Putting Medicaid in the Larger Budget Context: An In-Depth Look at Three States in FY 2015 and 2016


Economic and Budget Outlook


Tennessee’s economy has seen continual improvements in economic conditions since the Great Recession, during which Tennessee experienced record unemployment (peaking at 11.1 percent) as well as steep declines in state revenues. The state has recovered all of the jobs lost during the recession.1 Nonfarm and manufacturing sectors in the state have outgained national growth.2 The unemployment rate has steadily declined to 5.7 percent in August 2015, though the state’s unemployment rate continues to be slightly above the national average (5.1 percent).3 State tax revenue collections have also continued to improve since the recession. State revenue collections were up 4.6 percent in the third quarter of 2014, exceeding growth of 3.2 percent in the Southeast Region and 4.4 percent nationally.4 By the end of FY 2015, the state had collected $605.7 million5 more than the original budgeted estimate of $12.1 billion (which had assumed 3.17 percent growth6).

State Budget

Governor Bill Haslam’s budget proposal for FY 2016, presented to the Tennessee General Assembly in February 2015, was based on a conservative revenue estimate of 2.53 percent and continued slow growth in the economy. The Governor proposed strategic investments in higher education and in primary and secondary education, including teacher pay, but also proposed cuts in other program areas to stay within projected revenue growth for the year.7  Health care cuts included downsizing of a state-run facility for individuals with Intellectual and Developmental Disabilities and limiting new eligibility for certain in-home long-term services and supports8 under the state’s Section 1115 Medicaid waiver to only individuals who meet the income and disability standards for SSI.9 He also proposed and received an increase from 5.5 percent to 6 percent for 2016 in the state’s assessment on health maintenance organizations including those that manage benefits for Medicaid beneficiaries through its TennCare program. In addition, the General Assembly passed a bill to increase nursing home assessments FY 2016. The Tennessee General Assembly approved the FY 2016 budget on April 16, 2015 after rejecting attempts to add a provision to authorize an expansion of Medicaid (described further below).10

Affordable Care Act Update

Governor Haslam, who was reelected by a wide margin in 2014, proposed an alternative to Medicaid expansion in early 2015 that enjoyed strong support from both business and health care organizations.11 “Insure Tennessee” would have relied on Section 1115 waiver authority.  The plan offered uninsured Tennesseans, ages 19-64, earning less than 138 percent FPL a choice between a defined contribution which could be used to purchase employer-sponsored insurance in the private market or enrollment in a managed care plan with a benefit package identical to Medicaid. The managed care option provided Health Savings Accounts, with incentives for healthy behaviors, and included premiums and copayments for individuals above 100 percent of the federal poverty level. The state’s share of expansion costs would have been covered by an increase to an existing hospital assessment on net patient revenue.12

The Governor convened a special session of the legislature in February to seek legislative approval to move forward with Insure Tennessee but the proposal was voted down in a Senate committee formed to hear the bill, bringing the special session to a close. Subsequently, the bill was reintroduced by members of the legislature in the regular session and passed out of the Senate General Welfare Committee only later to be voted down in the Senate Commerce Committee. It was not taken up in the House during regular session. Conservative lawmakers who opposed Insure Tennessee expressed concerns over the potential long-term costs to the state and the difficulty the state would face if it were to try to repeal Medicaid expansion in future years.13

The state already covers parents to 101 percent of the FPL and pregnant women to 200 percent FPL under the existing TennCare program14, and reported significant increases in Medicaid enrollment in 2015 for non-elderly, non-disabled adults, pregnant women and children. These increases are thought to reflect more parents seeking required insurance coverage under the Affordable Care Act, including through applications made to the Federally-Facilitated Marketplace (FFM). The state is projecting enrollment growth to slow in 2016.

In 2012, Tennessee contracted with a vendor to redesign the program’s eligibility system to enable online applications for eligibility and to reflect other new requirements under the Affordable Care Act, expecting the new system to begin accepting applications by October 2013.15 However, contractors were unable to meet this and subsequent deadlines. Due to the challenges and delays, individuals were unable to apply for Medicaid through an online portal at the state level. The state instead encouraged TennCare applicants to apply through the federally facilitated marketplace at www.healthcare.gov,16 and makes computer kiosks available in all county Department of Human Services offices to support this process. Some Tennesseans experienced difficulties in 2014 obtaining timely eligibility decisions through the federally facilitated marketplace.  A class action lawsuit was filed against the state in July 2014 on behalf of individuals who claim to have been harmed by delays in enrollment into TennCare.17 TennCare now offers a “delay hearing” process to individuals who have not received their eligibility determination within 45 days or 90 days, depending on application type.18 After an independent review of the work completed on the Tennessee Eligibility Determination System (TEDS), the state announced in early 2015 it was bringing in a new vendor to complete the system redesign,19  and the state now expects to have its new system fully operational in 2018.

Managed Care and Health System Reform in Tennessee

Tennessee initiated the use of capitated managed care arrangements in 1994 with the creation of TennCare under its Section 1115 demonstration waiver. The state has enrolled all Medicaid populations in managed care arrangements since 1994, though the state has continued to innovate in its delivery and financing arrangements to address specific state program goals. Today, most services are provided as part of a comprehensive contract with three statewide managed care organizations (MCOs).20 In 2010, Tennessee incorporated TennCare CHOICES21 into the TennCare MCO contracts, thereby including long-term services and supports for older adults and people with physical disabilities in comprehensive managed care. Most outpatient pharmacy services, however, are “carved-out” and paid on a fee for service basis (managed by a pharmacy benefits manager).

The Health Care Finance Administration, within the Tennessee Department of Finance and Administration, administers the TennCare program, working with and through contracted private health plans to achieve Medicaid program improvement goals.  For example, the state’s commitment to improving the quality of care for beneficiaries is pursued through a variety of initiatives.  TennCare requires MCOs to be NCQA accredited, and plans are required to report a full set of HEDIS and CAHPS measures to the state. The state will pay a performance incentive for high performance in selected HEDIS measures and year-over-year improvement against standards established in annual contracts with the state. Current performance targets include timeliness of prenatal and post-partum care; measures of asthma and diabetes care; follow-up care for children prescribed with ADHD medication; adolescent well-care visits and immunizations; and antidepressant medication management, among others. The 2016 contract year will begin a new three-year cycle for quality improvement.  There is also a monthly withhold that must be earned back by plans through meeting state performance expectations.  TennCare officials point to achieving improvement in quality scores in the program, even while maintaining low PMPM cost trends.

In recent years, the state has required its health plans to undertake initiatives to reduce the rate of early elective deliveries; for example, since 2011, plans can pay no more for C-sections than for vaginal deliveries.22 TennCare has also implemented Patient-Centered Medical Homes (PCMHs) through its MCOs and is working now to align these programs across plans. Further, under its State Innovations Models (SIM) grant from the Center for Medicare & Medicaid Innovation (CMMI), Tennessee is pursuing a multi-payer approach to PCMHs, beginning with 12 sites in 2016. The goal is to improve prevention and management of chronic disease, increased coordination and integration across multidisciplinary provider teams, and improved wellness and preventive care within the state. As part of this broader initiative, Tennessee plans to create a statewide TennCare Health Homes initiative in 2016 for individuals with Severe and Persistent Mental Illness, to further promote effective integration of physical health care, behavioral health care, and long-term services and supports within the state.

The state’s SIM grant is supporting a wide array of reform initiatives that the state anticipates will help providers build capacity in their practices to transition to value-based payment and delivery models.  The state established a goal to introduce 75 Episodes of Care (EOC) payments over five years; the first three EOCs for acute asthma exacerbation, perinatal and total joint replacement (hip and knee) are fully implemented, design has been completed for another five episodes and design is underway for 12 additional episodes.23 The SIM grant will also be used to develop quality and acuity-based payments for long-term services and supports.

In addition, the state’s SIM grant is supporting the Department of Health in development of a statewide stakeholder process to develop a plan for improved population health. This will include the use of economic analysis and forecasting during the development of the State Health Plan to identify health disparities and “hot spot” populations accounting for a disproportionate share of health care costs. The Department of Health will also use grant awards to Tennessee academic public health programs to address five population health priority topics: obesity, diabetes, tobacco use, child health, and perinatal health.


TennCare officials report that pharmacy costs are a significant upward pressure on expenditures in the program, fueled by the cost of new Hepatitis C treatments, generic drug price increases, and especially the cost of biosimilars and certain specialty agents (e.g., for cystic fibrosis and cholesterol lowering treatments).   The state, which has managed the pharmacy benefit closely through its single statewide pharmacy benefits manager (PBM) for many years, implemented policy changes in 2015 and plans additional changes in 2016 to counter this pressure.

After reporting growth in pharmacy expenditures of 23 percent in FY 2014 over FY 2013, TennCare implemented pharmacy ingredient cost reductions as it moved to AWP-15% for brand name drugs in 2015, and also implemented tighter management of specialty agents.  For example, oncology agents are limited to a 14 day supply on initial fill, the state has introduced edits to identify late refills for Hepatitis C treatment to better ensure medication compliance, and select specialty agents have been designated as “MCO-reimbursed only” when administration should only be performed in a healthcare facility. The state also introduced new prior authorization requirements for ADHD stimulant agents prescribed for adults and on the use of compounded prescription medications to ensure that all compounded prescriptions are medically necessary and FDA-approved or otherwise supported by CMS-recognized compendia.24

Additional planned reductions for 2016 include a 2 year lifetime limit for individuals being treated for opioid addiction with Buprenorphine-containing medications.25 TennCare implemented a “New Drug” Review Policy that will implement clinically relevant prior authorization criteria and point-of-sale rejections until new agents are appropriately review by the state’s Pharmacy and Technology committee. The state also plans to transition to Guaranteed Net Unit Price (GNUP) contracting with pharmaceutical manufacturers.

Tennessee Medicaid (TennCare) Policy Changes FY 2015-2016
Eligibility, Application and Renewal Policies
  • Limiting new LTSS enrollment into a 1915(i)-like group (CHOICES III, offered under 1115 authority) to SSI eligibles only in FY 2016.  People already enrolled in the group under institutional income standards will be grandfathered.
  • Implemented new policy to suspend Medicaid eligibility upon incarceration (rather than terminate26).
Delivery System and Payment Reforms
  • Continuing to expand the use of Episodes of Care. (FYs 2015 and2016)
  • Expanding the use of PCMHs. (FYs 2015 and 2016)
  • Planning to implement of health homes for those with severe and persistent mental illness. (FY 2016)
  • Implemented individual cost cap in one 1915(c) waiver for individuals with intellectual disabilities in FY 2015. (People whose services exceeded the cap were transitioned to another waiver with an aggregate cost cap, such that their services were not reduced.)
Provider Rates and Provider Fees/Taxes
  • Across the board 1% rate cuts for MCOs and many ancillary providers in FY 2015 which were continued in FY 2016.
  • Increase nursing facility assessment in 2015 and 2016 and TennCare MCO tax in 2016 (from 5.5% to 6%)
Benefits and Pharmacy
  • Reducing pharmacy ingredient cost reimbursement (no change in the dispensing fee).
  • Adjusting the state’s PDL to add new prior authorization for ADHD stimulant agents for adults. (2015)
  • Planning to transition supplemental rebates to Guaranteed Net Unit Price (GNUP) contracting with pharmaceutical manufacturers. (October 2015)
  • Implementing new pharmacy cost-containment measures targeted to specialty drugs, such as new prior authorization requirements and edits on specialty agents. (FYs 2015 and 2016)
  • Implementing additional pharmacy cost-containment measures such as management of compound drugs (2015) and instituting a 2-year life-time limit on use of Buprenorphine-containing medications for opioid addiction treatment (2016).

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