Payment Models

Analysis: Tennessee proposes an overhaul to funding of its Medicaid program

September 30, 2019 1:53 pm
  • Tennessee has proposed increasing its Medicaid funding based on projected Medicaid per capita costs and program enrollment.
  • The plan is founded on the premise that the state will save money for the federal program, and in return, Tennessee receives a relaxation of Medicaid program federal restrictions.
  • CMS is likely to reject Tennessee’s Medicaid overhaul proposal, according to HFMA’s Chad Mulvany.

The Wall Street Journal is reporting, “Tennessee on [Sept. 17] released a draft plan to overhaul funding for its Medicaid program, a proposal that would convert the open-ended federal funding it receives into a lump sum that would increase on a per-person basis if enrollment climbs. Under Tennessee’s draft proposal, the state would get a lump sum based on projected Medicaid costs. The block grant amount will be inflated each year — by specified member categories — on a predetermined index used by the CBO for comparable enrollment categories.

The federal government would increase its funding on a per capita basis when Medicaid enrollment eclipses the number used to calculate the state’s initial grant amount. Tennessee would be able to keep any federal dollars that aren’t spent if costs decline in the program for the low-income and disabled. Separately, any savings that stem from the state’s administration of the program would be equally shared with the federal government. In addition to Tennessee, Alaska Gov. Mike Dunleavy, a Republican, is pushing to change the state’s Medicaid to a block grant system. He said in a March 2019 letter to the president that Seema Verma, administrator at the Centers for Medicare and Medicaid Services, urged Alaska to be the first state to move on block grants. In June, Alaska awarded a contract to study changing the state Medicaid program to a block grant.”  

This is a bit of a wonky/complex topic. Anyone who would like additional details and commentary should check out this week’s Politico Pulse Check Podcast “Is this the next big change to Medicaid?” The specific discussions of the Tennessee waiver are between the nine-minute and 22-minute mark and after the 30-minute mark.


Where do the savings to the Feds come from?

My guess is CMS is going to say, “Thanks but no thanks,” on this one. I’m struggling a bit to see where the savings to the Feds come from.

  • First, Tennessee carves out outpatient drug costs and payments for dual-eligible beneficiaries (more on this in a second). So they’ve basically said, “We want to go at risk on a per capita basis on the federal funding component,” which for Tennessee is approximately 65% of their Medicaid expenditure. They also have said, “But we don’t want to go at risk for the really hard stuff, which is where the savings are.”
  • Second, to achieve federal savings, most proposals for a per capita allotment set the amount of growth in per enrollee spending below current projections. For example, one of the bills that attempted to repeal and replace the ACA, the “American Healthcare Act” included a per capita cap that was indexed for inflation to the Consumer Price Index for medical services, which is typically lower than the CBO’s inflation estimates for comparable categories (3.7% versus 4.4%.) And while .7% difference doesn’t seem like a lot, compound that over a decade on almost $10 billion per year, and the savings adds up quickly.

Why Tennessee wants in

From the Tennessee side, I get why they want in. The bargain is that the state helps the Feds save money, and in return, the Feds relax most of the Medicaid program’s federal restrictions. But I’m struggling to see what Tennessee is going to do, aside from cut rates to providers or reduce benefits in some way, to generate savings. I created the chart below, which lays out the basic options available to states to reduce Medicaid expenditures.

I see some issues with Tennessee’s plan as follows:

  • First, Tennessee has already carved out duals, so they’ve violated the Wille Sutton rule given the elderly and disabled make up 28% of the enrollee population but account for 54% of Medicaid spending.
  • Second, 100% of the state’s Medicaid beneficiaries are enrolled in Medicaid Managed Care. So, state payments are already capped, and in theory, the managed care plans should be coordinating care for beneficiaries.
  • Finally, Tennessee is a relatively progressive state and has already implemented select Medicaid episodes of care. It also has approximately 37% of its Medicaid beneficiaries enrolled in a patient centered medical home. So, while there may be some upside to further alternative payment model  implementation, they’ve already kind of pulled that lever.  


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