Press Releases

CMS Approves Innovative Tennessee Aggregate Cap Demonstration to Prioritize Accountability for Value and Outcomes

New Medicaid financing approach gives Tennessee unprecedented flexibility supporting innovative, high-quality, fiscally sustainable, and broadly accessible care.

The Centers for Medicare & Medicaid Services (CMS) today approved an innovative demonstration offering unprecedented flexibility to Tennessee’s Medicaid program with a new “aggregate cap” approach to Medicaid financing provided to the state under this demonstration. In Medicaid’s current financing framework, the volume – rather than value – of care patients receive drives spending. This can lead to greater spending that limits the resources available for states striving to control costs while improving the value of care. The new financing approach aims to shift this paradigm by aligning incentives across the state and federal government. The section 1115 demonstration, known as “TennCare III,” includes an agreement with Tennessee on a fixed budget target, more flexibility in how that funding can be used to improve services under the Medicaid program, and the opportunity to earn federal savings that can be reinvested in programs that improve the health of vulnerable populations in the state, all while preserving existing Medicaid coverage.

“The TennCare III demonstration builds on all the good ideas that have been out there around a new financing model for Medicaid, but addresses many of the most prominent concerns,” noted CMS Administrator Seema Verma. “This groundbreaking waiver puts guardrails in place to ensure appropriate oversight and protections for beneficiaries, while also creating incentives for states to manage costs while holding them accountable for improving access, quality and health outcomes. It’s no exaggeration to say that this carefully crafted demonstration could be a national model moving forward.”

The TennCare III demonstration leverages many of the flexibilities outlined in the HAO guidance CMS released in 2020. The HAO gives states a broad suite of flexibilities along with certain performance and spending targets, with a focus on fixing administrative processes to allow the state to focus on improving the health of Medicaid populations.

Under the approved demonstration, CMS will work with Tennessee to evaluate well-established, historical enrollment and Medicaid cost data to create a financial structure that establishes a fixed spending target provided under the demonstration, which will increase at a reasonable growth rate over time. The amount is not unlimited, but the plan does include a “safety valve” to help increase funding due to unexpected increases in enrollment and ensure that the state is incentivized to control cost growth through efficient administration and reducing unnecessary costs rather than through reduced enrollment. The safety valve will maintain Tennessee’s commitment to enroll all eligible Tennesseans with no reduction in today’s benefits for beneficiaries.

For example, the state has committed to maintaining coverage for eligible beneficiaries or state plan-covered services in place today. Additionally, any benefit changes implemented under the program must be additive in nature, meaning the state cannot reduce its current minimum approved benefits package. Further, beneficiaries have access to all appeals and fair hearing rights, and the state committed to rigorous monitoring and evaluation of both implementation and beneficiary outcomes. 

In exchange for taking on this financing approach, the state will receive a range of operating flexibilities from the federal government, as well as up to 55% of the savings generated on an annual basis when spending falls below the aggregate cap and the state meets quality targets. These savings can be spent on vital state health programs that include addressing the social determinants of health for vulnerable populations (the technical term for factors including, but not limited to, access to nutritious food, affordable and accessible housing, convenient and efficient transportation, safe neighborhoods, strong social connections, quality education, and opportunities for meaningful employment). Such an approach will enable the state to advance Medicaid objectives by continuing to improve health outcomes and increase the efficiency and quality of care that Medicaid beneficiaries and similar populations receive while maintaining a neutral impact on the federal budget.

“We applaud Governor Lee in his historic efforts to strengthen and sustain the Medicaid program,” CMS Administrator Verma noted.

CMS is approving this demonstration for a period of 10 years to reduce administrative burden and allow the state sufficient time to evaluate its innovative approach. This approval, which includes robust monitoring and evaluation, empowers the state to better manage costs and target resources when delivering high-quality patient care for more than 1.4 million Tennesseans, many of whom continue to reel from the effects of the coronavirus disease 2019 (COVID-19) pandemic.

An expansive list of flexibilities from the federal government will help Tennessee better respond to local needs – all while incentivizing cost savings that federal and state governments can share.

Among those flexibilities, CMS has approved several new approaches to help Tennessee better serve its Medicaid population and lower prescription drug costs. With the exception of drugs for individuals eligible for Early and Periodic Screening, Diagnostic and Treatment benefits, the state will have the authority to implement a “commercial-style” closed drug formulary, while continuing to receive statutory Medicaid drug rebates for covered drugs. Specifically, the state will have authority not to cover certain medications when there is at least one drug available per therapeutic class under essential health benefit rules (with the exception of certain protected drug classes), and to exclude certain new drugs from its formulary, with an exceptions process for specialty drugs. With this approval, Tennessee will have greater ability to negotiate other supplemental rebates directly with drug manufacturers.

Additionally, this approval includes:

  • Flexibilities to increase benefits and coverage without seeking prior approval from CMS within the parameters approved.
  • Authority to address Medicaid fraud more aggressively. For example, if the state has determined that a beneficiary has committed fraud in the Medicaid program, the state has the ability to suspend their benefits for up to twelve months after a full investigation.
  • Flexibilities to change existing benefits and services without reducing the amount, duration, or scope of covered services below levels in place at present.
  • Controls to better regulate uncompensated care costs.

At the federal level, the demonstration continues to meet “budget neutrality,” meaning anticipated federal spending during the program’s 10-year lifespan will be no greater with the demonstration than it would have been without it. State and federal partners can equitably share the risks and rewards that come with fueling innovation while also working to reduce costs. Expansive federal monitoring and evaluation will help CMS ensure the TennCare III demonstration moves in lock-step with Medicaid’s commitment to beneficiaries, all while potentially driving future approaches to improve their care.

TennCare itself began in 1994 as a 1115 demonstration project that assisted in promoting the objectives of the Medicaid program. Like TennCare in its infancy and this new demonstration building on its innovative legacy, section 1115 demonstrations present an opportunity for states to institute innovative reforms that meet the needs of their population, often going beyond routine medical care and focusing on evidence-based interventions to drive better health outcomes and improve quality of life. They also represent many of the most powerful tools employed by the Trump Administration to sustain Medicaid for future generations by moving toward a system that pays for what Americans need: Better quality, at a lower cost.

TennCare’s new demonstration program is authorized statewide beginning January 8, 2021 and lasting through December 31, 2030.

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CMS Administrator Verma’s press call remarks on TennCare III are available here:


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