What Does New Block Grant Guidance Mean for Medicaid?

Health Update

Editor’s Note: The Trump administration is continuing its attempts to cap federal Medicaid funding—a prominent feature of the 2017 repeal-and-replace proposals that have been included in the president’s budget every year since. In a post for The Commonwealth Fund’s To the Point blog, summarized below, Manatt Health explains the process for calculating caps, the flexibilities available under the new guidance, the added incentive to divert block grant funds to health-related services outside of Medicaid, and the relief from oversight and delivery system rules. The blog post also highlights key risks the new policy raises.

Click here to read the full post.


The Trump administration has issued sweeping new Medicaid guidance, continuing its efforts to cap federal Medicaid funding. The new policy relies on untested legal theories to implement the fundamental “bargain” of block grant arrangements through Medicaid Section 1115 demonstrations. States would get less federal money and bear more financial risk in exchange for more flexibility and less oversight.

The policy, released as guidance to states, invites states to apply for what the Centers for Medicare & Medicaid Services (CMS) refers to as the “Healthy Adult Opportunity.” Targeted to the adult expansion population—parents and other adults who can be covered through the Medicaid expansion created by the Affordable Care Act (ACA)—the central feature of the initiative is the imposition of capped funding. Under Medicaid, states and the federal government jointly finance the cost of the program. All program expenditures are shared without a cap. That means that when spending increases, the federal contribution automatically adjusts. For states that opt in to a capped funding waiver, that would no longer be the case.

How Caps Would Work

States could choose between a per capita cap (imposing a cap per enrollee) or an aggregate cap (imposing a cap on total spending). A per capita cap allows federal funding to adjust for changes in enrollment but not healthcare costs, while an aggregate cap (or block grant) puts states at risk for both higher costs and increased enrollment.  

Caps are set when the waiver is first approved and applied annually. They are based on states’ historical spending for the waiver population or for newly covered populations, based on CMS estimates that can be adjusted later using state expenditure data. The base amount is then trended forward using the medical consumer price index (CPI) for the per capita cap or the medical CPI plus 0.5 percentage points for the aggregate cap (or the state’s historical growth rates, if lower). States still must provide matching fund dollars to draw down federal funds, but the federal government stops contributing matching funds once the state reaches the cap.

Key features include:

  • Flexibility. The guidance would allow states to reduce benefits, increase premiums and cost-sharing, impose work requirements and lockouts, revise enrollment processes, and make other changes. While most flexibilities offered undo beneficiary protections, the guidance also allows states to use capped funds to address social determinants of health (SDOH)—although, since expenditures are capped, any dollars spent on SDOH interventions would reduce the amount available for traditional Medicaid services.      
  • The ability to divert block grant funds. States that opt for the aggregate cap and spend less than the cap in a given year could divert up to 50% of their unused federal funds to health-related services outside of Medicaid, if they meet certain performance standards. There are strings attached, however. States would still have to put up their own dollars to draw down the unused federal allotment (and they would do so at their regular match rate, not the 90% enhanced rate that applies to the expansion population).
  • Relief from oversight and delivery system rules. Under the guidance, states would no longer be required to get CMS approval of managed care rates, contract amendments or fee-for-service provider payment rates or to meet the current regulatory standards for network adequacy or access to care.

Issues and Risks

The guidance requires more analysis, but two issues are certain:

  • With less coverage and more programmatic flexibility, coverage will be constrained and access to care will be at risk.
  • States that pursue these waivers will inevitably face prolonged legal fights.  
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