Tennessee’s Take on the Block Grant Idea

Tennessee’s draft proposal to reform the state’s Medicaid program (called “TennCare”) has resurrected old arguments about the merits, defects, and feasibility of using a federal block grant to finance the program.

The financial details of the Tennessee plan, which are still emerging, will matter greatly to the federal officials who will review it for budget neutrality. There are also questions about its legality. Consequently, even if Tennessee submits its plan soon (as is expected), it will be some months (and maybe years) before it is operational.


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The following is a summary of the current state of play:

  • Tennessee’s Timeline: The Tennessee legislature passed a law in May 2019 requiring the governor, Republican Bill Lee, to submit a block grant waiver plan to the federal government by November 20th. To meet that deadline, and to accommodate a 30-day public comment period, the state released its draft plan on September 17th. The state government will hold three public hearings in early October to solicit direct input from stakeholders and citizens. The governor is expected to submit the final waiver request to the Centers for Medicare and Medicaid Services (CMS) sometime in November.
  • Shared Savings: Tennessee wants a shared savings approach to replace the current federal matching system. Tennessee’s current federal medical assistance percentage (or “FMAP”) is 65.87 percent, which means the federal government covers $2 out of every $3 spent by the state on Medicaid. Tennessee has been operating under the TennCare waiver since 1994, with a ceiling on federal payments set at what federal spending would be without the waiver. Tennessee argues that TennCare spending is consistently below this “without waiver” baseline and proposes to share in any future savings by moving to a block grant. Put another way, the federal government’s contribution would be set at the “without waiver” baseline and the state would get to keep (and invest) half of the savings it achieves below that amount.
  • Protecting Eligibility and Benefits: The state says the waiver plan fully protects current eligibility rules and benefits, which means it will only be able to reduce its Medicaid costs by making the program more efficient and by eliminating waste. The state believes more flexible use of funds will allow public health investments that lower costs. It also plans to use a formulary to cut drug costs.
  • Exclusions: While billed as a block grant, Tennessee’s proposal is better described as a modified or partial block grant because of exclusions. Medicaid beneficiaries who are also eligible for Medicare (the “dual eligibles”) are excluded from the proposal, as are disproportionate share hospital (DSH) payments, spending on prescription drugs, and state administrative expenses.
  • An Enrollment Safety Valve: With a pure block grant, the federal government would provide a fixed level of funding to the state, and that funding would not increase when enrollment grew above what was expected when the block grant amounts were calculated. To avoid that risk, Tennessee is proposing a safety valve, which would compel the federal government to provide additional payments to the state for every person on Medicaid above the expected enrollment level assumed in the block grant payments. However, if enrollment were to fall below those assumed in the block grant payments, there would not be a downward adjustment in federal payments. The one-sidedness of this equation may draw scrutiny from federal officials.
  • Anticipated Federal Guidance: CMS submitted a draft State Medicaid Director letter to the Office of Management and Budget (OMB) for review in early June, under the title of “Medicaid Value and Accountability Demonstration Opportunity.” It is widely assumed that this draft letter outlines the steps a state would need to take to convert federal financing for its program into a block grant, or something approximating a block grant. However, because that letter has now been under review for nearly four months, it is not clear if OMB or others in the White House have concerns about its content.
  • The Legal Question: As Nicholas Bagley of the University of Michigan Law School has noted, section 1115 of the Social Security Act allows states to request waivers of certain provisions of Medicaid law, but section 1903, which established the FMAP system of financing, is not specifically cited as a provision that can be waived. That being the case, legal scholars have debated whether there is any feasible way for states to take federal support for the program in the form of a block grant. What is near certain is that if the federal government approves Tennessee’s waiver request, it will be sued and the federal judiciary will be asked to settle the question.

Republicans have been pushing a Medicaid block grant for years, in large part because they believe the FMAP system encourages states to seek additional federal financial support. A block grant would change the incentives. After being discussed for four decades, it would be useful to have a real test case to move the debate beyond well-worn talking points to evaluation of actual data.

It’s not yet clear if Tennessee’s plan provides the right mix of risk and reward necessary for a fair evaluation of the block grant concept. As such, the current forecast is for the political wrangling to continue for some time.

James C. Capretta is a resident fellow at the American Enterprise Institute.