Medicaid Section 1115 Demonstration Waivers: C A L I FOR N I A Comparing California, Massachusetts, and New York H EALTH C ARE F OU NDATION Introduction the uninsured, towards a more comprehensive California’s Medi-Cal Hospital Uninsured Care waiver that promotes expansion of coverage to the 1115 waiver, which took effect on July 1, 2005 uninsured and access to better coordinated care for and expires on August 31, 2010, fundamentally Medicaid beneficiaries. altered the way Medi-Cal pays hospitals and Issue Brief provided $180 million in federal funds for each This issue brief compares California’s waiver to of three years to provide coverage for low-income the 1115 waivers of two states with innovative uninsured individuals. These changes were made and more comprehensive waivers: Massachusetts under the authority of Section 1115 of the and New York. Massachusetts illustrates how a Social Security Act, which permits the federal state has used the 1115 waiver to substantially government to waive certain Medicaid statutory expand Medicaid coverage to the uninsured and requirements and allows states to receive federal attain nearly universal coverage. New York has also matching funds for Medicaid services that would used its waiver to reorient the state’s health care otherwise not be eligible for federal funding. spending away from inpatient facilities towards The Medi-Cal Hospital Uninsured Care waiver delivery systems focused on outpatient and involves several billion dollars in federal funds primary care. and is reshaping health services for low-income Californians, the hospitals that serve them, state Although these states are different from California and county budgets, and California’s health care in important ways (see Table 1 on page 2), the goal economy. of this brief is to learn how these states are using 1115 waivers to achieve a range of program goals, This fall, state officials are expected to submit and to present a broad range of possibilities to a concept paper to the federal government California’s policymakers and stakeholders as the describing the desired goals and features of a state moves forward to renew its waiver. renewal of the waiver. The concept paper is an important step toward ensuring that California is Following a summary of key findings, this issue able to renew its waiver before the current waiver brief examines the three states’ 1115 waivers, expires, and initiating discussions with federal including descriptions of each waiver’s purpose and officials regarding the future of the coverage key provisions. The final two sections of the brief expansion provisions of the waiver before an discuss the key similarities and differences among enrollment freeze begins on March 1, 2010. the three waivers, and consider future possibilities State policy makers are considering a range of for California’s waiver. possibilities for a renewed waiver, including altering the structure of the current waiver, which directs significant federal funds to safety-net hospitals but provides limited funding to cover O ctober 2009 Table 1. Key State Characteristics, 2006 – 2007 managed care to achieve budget neutrality while CA MA NY financing the cost of expanding Medicaid coverage Population* 36.2 million 6.3 million 19.0 million to the uninsured or services not otherwise eligible for federal matching funds. Uninsured Rate* 18.5% 7.9% 13.6% Medicaid ◾◾ Both Massachusetts and New York, unlike California, Enrollment† 6.4 million 1.0 million 4.1 million negotiated waivers that allow federal payments to grow over time, versus an absolute cap on federal Expenditures‡ $36.0 billion $10.3 billion $44.3 billion participation. Spending per Enrollee§ $4,528 $8,300 $9,656 Sources: Kaiser Family Foundation, www.statehealthfacts.org, based on analysis of Medicaid While California lawmakers have expressed an interest enrollment and expenditure data from the Center for Medicare and Medicaid Services, and of population and health insurance coverage data from the Census Bureau’s Current Population in pursuing a more comprehensive waiver like those in Survey. California HealthCare Foundation, Medi-Cal Facts and Figures, September 2009. Massachusetts and New York, doing so is complicated *Two-year average of 2006 and 2007. †As of December 2006. by the state’s budget crisis, the peculiar incentives created ‡Federal Fiscal Year 2007 (October 1, 2006 through September 30, 2007). §Federal Fiscal Year 2006; excludes payments that are not allocated to beneficiaries, such as by CPEs, federal health care reform proposals that may disproportionate share hospital payments and administrative expenditures. significantly alter Medicaid policy and funding streams, and uncertainty about whether or not CMS will allow California to use hospital taxes to generate non-federal Key Findings matching funds. An evaluation and comparison of the 1115 waivers of California, Massachusetts, and New York yield the Moreover, Massachusetts and New York have distinct following key findings: advantages over California when it comes to identifying ◾◾ The waivers in California and Massachusetts both federal savings that can be re-invested elsewhere through phase out the use of most Intergovernmental an 1115 waiver. One is that Medicaid spending per Transfers (IGTs) as a source for the non-federal share enrollee in New York and in Massachusetts is among of Medicaid expenditures. This shift stems from IGT the highest in the nation, whereas California spends less payments coming under scrutiny by the Center for per enrollee than any other state. It is much easier for Medicare and Medicaid Services (CMS). high-cost states to reduce their spending and use these program savings to finance coverage expansions or other ◾◾ While all three waivers allow states to use certified program improvements than it is for states like California public expenditures (CPEs) as the non-federal share that have already achieved significant Medicaid savings. of Medicaid expenditures, only California has used CPEs as the major source of funds for Medicaid In addition, the federal government’s contribution to hospital payments. help states offset indigent care costs is two to three times higher per resident in Massachusetts and New ◾◾ Both California and Massachusetts established Safety York than it is in California, despite the fact that a Net Care Pools, which allow federal funds to be used larger share of California’s population is uninsured. The to pay for the cost of covering populations or services higher allotments for Massachusetts and New York (on not otherwise eligible for federal matching funds a per resident basis), give these states an advantage over under Medicaid. California in terms of funding indigent care or leveraging ◾◾ Massachusetts and New York, unlike California, these funds to expand coverage to the uninsured. used savings associated with expansions of Medicaid 2  |  California HealthCare Foundation Section 1115 Demonstration Projects Section 1115 of the Social Security Act provides the Secretary of the U.S. Department of Health and Human Services (HHS) broad discretion to authorize demonstration projects likely to assist in promoting Medicaid objectives. These projects are intended to demonstrate and evaluate a new idea or policy that has not been demonstrated on a widespread basis. Examples include expanding eligibility to individuals not otherwise eligible under the Medicaid program, providing services that are not typically covered, or using innovative service delivery systems.1 Section 1115 waivers (and other Medicaid waivers) enable states to receive federal Medicaid matching funds without complying with all of the usual requirements set forth in the federal Medicaid statute.2 They also allow states to receive federal matching funds for “costs not otherwise matchable” (e.g., costs to serve populations or provide services that would not otherwise qualify under federal statute for federal matching funds). Section 1115 projects are generally approved to operate for five-year periods, and states may submit renewal requests to continue the projects for additional periods of time. Medicaid waiver programs must be “budget neutral” to the federal government over the life of the waiver program. To meet the budget neutrality test, estimated federal spending under the waiver cannot exceed the estimated federal spending of the state’s existing Medicaid program under current law and program requirements. For example, federal expenditures associated with expanding coverage to a population not already covered under the state’s Medicaid program must be offset by reductions elsewhere within the Medicaid program. Several common methods used by states to generate cost savings for the waiver component include moving part of the Medicaid population into managed care; redirecting certain health care provider payments to provide health care coverage; limiting benefit packages for certain eligibility groups; providing targeted services to certain ineligible individuals to divert them from qualifying for full Medicaid coverage; and using cost sharing to reduce the amounts the federal government must pay. California: Medi-Cal Hospital Uninsured The following subsections discuss the key elements of Care Waiver California’s waiver in more detail. In 2005, California received approval from the CMS for its Medi-Cal Hospital Uninsured Care 1115 Waiver.3 Phase-Out of IGTs The purpose of this waiver was to replace financing When California’s 1115 waiver came up for renewal arrangements deemed inappropriate by the CMS, retain in 2005, the urgent issue was to identify a source of federal funding that had been provided under another funds other than Intergovernmental Transfers (IGTs) 1115 waiver for Los Angeles County, and fund initiatives as the non-federal share of Medi-Cal payments to to expand coverage for the uninsured. hospitals. IGTs are transfers of public funds from one level of government to another (e.g., from a county to The waiver imposed new limitations on Medi-Cal a state), or from one agency to another (e.g., from a payments to hospitals, and dramatically changed how state university teaching hospital to a state Medicaid Medi-Cal reimburses a subset of “designated public program). Historically, California relied heavily on hospitals” for the costs of caring for Medi-Cal patients IGTs from counties and the University of California and the uninsured.4 It also provided $766 million to fund the non-federal share of its DSH program and annually in federal funds to a Safety Net Care Pool to hospital supplemental payment programs. California also maintain funding for the state’s safety-net hospitals and uses IGTs to fund, in part, other programs such as the to fund the cost of care to the uninsured. This included In-Home Supportive Services Program. $180 million per year for a three-year Health Care Coverage Initiative to expand health care coverage for Although IGTs are legal,5 they came under increasing low-income uninsured individuals in ten counties. federal scrutiny when, in 2003, CMS began an initiative Medicaid Section 1115 Demonstration Waivers: Comparing California, Massachusetts, and New York  |  3 Disproportionate Share Hospital (DSH) and Other Supplemental Payments Federal Medicaid law requires states to make payments to public and private hospitals that serve a “disproportionate share” of Medicaid and uninsured patients.6 These payments, known as “disproportionate share hospital payments” or DSH payments, supplement standard Medicaid payment rates. Medicaid law does not, however, provide federal matching funds for treating the uninsured at facilities other than disproportionate share hospitals, nor does it provide matching funds for providing coverage to those otherwise ineligible for Medicaid, or for purchasing (or subsidizing) private or other public coverage for uninsured citizens. The amount of federal matching funds available for these DSH payments is subject to a statewide limit on total DSH payments and also to a facility-specific limit. In all states but California, federal law establishes the maximum DSH payment for an individual hospital as the difference between (1) the hospital’s inpatient and outpatient costs of treating Medicaid enrollees and the uninsured, and (2) the amounts the hospital receives from Medicaid (other than DSH) reimbursements and out-of-pocket payments from uninsured patients. In California, by federal law, DSH payments for most public hospitals may equal up to 175 percent of the difference between costs and reimbursement.7 In addition to DSH payments (which are the only Medicaid payments that directly cover the costs of providing health care to uninsured patients, including undocumented immigrants), states may make additional Medicaid supplemental payments to hospitals, nursing homes, and other institutional providers up to a federally designated “upper payment limit” (UPL).8 In the case of inpatient hospital services, there are three UPLs: one for all state-operated hospitals, one for all county or local government hospitals, and one for all private hospitals. The UPL is set at the estimated amount all the hospitals in each group would receive for treating Medicaid patients if they were paid at Medicare rates. States may also increase funding to hospitals or other providers indirectly by making supplemental Medicaid payments to managed care plans, which in turn increase reimbursements to hospitals. Medicaid rates paid to managed care plans must be actuarially based. Payments to hospitals by managed care plans do not fall within federal UPL rules, but they are considered when calculating each hospital’s maximum DSH payment. to determine the extent to which states had Medicaid their state plan amendment processes. California, financing arrangements that enabled a state to draw Massachusetts, and New York, among others, chose the federal matching funds without actually expending Section 1115 waiver process to address issues with their state or local funds as the non-federal share of Medicaid financing arrangements.9 expenditures. As illustrated in Figure 1, some of these arrangements netted states millions of dollars. CMS was Under the terms of the 2005 California waiver, IGTs mostly concerned with certain supplemental payments may be used only to fund the non-federal share of to government-owned providers such as county hospitals disproportionate share hospital (DSH) payments between for which the providers returned all or a portion of the 100 and 175 percent of a designated public hospital’s supplemental payment to the state. Other cases involved uncompensated costs. The state may also use IGTs to providers receiving Medicaid payments in excess of their fund its share of Medi-Cal payments to private and actual costs for providing medical services and returning district hospitals; however, the source of non-federal those funds to a state or local governmental entity. matching funds for supplemental payments to private hospitals was changed from IGTs to state general funds. By 2007, faced with the threat of losing federal matching The waiver also requires that public or private hospitals funds, 29 states terminated 55 Medicaid financing receiving DSH or Safety Net Care Pool payments retain arrangements that CMS considered inappropriate. the full amount of the payment and not return the funds Most states sought to implement these changes through to the state or any other unit of government. 4  |  California HealthCare Foundation Figure 1. GAO Example of an Inappropriate State Financing Arrangement State Medicaid CMS Agency $30.5 million $10.5 million $41 million 1. State Medicaid agency made a $41 million supplemental payment to local-government hospital, consisting of $10.5 million in state funds and $30.5 million provided by CMS as the federal share. Local-Government Hospital $39 million 2. Local-government hospital transferred $39 million back to state via an IGT. CMS paid Local-government hospital State netted $30.5 million retained $2 million $28.5 million Analysis of one state’s financing arrangement for state fiscal year 2004. Source: United States Government Accountability Office (GAO), “Medicaid Financing: Federal Oversight Initiative Is Consistent with Medicaid Payment Principles But Needs Greater Transparency,” March 2007: www.gao.gov/new.items/d07214.pdf. CPEs Replace Some IGTs California’s waiver specifies that the state may use CPEs In lieu of IGTs it deemed inappropriate, CMS has from designated public hospitals (i.e., county and allowed states to use certified public expenditures (CPEs) University of California hospitals) as the non-federal as the non-federal share of Medicaid expenditures.10 CPEs share for purposes of claiming federal matching funds for are expenditures that have been certified by counties, inpatient Medi-Cal per diem payments, DSH funds, and university teaching hospitals, or other public entities funds from the Safety Net Care Pool. Although state and within a state as having been spent on the provision of local officials were initially concerned that public hospitals covered services to Medicaid beneficiaries. For example, would not have sufficient expenditures to make the shift instead of actually transferring public funds to the state from IGTs to CPEs work, thus far this has not been the Medicaid agency through an IGT, a county can certify case. the costs incurred in treating Medicaid inpatients and outpatients in a hospital it operates. The state Medicaid Although the CPE approach has been used successfully agency can then include those certified costs as part of the in California, it is not without serious drawbacks. non-federal share of Medicaid payments for the purposes For example, state lawmakers have a disincentive to of claiming federal matching funds. expand managed care or invest general fund resources Medicaid Section 1115 Demonstration Waivers: Comparing California, Massachusetts, and New York  |  5 in initiatives that would reduce inpatient utilization and In October 2007, CMS approved the state’s proposal to costs if they increase outpatient costs. This is because the use Safety Net Care Pool funds to pay for a Coverage non-federal share of Medicaid expenditures for outpatient Initiative that would cover uninsured individuals with care and managed care is financed with general fund income at or below twice the Federal Poverty Level, and dollars, whereas inpatient care provided by county and who are not currently eligible for Medi-Cal, Healthy University hospitals is financed with CPEs. In other Families, or Access for Infants and Mothers. Individuals words, expanding managed care would increase general enrolled in the Coverage Initiative have access to primary fund expenditures, whereas much of the savings would care and care management services delivered through accrue to the counties who finance CPEs. public hospitals and other governmental entities. Safety Net Care Pool Created to As of March 2009, there were ten counties designated to Expand Coverage participate in the Coverage Initiative.11 As of August 31, When faced with the possibility of losing federal 2008 (the end of the first year of the three-year matching funds related to financing arrangements deemed initiative), just over 85,000 people had been enrolled inappropriate by CMS, California negotiated with CMS and an estimated $95 million in federal funds had been to maintain federal funding levels under an alternative claimed, about $85 million less than allowed under the financing arrangement, which included establishing a waiver. Unspent funds do not roll over to future years.12 Safety Net Care Pool to pay for services to the uninsured Enrollment continues to climb (nearly 129,000 were and unreimbursed Medicaid costs. California was among enrolled as of April 2009) and the state expects to draw a the first states to establish a Safety Net Care Pool under greater share of federal funds in year two. Section 1115 demonstration waiver authority. California has broad discretion in using federal Safety Net Care New Hospital Categories for Payment Pool funds, but these funds become available only after Under the terms of California’s waiver, three general the state provides non-federal matching funds from a categories of hospitals were established for reimbursement CMS-approved source. purposes: designated public hospitals (DPHs) which are hospitals owned by counties and the University of The waiver provides an annual allotment for the Safety California; non-designated public hospitals (mainly Net Care Pool of $766 million in federal matching funds district hospitals); and private hospitals. Instead of using (totaling $3.83 billion over five years) to pay for treating an aggregate upper payment limit (UPL) for designated uninsured persons who presently utilize public health public hospitals, California’s waiver limited Medi-Cal systems for medical care, and to allow the state to claim payments to cost (certified public expenditures), and federal funds for a number of state-funded programs allowed the state to transfer the federal share of Medicaid for the uninsured. The waiver made a portion of these payments equal to the difference between the cost of funds ($180 million per year) contingent on a Medi-Cal treating Medi-Cal beneficiaries at the time the waiver was managed care expansion in the first two years of the negotiated and what payments would have been had the waiver (which was not realized), and on implementation state paid Medicare rates to the Safety Net Care Pool. of a “Coverage Initiative” in the last three years of the (Payments to hospitals from the Safety Net Care Pool are waiver, as described below. Federal funding for the Safety also cost-based with a discount taken for an assumed level Net Care Pool is capped at the same amount for each year of care provided to undocumented immigrants, for whom of the waiver, regardless of increases (or decreases) in the federal matching funds are not provided.) Reimbursement number of uninsured. 6  |  California HealthCare Foundation for designated public hospitals is calculated based on the and uniformity requirements, which allows states some Medi-Cal hospital cost report. ability to minimize the tax burden that would otherwise be imposed on providers that do not participate in The California Medical Assistance Commission continues Medicaid or have low Medicaid volume. All but five states to determine reimbursement for non-designated public imposed at least one health care-related provider tax in and private hospitals that contract with Medi-Cal through 2009.15 the Medi-Cal Selective Provider Contracting Program, as it did prior to the 2005 waiver. The waiver allows these The prohibition in California’s waiver on implementing hospitals to be paid up to the applicable UPL, which hospital provider taxes as a source of Medicaid matching provides significant room for increased payments to these funds is stricter than the requirements applied to most providers to the extent that the state can provide the states, which are allowed to seek approval to use hospital non-federal share of these payments. provider taxes. During waiver negotiations, the U.S. Office of Management and Budget insisted that the terms Managed Care Expanded and conditions of California’s waiver prohibit the state During the first two years of California’s five-year waiver, from imposing an otherwise permissible tax on inpatient $360 million in federal Safety Net Care Pool funds hospital, outpatient, or physician services during the were set aside contingent on expanding mandatory five-year term of the demonstration in order to limit the Medicaid managed care to the aged, blind, and disabled overall level of federal funding and guarantee budget population. California has been expanding managed care neutrality under the waiver. California is not precluded geographically since the current waiver was approved in from imposing taxes or fees on other classes of providers, 2005, but it did not initiate an expansion of mandatory or on managed care organizations. managed care enrollment for seniors and people with disabilities beyond counties with a County Organized Massachusetts: MassHealth Waiver Health System.13 As a result, the state did not receive Massachusetts has been operating a Section 1115 the $360 million in federal funds that were tied to the demonstration waiver since 1997.16 The state’s expansion of mandatory managed care. MassHealth waiver was originally designed to expand Medicaid managed care and reinvest the state and Provider Tax on Hospitals Prohibited federal savings to extend public and private coverage Federal Medicaid law allows states to raise revenue to to low-income individuals who would otherwise be pay the non-federal share of Medicaid costs by imposing uninsured. The waiver was extended for three years in taxes or fees on hospitals, nursing homes, managed care 2003 and again in 2005. Massachusetts’ third waiver organizations, and other classes of providers, but only extension was approved in December 2008. The if the taxes meet certain requirements.14 To qualify as Massachusetts 1115 waiver now covers more than one non-federal matching funds, the tax must be broad-based million low-income people, and the state reports that (e.g., apply to all providers in the class) and uniform (e.g., since April 2006, the uninsured rate in Massachusetts has all providers pay the same rate). In addition, the tax may dropped from somewhere between 6 and 10 percent to not hold providers harmless against its costs (in other less than 3 percent of the state population.17 words, a provider is not “guaranteed” the return of their tax costs through increased Medicaid payments) nor may IGTs Replaced it exceed 5.5 percent of revenues for a particular class of Faced with the threat of losing federal matching funds provider. States may request a waiver of the broad-based due to IGTs being deemed inappropriate by CMS, Medicaid Section 1115 Demonstration Waivers: Comparing California, Massachusetts, and New York  |  7 Massachusetts (like California) chose the Section 1115 for uninsured persons at or below 300 percent of the waiver process to address issues with its financing federal poverty level. Commonwealth Care members arrangements. The Massachusetts waiver restricts the use access free or low-cost health services through the same of IGTs to only those funds that are derived from state four health plans that serve Medicaid managed care. and local taxes and transferred by units of government, Commonwealth Care is run by the Commonwealth and it provides for the use of CPEs of public hospitals Health Insurance Connector Authority, a new entity that for inpatient and outpatient services to Medicaid and was created to help Massachusetts residents and businesses uninsured patients. The waiver phased out four specific find and pay for health insurance. IGTs that the state had used to fund the non-federal share of some costs, including IGTs from two managed care Massachusetts’ Safety Net Care Pool is designed so organizations sponsored by Massachusetts’ two largest that as the share of funds used to subsidize coverage safety-net hospital systems: Boston Medical Center and for uninsured residents through Commonwealth Care Cambridge Health Alliance. These IGTs were replaced grows, the share going to offset unreimbursed hospital with supplemental payments, the non-federal share of costs declines. Indeed, Safety Net Care Pool payments which is funded with state general revenue. for unreimbursed hospital services have decreased from $656 million in 2006 to an estimated $406 million in Implementation of Safety Net Care Pool 2009.18, 19 The 2008 waiver extension phases out federal A principal policy objective of the Massachusetts waiver support for safety-net providers participating in the is to shift government subsidies away from direct demonstration, and requires the state to document that payments to health care providers for delivering care to the program is moving in the direction of providing the uninsured, towards subsidizing the purchase of health health care coverage for people rather than being a insurance coverage for the low-income uninsured. To payment vehicle for providers. It also increases annual facilitate this transition, the 2005 waiver extension created federal funding for the Safety Net Care Pool by a new Safety Net Care Pool. $97 million to keep pace with Commonwealth Care premium inflation and enrollment growth. The Massachusetts Safety Net Care Pool is funded by federal and state expenditures that had previously been Savings from Expansion of Mandatory used to fund DSH payments and to pay for supplemental Managed Care payments to the managed care organizations sponsored by As part of the 1997 MassHealth waiver, Massachusetts Boston Medical Center and Cambridge Health Alliance. expanded mandatory managed care for Medicaid About half of the state’s allotment of DSH payments was beneficiaries. Medicaid managed care is now mandatory diverted to the Safety Net Care Pool. The 2005 waiver for children, parents, and people with disabilities, and extension provided $1.34 billion per year in funding for is voluntary for beneficiaries who are dually eligible for the Safety Net Care Pool, half of which ($670 million Medicaid and Medicare. Managed care enrollees may annually) is federal funds. choose to receive services from a state-operated primary care case management program or from among four Funds from the Safety Net Care Pool are used to offset managed care organizations. uncompensated hospital care costs, to pay for designated state health programs, and to subsidize premiums for Massachusetts’ Medicaid managed care expansions have Commonwealth Care, a program that provides sliding- resulted in significant savings to the federal government, scale premium subsidies for private health plan coverage but the state has been limited in its ability to reinvest 8  |  California HealthCare Foundation those savings due to insufficient matching funds from New York: Partnership Plan and Federal- state and local sources. Under the 2005 renewal, State Health Reform Partnership Waivers Massachusetts was allowed to access a large portion of New York has two 1115 waivers. The first, called the these federal savings and apply them to the Safety Net Partnership Plan, was approved in 1997 with the goal of Care Pool. In essence, the federal government credited enrolling most Medicaid beneficiaries in managed care, Massachusetts with these savings by contributing federal including children and adult family members living in dollars to the Safety Net Care Pool. New York City and in 23 of the state’s 62 counties. It was amended in 2001 to provide comprehensive health Provider Payments coverage to low-income uninsured adults through a When the Medicaid managed care expansion was first program called Family Health Plus, and to integrate the proposed, Massachusetts’ two largest safety-net hospital financing and delivery of Medicare and Medicaid benefits systems — Boston Medical Center and Cambridge Health for beneficiaries dually eligible for both programs through Alliance — were concerned that the shift to managed care a program called New York Medicaid Advantage. would result in Medicaid patients being treated elsewhere, reducing DSH payments these hospitals use to finance The second waiver, called the Federal-State Health care for their uninsured patients. To address that concern, Reform Partnership (F-SHRP), was approved in each of the hospital systems created their own Medicaid September 2006 to reorient the state’s health care managed care organizations (MCOs) and Massachusetts spending away from inpatient facilities towards delivery created a new managed care supplemental payment systems focused on outpatient and primary care.21 program that supported these MCOs, in addition to an Under F-SHRP, the state made a commitment to reduce existing hospital supplemental payment program that excess capacity in acute care hospitals and nursing benefited the two hospital systems. By 2006, the state was homes; expand primary care; implement chronic disease distributing $1.6 billion a year in supplemental federal management programs; expand Medicaid managed care; and state Medicaid funds to the two hospital systems and and invest in health information technology. The state their affiliated MCOs.20 must invest $3 billion over five years on waiver-approved initiatives to receive $1.5 billion in federal funds. If CMS expressed concern about these financing the state does not draw the full federal amount (up to arrangements, so Massachusetts used its 2005 waiver $300 million per year), any unused funds may not roll extension to discontinue the managed care portion of over to future years. the supplemental payment program and instead use the state and federal share of that money, along with about CMS Policy on IGTs and CPEs Clarified half of its DSH allotment, to fund the Safety Net Care CMS used the New York waiver as an opportunity to Pool. In order to ease the transition as these changes were reinforce its policy on IGTs and CPEs, although neither implemented, CMS allowed Massachusetts to create a of these financing mechanisms were an issue in New temporary three-year supplemental payment program York. The waiver includes boilerplate language that (with an annual $287 million in state and federal funds) declares a state may use IGTs to the extent that such to support Boston Medical Center and the Cambridge funds are derived from state or local tax revenues and Health Alliance. The special payments end in 2009, are transferred by units of government within the state. and the December 2008 waiver extension phases out Under all circumstances, health care providers must all other federal direct payments to safety-net providers retain 100 percent of the claimed expenditure, and no participating in the demonstration. prearranged agreements (contractual or otherwise) may Medicaid Section 1115 Demonstration Waivers: Comparing California, Massachusetts, and New York  |  9 exist between health care providers and state and/or local period, and therefore proposed F-SHRP as a new waiver government entities to return and/or redirect any portion with five years to achieve savings needed to finance other of the Medicaid payments. Normal operating expenses program changes. that are unrelated to Medicaid and for which there is no connection to Medicaid payments (including the payment To ensure they achieved the $1.5 billion in federal savings of health care-related provider taxes), are not considered during the five-year life of the waiver, New York proposed returning or redirecting a Medicaid payment. shifting the aged, blind, and disabled (ABD) population out of the Partnership Plan and into the F-SHRP waiver. New York’s 1115 waiver also includes boilerplate language New York officials successfully argued that if CMS related to the use of CPEs. The waiver states that units of would withhold funding from California because it was government, including government-operated health care unable to enroll the ABD population in managed care, providers, may certify that state or local tax dollars have then it should give New York credit for savings related been expended as the non-federal share of funds under to the mandatory enrollment of this population. CMS the demonstration. allowed the state to transfer authority to enroll the ABD population into mandatory managed care from Savings from Managed Care Expansion and the Partnership Plan waiver to the F-SHRP waiver and System Restructuring count managed care savings from the approval date of Federal funds under the F-SHRP waiver are contingent the F-SHRP waiver to meet the F-SHRP waiver’s budget on New York meeting specific milestones for the waiver- neutrality requirements. approved initiatives, which include implementing a Medicaid preferred drug list, increasing anti-fraud Under the terms of the F-SHRP waiver, Medicaid activities, adopting other Medicaid cost-containment managed care per-member per-month (PMPM) rates initiatives, and creating a single point-of-entry system are the basis for calculating the annual budget neutrality for Medicaid recipients needing long term care. The expenditure cap. The state is at risk for the per capita state is also required to demonstrate Medicaid program cost for beneficiaries eligible for the demonstration, but savings resulting from health system restructuring (such not for the number of beneficiaries eligible, which could as savings due to decreased hospital utilization resulting change as a result of changing economic conditions that from eliminating excess acute care capacity), and from impact enrollment levels. New York’s Medicaid capitation a managed care expansion. The F-SHRP waiver also rates for children are more than five times higher than expanded mandatory Medicaid managed care for Medi-Cal’s. Consequently, it should be much easier for children and families from 23 counties to an additional New York than it is for California to control the rate of 14 counties. spending growth without adversely impacting access to or quality of care. New York originally proposed the F-SHRP waiver as an amendment to the Partnership Plan waiver, but shifted to a new waiver because CMS insisted on new savings and would not permit the use of accrued savings under the Partnership Plan. State officials did not believe they could generate sufficient savings associated with F-SHRP’s expansion of managed care and its health care restructuring initiatives during a three-year extension 10  |  California HealthCare Foundation How California Compares ◾◾ All three waivers specifically allow states to use CPEs California’s waiver shares a few common elements with as the non-federal share of Medicaid expenditures, the Massachusetts and New York waivers. These include: but only California does this on a large scale to support Medicaid hospital payments. ◾◾ All three waivers reflect a response to a concerted effort by CMS to restrict the use of most IGTs ◾◾ Both California and Massachusetts established Safety as a source for the non-federal share of Medicaid Net Care Pools, which allow federal funds to be expenditures. The waivers clarify that IGTs may only used to pay for the costs of covering populations or involve funds derived from state or local tax revenues services not otherwise eligible for federal matching that are transferred by units of government within funds under Medicaid. the state and, under all circumstances, health care providers must retain 100 percent of the claimed California’s waiver differs from the Massachusetts and expenditures. New York waivers in several important ways, beginning with differences in purpose (Table 2). The primary Table 2. Medicaid Section 1115 Waivers: Summary Comparison N ew Y ork P artnership P l an an d C a l ifornia F e d era l - S tate H ea l th M e d i - C a l H ospita l M assachusetts R eform P artnership U ninsure d C are M ass H ea l th (F-SHRP) Effective Dates September 1, 2005 to July 1, 1997 to June 30, 2011 Partnership: October 1, 1997 August 31, 2010 to September 30, 2009 F-SHRP: October 1, 2006 to September 30, 2011 Primary Purpose Restructure hospital financing Shift government subsidies Restructure the state’s arrangements deemed away from direct payments health care delivery system inappropriate by CMS, including to health care providers for to reorient health care supplemental payments to hospitals delivering care to the uninsured spending away from inpatient for Medicaid and uninsured costs; and instead subsidize health facilities to outpatient and and increase federal funding for insurance coverage for the primary care-focused delivery safety-net hospitals. low-income uninsured. systems. Expands Medicaid Managed Care 4 4 4 Expands Coverage 4 4 4 Creates a Safety Net Care Pool 4 4 Changes to Disproportionate 4 4 Share Hospital Payments Limits Intergovernmental Transfers 4 4 4 Authorizes Certified Public 4 4 4 Expenditures Adjusts Upper Payment Limits/ 4 4 4 Other Provider Payments Restricts Provider Taxes 4 Source: Health Management Associates analysis of CMS Medicaid 1115 waiver approval documents: www.cms.hhs.gov/MedicaidStWaivProgDemoPGI/08_WavMap.asp. Medicaid Section 1115 Demonstration Waivers: Comparing California, Massachusetts, and New York  |  11 purpose of the 2005 California waiver was to replace ◾◾ Massachusetts and New York, unlike California, financing arrangements deemed inappropriate by CMS negotiated waivers that allow federal payments to and increase federal funding for the state’s safety-net grow over time, versus an absolute cap on federal hospitals. (An additional purpose was to retain federal financial participation. funding that had been provided under another Section ◾◾ California’s waiver prohibits the state from imposing 1115 waiver for Los Angeles County.) By contrast, an otherwise permissible tax on inpatient hospital, the waivers in Massachusetts and New York have outpatient, or physician services. Massachusetts and more expansive goals, aiming to restructure the health New York impose provider taxes on hospitals. care delivery systems in those two states by shifting government spending trends and expanding coverage. Looking Ahead When California’s 1115 waiver was approved in 2005, the Other key differences include the following: urgent issue was to come up with an alternative method ◾◾ Massachusetts and New York expanded Medicaid of financing hospitals because the method at the time managed care through their waivers and were was challenged by CMS. CMS worked with California allowed to reinvest the federal share of savings through the 1115 waiver process to develop an alternative associated with these expansions on Medicaid costs financing method and an increased federal funding otherwise not eligible for federal matching funds, commitment, but system reform was limited to the such as coverage for the uninsured. California Coverage Initiative and a modest expansion of managed implemented its managed care expansions during care. the same period, but these expansions were not done under an 1115 waiver, so California gets no credit For the 2010 renewal, California lawmakers have for these savings. As of June 2007, 60 percent of expressed an interest in pursuing a more comprehensive Medicaid beneficiaries in Massachusetts were enrolled waiver like those in Massachusetts and New York. The in managed care, 62 percent in New York, and process of doing so, however, is complicated by the 51 percent in California. state’s budget crisis, the peculiar incentives created by CPEs, federal health care reform proposals that may ◾◾ In Massachusetts, as a result of its coverage significantly alter Medicaid policy and funding streams, expansions, the uninsured rate has dropped from and uncertainty about whether or not CMS will allow between 6 and 10 percent of the state’s residents to California to use hospital taxes to generate non-federal less than 3 percent. In contrast, California’s waiver matching funds. It is expected that the Obama did not significantly reduce the number of uninsured Administration, which has made health reform one of its in the state. It provided only a modest coverage highest policy priorities, will have different objectives for expansion through the Coverage Initiative, and it did Medicaid 1115 waivers than the Bush Administration, not finance care for any existing Medi-Cal coverage under which the most recent 1115 waivers for all three groups. states were negotiated. ◾◾ Unlike California, Massachusetts and New York shifted public money from institutional providers, Furthermore, Massachusetts and New York have distinct including hospitals and nursing homes. Massachusetts advantages over California when it comes to identifying used these funds to help pay for premiums to cover federal savings that can be re-invested elsewhere through the uninsured, and New York used the funds to an 1115 waiver. One reason for California’s comparative expand access to community-based services. disadvantage is that Medicaid spending per enrollee in 12  |  California HealthCare Foundation New York and in Massachusetts is among the highest in New York (on a per resident basis) give these states an the nation ($9,656 and $8,300, respectively, in 2006), advantage over California in terms of funding indigent whereas California spends less per enrollee than any care or leveraging these funds to expand coverage to the other state ($4,528). It is much easier for high-cost uninsured. states to reduce their spending and use these program savings to finance coverage expansions or other program Another important difference between California improvements than it is for states like California that have and these other states is California’s higher maximum already achieved significant Medicaid savings. DSH payment, which allows the state to make DSH payments to most public hospitals up to 175 percent of A second disadvantage for California is that the the difference between costs and reimbursement. This federal government’s contribution to help states offset complicates the tradeoff in California between federal indigent care costs is three times higher per resident in funding for DSH payments versus federal funding for Massachusetts and almost twice as high per resident coverage. States like Massachusetts and New York trade in New York as it is in California (Figure 2), despite off federal dollar for federal dollar — an even trade. the fact that a larger share of California’s population is California, however, would receive only 50 cents in uninsured.22 DSH allotments were first established by federal matching funds for each dollar spent for Medicaid Congress in 1991 based on each state’s historical DSH coverage, instead of the 87.5 cents in federal matching spending; California’s lower DSH allotment reflects the funds it receives for each dollar of DSH-claimable fact that historically California had been less aggressive expenditures.23 Furthermore, DSH payments can than these and other states in claiming Medicaid DSH be used to compensate public hospitals for treating funds. The higher DSH allotments for Massachusetts and undocumented immigrants, whereas federal matching funds are not available to provide Medicaid coverage to this population. Figure 2. ederal Contributions for Indigent Care, F Per Resident If California can overcome these challenges, expanding Safety Net Care Pool Funds the waiver to include more of the Medi-Cal program —  (other contributions not already counted as DSH) and leveraging the precedents set in other states like DSH Allotment Massachusetts and New York — could be a meaningful $164 step toward increasing federal support for safety-net hospitals and clinics and expanding coverage to the uninsured. $96 $50 Massachusetts New York California Source: Health Management Associates estimates based on data from the Census Bureau State Population Estimates (as of July 1, 2008), Center for Medicare and Medicaid Services (CMS) Disproportionate Share Hospital allotment reports (2009 pre-American Recovery and Reinvestment Act enhancements), and CMS Medicaid 1115 waiver approval documents. Medicaid Section 1115 Demonstration Waivers: Comparing California, Massachusetts, and New York  |  13 About the Authors Endnotes Greg Moody is a senior consultant with Health Management 1.Centers for Medicare and Medicaid Services, Associates, and Stan Rosenstein is a principal advisor to “Section 1115 Research and Demonstration Projects,” Health Management Associates, a national health policy www.cms.hhs.gov/MedicaidStWaivProgDemoPGI/03_ consultant firm. They can be reached at: Research&DemonstrationProjects-Section1115.asp. gmoody@healthmanagement.com and (accessed June 15, 2009). srosenstein@healthmanagement.com. 2.Medicaid is jointly financed by states and the federal government. States spend money on Medicaid services for About the F o u n d at i o n Medicaid beneficiaries and on supplemental payments to The California HealthCare Foundation is an independent hospitals that provide a disproportionate share of indigent philanthropy committed to improving the way health care care. They report these expenditures to the federal is delivered and financed in California. By promoting government and receive federal matching funds based on innovations in care and broader access to information, our the state-specific Federal Matching Assistance Percentage goal is to ensure that all Californians can get the care they (FMAP). need, when they need it, at a price they can afford. For more information, visit www.chcf.org. 3.The terms and conditions of California’s waiver are posted on the CMS Web site under “Medicaid Waiver and Demonstrations List” at www.cms.hhs.gov/ MedicaidStWaivProgDemoPGI/MWDL/list.asp. 4.Designated public hospitals include hospitals owned by the University of California (Davis, Irvine, San Diego, San Francisco, Los Angeles, and Santa Monica), Los Angeles County (Harbor/UCLA, Olive View, Rancho Los Amigos, and USC), and other counties (Alameda County, Arrowhead Regional, Contra Costa Regional, Kern, Natividad, Riverside County, San Francisco General, San Joaquin General, San Mateo County, Santa Clara Valley, and Ventura County). 5.Under the federal Medicaid statute and CMS regulations, public funds received by state Medicaid programs as the result of IGTs from public agencies, including public hospitals, may be used as the state share of Medicaid spending for purposes of receiving federal matching payments. See Section 1903(w)(6) of the Social Security Act, 42 USC 1396b(w)(6); 42 CFR 433.51(b). 6.Section 1902(a)(13)(A)(iv) of the Social Security Act, 42 USC 1396a(a)(13)(A)(iv). 7.Section 701(c)(2) of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (PL 106-554). 8.42 CFR 447.272. 14  |  California HealthCare Foundation 9.United States Government Accountability Office (GAO), 1 9.In 2009–10, California will spend approximately “Medicaid Financing: Federal Oversight Initiative is $480 million of its Safety Net Care Pool funds on Consistent with Medicaid Payment Principles but Needs unreimbursed hospital, clinic, and physician services. As Greater Transparency,” (GAO-07-214), March 2007: previously noted, California’s population is five times www.gao.gov/new.items/d07214.pdf. larger than the population of Massachusetts. 1 0.Section 1903(w)(6) of the Social Security Act, 42 USC 2 0.US Government Accountability Office, “Medicaid: CMS 1396b(w)(6); 42 CFR 433.51(b). Needs More Information on the Billions of Dollars Spent on Supplemental Payments,” GAO-08-614, May 2008. 1 1.Alameda, Contra Costa, Kern, Los Angeles, Orange, Santa Clara, San Diego, San Francisco, San Mateo, and Ventura. 2 1.The terms and conditions of New York’s waiver are posted on the CMS Web site under “Medicaid Waiver 1 2.Department of Health Care Services, “Health Care and Demonstrations List” at www.cms.hhs.gov/ Coverage Initiative Enrollment and Health Care MedicaidStWaivProgDemoPGI/MWDL/list.asp. Expenditures”; and California Association of Public Hospitals and Health Systems, “Policy Brief: California 2 2.Federal spending to pay for indigent care, including Public Hospitals and the Health Care Coverage Initiatives: Disproportionate Share Hospital (DSH) payments, Safety A Model for Health Care Reform,” Oakland, CA, Net Care Pool (SNCP) funds, and other waiver programs April 2009. is approximately $164 per resident in Massachusetts ($299 million DSH and $767 million SNCP for 1 3.For additional information on Medi-Cal’s three models 6.5 million residents), $96 per resident in New York of managed care, see “Medi-Cal Managed Care” at ($1,573 million DSH and an additional $300 million www.chcf.org/topics/medi-cal/index.cfm?itemID=20396 allowed under the waiver for 19.4 million residents), and &subtopic=CL157&subsection=medical101. $50 per resident in California ($1,074 million DSH and 1 4.Section 1903(w) of the Social Security Act, 42 USC $766 million SNCP for 36.7 million residents). 1396b(w), 42 CFR 433.50 et seq. 2 3.California can make DSH payments to most public 1 5.Kaiser Commission on Medicaid and the Uninsured, hospitals of up to $1.75 for every dollar of DSH-claimable “Provider Taxes in Place in the 50 States FY2008 and expenditures (i.e., the difference between hospital costs, FY2009.” or certified public expenditures, and reimbursement), up to its DSH allotment. The state receives half the amount 1 6.MassHealth is also the name of Massachusetts’ Medicaid of its DSH payments, up to 87.5 cents, from the federal program. The terms and conditions of the MassHealth government for every dollar of DSH costs. In contrast, Waiver are posted on the CMS Web site under “Medicaid the state normally receives only 50 cents from the federal Waiver and Demonstrations List” at www.cms.hhs.gov/ government for every dollar spent on Medicaid-covered MedicaidStWaivProgDemoPGI/MWDL/list.asp. services (increased to 61.6 cents under the temporary 1 7.Urban Institute, “Estimates from the 2008 Massachusetts enhanced matching rates provided under the American Health Insurance Survey,” December 2008:  Recovery and Reinvestment Act of 2009). www.urban.org/publications/411815.html. 1 8.Massachusetts Taxpayers Foundation, “Health Reform: The Myth of Uncontrolled Costs,” May 2009: www.masstaxpayers.org/publications/health_care/ 20090501/massachusetts_health_reform_the_myth_ uncontrollable_costs. Medicaid Section 1115 Demonstration Waivers: Comparing California, Massachusetts, and New York  |  15