Anyone who has had the chance to witness (or be part of) any of the epic health reform dramas that continually play out in Washington D.C. will agree: in the end, it always comes down to Medicaid. We have once again arrived at one of those moments.

The typical starting point for this continuing drama is the initial reaction to Medicaid’s sheer size and reach—16 percent of all health care spending in FY 2014, and 74 million people enrolled as of December 2016. These figures are especially astonishing to the newly initiated when one compares them to where Medicaid was only 37 years ago in 1980—fewer than 20 million people enrolled, expenditures around $25 billion.

It is when one begins to consider the causes of Medicaid’s exponential growth that it begins to dawn on the observer just how complicated reforming the program can get. Medicaid size and scope are a reflection of profound drivers:

  • escalating poverty especially among families with children;
  • population demographics and an aging society;
  • the widespread erosion of employer coverage, particularly for lower income workers;
  • infant mortality and child development;
  • major advances in life-saving technology; and
  • public health crises both natural and manmade.

Over a half century, federal and state policymakers alike have turned to Medicaid because its flexible structure repeatedly has offered the ability to nimbly respond to social problems as they emerge—for example, ramping up relatively quickly in the face of immediate need, such as a recession, and then  scaling back. When the Zika crisis hit, states turned to Medicaid to immediately fund the intensive outreach and case management needed to help identify women and families at risk. Medicaid accounts for nearly half of all births, covers over one-third of all children, and accounts for nearly half of all long-term care spending. The program has enabled children with severe disabilities to attend school and adults with severe disabilities to work.

Thus, how to change Medicaid’s growth trajectory without weakening its unique and indispensable qualities represents perhaps the most significant of all U.S. health policy challenges. The rest of the nation’s intensely market-driven system, as well as Medicare, rests on Medicaid’s features and capabilities.

The debate over Medicaid is now playing out on three fronts.


The American Health Care Act, now moving through Congress, would make vast changes in the program. The measure would reduce Medicaid spending by $880 billion over a 10-year time frame, chiefly by 1) eliminating enhanced federal funding for the adult expansion population added to Medicaid under the Affordable Care Act and 2) introducing per-person spending limits pegged to medical inflation without a mechanism for adjusting federal spending to take real growth pressures into account. The bill would preserve states’ ability to recognize poor adults without ties to the traditional program as a distinct eligibility class, thereby permanently reconfiguring Medicaid as a program capable of serving as the nation’s principal insurer of the poor. At the same time, the bill would impose tremendous spending pressures on states by scaling back funding without commensurate changes to enable states to restructure their programs in terms of eligibility, enrollment, benefits and coverage, and cost-sharing.

The House of Representatives is poised to permit additional amendments when the bill reaches the floor.  Amendments under consideration would allow states to impose work requirements (a change long sought by some state Governors as part of their request for Medicaid demonstration authority under the Social Security Act’s section 1115 demonstration authority.  Amendments under review also would also give states the ability to run part or all of their Medicaid programs as block grants, although the actual block grant language contemplated by the House does not yet appear to exist.  If the ultimate language is patterned after earlier block grant bills, a new structure would place aggregate caps on federal spending and would separate the growth of that funding from changes in population, case mix, technology advances, or service intensity.

CBO has estimated that the House bill, as reported by the authorizing committees and without the addition of work requirement or block grant features, would not only reduce federal funding by almost $900 billion over a 10-year time frame but also result in 14 million fewer beneficiaries served by 2026, as states move to eliminate the ACA adult expansion population and make other changes in program scope. These estimates of the financial and human impact of the legislation are the cause of the controversy that surrounds it.

The Governors’ Letter

On March 16, in the face of the white-hot furor caused by the House bill, House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell, received a lengthy letter from four highly influential Republican Governors—John Kasich (OH), Rick Snyder (MI), Brian Sandoval (NV) and Asa Hutchinson (AR)—all from expansion states and all considered Medicaid innovators. Only two days before, on March 14th, HHS Secretary Price and Seema Verma, administrator of the Centers for Medicare and Medicaid Services, had reached out to the Governors with their own invitation to help states adjust to new funding realities through the use of federal administrative authority.

The fact that the Governors wrote directly to Congressional leadership can only be interpreted as evidence that they do not see the path to Medicaid reform as one that winds through the long slow process of regulatory change, a process that in the end is limited both by the terms of the statute itself and the requirements—grounded in basic principles of democracy and due process—of the Administrative Procedure Act.  Nor do they see the HHS Secretary’s Section 1115 powers as the means to their end. Despite its breadth, section 1115 confers only narrow demonstration powers; grounded in the concept of research, these powers link Secretarial actions to strict requirements tied to Medicaid’s objectives and restrict demonstration undertakings to discreet and unique experiments that test and evaluate changes to Medicaid within the bounds of budget neutrality. (On March 16, Senator Ron Wyden (D-OR) and Representative Frank Pallone (D-NJ) weighed in with a letter to Secretary Price reinforcing the limited nature of section 1115, objecting to the use of section 1115 to limit access to coverage among otherwise eligible people through work requirements and lock-out periods, and emphasizing Medicaid’s principal objective — to furnish medical assistance to people who cannot afford necessary health care).

Given the limits of federal agency authority, the Governors understandably want large-scale legislative action aimed at altering the very tenets of Medicaid law, reforms that give states the power to fundamentally reshape what is meant by the concept of medical assistance, coupled with major new cost containment tools. Offering concepts have been under discussion among states for years, the letter also makes clear that the Governors view Medicaid as essential to the health of their states’ low income and medically vulnerable populations. The letter raises fundamental objections to the House bill, which, in the Governors’ view, “provides almost no new legislative flexibility for states, does not ensure the resources necessary to make sure no one is left out, and shifts significant new costs to states.”

Reform tools sought by the Governors

What types of tools do Governors want in exchange for agreeing to new funding limits?

First – and perhaps most strikingly, — they want any state to be able to choose to keep Medicaid’s existing financing structure even as they transition off the ACA’s enhanced financing structure for the expansion population. Under this scenario, current Medicaid law (minus the enhanced match) would remain a “default” option for any state.

Second, the Governors want states that elect to do so to be able to alter Medicaid in far-reaching ways, moving to a per capita arrangement, a block grant, or a mix of the two. To that end, they seek the following legislative flexibilities and reforms in connection with a state’s selection of an alternative federal financing arrangement:

  • Allowing states to transition over time to either per capita financing or block grants, using a broad definition of what qualifies as a state expenditure for federal payment purposes (including funds transferred from local governments or generated through provider taxes) to define the scope of the federal contribution. (Depending on how alternative financing legislation is drafted, states still would be expected to make qualifying expenditures to be eligible for federal funding, whether calculated on a per capita basis or paid under an aggregate formula not adjusted for real population growth. Aware of this, the Governors naturally seek recognition of all lawful sources of state spending under current law);
  • Allowing states to choose between per-person payments or block grants for five distinct eligibility categories: working-age adults without minor children (aka childless adults), parents and caretaker relatives, children, pregnant women, and elderly and disabled persons;
  • An end to state funding through of Medicare cost-sharing for low-income people, as well as an end to the special federal Medicaid “clawback” that results in compulsory state funding of the Medicare Part D drug benefit;
  • Modification of the per capita cap formula to allow for certain types of spending that grow faster than simple inflation, as well as adjustments for “national economic events” such as a significant economic downturn;
  • A new federal block grant option, grounded on a flat state maintenance-of-effort payment rather than the traditional federal matching/state Medicaid expenditure approach. This new optional block grant structure would consist of three distinct block grant pools:
    • Part A covering low income working-age adults and children (other than those with disabilities), with coverage rules tied to fixed benchmarks, using as models CHIP for children and Medicaid’s earlier “benchmark” approach that was broadened under the ACA to parallel the “essential health benefit” standard;
    • Part B dedicated to long term services and supports, with Medicare assuming responsibility for all of Part D and for Medicare cost sharing; and
    • Part C covering medical services for individuals with disabilities and low-income seniors as well as others not covered under Part A. Costs associated with ongoing treatment for children and adults with disabilities, including all benefits and services required under Medicaid’s special early and periodic screening diagnosis and treatment (EPSDT) benefit for children, would be preserved, and federal funding for Part C would remain “open-ended”;
  • Allowing states to retain and reinvest savings generated either through a block grant or per capita cap approach;
  • Federal/state negotiated limits on states’ use of “supplemental payment” strategies in which certain providers (typically safety net health systems) receive supplemental payments separate from the payments received for the delivery of specified patient care;
  • Provision of supplemental federal funding to help states address the needs of certain populations including American Indians and Alaska Natives (particularly the long term services and support needs of tribal elders), emergency care for undocumented immigrants, refugee health care, and financing care for disaster victims not otherwise eligible for Medicaid; and
  • Additional relief for the U.S. territories

In addition, the Governors seek broad new legal powers:

  • the authority to place limits on enrollment “as states transition into per capita caps”;
  • the power to impose work requirements on “able-bodied” individuals, with the term able-bodied defined by each state;
  • flexibility regarding the use the “modified adjusted gross income” test (MAGI) begun under the ACA for determining income eligibility;
  • the power to reintroduce an asset test for low-income populations;
  • the “latitude to establish eligibility requirements that promote state-specific policy goals”
  • broader cost-sharing authority as well as “enforceable financial participation” by enrollees
  • the right to entirely exclude FDA-approved drugs from state Medicaid formularies;
  • the elimination of the “essential health benefit requirements added by the ACA, and the elimination of the enhanced level of coverage required under EPSDT except for children with disabilities and those in custody;
  • the elimination of non-emergency medical transportation as a required benefit;
  • the ability to mandate managed care enrollment for all beneficiaries other than American Indians and Alaska Natives, including certain special needs populations and Medicare/Medicaid dual enrollees, for whom special waivers must be obtained under current law;
  • broadening current health care delivery options beyond sanctioned managed care arrangements and control over provider network adequacy standards; and
  • loosening, although not eliminating, federal payment requirements for federally qualified health centers and rural health clinics by introducing new restrictions into the payment formula.

Finally, the Governors also seek an enhanced state role in rulemaking and the pre-rulemaking policy development phase of federal implementation of this redesigned statute, as Medicaid is moved away from its historic legislative moorings.

The Price/Verma Letter

On March 14, two days before the Governors letter to House Speaker Ryan and Senate Majority Leader McConnell arrived, HHS Secretary Price and CMS Administrator Verma sent a letter of their own to the Governors. The HHS Secretary obviously cannot do what the Governors seek, namely undertake a wholesale restructuring of the Medicaid statute. Instead, the letter essentially promises only what the Secretary can do: to use his policy-making and demonstration authority to make incremental changes in Medicaid that, other than on a circumscribed demonstration basis, must stay within the bounds of the law.

The HHS letter offers the Administration’s fundamental view of Medicaid, which contrasts sharply with the Governors’ vision: “The expansion of Medicaid through the Affordable Care Act (ACA) to non-disabled, working age adults without dependent children was a clear departure from the core, historical mission of the program.” This assertion stands in clear opposition not only to how the states want to use Medicaid, but also to the clear language of Medicaid law, and even to the AHCA, which permits states to fashion Medicaid to reach all low-income adults.

In other words, the Administration and the Governors begin this administrative courtship with fundamentally divergent views regarding the role of Medicaid. In the Administration’s mind, the ACA expansion “provided states with an incentive to deprioritize the most vulnerable populations.” The Secretary and Administrator seem to want to get back to what they see as the basic purpose of the law—helping only specified populations whose eligibility is grounded in ancient concepts of cash welfare assistance.

It is in this context that the Administration offers its help. This positioning of Administration policy toward reining in Medicaid raises the possibility that their administrative actions and their demonstration initiatives will emphasize this vision. It also raises the further possibility that this vision and set of policy preferences will translate into conditions imposed on

  • new demonstration proposals from states such as Kentucky and Iowa,
  • existing ACA eligibility demonstrations coming up for renewal, including those that focus on the ACA adult eligibility expansion (Indiana, Montana, Arkansas, New Hampshire, Iowa, Michigan and potentially Arizona, Ohio, and Kentucky), and
  • demonstrations in states such as New York, Massachusetts, and California, which focus on delivery system reform.

In other words, states that do not share the Administration’s basic orientation toward Medicaid—as a program intended only for certain populations and not a source of insurance for the poor—may find that the price of continuation is accommodation to work requirements, time limits, enforceable premium requirements coupled with lock-out for failure to pay, and other measures that have the effect of minimizing coverage access and continuity among low income adults.

HHS cannot do anything, through administrative action or demonstration, to overcome the massive funding reductions that would occur under the AHCA. Instead, Secretary Price and Administrator Verma promise that states will be given “freedom to design programs that meet the spectrum of diverse needs,” “advance the next wave of innovative solutions to Medicaid’s challenges,” and “drive reforms that result in better health outcomes.” At the same time, the letter reiterates section 1115’s budget neutrality requirement; of course, were the AHCA to become law, states would receive far less in the way of federal funding, and therefore the test of budget neutrality would be that much more stringent.

Specifically, the letter invites 1115 demonstrations that will “support innovative approaches to increase employment and community engagement” (work requirements). It also invites (without indicating the mechanism that will be used to authorize such practices) state efforts to “align Medicaid and private insurance policies for non-disabled adults.” These mechanisms could include:

  • health plans linked to health savings accounts and higher cost sharing;
  • facilitating enrollment in employer-sponsored plans (since its enactment, Medicaid has allowed states to use federal funds to buy private insurance);
  • “enforceable” premium contribution requirements with appropriate protections for high-risk populations;
  • initiatives designed “to break down the barriers that prevent families from being together on the same plan”;
  • elimination of non-emergency transportation requirements;
  • higher emergency room cost sharing; and
  • ending presumptive eligibility (temporary coverage while a full application is pending) and retroactive eligibility.

The letter also expresses interest in initiatives that address the opioid epidemic and expresses support for modifying state obligations under its home and community based care regulation.

Some of these issues, such as shortening retroactive eligibility, already have made an appearance in the AHCA. Other invited initiatives, such as higher cost sharing, enforceable premiums, and waiver of transportation rules, already have been allowed under already-approved demonstrations. This again raises the possibility that HHS intends to use Section 1115 not to introduce carefully designed, budget neutral, program modifications and then evaluate their results, but instead as a sort of legislative grant of power in the Secretary to remake the Medicaid statute according to the Administration’s vision. This is not the purpose of 1115, nor do the terms of the statute allow wholesale program adjustments.

Certain areas of emphasis in the letter, including its offer to revisit the services requirements contained in its home and community-based care rule, its promise to conduct a “full review of managed care regulations in order to prioritize beneficiary outcomes and state priorities,” and its willingness to eliminate the non-emergency medical transportation requirement, may lie within the purview of the Administration’s rulemaking authority. But before existing rules governing managed care, non-emergency medical transportation, and home and community-based care can be changed, there must be notice and an opportunity for public comment.

Furthermore, any changes adopted by the Secretary must be consistent with both the statute and the administrative record. In other words, the HHS Secretary acts within considerable constraints.  In the case of certain protections, such as non-emergency medical transportation, the benefit has been part of the program’s fundamental guarantee for decades. Furthermore, there would be a strong argument that until ongoing 1115 demonstrations that waive non-emergency transportation have been fully evaluated for their impact on access and patient health outcome, no sweeping regulatory chance would be rational, the basic test for regulatory reform under principles of federal administrative law.

Whose vision of Medicaid ultimately will prevail—that of Congress, which seeks to cut funding and little else; that of the Administration, which seeks to introduce regulatory reforms that square with its narrow image of Medicaid’s true objectives; or that of the Governors, who seek unprecedented authority to fundamentally alter the program and its role within the health care system—is the issue that lies at the heart of what we loosely have come to call repeal and replace.

Author’s note: I am grateful to the Commonwealth Fund for its ongoing Medicaid research support.