TennCare III: A Potential Case Study in the Impact of CMS’ Approved Tennessee Aggregate Cap Demonstration Waiver in Medicaid

Ethan HeidornHealthcare Industry, Healthcare Policy

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Quick Summary:

  • Allows Tennessee Medicaid to cover the greater of either one drug per therapeutic class or the same number of drugs per class as a selected Essential Health Benefits benchmark plan in the ACA exchange
  • Requires an exceptions process for coverage of non-formulary drugs
  • Tennessee can still collect statutory rebates for covered drugs
  • Flexibilities to increase benefits and coverage without seeking prior approval from CMS within the parameters approved
  • This approval is effective January 2021 through December 31, 2030

Deeper Dive:

TennCare itself began in 1994 as a 1115 demonstration project that assisted in promoting the objectives of the Medicaid program. State Medicaid Section 1115 demonstrations are often used to test innovative or new policies in the program. However, some demonstrations that have placed new conditions on eligibility have led to unintended coverage losses and other adverse effects. Section 1115 waivers are the same vehicle through which states, with CMS approval during the Trump Administration, attempted to implement Medicaid work requirements.

The TennCare III Section 1115 waiver is essentially a Medicaid block grant, which has been a key conservative staple for reigning in Medicaid costs for a long time. Unlike previous conservative proposals, federal funding continues to increase as enrollment increases, however, states are financially at-risk if per-beneficiary costs increase beyond the agreed upon, inflation-adjusted cap. Oklahoma and Tennessee were the only states to pursue the Healthy Adult Opportunity (HAO) initiative introduced by CMS in January 2020, inviting states to submit Section 1115 waivers for Medicaid financing proposals. Oklahoma’s waiver was rescinded after the state finally chose to expand Medicaid coverage. Tennessee was left as the only state to pursue a Section 1115 waiver (pseudo-block grant) which was approved by CMS on January 11, 2021, during the final weeks of the Trump Administration. Following approval, former CMS Administrator, Seema Verma, referred to TennCare III as “…not a traditional block grant proposal; but rather, [taking] many of the advantages associated with traditional proposals and leveraging value-based care concepts.” In a nutshell, the waiver allows the State certain flexibilities in managing their Medicaid program in exchange for risk-sharing with the Federal government, and the ultimate opportunity to share in the savings (55%) or burden the risk of increased spend. The Kaiser Family Foundation summarizes the broad strokes of the TennCare III waiver in this graphic.


Naturally, the waiver contains relatively expansive changes to the existing distribution of the Medicaid benefit. In the prescription drug coverage focus, several significant flexibilities are given to the state Medicaid program. Among those flexibilities, CMS has approved several new approaches to help Tennessee better serve its Medicaid population and lower prescription drug costs. (The details on the formulary allowances can be found in the Demonstration Approval document under the “Pharmacy Flexibilities” section).

Pharmacy Flexibilities:

  • Closed Formulary: The state can cover the greater of either one drug per therapeutic class or the same number of drugs per class as a selected Essential Health Benefits (EHB) benchmark plan
    • Drugs for individuals with Early and Periodic Screening, Diagnostic and Treatment (EPSDT) benefits are excluded and the formulary must comply with EHB requirements, mandatory Medication-Assisted Treatment drug coverage requirements, and the “substantially all” Medicare Part D rules for mental health and other protected class drugs
    • A P & T Committee shall be used to manage the formulary
  • The state must maintain and publish in print and on a website up-to-date, accurate, and complete lists of all covered drugs in their formularies
  • The state must also provide timely notice to beneficiaries of the changes to the pharmacy benefit in advance of the changes going into effect
  • Requires an exceptions process for coverage of non-formulary drugs
    • The state will publish an explanation of internal and external exceptions processes and timeframe to obtain non-formulary drugs when clinically appropriate.
  • Allows Tennessee to still collect statutory rebates for covered drugs despite the closed formulary option

CMS posits that with this approval, Tennessee will have greater ability to negotiate other supplemental rebates directly with drug manufacturers, especially on specialty medications. Supplemental rebate agreements have been sparse, with only 9 agreements presently active. The closed formulary for Tennessee would certainly present an opportunity for a significant increase in that number.

Stakeholder Response

PhRMA released a statement rebuking the allowance of the “tone-deaf and disruptive” waiver that also “violates federal law and Medicaid statute by allowing the use of closed formularies while maintaining statutorily mandated rebates.” Current law already provides states with authority to create preferred drug lists, and even formularies, as well as use other statutory utilization management tools to manage drug spending. Limiting access to medicines in Medicaid is also proven to increase costs in other health care services that are a far greater strain on state budgets than prescription medicines, which make up just 4.1% of total Medicaid spending in Tennessee. Additionally, a group of 21 patient and consumer groups came out against CMS’s approval of TennCare III, saying it “is a reckless move that would reduce Tennesseans’ ability to get needed healthcare.” The potential for the per-beneficiary costs to continue to rise despite increased management flexibilities may ultimately require Tennessee to limit enrollment in Medicaid as the only option to reign in spending below the targeted cap, leading to the staunch opposition of many patient and consumer groups.

Although this waiver only applies to the Tennessee Medicaid program, the results of the test will provide evidence required to translate these innovations to the broader Medicaid marketplace. Thus, any rules proposed in the waiver are worth examining as Medicaid continues to rank either first or second in state budgets. As 23 states followed lock step in issuing Medicaid work requirements back in 2016, it would reason that any amount of success with this piloted program would ring in the ears of at least those 22 other governors. Former CMS Administrator Seema Verma even remarked that “TennCare III represents a new paradigm for Medicaid, one capable of one day being a national model.”


CMS approved the TennCare III waiver on January 11, 2021, during the final week of the Trump Administration. The changes are expected to take months to implement because they need final legislative approval, and state officials must negotiate quality of care targets with the administration. The Biden Administration will likely oppose the waiver, but it will require them to set up a public hearing which has yet to occur. Implementing block grants via an executive branch action rather than getting Congress to amend Medicaid law is also likely to be met with court challenges. Similar to the work requirement waivers approved by CMS previously, the TennCare III waiver has the potential to be struck down by the courts as “the statutory authority for demonstration projects, does not provide the Secretary authority to waive section 1903 of the Medicaid Act governing the federal matching payments to states.” We will monitor to block grant process as it relates to TennCare III as the hybrid block grant attempts to stand ground despite the likely opposition in the current Administration.


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