Unpacking TennCare III: Why It's Not a Model for Capping Medicaid Funding

Author: Jocelyn Guyer
Editor: Patti Boozang

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tl;dr

• At the tail end of the first Trump Administration, CMS approved an “aggregate cap” in Tennessee’s section 1115 Medicaid waiver. That deal is not a blueprint for how Medicaid could be turned into a block grant under Trump II.   

• In effect for 2 years, the aggregate cap gave the state a large financial cushion; the various features of the cap authorized expenditures that were 15.8 percent above Tennessee’s Medicaid spending. 

• Under this cap arrangement, Tennessee covered all its Medicaid expenditures, used close to $1 billion to re-finance existing state initiatives (outside of Medicaid), and still had $2 billion left over. 

• If all other states secured a similar deal, it would cost the federal government close to $100 billion in FFY2025 and more than half a trillion dollars over five years. 

• With a focus on cutting federal spending, neither Congress nor the Trump Administration is likely to provide a similar “deal” to states. 

• If Congress advances block grant legislation, its aim will be to reduce federal Medicaid dollars flowing to states, not increase federal funding as TennCare III allowed. 

Introduction 

Approved in the final days of President Trump’s first term in office on January 8, 2021, TennCare III was a major amendment to the state’s long-standing Medicaid waiver that generated significant controversy. TennCare III was much discussed because CMS approved it for ten years, allowed the state to operate a closed formulary in Medicaid and established an “aggregate cap” on funding for Tennessee’s Medicaid program. Indeed, some described (and still describe) the amendment as converting financing for Tennessee’s Medicaid from the guaranteed funding model in which the federal government matches all state Medicaid expenditures into a “block grant.”  Now, with discussions arising again in Congress over possibly converting Medicaid into a block grant or some other capped funding mechanism, it is an opportune time to review the financing of the TennCare III demonstration. 

Financing Approach in TennCare III 

Under TennCare III, the state accepted an “aggregate cap” on Medicaid expenditures for which it could receive federal Medicaid matching dollars and secured the right to “shared savings” if its expenditures came in below the aggregate cap. Specifically, at the time of approval, CMS established an aggregate cap for each of the first five years of the ten-year demonstration (i.e., for 2021 through 2025).  To create the annual aggregate limits, it used data on Tennessee’s Medicaid expenditures in 2019, trended forward for each year based on the President’s Budget trend rate for each major eligibility group. 

Notably, Tennessee and CMS also agreed to adjust the aggregate cap upward (or downward) in each year if enrollment came in more than 1 percent above (or below) the 2019 level—not a typical feature of a block grant which generally does not adjust for enrollment changes. For each person enrolled above the 2019 level, CMS allowed the State to receive an additional “add on” payment to its aggregate cap, with the pre-determined amount based on eligibility group. This per capita adjustment or “risk corridor” immediately went into effect, reflecting that Tennessee’s enrollment already exceeded 2019 levels at the time that TennCare III was approved.¹  As a result, Tennessee’s aggregate cap was increased by $1.1 billion (12 percent) in the first year of the demonstration and $1.8 billion in the second year (18 percent). In addition, CMS permitted Tennessee to retain approximately $6 billion in savings from its prior TennCare II Demonstration, providing the state the ability to fall back on these “carry over” savings if it otherwise exceeded its cap. 

Finally, Tennessee secured the ability to capture “shared savings” if its actual Medicaid demonstration expenditures fell below the aggregate cap in any given year and the state met certain quality benchmarks. Depending on its quality performance, the state had the right to access up to 55 percent of the difference between the aggregate cap and actual expenditures. TennCare III allowed the state to divert these “savings” to state-funded health initiatives that would not normally qualify for federal Medicaid funding. By providing federal Medicaid matching funds for existing state-funded programs, the state gained the ability to supplant existing state spending and free up state dollars for use on other priorities.  

What Happened to TennCare III? 

The “aggregate cap” in TennCare III ended up only being operational from January 8, 2021, to August 3, 2023. By the spring of 2021, the Tennessee Justice Center had sued CMS on behalf of 14 individual plaintiffs, challenging its approval of TennCare III on substantive and procedural grounds. With the turnover from a Trump to a Biden Administration, Tennessee no longer had CMS’s backing for some key elements of TennCare III and the state agreed to rescind its aggregate cap and closed formulary by August of 2023.

What Can Be Learned from TennCare III About Block Grant Financing? 

TennCare III was not a true test of a “block grant.” It was clear from the very beginning of implementation of TennCare III that its aggregate cap was not a valid test of a block grant. Under a block grant, states are given a defined amount of money (typically based on historical expenditures with a pre-set annual adjustment not related to actual program costs) to use for specified purposes and generally must live within that cap. When block grants or per capita caps are designed to generate federal savings, as they would be under a reconciliation bill advanced in the 119th Congress, the limit on Medicaid expenditures is set at a “binding” level that is below expected costs. The aggregate cap in TennCare III was set at a high level relative to Tennessee’s need for Medicaid funding. Under its “cap,” the state had more than enough room to cover its Medicaid expenditures and to draw down federal Medicaid matching funds on nearly $1 billion in a host of existing state initiatives that provided fiscal relief to the state but no new services to Medicaid enrollees. Even then, it still had plenty of room under its “cap” for any additional expenditures. Specifically, Tennessee’s cap (taking into account the enrollment adjustment or “risk corridors”) was set at $22 billion when its expenditures for Medicaid were only $19 billion. Even after the State used close to $1 billion on existing state programs, bringing its total expenditures to $19.9 billion, it still had $2 billion of “room” left over. 

The 80 Million Impact 

If Congress pursues a block grant in Medicaid, it will do so to reduce, not expand, Medicaid expenditures. As we noted in our recent 80 Million post  Cutting Federal Medicaid Funding: 8 Key Consequences That Everyone Should be Talking About block grants and other proposals to reduce federal Medicaid funding would have significant negative impact to coverage, benefits, and access for the 80 Million people enrolled in Medicaid. Based on prior proposals debated by Congress and being put forth by think tanks, states can anticipate that their allowable expenditures would be limited to levels below projected levels, not set 10 to 20 percent above what they turned out to need as occurred in the TennCare III demonstration (18.9% in 2021, 13% in 2022 and 15.8% over the first two years). To put the generosity of Tennessee’s aggregate limit into context, it is worth noting that if all states were given a cap set at 15.8 percent above their Medicaid expenditures and took full advantage of it, it would increase federal Medicaid expenditures by $94.6 billion in federal fiscal year (FFY) 2025 and by $512.7 billion from FFY2025 – FFY2029. 

The Bottom Line 

Given the generous nature of the financing arrangement that Tennessee secured with TennCare III, it would be no surprise if other states want to pursue such an initiative in exchange for new programmatic flexibility. Securing a comparably favorable arrangement today is highly unlikely considering the heightened focus on government efficiency and reducing Medicaid expenditures, and the federal financial implications of extending a similar arrangement to more states.  Most importantly, the Tennessee experience is not useful in evaluating the potential implications of a Medicaid block grant as a mechanism that Congress might pursue to reduce federal Medicaid expenditures. 

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