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POLICY INSIGHT
BEYOND THE NUMBERS

Trump Last-Minute Approval of Tennessee Medicaid Demonstration Conflicts With Biden Health Care Goals

President Biden directed federal agencies to review agency actions affecting health care, including “demonstrations and waivers… that may reduce coverage under or otherwise undermine Medicaid or the [Affordable Care Act]” — and the Trump Administration’s last-minute approval of Tennessee’s Medicaid demonstration is a prime candidate for review because it’s likely to harm Medicaid enrollees.

The demonstration project, known as TennCare III:

  • Caps nearly all of Tennessee’s federal Medicaid funding over the next ten years. The cap applies to Medicaid spending for nearly all Tennessee Medicaid enrollees — including children and people with disabilities. If the state spends less than the capped amount, the demonstration lets the state get a share of the federal government’s unspent funds. If the state spends more than the capped amount, it will have to cover the additional costs (although the capped amount could change based on significant changes to enrollment or benefit cuts, and the state can carry over savings from its earlier TennCare II demonstration to meet any shortfall — which the Trump Administration previously prohibited).
  • Rewards Tennessee for reducing access to care. Medicaid gives states flexible federal funding that adjusts to need. TennCare III makes an unprecedented change in Medicaid’s financing that rewards Tennessee if enrollees use less care and potentially penalizes the state if need increases, creating a dangerous incentive for the state to impede access. While the demonstration limits the state’s ability to save money by directly cutting benefits, the state could receive extra federal funding by cutting provider payment rates, which could threaten access to care and providers’ sustainability, or by discouraging enrollees from getting care in other ways. Tennessee could also receive extra federal money by making it somewhat harder for people to enroll or stay covered, because the funding cap stays the same as long as enrollment doesn’t rise or fall by more than 1 percent.
  • Lets Tennessee redirect federal Medicaid funds. The demonstration gives Tennessee broad authority to use its share of unspent federal funds on budget items that don’t add value to Medicaid, such as by supplanting current state spending on other state health programs. Because state spending is fungible, the state effectively could spend the money it saves on programs that it previously funded with state-only dollars on anything else, including tax cuts or non-health programs. This flexibility makes Tennessee likelier to use this funding on budget items unrelated to Medicaid, rather than investing in its Medicaid program.
  • Authorizes a closed formulary for prescription drugs. TennCare III gives the state unprecedented new authority to deny coverage for many drugs that the Food and Drug Administration has approved. The Trump Administration approved this proposal even though it denied an almost identical proposal from Massachusetts in 2018 because it didn’t conform to federal law. This authority could let Tennessee deny coverage of newly approved medications if the state determines they are too costly, for example. The state’s ability to exclude coverage of many prescription drugs, combined with the incentive to reduce Medicaid spending, will likely impede Medicaid enrollees’ access to needed medication.
  • Doesn’t improve TennCare. TennCare III does not expand coverage or enhance benefits. Despite the governor’s statements describing how the state would improve TennCare, the demonstration discourages such improvements, because adding benefits will increase state spending and reduce the unspent federal funds that the state can keep. The TennCare III approval also makes it less likely that Tennessee will adopt the Affordable Care Act’s Medicaid expansion because the state would have to amend the demonstration, which could make the terms less favorable to the state. Tennessee could cover more than 200,000 people and bring in billions of additional federal funds by expanding Medicaid to adults with incomes up to 133 percent of the federal poverty level, which is especially needed during COVID-19.

In approving Tennessee’s new demonstration for ten years, the Trump Administration violated its own guidance, which allowed the federal government to consider state requests to approve ten-year extensions only of “routine, successful, non-complex” demonstration projects — which doesn’t apply to TennCare III. Moreover, it approved Tennessee’s demonstration in spite of strong public opposition. Public comments on an earlier version of the proposal were overwhelmingly negative, and the Centers for Medicare & Medicaid Services received about 6,200 comments that reflected broad opposition to Tennessee’s proposal from national organizations representing providers, patients, and advocates.

If implemented, TennCare III will set a precedent that could let other states implement similarly harmful policies. The Biden Administration should therefore consider whether TennCare III meets the standard for Medicaid demonstration projects that the President set out in his directive and act to avert the likely harm to Medicaid enrollees.