On January 30, 2020, the Centers for Medicare & Medicaid Services (CMS) announced the “Healthy Adult Opportunity” demonstration program, which will allow participating states to adopt a closed formulary. To participate in the program, states must accept a spending cap on the amount of money that the federal government will contribute towards expenses for the state’s Medicaid expansion population. States will be able to apply to CMS to participate in the program immediately using the existing Sec. 1115 waiver application process. Approved applications will be effective for five years and may be eligible to be renewed for up to 10 years.
If a state implements a closed formulary, it will no longer be required to cover all prescription drugs for enrollees. Instead, states will only be required to cover a number of drugs that is comparable with health plans sold through the state’s health insurance exchange. Specifically, states must cover the greater of one drug in each U.S. Pharmacopeia category and class or the same number of drugs in the state’s essential health benefits package. This is in addition to being required to cover all or substantially all medications for HIV, mental health, and opioid use disorder. CMS claims that the closed formulary policy will be beneficial for states because it will provide them with additional negotiating power over drug prices. However, the policy will inherently limit the variety of medications that are available to Medicaid enrollees, which could be detrimental to their health.
States that choose to participate in the Healthy Adult Opportunity program will be required to accept their Medicaid funding in a “block grant,” which will limit the amount of Medicaid funding that the state can receive from the federal government each year. If a state’s expenses exceed the cap, the state will be required to pay the difference. Alternatively, states may choose to implement other eligibility or coverage limitations to stay within the budgeted amount. If a participating state’s expenditures fall below the cap, they will be eligible to receive some of the savings back from CMS to reinvest in the Medicaid program. Block grants can have negative effects on Medicaid enrollees as they could find their level of coverage reduced over time while the state attempts to align its expenses with the budget cap. Furthermore, allowing block grants is a drastic change from existing Medicaid policy, whereby the federal government’s financial contributions to state Medicaid programs are uncapped. Some Medicaid enrollees would be excluded from the budget cap, including those covered by traditional state Medicaid programs, adults living with a disability or eligible for long-term care, low-income adults, children, pregnant women, and the elderly.
In addition to allowing states to implement a closed formulary, participants in the Healthy Adult Opportunity program will be eligible to implement evidence-based payment and delivery system reforms. These reforms will allow states to blend fee-for-service and managed care payment arrangements to improve the effectiveness of coverage, improve health outcomes, and reduce the cost of health care. Additionally, states will be allowed to adjust these payment arrangements over the course of the demonstration.