words, it does allow for circumstances for federal dollars to flow for costs.

Tom Barker: I'll just give one example of the last point, Section 1903. So, there is a provision of the Social Security Act that prohibits Medicaid funds from paying for services that are provided to individuals, between the ages of 21 and 65, who are patients in an institute for mental disease, can be paid for in those states.                      

Stephanie Carlton: One of the questions that has been asked by some states is, "Can HHS approve a Medicaid expansion up to just 100% of the federal poverty level instead of 138% via an 1115 waiver? And if a state gets that, can they get the enhanced match that is available through the ACA?"                      

Tom Barker: I think that we are in agreement that in theory, HHS could approve a waiver request for a state that wants to limit the expansion to 100% of the federal poverty level, because that is within the purview of a provision of the Social Security Act that can be waived.

As long as the Secretary of HHS determined that such a waiver would promote the objectives of Medicaid, then he could grant such a waiver. But, I think Ken and I are also in agreement, that the enhanced match could not be used for that population on the theory, that Ken mentioned earlier, which is that the FMAP cannot be waived in the Medicaid program. And so I'm not certain that a state could get a waiver of the enhanced match if it wanted to limit the expansion population to 100% of the federal poverty level.                       

Ken Choe: I agree with Tom. Just as they could before the Affordable Care Act, states certainly may choose to expand their programs to adults up to 100% of the federal poverty level. I don't think there's any question that there is the authority of the Secretary to grant such a waiver.

But the key question, as you suggest, is whether the enhanced federal match would apply in that situation. This was a question that was raised immediately after the Affordable Care Act was passed. States wanted to know if they could be eligible for the enhanced match, notwithstanding their desire not to expand all the way to 133% of the federal poverty level. And the answer that they received was a very clear, "No."                       

Stephanie Carlton: Great. That's very helpful. Another aspect that we're seeing from a lot of states is, can work requirements be implemented in the Medicaid program? Or can out-of-pocket cost sharing be implemented through 1115 waivers? What are some of the constraints associated with both of those changes?

Tom Barker: I'll give my view on both. In terms of work requirements, which is something that I know the Obama administration was reluctant to approve in the context 1115 waivers, I'm guessing that the reason for their rejection of those waiver requests was because they did not believe that such waivers would promote the objectives of the Medicaid program.

I think legally, if a different Secretary had a different view, they probably could approve a waiver that permits a work requirement in the Medicaid program. In terms of cost-sharing, the Medicaid statute is incredibly precise about how cost sharing has to be applied. There are special rules, in Section 1916 cap A, that specify how cost-sharing has to be applied.

I think that those provisions are probably waivable. And to some degree, of course, they were. So, for example, the Indiana Medicaid waiver did have cost sharing that went beyond the permissible limits of Section 1916 cap A. So, I think that those are waivable as well.                      

Ken Choe: I agree with Tom that, of course, the Secretary would have to be able to articulate how the proposed demonstration project would further the objectives of the Medicaid Act. But the bar, frankly, is not high. And so we are seeing Verma suggesting that these are the types of situations where she would actively consider granting a Section 1115 application to a state, both in terms of work requirements and also in terms of departures from the statutory norm of only nominal cost sharing, as Tom mentioned.

I will say that there has been some departures from nominal cost-sharing under Section 1115. And there has been some success by some advocates, on behalf of Medicaid beneficiaries, where they felt that the administrative record did not sufficiently support a conclusion, by the Secretary that the increased cost-sharing would further the objectives of the program. And, the matter was remanded back to the Secretary for further consideration and further development of that administrative record.                       

Tom Barker: Can I make one additional point on work requirements? It's sort of a hypothetical or theoretical point, because I don't believe that there are currently any waiver requests pending that make this request.

But I will say that there is a little bit of a legal distinction between a waiver requesting work requirements than other types of waivers. So typically when you are thinking about an 1115 waiver, you are thinking about requirements of Section 1902 that can be waived. But with a work requirement, you're not really asking for a waiver. The state is asking to permit a new additional requirement on Medicaid beneficiaries.

And that's not quite the same thing as seeking a waiver. And so I do think that if an administration wanted to reject a waiver request that imposed a work requirement, that would probably be the avenue to pursue, to somehow say that you're not really asking for a waiver of anything; you're asking to impose a new requirement. And that's a little bit of a legal nuance, but I do think it's worth mentioning.

Stephanie Carlton: Very helpful point. And very important considerations as we move forward. This has been extremely insightful. We appreciate it.                       

Ken Choe & Tom Barker:

Thank you. Sure thing.