Opportunities for State Medicaid Reform

Policy Reports | Health

No. 288
Thursday, September 28, 2006
by John C. Goodman, Michael Bond, Devon M. Herrick, and Pamela Villarreal

Federal Waivers for Medicaid Reform

If state Medicaid programs were as efficient as most private-sector health plans, they could spend billions of dollars less to achieve the same health outcomes and would have billions of dollars each year to fund tax cuts or other spending programs. 

Section 1115 waivers, granted by the Centers for Medicare and Medicaid Services (CMS), have traditionally been used to test innovative, comprehensive Medicaid reform.  In 2001, the Bush administration announced a streamlined waiver process called the Health Insurance Flexibility and Accountability (HIFA) initiative.  Through HIFA waivers, states have the opportunity to reduce some benefits in order to increase other benefits, reduce benefits in return for increases in the number of people eligible, and/or reduce benefits for some people in order to create a new set of benefits for others.102

“Waivers allow states to implement reforms.”

There are certain restrictions on the waivers.103  They are usually valid for only three years (although they can be renewed).  They must be budget neutral (that is, require no additional federal spending).  The state must be trying to "research an idea" (rather than just trying to cut costs).  Certain populations must be "held harmless" (usually pregnant women and children).  Certain benefits must be protected.  However, states can adjust almost all benefit, eligibility and reimbursement standards.  If the waiver proves unsuccessful at any time, the state can unilaterally cancel it after closing the pro-gram to new enrollees for six months.

In addition, the Deficit Reduction Act of 2005 gives states new authority to adopt many common-sense reforms that formerly required federal waivers.  [See the sidebar "The Deficit Reduction Act of 2005."]

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