From a structural perspective, what makes the pending Medicaid legislation so extraordinary is that, without changing any of the program’s fundamental contours, both the House and Senate bills would simply superimpose arbitrary spending caps onto the statute’s federal funding contribution formula. In the near term, the loss of enhanced federal funding for the optional ACA adult expansion group would cause the most financial damage. But over the long term the true injury to Medicaid would come from holding back federal funding otherwise due under the financing agreement that has been the program’s statutory hallmark for more than a half century.

A Hobson’s Choice

Under the legislation as written, even as federal funding declines, Medicaid would retain its basic structure: certain eligibility groups would be mandatory, while others would be optional; any individual wishing to apply for medical assistance would have the right to do so, and, if found eligible, would have a right to medical assistance with reasonable promptness; and coverage of certain services with limited cost sharing would remain a requirement.

As the Medicaid and CHIP Payment and Access Commission (MACPAC) recently has documented, slightly less than half of total Medicaid spending goes to mandatory services furnished to mandatory populations — poor children; poor pregnant women; impoverished Medicare beneficiaries; children and adults with disabilities who receive Supplemental Security Income; and exceptionally impoverished parents and caretakers of minor children. A large proportion of adults receiving long-term services and supports, whether on the basis of age, poverty, or disability, are optional populations, and so are the services they use. Only in the case of children, as a result of Medicaid’s unique benefit guarantee known as Early and Periodic Screening, Diagnosis, and Treatment (EPSDT), is virtually all coverage mandatory, and even with the EPDST guarantee, children are by far the least expensive coverage group, comprising 43 percent of all beneficiaries but only 19 percent of total program spending.

Over time, in order to cope with the level of losses flowing from the federal spending caps, states would be compelled to turn to those parts of Medicaid that are optional and where the real money is found: adults, whether eligible on the basis of age, disability, or poverty; children receiving home and community-based care; and big ticket benefits and services such as prescription drugs, long-term services and supports furnished in community settings, and inpatient and outpatient rehabilitation services.

These choices are unthinkable.

Because they are unthinkable, the Trump Administration has dangled Section 1115 of the Social Security Act as a sort of strategic antidote, a magical totem that can provide a sufficient level of flexibility that can enable states to dramatically reduce spending while somehow avoiding the terrible human and financial consequences. The first dangle came in the form of a letter from Health and Human Services’ Secretary Price and Center for Medicare and Medicaid Services’ Administrator Verma to governors in March that offered to use section 1115 to give states flexibility, even as unprecedented federal legislative Medicaid spending reductions were being drafted. News reports now suggest that the dangle is happening in one-on-one meetings during which promises are being made.

The Limits of Section 1115 Waivers

Read carefully, the March letter is circumspect in what it promises. Indeed, the law demands circumspection, even if, in one-on-one meetings with governors, Administration officials are promising the moon and stars.

Section 1115 is a unique grant of federal authority, one that has been used by Republican and Democratic Administrations alike to advance federal social welfare policy. But Section 1115 operates within important boundaries, not only with respect to the actual scope of power granted to the HHS Secretary but also with respect to the legal process the Secretary must follow in reviewing demonstrations and authorizing their implementation. To be sure, the Price/Verma letter invites certain ideas such as “work and community engagement” and proposals to “align” Medicaid principles with private health insurance. But the letter makes no promises regarding what types of demonstrations will be approved. Nowhere does it discuss the types of wholesale restructuring that would become essential were states to lose more than one-third of their federal Medicaid funding.

Simply put, the Administration cannot make such promises because Section 1115 does not support radical Medicaid restructuring that could harm tens of millions of people. Nor does Section 1115 enable quick actions. Indeed, the Price/Verma letter makes clear that the Secretary’s 1115 authority can be exercised only through an extended legal process that entails proposals that are “reviewed on a case-by-case basis”. As a matter of federal law, Section 1115 demonstrations must be reviewed individually, each based on a public record that, in the words of the letter, impose “public input processes and transparency”.

Added to the Social Security Act in 1962 in order to enable the government to test innovations in public welfare programs, Section 1115 is a complex law that authorizes only demonstrations that “in the judgment of the Secretary” may “assist in promoting the objectives” of the Social Security Act program that is the subject of the demonstration. In Medicaid’s case, this objective is laid out in statute — to provide medical assistance to families and children whose resources are insufficient to meet the cost of necessary medical care. Furthermore, federal law places certain types of demonstrations off limits. For example, federal Medicaid law bars any Section 1115 cost-sharing demonstration other than under the following conditions:

the Secretary finds after public notice and opportunity for comment — (1) will test a unique and previously untested use of copayments, (2) is limited to a period of not more than two years, (3) will provide benefits to recipients of medical assistance which can reasonably be expected to be equivalent to the risks to the recipients, (4) is based on a reasonable hypothesis which the demonstration is designed to test in a methodologically sound manner, including the use of control groups of similar recipients of medical assistance in the area, and (5) is voluntary, or makes provision for assumption of liability for preventable damage to the health of recipients of medical assistance resulting from involuntary participation. (Social Security Act §1916(f))

Furthermore, the fact that demonstrations must be “found” by the Secretary to promote Medicaid program objectives means that demonstrations must follow a developmental process akin to other significant rulemakings. The Secretary’s decision to proceed with any single demonstration must rest on a factual record documenting how the demonstration will, in fact, advance these objectives. This obligation is not simply a matter of underlying Congressional intent; the text of the statute demands it. Specifically, the law provides that Medicaid demonstrations that “would result in an impact on eligibility, enrollment, benefits, cost-sharing, or financing” must be governed by a regulatory review process that provides for: “a process for public notice and comment at the State level, including public hearings, sufficient to ensure a meaningful level of public input;” clearly articulated demonstration goals; expected demonstration costs; how the state will “ensure that the demonstration project will be in compliance with” federal law; a “process for providing public notice and comment after the application is received by the Secretary, that is sufficient to ensure a meaningful level of public input;” submission of periodic reports; and “periodic evaluation by the Secretary of the demonstration project.” These legislative requirements are reflected in extensive federal regulations that establish the scope of federal authority and a detailed review and approval process.

In sum, Congress did not cede its legislative powers to the President when it wrote Section 1115. Section 1115 has had a remarkable impact on the course and direction of federal Medicaid policy. Over the decades, demonstrations conducted under its auspices laid the groundwork for the Affordable Care Act’s Medicaid eligibility expansion, the introduction of large-scale managed care programs into Medicaid, and the transformation of long-term care to a system of community-based supports. During the Obama years, Section 1115 served as a vehicle to enable states to expand coverage for poor adults, albeit under conditions less generous than those delineated in the statute itself. Thus, states have been permitted to test limits on benefits, and, under carefully delineated circumstances, the use of premiums and cost-sharing requirements other than those allowed under the law itself.

But Section 1115 is not a license to the HHS Secretary to rewrite the Medicaid statute to fit a dramatically altered federal funding environment. Only Congress can give states the broad authority to roll back Medicaid’s essential structure, and states should be careful not to allow themselves to be sold a bill of goods.

Author’s Note

The author’s Medicaid work is supported by the Commonwealth fund.