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On January 16, CMS released a State Medicaid Director Letter (SMDL) rescinding January 2020 guidance that invited states to apply for Section 1115 “Healthy Adult Opportunity” (HAO) demonstrations. Under such a demonstration, a state could accept a cap on federal Medicaid funding in exchange for fewer federal program rules and oversight, including the ability to implement a closed prescription drug formulary. The new SMDL asserts that an HAO demonstration “would raise legal conflicts with the core statutory objective of Medicaid,” citing the HHS General Counsel’s recent discussion of Medicaid objectives in an advisory opinion focused on work requirements. 1, 2 Tennessee was the only state to implement an HAO-style demonstration, called TennCare III, although the financing model departed meaningfully from the HAO model. (For more on the TennCare III demonstration, see Manatt’s overview of the original approval and more recent deep dive on TennCare III’s financing.) Following a legal challenge and a formal request by the Biden CMS, Tennessee agreed to voluntarily remove the authority for capped financing and closed formularies. This formal rescission of the HAO guidance does not prevent the incoming Trump CMS from reinstating a similar policy, but it would add strength to any legal challenges opposing a reinstated policy or a specific demonstration approved under it.

1 CMS Guidance Authorizes Medicaid Demonstration Applications That Cap Federal Funding: Implications for States, February 2020.

2 HHS General Counsel Clarifies Medicaid Limits for Work Requirements and Provider Abortion Exceptions, December 2024.

For more information on how to subscribe and to activate a complimentary one week trial to Manatt on Health, please reach out to Barret Jefferds.