Forget Congress. With President Trump's Help, States Can Transform Medicaid on Their Own

As a candidate, President Donald Trump promised to repeal and replace the Patient Protection and Affordable Care Act (ACA, or “Obamacare”). Congressional Republicans had also been campaigning on the same promise for about six years. But the introduction of a House Republican bill to do just that was quickly met with mixed reviews, and the legislation looks likely to fail in the Senate in its current form even if approved by the House. But even if disagreement on Capitol Hill stymies an Obamacare replacement, states are fully capable of transforming America's health care landscape by making significant changes to a major piece of the puzzle — Medicaid — with a little help from the Trump Administration. And by all indications, that's just what they'll do.

But first, some necessary background information. (If you really don't have time for the background, click here to skip to the punchline.)

Medicaid Under the ACA

Medicaid is the government health care program for low-income families and adults. Established in 1965, state and federal governments jointly fund it, and the states largely manage their own Medicaid programs, although they must meet minimum requirements to receive federal funds. Although the Medicaid program is voluntary for states, all 50 states have participated since 1982. Medicaid currently provides health insurance for over 70 million people.

In an effort to increase health insurance coverage, the ACA included provisions directing all states to expand their Medicaid programs for residents earning up to 138 percent of the federal poverty level (FPL). However, the the U.S. Supreme Court ruled in 2012 (National Federation of Independent Business v. Sebelius) that the ACA could not force states to expand their Medicaid programs.

With the Supreme Court making Medicaid expansion optional, 25 states and Washington, D.C., chose to expand their Medicaid programs as directed under the ACA. Six additional states chose to expand their Medicaid programs under alternative models approved by the federal government (more on that below). In total, 31 states have expanded their Medicaid programs to date, providing an additional 11 million Americans with health insurance.

States that choose to expand their Medicaid programs can take advantage of additional federal funding. Normally, under Medicaid's joint funding system, federal and state governments both pay for a share of a state's Medicaid program. Under the ACA, the federal government pays for the entire share of the newly eligible population for a state's expanded Medicaid program until 2017, after which the federal contribution reduces each year and settles at 90 percent in 2020. This is a much larger federal share of funding than the normal Medicaid split, which varies by state but is about 60 percent on average.

Section 1115 Waivers

Many conservative governors and state lawmakers campaigned against “Obamacare” and disapprove of the heavy hand the federal government plays in implementing Medicaid programs in the states. A combination of anti-Obamacare sentiment and concerns over the growing costs of the Medicaid programs convinced governors in 19 states to decline the offer to expand their Medicaid programs under the ACA.

But those federal dollars were hard to leave on the table. Additionally, governors recognized that their citizens federal tax payments will continue financing new Medicaid enrollees in other states that chose to expand coverage regardless of their own state's decision. So, while forgoing expansion might be a principled stand to keep the federal debt in check, governors must contend with the political fact that their voters will pay for new Medicaid enrollees in neighboring states.

Arkansas, however, discovered a third approach, and several states followed its lead. This third way came in the form of federal waivers (authorized under Section 1115 of Social Security Act) granted to a state by the Centers for Medicare & Medicaid Services (CMS) in order to implement modified plans to cover the expanded Medicaid population. As the U.S. Department of Health & Human Services (HHS, which oversees CMS) explains, “Section 1115 of the Social Security Act gives the Secretary of Health and Human Services authority to approve experimental, pilot, or demonstration projects that promote the objectives of the Medicaid” program. These demonstration waivers give states “additional flexibility to design and improve their programs.” Section 1115 and its waivers predate the ACA's passage and encompass other state waivers, but here we focus on 1115 waivers that are used to modify Medicaid but still allow a state to collect the higher federal contribution rate dollars outlined in the ACA.

In 2013, Arkansas Governor Mike Beebe (D) reached a deal with his conservative legislature to expand Medicaid if the Obama Administration would grant the state a 1115 waiver to implement what Arkansas called the “private option.” The waiver negotiated with CMS allowed Arkansas to use federal funds granted for Medicaid expansion to help most of the newly eligible population purchase health coverage through the private health insurance exchanges set up under the ACA. Thus, the state still used the federal money intended for Medicaid expansion to provide most of that population with health coverage — it was just private health care instead of traditional Medicaid. Both sides walked away happy. Conservatives shifted potential enrollees of a government program into the private market, and supporters of the ACA provided low-income residents with health coverage (an additional 220,000 people).

Over the next few years, a handful of states joined Arkansas and were granted 1115 waivers (as indicated in the map above).

Initially, states were not very successful at negotiating with CMS to add “skin in the game” requirements for new enrollees whose income fell below the federal poverty line (FPL). For example, Iowa was granted approval to add small premium charges ($5-10 a month) for most enrollees, but these premiums included a “financial hardship” waiver that made the charges largely unenforceable for enrollees earning less than the FPL. But with each subsequent negotiation, CMS conceded more to states. Michigan was able to include a health savings account (HSA) component to its approved expansion plan. Pennsylvania officials struck a deal with CMS that allowed small premium charges for new enrollees whose incomes were above the FPL. Additionally, the Pennsylvania plan charged co-payments ($8) when an enrollee improperly used an emergency room. Pennsylvania Democratic Governor Tom Wolf later dropped the alternative expansion plan negotiated by his Republican predecessor and transitioned Pennsylvania to a traditional expansion of Medicaid.

Although states were successful at gaining approval for smaller concessions on 1115 waivers, the Obama Administration's CMS drew a hard line at any requirements that CMS staff concluded would reduce coverage for those below 100 percent of the FPL. CMS rejected requests to require those below the FPL to pay premiums or fulfill work requirements as a condition of eligibility. CMS also required states to provide coverage for everyone who was newly eligible for Medicaid expansion under the ACA, which meant all adults up to 138 percent of the FPL, if the state wanted approval to use federal funds under the ACA.

But the Trump Administration has already indicated CMS will now look more favorably on such requests and potentially grant more dramatic changes to state Medicaid programs.

Waivers Under the Trump Administration

So, what's all this mean for the future of Medicaid in America? If CMS chooses to broaden the type of program changes that states may pursue under the 1115 waiver program, states would have the ability to make major changes to Medicaid and the program's 70 million enrollees.

Currently, two states have pending 1115 waiver requests and two additional states have announced intentions to submit similar waiver requests to CMS. Depending on the outcome of these four requests, CMS could see a wave of applications flowing in from the states.

The Obama Administration approved an 1115 waiver from Indiana (submitted by then-Governor Mike Pence) that requires all beneficiaries to contribute money into an HSA on a sliding scale based on income from $1-20 a month. While other states have included premiums in their plan, Indiana was the first state to convince CMS to allow cost-sharing for beneficiaries below the FPL. Indiana has submitted an application to extend its current waiver and make certain changes, including charging higher premiums for tobacco users and incentives to encourage employment (e.g., job training, work search).

Kentucky submitted a waiver to transform its traditional Medicaid expansion into an alternative expansion model. Its waiver application asks CMS to allow charging enrollees premiums (from $1 to $15 per month), requiring employment as a condition of eligibility, adding a HSA component, and providing healthy behavior incentives.

Arizona, under Governor Doug Ducey (R), announced its plan to submit a waiver request to CMS. In 2013, under then-Governor Jan Brewer (R), Arizona expanded Medicaid under the traditional model spelled out in the ACA. However, the state has a long-standing 1115 waiver that modifies its entire Medicaid program. Arizona's planned waiver application requests permission to amend its current 1115 waiver to add work requirements as a condition for eligibility for all “able-bodied” adults enrolled in the state's Medicaid program and impose "meaningful cost-sharing requirements." The newly eligible enrollee population would be subjected to monthly income and work verification requirements. Most significantly, Arizona asks CMS to approve a five-year lifetime limit on Medicaid benefits (applied to non-disabled adults). Therefore, if CMS approves Arizona's waiver request as submitted, low-income residents in the state (those below 138 percent of the FPL) would only have access to the insurance offered under Medicaid for five years. After that period, they would be ineligible for benefits and presumably have to secure insurance on their own. CMS under the Obama Administration denied similar requests from Arizona last year.

Arizona State Senator Nancy Barto (R), who sponsored a 2015 law (AZ SB 1092) requiring the state to submit the waiver application, told the Arizona Republic that she's “much more optimistic that more, if not all, of the provisions in Arizona’s waiver application will be approved under the new administration."

Arkansas, the pioneer of 1115 waivers to expand Medicaid under the ACA, will submit a request to rewind its previous expansion. Under a proposed waiver, announced by Governor Asa Hutchinson (R), Arkansas is seeking to reduce Medicaid eligibility in the state from the current limit of 138 percent of the FPL down to 100 percent. CMS has issued policy guidelines providing that “the Affordable Care Act does not provide for a phased-in or partial expansion.” CMS says that states wishing to “take advantage of the enhanced federal matching funds for newly eligible individuals must extend eligibility to 133 percent [effectively 138 percent] of the federal poverty level (FPL) by adopting the new adult group.” The fact that Arkansas has made such a request indicates optimism that CMS under the Trump Administration will reinterpret the ACA, rescind the current guidelines, or anticipates congressional action on this issue.

In a statement announcing the proposed waiver, Governor Hutchinson said, “I have spoken with [HHS] Secretary Price and the Trump Administration about our plans to file these waiver amendments, and they’ve conveyed to me that the requests are consistent with the overall objectives of reform efforts in Washington.” The governor intends to shift the costs of this population entirely to the federal government because those in the 100-138 percent range of the FPL would be eligible for federal subsidies under the ACA. Critics note that this assumption may be premature if Congress decides to make significant changes in a potential repeal-and-replace law.

In addition to Arizona's proposed five-year lifetime limit, and Arkansas' plan to shift current Medicaid enrollees above the FPL out of the program, one policy shift consistent in the waiver requests are work requirements as a condition of eligibility. Policy analysts on both the left and the right have criticized the idea of work requirements for Medicaid enrollees as envisioned in these waiver requests. However, the Trump Administration has indicated it favors allowing states to begin requiring employment (community service or enrolling in a training program are other options) as a condition of “able-bodied” adults receiving health insurance under Medicaid.

In a letter sent last week to all current state governors, HHS Secretary Price and CMS Administrator Seema Verma expressing their commitment "to ushering in a new era for the federal and state Medicaid partnership where states have more freedom to design programs that meet the spectrum of diverse needs of their Medicaid population.” Among other things, the letter promised to fast-track waiver requests and stated CMS' intent to “use existing Section 1115 demonstration authority to review and approve meritorious innovations that build on the human dignity that comes with training, employment and independence." Verma was the architect of Indiana's 1115 waiver and guided many other states through the waiver process.

Expect Major Medicaid Changes, Especially in Red States

Under the Trump Administration, CMS is more likely to grant states waivers for Medicaid requirements that have never been tried before. These waivers could transform the Medicaid programs in states that receive them. If CMS approves the most stringent provisions of Arizona's and Arkansas' proposed waiver requests, expect many states — especially those controlled by conservatives — to follow suit. And because Republicans currently have complete control (governor and both chambers of the legislatures) in 25 states and 33 governors are Republican (in many states, governors can request a Medicaid waiver without legislative approval), this transformation could affect a significant portion of the country's population.