On January 30, the Department of Health and Human Services (HHS) released long-anticipated guidance that invites states to pursue capped funding demonstrations for the Affordable Care Act Medicaid expansion population as well as optional, non-elderly, non-disabled adults. States that pursue such a demonstration would trade open-ended federal Medicaid matching for either a per capita cap (i.e., a fixed amount per enrolled beneficiary each year) or an aggregate cap (i.e., a block grant—a fixed annual amount based on projected spending and enrollment); states that have not previously expanded Medicaid would be required to adopt a per capita cap for two years and could then transition to an aggregate cap. The guidance and accompanying application template include detailed information about how caps would be calculated, and also outline other key features of the proposed “Healthy Adult Opportunity” demonstrations. By authorizing states to pursue such demonstrations, the Administration is seeking to achieve through the use of voluntary Section 1115 demonstrations a policy goal that Congressional Republicans and the Administration have not succeeded in achieving through legislation.

The guidance offers states the promise of “flexibility” in exchange for taking on the risks inherent in capped funding. However, many forms of flexibility touted by the guidance (such as work requirements) have already been granted by the Centers for Medicare & Medicaid Services (CMS) in demonstrations that do not include capped funding or already are available for the expansion population. Some elements of the guidance are new – such as the ability to “share savings” with the federal government, charge much higher copays than allowed under current law, depart from certain managed care rules, and avoid some forms of federal oversight. States could, for example, secure advance approval of programmatic authorities that could be implemented later, without the need to formally amend the demonstration (although public consultation would be required). These relaxed rules would be coupled, however, with evaluation and new monitoring requirements.

Notably absent from the guidance are certain forms of flexibility sought by some non-expansion states, such as the ability to retain the enhanced federal match for “partial” expansions or expansions with enrollment caps. Nonetheless, at least one governor has already signaled his interest in pursuing a demonstration under the new guidance. Oklahoma Governor Kevin Stitt (R) joined HHS Secretary Alex Azar and CMS Administrator Seema Verma at the agency’s rollout of the demonstration and indicated his intent to apply for a Healthy Adult Opportunity demonstration to expand Medicaid in his state; a ballot question calling for an expansion has been certified in Oklahoma Congressional Democrats, on the other hand, have already called into question CMS’ ability to approve capped funding demonstrations. Legal challenges to the guidance are certain to follow in the coming months.

In an issue brief prepared for State Health and Value Strategies, a program supported by the Robert Wood Johnson Foundation, Manatt analyzes the guidance and its implications for states.

Support for this brief was provided by the Robert Wood Johnson Foundation. The views expressed here do not necessarily reflect the views of the Foundation.