The Centers for Medicare & Medicaid Services (CMS) has announced a controversial plan to allow states to apply to participate in a new Medicaid “Healthy Adult Opportunity” (HAO) Demonstration.  In short, the HAO Demonstration will give participating states greater flexibility in the scope and administration of Medicaid benefits for certain beneficiary populations (i.e., the Affordable Care Act (ACA) expansion population) under a capped aggregate or per-capita federal financial participation (FFP) financing model.  CMS is offering participating states a “comprehensive suite of pre-packaged waiver authorities” under section 1115(a)(2) of the Social Security Act related to, among other things, cost sharing, benefit design (including closed drug formularies), eligibility, care delivery, and changes to provider payment rates.  States may apply for the HAO Demonstration immediately, although CMS’s authority to institute the program undoubtedly will be challenged in court.

CMS has provided extremely detailed guidance to states regarding the parameters of the HAO Demonstration.  Highlights of the program include the following:

  • Beneficiary Population – HAO Demonstration is limited 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 eligible under a state plan. CMS will allow states to impose certain additional conditions of eligibility, including income qualifications and “community engagement” (i.e., work) requirements for non-elderly, non-pregnant adult Medicaid beneficiaries who are eligible for Medicaid on a basis other than disability.
  • Benefits – CMS is linking Medicaid coverage under the HAO Demonstration to the ACA essential health benefit (EHB) standard rather than the traditional Medicaid benefits package.  This includes authorization to adopt a closed prescription drug formulary, with no requirement to comply with coverage requirements under the Medicaid rebate statute. Coverage would have to be in line with EHB requirements (e.g., formulary coverage of the same number of drugs in each therapeutic class as under the applicable state benchmark plan, with certain exception and appeal rights).  CMS would also require that some, but not all, of the Medicare Part D “protected class” requirements be satisfied—specifically, that all or substantially all antipsychotics, antidepressants, and HIV drugs be covered, but not all anticonvulsants, antineoplastic (cancer), and immunosuppressants for transplant rejection.  Coverage of drugs for opioid use disorder would also be required.  CMS specifies that the obligation for a drug manufacturer with drug rebate agreement to pay rebates would continue to apply under the Demonstration, and states could negotiate supplemental rebates in exchange for the inclusion of the manufacturer’s drugs on the state’s formulary.  Additionally, CMS will allow states to offer services that cannot traditionally be funded by Medicaid, such as enhanced case management services and services provided by a federally qualified health center as part of value-based payment reform efforts.
  • Cost Sharing – States will have enhanced flexibility with regard to premium and cost sharing structures, except that the aggregate limit on premiums and cost sharing may not exceed 5% of family income.
  • Managed Care and Delivery Systems – States will be able to use any combination of fee-for-service and managed care delivery systems under the demonstration as long as certain guidelines are met. States using managed care will have flexibility to propose alternative approaches to meeting statutory requirements to ensure network adequacy, access to care, and availability of services.  CMS also encourages applicants to “implement payment and delivery system reforms to improve the effectiveness of coverage, improve health outcomes and reduce the cost of health care,” including models similar to those developed by the CMS Center for Medicare & Medicaid Innovation.
  • Quality Strategy and Performance Assessment – Participating states will be required to implement a quality strategy and assess coverage, access to care, quality of care, and health outcomes of beneficiaries covered under the Demonstration. As part of this process, participating states must report on quality and access measures and continuous performance indicators addressing enrollment, retention, access to care, and financial management.
  • Financing – States participating in the HAO Demonstration will be required to operate their program under a defined total expense/aggregate cap or per-enrollee budget target. For states that assume the risk of an aggregate cap model, states with spending under their annual aggregate cap that also meet certain performance measures may qualify to receive between 25% and 50% of the federal savings, to be used for specified Medicaid reinvestment purposes (note that states selecting the total expense model will be required to spend at least 80% of their target amount on health services).
  • Demonstration Period – HAO Demonstrations generally will be approved for a five-year period, and successful demonstrations may be renewed for up to 10 years.  Additional information on the HAO Demonstration application process is available here.

As for the legality of HAO Demonstrations, it remains to be seen whether or when litigation will be filed by Medicaid stakeholders opposed to CMS’s effort.  For its part, CMS included language in its recent announcement stating that states’ requests to participate would be evaluated on a case-by-case basis with no guarantee of approval, which may complicate judicial review prior to CMS taking final agency action with respect to a particular state’s application to participate.  In the meantime, the legality of CMS’s previously announced demonstration waivers involving Medicaid work requirements is expected to be resolved shortly by the United States Court of Appeals for the District of Columbia Circuit, which heard oral argument last fall in CMS’s appeal of adverse district court rulings that found the agency exceeded its statutory authority.

2/14/2020 update:  The D.C. Circuit unanimously affirmed the district court’s judgment, finding the Secretary of Health and Human Services acted in an arbitrary and capricious manner by approving a section 1115(a) demonstration waiver imposing work requirements on Medicaid beneficiaries.