CMS Unveils 1115 Option that Includes Block Grants and Per Capita Caps

Topics: Federal News, Medicaid,

The Centers for Medicare & Medicaid Services (CMS) has announced the Healthy Adult Opportunity (HAO) initiative, which will allow states to carry out demonstrations under section 1115(a)(2) of the Social Security Act (the Act) to provide coverage under either an aggregate or per-capita cap financing model for certain populations without being required to comply with a list of Medicaid provisions identified by CMS. In rolling out the plan, CMS said that it is aimed at adults who do not qualify for Medicaid on the basis of a disability — primarily, the Medicaid expansion population.

The agency says it expects that coverage under an HAO demonstration will focus on adults under age 65 who are not eligible for coverage under the state plan, and it may consider state requests to include other adult populations who are not eligible for coverage under the state plan. Language in the State Medicaid Director (SMD) letter sent to states regarding the initiative suggests that HAO waivers are "a mechanism to cover populations not covered under their state plan," indicating that "the HAO initiative will involve the use of section 1115(a)(2) authority to provide coverage to individuals not eligible for benefits under the state plan, while affording states maximum flexibility in the administration of benefits for such individuals." In the eligibility section of the SMD letter, CMS indicates that "the HAO initiative is focused on coverage provided to adults under age 65 who qualify for Medicaid on a basis other than disability or need for long-term care services and supports and who are not covered in the state plan, including individuals described in the new adult group." However, given the complexity of the various Medicaid policies at issue, it may be too early to determine the full reach of the HAO initiative.

According to the SMD letter, the initiative is intended to "encourage states to apply for all flexibilities that have been previously approved in other demonstrations" where "such flexibilities would be likely to promote the objectives of the Medicaid program," such as: 

  • The ability to cover adults who qualify for Medicaid on a basis other than disability or need for longterm care services and supports and who are not covered under the state plan, including covering the "adult group", through a block grant or per capita cap;
  • Providing populations covered under an HAO demonstration with coverage more consistent with insurance benefits provided through the exchanges, rather than the traditional Medicaid benefit package;
  • The ability to pay for services that cannot traditionally be funded by Medicaid, including those designed to address certain health determinants, such as enhanced case management services that link individuals to housing or other supports;
  • Design of flexible premium and cost sharing structures;  The ability to impose additional conditions of eligibility, such as community engagement requirements for non-elderly, non-pregnant adult Medicaid beneficiaries who are eligible for Medicaid on a basis other than disability;
  • The ability to make certain changes in benefits, premiums, and co-payments during the course of the demonstration without the need for state plan or demonstration amendments and further approval by CMS;
  • The ability to change eligibility and enrollment processes, such as eliminating retroactive eligibility.


Additionally, the SMD letter continues, the HAO initiative offers states new opportunities, including:

  • The ability to make certain administrative changes during the course of the demonstration, such as certain changes in provider payment rates and application of claims review prior to making payment, without amendments or further approval by CMS;
  • The ability to adopt a closed formulary in line with Essential Health Benefit (EHB) requirements (with special protections for individuals with HIV and behavioral health conditions);
  • The ability to include coverage of services provided by a federally qualified health center as part of the state's value-based payment reform efforts.
  • The opportunity to propose alternative approaches to compliance with statutory managed care provisions that differ from those set forth in regulations;
  • The opportunity for states implementing an aggregate cap demonstration to be eligible for shared savings when actual FFP is less than the FFP allotment under the aggregate cap, provided a state meets certain performance criteria. 


States participating in HAO demonstrations will need to agree to operate their program within a defined budget target, set on either a total expenses or per-enrollee basis. Total expenditures for covered populations in excess of the annual budget will not be eligible for FFP. The targets will be negotiated based on factors including the state's own historic costs and national and regional trends. The financial parameters will be tied to inflation and adjustments may be made for extraordinary events, such as natural disasters.

Under the total expenses model, essentially a block grant structure, CMS would calculate a base year amount using prior year expenditures based on the populations and benefits included in the state's demonstration, and then trend this amount forward to each demonstration year without regard to changes in Medicaid enrollment. While available funding will be capped in the aggregate, states will not have the ability to cap enrollment and still receive the enhanced federal match rate available to the expansion population. States agreeing to the total expense model will be required to maintain spending on health services at a level at least 80 percent of the target amount. To the extent a state achieves savings and demonstrate no declines in access or quality, CMS will share back a portion of the federal savings for reinvestment into Medicaid.

Under the per enrollee model, similar to the model referred to as a per capita cap, CMS will determine a per enrollee base amount for each eligibility group included in the demonstration using prior year expenditures. If prior year expenditures for the covered population are unavailable, the base year amount will be determined initially considering national/regional expenditures and other relevant information, and will be subject to rebasing to ensure accuracy. CMS will trend each group's base amount forward to the demonstration year and then multiply the trended base amount by the number of enrollees for that year. The amount for each group will be added together to create an overall per capita cap. Therefore, the per-enrollee budget amount will fluctuate based on enrollment, while the aggregate cap budget amount will not.

Under both models, states will be required to participate in program integrity and financial oversight activities to ensure they continue to make accurate eligibility determinations and receive appropriate federal funds for covered populations. While total federal funding will be capped, the HAO does not change the need for states to submit claims reflecting actual expenditures to obtain federal matching funds for the Medicaid program. States will also be required to provide quarterly and annual expenditure reports to demonstrate their financial performance relative to their budget agreement.

CMS emphasizes that "states will continue to be held to a high standard of accountability for health outcomes and will be subject to regular and thorough monitoring and evaluation, consistent with CMS's approach to other section 1115 demonstrations." States will be expected to provide baseline data on a set of Adult Core metrics, as well as on a set of quarterly continuous performance indicators, relating to enrollment and retention, access and quality of care, health outcomes, and financial management, and to other effects for testing policies under HAO demonstrations, such as community engagement and federal
matching funds for services provided during an Institution for Mental Diseases (IMD) stay consistent with CMS guidance for substance use disorder (SUD) or Serious Mental Illness and Severe Emotional Disturbance (SMI / SED). States will be expected to report on these metrics and indicators throughout the demonstration, and engage in rapid course correction if needed, in accordance with guidance provided by CMS. In addition, states will be expected to conduct interim and summative impact evaluations for each demonstration period of performance, consistent with academic standards and guidance provided by CMS. 

CMS is providing an application template for the HAO initiative, which will include lists of the most typical administrative program requirements applicable to section 1115 demonstrations, with which the state would be expected to comply – for example, compliance with federal civil rights laws, program performance and program integrity standards; non-supplanting or duplication of other federal funding; and Transformed Medicaid Statistical Information System (T-MSIS) submissions and maintenance. HAO demonstrations generally will be approved for an initial five-year period from the date of implementation, and may be renewed for a period of up to 10 years.

There is a strong likelihood that he financing arrangements in the HAO initiative will be subject to legal challenges. Opponents to the ideas of Medicaid block grants and per capita caps have already raised questions about whether the executive branch has the authority to approve such proposals without congressional action. Some have also raised questions about whether approving such arrangements through 1115 waivers violates the requirement that such waivers "promote the objectives of the Medicaid program." CMS Administrator Seema Verma believes that CMS is on "very strong legal standing" because states will not be allowed to limit health benefits.

FMI An SMD letter describing the HAO initiative can be found at www.medicaid.gov/sites/default/files/Federal-Policy-Guidance/Downloads/smd20001.pdf