From AIS Health: Tennessee’s ‘Aggregate Cap’ Medicaid Waiver Gets CMS OK

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Reprinted with AIS Health permission from the January 15, 2021, issue of AIS Health Daily

Continuing its spree of approving ambitious waivers before the end of the Trump administration, CMS
on Jan. 8 gave Tennessee its blessing to become the first state in the nation to cap its Medicaid funding
in exchange for a range of operating flexibilities. Industry insiders tell AIS Health that while the future of
Tennessee’s demonstration is uncertain, its approval could still be a point of concern for Medicaid
managed care organizations.

“Similar to medical loss ratio (MLR) requirements in the Medicaid managed care final rule, the waiver
would give Tennessee more oversight over their Medicaid plans, from flexibility in managed care
contracting to rate setting,” explains Abner Mason, founder and CEO of ConsejoSano, a health tech
startup specializing in linguistically and culturally aligned Medicaid and Medicare health plan member

“The changes to rate setting will be particularly worrisome to plans,” Mason tells AIS Health. Currently,
capitation rates for plans must be actuarially sound, meaning “the rates are projected to provide for all
reasonable, appropriate and attainable costs, which CMS reviews and approves,” he explains. But under
the TennCare III waiver, “Tennessee would not have to get CMS approval for a plan’s capitation rate,”
Mason says. “Without the actuarial soundness requirement, plans will be concerned that TennCare
would have the ability to propose arbitrary capitation rates, with potential for reductions due to state
budget constraints.”

CMS Encouraged Capped Funding

The approval of Tennessee’s waiver comes a little less than a year after CMS issued its Healthy Adult
Opportunity guidance, which paved the way for states to cap their federal Medicaid funding in exchange
for more flexibilities (HPW 2/3/20, p. 3). Converting Medicaid financing to a block grant or similar
structure has been a core policy goal of CMS Administrator Seema Verma and the Trump administration
at large, particularly after Republican lawmakers included such a measure in their unsuccessful
legislation to repeal the Affordable Care Act.

The TennCare III demonstration, which is slated to last 10 years, uses what CMS calls an “aggregate cap”
approach to Medicaid financing. It will require Tennessee and CMS to evaluate historical enrollment and
spending data and create a fixed Medicaid spending target that “will increase at a reasonable growth
rate over time.” In exchange, the state will receive a range of flexibilities regarding how to administer its
Medicaid program, such as:

✦ The ability to increase benefits and coverage without seeking prior approval from CMS, within the
parameters approved;

✦ The authority to address Medicaid fraud more aggressively;

✦ The ability to change existing benefits and services without reducing the amount, duration or scope
of covered services below current levels; and

✦ The authority to better regulate uncompensated care costs.

Tennessee will also be able to access up to 55% of the annual savings generated when the state’s
Medicaid spending falls below the aggregate cap and when it meets quality targets. In addition, the
waiver allows Tennessee to set up a “commercial-style” closed drug formulary while still participating in
the Medicaid Drug Rebate Program — another unprecedented flexibility for a state Medicaid program.

Finally, in a likely nod to concerns about the COVID-19 pandemic increasing Medicaid spending, CMS
says the plan includes a “safety value” that would help increase funding to account for unexpected
increases in enrollment. That backstop would also “ensure that the state is incentivized to control cost
growth through efficient administration and reducing unnecessary costs rather than through reduced
enrollment,” according to the Trump administration.

But some policy experts are not convinced that CMS’s safety valve is enough to allay concerns about the
effects of an aggregate-cap Medicaid funding arrangement.

“The very nature of block grants in relation to Medicaid is about managing costs rather than
strengthening quality,” says Jerry Vitti, founder and CEO of Healthcare Financial, Inc., which connects
low-income, elderly and disabled populations with public benefit programs. “With a block grant in place,
running Medicaid in Tennessee becomes a fiscal exercise only, rather than the traditional approach of
improving outcomes and ensuring access while managing costs. That is a big distinction, safety valve or

Savings Create Incentives to Cut

Jocelyn Guyer, managing director with Manatt Health, says the shared-savings opportunity included in
Tennessee’s waiver program strikes her as the most problematic — and potentially the ripest target for
a legal challenge.

“What CMS has done is given Tennessee some of the federal government’s money if it brings spending
in below target levels — so it creates much more intense incentives for Tennessee to cut, whether that’s
through reduced payment rates to MCOs or other means,” Guyer tells AIS Health.

Mason points out that states already have plenty of reasons to be tightening their budgets for Medicaid,
which is often the largest state expense category.

“We know with COVID that state budgets are in crisis mode — [facing] declining income tax revenues
due to high unemployment and sharp drops in sales taxes and other fees due to decreased
consumption, coupled with increased spending to fight the virus,” he tells AIS Health. “Tennessee is no
exception. We’re already seeing other states’ efforts to claw back funds from plans, using COVID as
justification. Medicaid block grants during COVID will take that to another level. With the long-term
viability of Tennessee Medicaid MCOs at stake, plans will need to keep a close eye on the rates that
TennCare will be offering in a block grant-COVID environment.”

Guyer points out that Tennessee’s demonstration program may never get off the ground, as it faces the
possibility of legal challenges and a new presidential administration that is likely to view it skeptically.

“If I were a Tennessee official, I’d be extremely concerned I’m going to hit obstacles,” she says.

CMS Moves to Keep Waivers Intact

Yet Vitti argues that “any course of action by the Biden administration to undo this will be difficult.”
Indeed, CMS Administrator Seema Verma on Jan. 4 sent a letter to state Medicaid directors asking them
to quickly sign a “letter of agreement” that sets up a new, lengthier procedure CMS must follow in order
to withdraw approved waivers.

“Despite the administration’s efforts to make it as hard as possible to undo, ultimately Biden’s
administration will be able to, whether through a legal challenge or other means,” Vitti adds.

TennCare III is the latest in a series of waivers approved by CMS in recent months. In October, the
agency greenlighted Section 1115 waivers in Georgia and Nebraska that included another of Verma’s
signature initiatives: Medicaid work requirements (HPW 10/23/20, p. 1).

The next month, CMS approved Georgia’s request to set up a Section 1332 waiver program that allows
the state to stop using as a centralized enrollment platform starting in 2023 (HPW
11/6/20, p. 8).

by Leslie Small

Read more about the waiver approval at and
Contact Vitti and Mason via Joe Reblando at and Guyer via Sam Eisele