As states like Massachusetts, Vermont, and Maine continue to implement their health reforms, other states are also considering ambitious coverage expansions. Financing is a key concern. In the past, states interested in drawing down federal Medicaid funds to expand coverage had two primary mechanisms available to them: filing a state plan amendment using available optional eligibility categories and income disregards, or applying for a Section 1115 waiver. Under the first approach, states are required to provide all the Medicaid mandatory benefits, and to cover all people who meet the eligibility standards, with full federal financial participation guaranteed. The waiver approach gives states flexibility in areas like benefit design and eligibility, but limits the amount of federal financial participation because of budget neutrality requirements.
Under the Deficit Reduction Act of 2005 (DRA), a new approach is available that gives states some of the flexibility of the §1115 waiver, but without a cap on federal financial participation. Although at first glance the DRA did not appear to be a vehicle for expanding coverage, a closer read reveals that the DRA’s language actually allows states to use their new flexibility with benefits design, coupled with income disregards in existing categories, to expand coverage. This new flexibility, combined with long-standing Medicaid authority to expand eligibility by disregarding income, allows states to file state plan amendments in order to expand coverage to higher income populations in plans that look more like commercial insurance and charge limited premiums. Since the DRA became law, the Centers for Medicare and Medicaid Services (CMS) has urged states to make these types of changes through state plan amendments using new DRA authority rather than through §1115 waivers.
This State Health Policy Briefing provides a roadmap of options made possible with new authority in the DRA that may make it easier for states to finance coverage expansions with federal matching funds. It describes:
• the key language in the DRA,
• the long-standing authority to expand eligibility to certain Medicaid eligibility groups through income disregards,
• the new benefits and cost-sharing flexibility provided in the DRA, and
• how this authority might support state coverage expansions.