CMS Announces New Medicaid Initiative to Limit Drug Coverage, Keep Rebate Obligations

February 2020 ~

On January 30, CMS announced the new Healthy Adult Opportunity (HAO) initiative that it will allow states to limit drug coverage under Medicaid without reducing manufacturer rebate obligations.

According to the press release, the optional demonstration initiative has been designed to give states unprecedented tools to design innovative health coverage programs tailored to the unique needs of adult beneficiaries, while holding states accountable for results and maintaining strong protections for our most at-risk populations.

The initiative seeks to enhance the Medicaid program’s integrity through its focus on accountability for results and quality improvement, making the Medicaid program stronger for states and beneficiaries, by emphasizing “the concept of value-based care while granting states with extensive flexibility to administer and design their programs within a defined budget”.

HAO is available to all states, with a focus on a limited population: adults under age 65 who are not eligible for Medicaid on the basis of disability or their need for long term care services and supports, and who are not eligible under a state plan. Other very low-income parents, children, pregnant women, elderly adults, and people eligible on the basis of a disability will not be directly affected – except from the improvements that result from states reinvesting savings into strengthening their overall programs. Key provisions of the HAO initiative, as highlighted in the CMS fact sheet, include:

Beneficiary Protections

Under HAO, beneficiaries will maintain all of the federal due process and civil rights they have today, and HAO demonstrations will be expected to provide minimum benefit standards, eligibility protections, and limits on out of pocket expenses. Specifically, the guidance articulates the key beneficiary protections that states will be required to adhere to and standards that states will be expected to meet, including:

  • Following all federal disability and civil rights laws,
  • Following a public and beneficiary notice process, and providing for fair hearing rights,
  • Providing regular and ongoing reporting on key performance metrics,
  • Providing key statutory protections for tribal beneficiaries,
  • Maintaining benefits that at a minimum meet the Essential Health Benefits (EHB) standard,
  • Ensuring access to medications for people with HIV or behavioral health needs; and
  • Ensuring that the aggregate limit on premiums and cost-sharing does not exceed 5% of family income.

Flexibilities Available Under the Healthy Adult Opportunity 

For the first time, CMS is offering flexibilities currently available to states in a comprehensive suite of pre-packaged waiver authorities. This will give states, if they choose it, the opportunity to propose commonly requested authority for participating populations, including the ability to:

  • Adjust cost-sharing requirements to incentivize high-value care,
  • Align benefits more closely to what is available through a commercial insurance benefits package,
  • Improve negotiating power to lower drug costs by adopting a closed formulary similar to those provided in the commercial market (see the section below for more detail),
  • Make timely programmatic adjustments without additional federal approval,
  • Apply additional conditions of eligibility which support the objectives of the program,
  • Deliver care through innovative delivery systems, and
  • Waiving retroactive coverage and hospital presumptive eligibility requirements.


Demonstration applications submitted under the HAO are subject to all relevant public notice and transparency requirements associated with section 1115 demonstrations, and where applicable, states will be required to comply with the state’s tribal consultation process and describe how the state is responding to comments received through the tribal consultation process.  States will have the flexibility to make many program adjustments within their approved authority without additional federal approval, but certain changes may also require beneficiary notice and transparency.

Financing and Program Integrity

States participating in HAO demonstrations will need to agree to operate their program within a defined budget target, set on either total expenses or per-enrollee basis, in a manner similar to that used in other section 1115 demonstrations.  Total expenditures for covered populations in excess of the annual budget will not be eligible for Federal Financial Participation.  The targets will be negotiated based on the state’s own historic costs and other factors like national and regional trends. The financial parameters will be tied to inflation and adjustments may be made for extraordinary events. The agency states it will closely work with states to set a realistic baseline.

Eligibility and Enrollment Processes

States choosing to apply for an HAO demonstration will have the flexibility to propose to set the income standard for eligibility under an HAO, as well as to change the standard over the course of the demonstration, consistent with approved terms and conditions. States may also propose to target coverage to a defined subset of high need individuals, such as individuals with severe mental illness, individuals needing treatment for substance use disorder, or individuals with HIV/AIDS. However, consistent with current policy, an income standard of at least 133 percent FPL and eligibility for all individuals described in the adult group is required in order for states to be eligible for the enhanced FMAP available for this population under the statute. States will still have the flexibilities to propose additional conditions of eligibility, such as community engagement requirements, that are consistent with the objectives of the Medicaid program.  Additional flexibilities available for states to propose include but are not limited to, the ability to not provide retroactive coverage or hospital presumptive eligibility.

As part of this demonstration, states may develop eligibility and enrollment policies, which will improve upon the administrative efficiency of these processes, e.g., by periodically checking electronic data sources between regular eligibility renewals; however, the federal requirements governing these fundamental components of states’ eligibility and enrollment systems will apply to coverage under an HAO.

Benefit Design and Drug Coverage

States have the opportunity to design a benefits package that aligns with private coverage.  At a minimum, the proposed benefit design under an HAO should include Essential Health Benefits (EHB), defined using the requirements that apply under the law to the individual health insurance market, or benefits that meet larger health reform and Medicaid objectives.  The EHB approach promotes coverage of important services such as mental health and substance use services and a minimum level of prevention services that are otherwise optional in traditional Medicaid.  States will have the opportunity to design Federally Qualified Health Center (FQHC) coverage and payment in order to facilitate the use of value-based payment design among safety-net providers.

Managed Care and Delivery Systems

CMS encourages states applying for this demonstration to implement evidence-based payment and delivery system reforms in order to achieve compliance with the quality and cost goals.  In general, states will be able to use any combination of fee-for-service and managed care delivery systems and will have the flexibility to alter these arrangements over the course of the demonstration, as long as certain guidelines are met.  As part of the application, states will need to explain the payment or delivery system reforms they plan to use under the HAO.

States will be given the option in the application for an HAO demonstration to elect one of two options to measure and monitor access and availability of Medicaid services in a managed care delivery system.  States generally will be expected to meet specified managed care statutory requirements that provide beneficiary protections, facilitate beneficiary decision making, support access to services, monitor program administration, and measure the quality of the delivery system.

Streamlined Application Process Transitioning Demonstrations

CMS is releasing a simplified application template that will guide states on the full range of policy decisions, making it easier for states to apply for the flexibilities under this demonstration.  The template will still allow states and CMS to collect necessary information for robust public input.

The application template includes a set of standards related to compliance requirements typical of 1115 demonstrations. Those standards will be incorporated into the demonstration’s special terms and conditions (STCs).  After an application is approved, the state will submit an implementation plan, containing detail, consistent with the STCs, on how the state plans to implement the flexibilities authorized under the STCs, for CMS approval.

HAO demonstrations generally will be approved for an initial five-year period from the date of implementation, and successful demonstrations may be renewed for a period of up to 10 years.

Quality Strategy and Performance Assessment

The HAO initiative includes several components to ensure this accountability.  Each state will submit for CMS approval a written quality strategy and performance assessment – including measurable goals and measures, baselines and targets, interventions and rapid-cycle assessment and continuous quality improvement – for assessing coverage, access to care, quality of care, and the health outcomes of beneficiaries covered under the demonstration.  Participating states also will be required to report 25 quality and access measures drawn from the CMS Adult Core Set, which are currently optional for states to report.

These measures include, but are not limited to:

  • Flu vaccinations
  • Screening for depression and follow-up care
  • Prenatal and postpartum care
  • Controlling high blood pressure
  • Comprehensive diabetes care
  • HIV viral load suppression
  • Follow-up after hospitalization for mental illness

A complete list of the 25 measures is found in Appendix D of the guidance.

In addition, states operating an HAO will be expected to report quarterly on a set of continuous performance indicators identified by CMS (relating to enrollment, retention, access to care, and financial management) which will provide a timely indication of potential issues impacting beneficiary access to coverage or care so that needed adjustments can be made. These include measures like:

  • Number of providers actively enrolled and seeing patients
  • Complaints regarding the difficulty in accessing timely services
  • Total emergency department visits per month, including for non-emergency reasons, which can be an indicator of poor primary care access
  • Retention of beneficiaries at renewal
  • Number of appeals for eligibility or service denials
  • Number of grievances filed

For more information and additional guidance on the HAO initiative, visit

Source(s): Lexology; National Law Review; Health Leader’s Media;