Tennessee Announces First-in-Nation Block Grant Proposal


By: Ross Margulies, Foley Hoag

On September 17, 2019, Tennessee released its proposal to block grant most of the funding the state’s Medicaid program (TennCare) receives from the Federal government. If approved by CMS, the amendment to the state’s longstanding 1115 waiver program would make Tennessee the first state in the nation to move to a true “block grant” format for Medicaid funding. A draft of the proposed waiver is available on the state’s website — the state is seeking comment from the public through October 18th, at which time we expect the state will submit the waiver to CMS for their review and Federal public comment period. While two states – Rhode Island and Vermont – did receive what are often referred to as “block grants” during the George W. Bush Administration, neither waiver resulted in a reduction or rigid constraint on its Federal funding, nor was either state given the authority to curtail enrollment or benefits offered.

While it is unknown whether or not all or some of the Tennessee waiver will receive approval from CMS, we do know that CMS is expected to issue guidance this Fall to states on how to convert their Federal Medicaid funding into a block grant or “per capita cap” funding mechanism. Given the Trump Administration’s longstanding support for the policy (block grants were included in the Republican healthcare proposal from 2017 that would have repealed the Affordable Care Act, and have since appeared in the President’s budgets), we expect the waiver to be given serious consideration. If approved, we expect other states to follow suit (Alaska has already expressed an interest in this model, and Utah is currently seeking approval for a similar, per-capita-caps model).

Below we provide a brief summary of the Tennessee waiver as laid out in its Draft Amendment — for a broader look at block grants (including a review of their legal vulnerabilities), you can read our previous posts here and here.


Currently, Tennessee (like every other state in the nation) receives Federal funding from CMS in accordance with the state’s Federal Medicaid Assistance Percentage, or FMAP. Tennessee’s FMAP will be 65.21% in 2020 — meaning that the states receives 65.21 cents for every dollar the state incurs for medical assistance on behalf of Medicaid beneficiaries. In this way, Medicaid in Tennessee (and every other state) is an open-ended entitlement: while states may only receive Federal funding for mandatory and optional services included in the State’s Medicaid plan (called a State Plan Amendment) or in a CMS-approved waiver, there is no cap or limit on the amount of Federal funding a state can receive as long as the state puts up its share.

In its purest form, under the concept of a block grant, states would be given a set amount of money from the federal government (presumably bearing some relationship to amounts spent for medical assistance in a prior year with an inflation trend) but could spend the money as they see fit.  A state could design its own eligibility standards and its own benefit design.  But the price of this enhanced flexibility would be that if the state exceeded budgeted expenditures, the federal government would not provide any additional payments. In other words, limitless matching dollars would no longer be available and the state would be on the hook for the full costs above their block grant.

The Tennessee proposal departs from this model in several fundamental ways:

(1) the state is proposing to exclude certain categories of services from the block grant model (so, for example, the state will still claim their federal share on outpatient prescription drugs and still seek rebates from manufacturers obligated under the Medicaid Drug Rebate program);

(2) the proposal includes a funding mechanism to increase the block grant as the state’s population increases (similar to a “per-capita-caps” model) and for inflation; and

(3) the Tennessee model includes a unique shared-saving component, allowing the state and the Federal government to split (50/50) the savings in any year in which the state underspends its block grant.

Before diving into the details of the plan, we should note that Tennessee is somewhat unique among state Medicaid programs. The state was one of the first to transition most of its Medicaid population into managed care — today nearly 95% of the state’s Medicaid population is served by a private managed care organization (MCO) (the small exception is for some long-term care services).  In addition, Tennessee is one of the only two states in the country (the other being Hawaii) that does not have a full disproportionate share (DSH) allotment.  While moving to a block grant system will be an enormous challenge for any state, we expect a state long vested in managed care (and making capitated payments to MCOs) will face a more moderate learning curve.

Funding Amount

As proposed, the amount Tennessee would receive in the form of a block grant from the Federal government would be based on the average enrollment in the state’s Medicaid program in 2016-2018 multiplied by the amount CMS projects the state would have spent on each Medicaid beneficiary, in the absence of its current TennCare waiver (referred to in the waiver as “Without Waiver Per Member Per Month Projected Costs.”) These “without waiver” costs are what CMS currently relies upon in determining whether a waiver meets the budget neutrality requirement of an 1115 waiver. As noted above, the block grant funding amount would be adjusted annually for inflation (by specific member categories) and for population increases (per-capita adjustments). Certain expenses (discussed below) would be specifically excluded from the calculation of the block grant.

To account for different levels of spending among different types of member categories, the per-member block grant amount would vary depending on whether a beneficiary is: (1) blind and disabled; (2) elderly; (3) children; or (4) adults.

Because the waiver relies on “without waiver” costs, the state should initially see a boon in its funding, given that the current TennCare demonstration greatly underspends relative to CMS’ “without waiver projections.” In its proposal the state notes that the savings from its current demonstration have “historically accrued to the federal government as a direct result of the efficiencies implemented under the TennCare demonstration.” By relying on “without waiver” costs for its block grant funding, Tennessee now seeks to share in these savings.

The state estimates that in year one the TennCare block grant amount from the Federal government would equal roughly $7.9 billion, if approved.

Services Excluded from the Block Grant

For certain expenses, Tennessee proposes to not fully opt out of the current FMAP-based funding system. In particular, the state proposes to exclude the following costs from the block grant:

  • Costs of services under the state’s Home & Community-Based Services (HCBS) waivers
  • Costs of targeted case management services provided to children in state custody
  • Administrative costs not treated as medical assistance for FMAP purposes
  • Uncompensated care payments to hospitals (DSH payments to hospitals, CAH payments, and EAH payments)
  • Costs on behalf of individuals also enrolled in the Medicare program
  • Costs for any new population the state may cover in the future
  • Outpatient (pharmacy) prescription drugs

These services will remain subject to the current financing mechanism, in which the state claims its federal share for expenses within these limited categories. The exclusion of DSH and other uncompensated care payments has an interesting history in the state.  As noted above, Tennessee has no DSH allotment; when the TennCare program was first approved in the 1990s, the state actually gave up its DSH payments. It quickly became clear to the state that this funding was still needed — beginning in 2002 the state began to receive payments for supplemental pools again, but Congress has to approve those payments each year, unlike all states other than Hawaii. A good history of DSH payments in Tennessee can be seen here.

Shared Savings

As noted above, one unique aspect of the Tennessee proposal is its shared savings component. To the extent the states underspends its block grant in any year, the state proposes that it would split (50/50) these savings with the Federal government. As written, the proposal would require the state to reinvest these savings back into its Medicaid program — but would not require the state to spend its block grant down before accessing these savings.

Flexibilities Sought by the State

In exchange for forgoing future FMAP payments from the Federal government for most Medicaid expenditures, Tennessee in its draft waiver request seeks a number of new flexibilities. The state is careful in its proposal to clarify that it is not intending to list each and every flexibility it seeks, reserving the possibility of requesting new flexibilities in exchange for foregoing future FMAP payments.

First, the state seeks an exemption from any new benefit mandates over the course of the demonstration. So, for example, to the extent Congress were to amend the definition of medical assistance in section 1905 to add a new benefit category for, say, Home Repairs, Tennessee would not need to comply with the new mandatory benefit category.

Second, Tennessee seeks flexibility to pay for items and services that will benefit the health of its enrollees or are likely to result in improved health outcomes, even if those items or services would not otherwise be eligible for Federal matching funds. For example, Tennessee seeks flexibility to pay for care for individuals who are residents of an Institution of Mental Disease (IMD) — costs of which are generally excluded from Federal funding under the Medicaid program. Further, the state seeks to pay for services to address social determinants of health (such as housing supports or nutrition).  We’ve written about this type of flexibility (or inflexibility) in the Medicaid program before on the blog. Perhaps most boldly, Tennessee seeks to pay for public health initiatives that are not specifically targeted at the TennCare population (citing, as an example, provider transformation efforts in rural areas).

Third, the state seeks a broad waiver of Medicaid’s comparability requirement to allow the state to vary the items and services it offers to discrete Medicaid populations. As an example, Tennessee cites the possibility of offering a limited dental benefit to pregnant women and children (without being obligated to offer a dental benefit to the state’s entire Medicaid population).

Fourth, as noted above, Tennessee has had a complicated history with the Medicaid DSH program. In particular, Tennessee currently receives its DSH allotment through two uncompensated care funds— (1) a virtual DSH fund; and (2) an uncompensated care fund for charity care. In its draft waiver proposal, Tennessee seeks the flexibility to modify its DSH funding methodology without prior CMS approval (as current required under the Terms and Conditions of its TennCare demonstration). The state notes this will allow it to be more responsive to the actual needs of Tennessee hospitals providing uncompensated care.

Fifth, the state seeks the authority to terminate or suspend a Medicaid enrollee’s eligibility for the program when convicted of program fraud. Tennessee proposes that it have the flexibility to disenroll individuals from the program and prevent re-enrollment for up to 12 months if an individual has been determined to be guilty of TennCare fraud.

The draft waiver proposal also more broadly discusses a whole host of flexibilities that the state may seek — from the requirements related to operating a managed care organization (42 CFR Part 438) to enrollment processes, service delivery systems, and benefit packages.

Changes to the State’s Coverage of Prescription Drugs

As an additional flexibility, Tennessee also seeks new flexibilities with regard to the coverage of outpatient prescription drugs. As noted above, Tennessee is not seeking to include outpatient prescription drugs in the block grant (citing the high and increasing costs of prescription drugs), but still seeks new flexibilities to control prescription drug costs in the state (although the state does note it would consider including prescription drugs in the block grant in the future if granted the flexibilities it seeks). In particular, the state is seeking approval to adopt a commercial-style closed formulary with at least one drug available per therapeutic class. According to the draft proposal, the state would still receive rebates under the Medicaid Drug Rebate program, but would be able to negotiate higher supplemental rebates because of the closed formulary system. To our long-time readers, this type of proposal might sound familiar. Just last year CMS rejected a similar request from Massachusetts. This of course raises the question – will CMS give any consideration to Tennessee request for prescription drug flexibility, particularly given the state is not proposing to include these costs in the block grant? The answer remains to be seen.

Legal Considerations

We have previously written about the potential legal vulnerabilities of a block grant financing mechanism. While the state identifies several provisions in Section 1902 of the Social Security Act it seeks to waive (for example, 1902(a)(54) in order to allow the state to modify its obligations under the Medicaid Drug Rebate Program), it does not identify the statute or requirement it seeks to waive in order to cap the state’s Medicaid expenditures at the annual block grant amount. As such, it remains to be seen how the state and CMS justify the proposal.

Medicaid waivers under section 1115 must also demonstrate that they advance one of CMS’ “objectives” for the Medicaid program. We’ve written about this relatively ambiguous requirement in the past. Yet, while ambiguous, this requirement has represented a significant stumbling block for states in the past seeking broad waiver approval. For its part, Tennessee states that it seeks to:

“… demonstrate how, by using the federal government’s projections for the state’s program costs without the 1115 demonstration as the basis for its block grant amount, the incentives between the state and federal government can be appropriately realigned so that TennCare can invest in and realize even better health outcomes for the Tennesseans it serves.”

Whether CMS will approve all — or some — of the Tennessee proposal remains to be seen. We are certain, however, that CMS will need to grapple with some major legal questions prior to any approval.