DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland   21244-1850 
 
 
     
    SMD# 20-001 
 
RE: Healthy Adult Opportunity  
 
January 30, 2020  
 
Dear State Medicaid Director:  
 
The Centers for Medicare & Medicaid Services (CMS) is pleased to announce a new opportunity 
for states to potentially achieve new levels of flexibility in the administration and design of their 
Medicaid programs while providing federal taxpayers with greater budget certainty.  The 
Healthy Adult Opportunity (HAO) initiative will allow states to carry out demonstrations under 
section 1115(a)(2) of the Social Security Act (the Act) to provide cost-effective coverage using 
flexible benefit designs under either an aggregate or per-capita cap financing model for certain 
populations without being required to comply with a list of Medicaid provisions identified by 
CMS.   
 
CMS recognizes that states, as administrators of the program, are in the best position to assess 
the needs of their respective Medicaid-eligible populations and to drive reforms that result in 
better health outcomes.  States that agree to implement demonstrations under either of these 
financing models and to increased transparency and accountability for effective administration of 
their programs, quality and access to care, which in the judgment of CMS, are likely to assist in 
promoting the objectives of the Medicaid program, will be granted extensive flexibility to test 
alternative approaches to implementing their Medicaid programs, including the ability to make 
many ongoing program adjustments without the need for demonstration or state plan 
amendments that require prior approval.  The list of Medicaid provisions with respect to which 
we will consider providing flexibility for states participating in demonstrations approved under 
the HAO initiative is provided in Appendix A.  This includes flexibility on provisions such as 
retroactive coverage, cost-sharing limits, presumptive eligibility, and other requirements that 
CMS historically has waived under section 1115 of the Act. 
 
Through the HAO initiative, CMS is inviting states to design demonstrations for consideration 
by CMS that will promote the objectives of the Medicaid program, including the furnishing of 
medical assistance in a manner that promotes the sustainability of government health care 
spending through use of an annual budget neutrality limit, calculated in the aggregate or on a per 
capita basis.  While federal funding will be capped, federal financial participation (FFP) will 
continue to flow to states as it does today; nothing in this letter changes the need for states to 
submit claims reflecting actual expenditures to obtain federal matching funds for the Medicaid 
program.  Demonstrations approved utilizing this approach will offer states far greater flexibility 
and discretion than is available under ordinarily-applicable Medicaid rules as well as the freedom 
to manage their programs within certain parameters and expectations without the need for 
complex amendments or advance federal approval of certain changes.    
  Page 2  State Medicaid Director 
 
In addition to added flexibility, states that agree to an aggregate cap financing model and meet 
certain performance criteria may be eligible to access shared savings when expenditures for the 
demonstration population are less than the annual allotment provided under the aggregate cap.  
The HAO initiative thus will allow CMS and states to test whether greater administrative 
flexibility will enable states to more efficiently run their Medicaid programs, while increasing 
state accountability, facilitating enrollment of eligible persons, ensuring timely beneficiary 
access to effective care, improving quality outcomes, and potentially freeing up resources for 
additional investment in coverage or benefits not offered under the state plan or other initiatives 
that advance the objectives of the Medicaid program.  While every application by states will be 
considered on its own merits, this will potentially allow states that practice greater fiscal 
responsibility to invest in projects designed to benefit Medicaid populations. 
 
This guidance does not impose any requirements on states and does not bind CMS to approve 
any states application for demonstration authority under the HAO initiative.  Rather, CMS will 
consider applications on a case-by-case basis and make an independent decision about whether 
the demonstration satisfies the requirements under section 1115 of the Act for approval. 
 
A.  Overview 
 
Under the demonstration authority granted by section 1115(a) of the Act, in the case of a 
demonstration that CMS determines is likely to assist in promoting the objectives of the 
Medicaid program, CMS can waive under section 1115(a)(1) of the Act, or not apply under 
section 1115(a)(2) of the Act, many federal requirements so that states can test new or existing 
ways to deliver and pay for health care services under the Medicaid program.  CMS can provide 
expenditure authority under section 1115(a)(2) of the Act to allow states to provide coverage to 
individuals not eligible under the state plan, which can offer significantly more flexibility 
without the need for individual section 1115 waivers.  The HAO initiative will involve the use of 
section 1115(a)(2) authority to provide coverage to individuals not eligible for benefits under the 
state plan, while affording states maximum flexibility in the administration of benefits for such 
individuals.   
 
The HAO initiative encourages states to apply for all flexibilities that have been previously 
approved in other demonstrations where such flexibilities would be likely to promote the 
objectives of the Medicaid program, such as: 
  The ability to cover adults who qualify for Medicaid on a basis other than disability or 
need for long-term care services and supports and who are not covered under the state 
plan, including covering all individuals described in section 1902(a)(10)(A)(i)(VIII) of 
the Act and 42 CFR 435.119 (adult group), using section 1115(a)(2) expenditure 
authority at the Federal Medical Assistance Percentage (FMAP) that would apply if they 
were covered under the state plan;  
  Providing populations covered under an HAO demonstration with coverage more 
consistent with insurance benefits provided through the Exchanges, rather than the 
traditional Medicaid benefit package; 
  The ability to pay for services that cannot traditionally be funded by Medicaid, including 
those designed to address certain health determinants, such as enhanced case 
management services that link individuals to housing or other supports;  Page 3  State Medicaid Director 
 
  Design of flexible premium and cost sharing structures that are not required to comply 
with the terms of section 1916(f) of the Act; 
  The ability to impose additional conditions of eligibility, such as community engagement 
requirements for non-elderly, non-pregnant adult Medicaid beneficiaries who are eligible 
for Medicaid on a basis other than disability;   
  The ability to make certain changes in benefits, premiums, and co-payments during the 
course of the demonstration without the need for state plan or demonstration amendments 
and further approval by CMS; 
  The ability to change eligibility and enrollment processes, such as eliminating retroactive 
eligibility. 
 
Additionally, the HAO initiative potentially offers states new opportunities, including: 
  The ability to make certain administrative changes during the course of the 
demonstration, such as certain changes in provider payment rates and application of 
claims review prior to making payment, without amendments or further approval by 
CMS; 
  The ability to adopt a closed formulary in line with Essential Health Benefit (EHB) 
requirements (with special protections for individuals with HIV and behavioral health 
conditions); 
  The ability to include coverage of services provided by a federally qualified health center 
as part of the states value-based payment reform efforts. 
  The opportunity to propose alternative approaches to compliance with statutory managed 
care provisions that differ from those set forth in regulations; 
  The opportunity for states implementing an aggregate cap demonstration to be eligible 
for shared savings when actual FFP is less than the FFP allotment under the aggregate 
cap, provided a state meets certain performance criteria.  
 
While the intent of this initiative is to provide states with a menu of maximum up-front 
flexibilities with which to design their program, states are not automatically entitled to all of the 
flexibilities described in this guidance; whether a demonstration will be approved is determined 
on a case-by-case basis and will depend on the details of each application.  CMS will need to 
determine whether the demonstration as a whole with the flexibilities requested supports the 
goals of the demonstration and is likely to promote the objectives of the Medicaid program.  
Similarly, any parameters set forth in this guidance reflect the conditions that CMS expects will 
be necessary to approve an application to implement an HAO demonstration.  CMS will make a 
state-by-state determination of the specific requirements needed for HAO demonstrations 
designed by each state, which will be reflected in the Special Terms and Conditions (STCs) for 
each states demonstration. 
The HAO initiative described in this guidance is available to all states as a mechanism to cover 
populations not covered under their state plan.  HAO demonstrations also could be used to 
extend coverage to populations a state has previously covered in its state plan or under other 
section 1115 demonstrations, but for whom the state has elected to end coverage.  We expect that 
coverage under an HAO demonstration will focus on adults under age 65 who are not eligible for 
coverage under the state plan.  CMS may consider state requests to include other adult 
populations who are not eligible for coverage under the state plan.        
  Page 4  State Medicaid Director 
 
With the significant flexibility afforded under this demonstration opportunity, states will 
continue to be held to a high standard of accountability for health outcomes and will be subject 
to regular and thorough monitoring and evaluation, consistent with CMSs approach to other 
section 1115 demonstrations.  As discussed in greater detail in Section D of this guidance 
relating to Oversight, we expect that states will also provide baseline data on a set of Adult Core 
metrics, as well as on a set of quarterly continuous performance indicators, relating to enrollment 
and retention, access and quality of care, health outcomes, and financial management, and to 
other effects for testing policies under HAO demonstrations, such as community engagement and 
federal matching funds for services provided during an Institution for Mental Diseases (IMD) 
stay consistent with CMS guidance for substance use disorder (SUD) or Serious Mental Illness 
and Severe Emotional Disturbance (SMI / SED).  States will be expected to report on these 
metrics and indicators throughout the demonstration, and engage in rapid course correction if 
needed, in accordance with guidance provided by CMS.  In addition, states will be expected to 
conduct interim and summative impact evaluations for each demonstration period of 
performance, consistent with academic standards and guidance provided by CMS.   
 
CMS is providing an application template for the HAO initiative, which will include lists of the 
most typical administrative program requirements applicable to section 1115 demonstrations, 
with which the state would be expected to comply  for example, compliance with federal civil 
rights laws, program performance and program integrity standards; non-supplanting or 
duplication of other federal funding; and Transformed Medicaid Statistical Information System 
(T-MSIS) submissions and maintenance.  States will have the opportunity in the application 
template to propose demonstration-specific processes for complying with these administrative 
program requirements.  These administrative program requirements will be incorporated into the 
demonstrations STCs.  CMS will review the state's proposed flexibilities and other materials 
submitted as part of the application, and make a determination of whether the demonstration can 
be approved.  After an application is approved, the state will submit an implementation plan for 
CMS approval, that will contain greater detail on how the state plans to implement the 
flexibilities authorized under the STCs.  As with other section 1115 demonstrations, states may 
not begin implementation of their approved HAO demonstration until CMS approves the 
implementation plan. The application process and implementation plan are discussed in section 
E.   
States with existing section 1115 demonstrations that cover populations eligible to be covered in 
an HAO demonstration may also propose to transition such demonstrations into HAO 
demonstrations.  CMS will work with states interested in such a transition to ensure a seamless 
conversion of coverage into the HAO demonstration and orderly close-out of the existing section 
1115 demonstration in a manner consistent with the STCs for the existing demonstration.  More 
information about this process is provided in Appendix B.   
 
This guidance describes additional programmatic and budgetary parameters for state 
consideration in the development of demonstrations that will utilize an annual aggregate or 
per capita cap approach.  
 
B. State Flexibility in Program Design 
 
States will have broad flexibility in the initial design of an HAO demonstration as well as the 
ability to make certain changes over the course of the demonstration, which generally will be  Page 5  State Medicaid Director 
 
allowed without need for a demonstration amendment.  CMS reserves the right to require an 
amendment, and to subject the amendment to the requirements in 42 CFR 431.412, if CMS 
determines that the state is proposing a significant change that is outside the scope of flexibilities 
approved in the STCs for a states HAO demonstration, or that would impact the baseline for 
determining budget neutrality.  The breadth of this flexibility in key program areas is discussed 
below.  Section E of this guidance includes a discussion of the extent of state flexibility and 
process for making changes to an HAO demonstration once the initial application and 
implementation plan have been approved.   
 
1.  Eligibility and Enrollment 
 
Eligible Populations   
The HAO initiative is focused on coverage provided to adults under age 65 who qualify for 
Medicaid on a basis other than disability or need for long-term care services and supports and 
who are not covered in the state plan, including individuals described in the new adult group 
at section 1902(a)(10)(A)(i)(VIII) of the Act and 42 CFR 435.119.  The demonstration 
opportunity is available to all states, including those with existing section 1115 
demonstrations, providing flexibility for populations eligible to be covered in an HAO 
demonstration.  To provide coverage under an HAO demonstration, participating states may 
need to phase out and transition, in whole or in part, an existing demonstration into an HAO 
demonstration.  CMS will work with states to ensure a smooth transition (see Appendix B).   
 
States will have the opportunity to impose conditions of eligibility on coverage under an HAO 
demonstration that do not generally apply to Medicaid coverage under state plans, such as 
community engagement requirements, as described in SMDL #18-002, and consistent with 
other applicable federal laws, including title VI of the Civil Rights Act of 1964, section 504 of 
the Rehabilitation Act of 1973, the Americans with Disabilities Act of 1990, the Age 
Discrimination Act of 1975, and section 1557 of the Patient Protection and Affordable Care 
Act (PPACA).  CMS, in consultation and coordination with the Department of Health and 
Human Services (HHS) Office for Civil Rights, is available to assist states in designing 
projects that comply with the civil rights laws.   
 
States may propose to impose such additional conditions of eligibility on coverage under an 
HAO demonstration at the beginning of the demonstration, or to adopt subsequent to initial 
implementation provided that, either during the initial application process or prior to imposing 
the additional condition, notice and transparency requirements at 42 CFR part 431, subpart G, 
have been met and CMS has determined that the additional condition on eligibility would 
promote the objectives of the Medicaid program.   
 
States choosing to participate in the HAO initiative also will have the opportunity to set the 
income standard for eligibility for coverage under an HAO demonstration, as well as to 
change the standard over the course of the demonstration, and/or to limit coverage to a 
defined subset of individuals, such as individuals with severe mental illness, individuals 
needing treatment for substance use disorder, or individuals with HIV/AIDS.  States also may 
propose to require an asset test for individuals seeking coverage under an HAO 
demonstration.  Under the HAO initiative, and in other demonstration projects covering the 
adult group under section 1115(a)(2) authority, increased FMAP will be available in  Page 6  State Medicaid Director 
 
accordance with sections 1905(y) and 1905(z) of the Act, provided that the demonstration 
includes a standard for eligibility based on a household income standard of at least 133 
percent of the federal poverty level (FPL), no asset test for those with income at or below 133 
percent FPL, and eligibility for all individuals described in the adult group, even when 
benefits are not provided in accordance with section 1937 of the Act, as required under 
sections 1902(a)(10)(A)(i)(VIII) and 1902(k) and 1903(i)(26) of the Act in the case of state 
plan coverage.  To claim increased FMAP for individuals described in the adult group, states 
participating in this initiative also would need to work with CMS develop a methodology for 
identifying those for whom increased FMAP is available, in accordance with 42 CFR part 433 
subpart E.  Increased FMAP is not available for coverage of individuals with household 
income above 133 percent FPL.  
   
Eligibility and Enrollment Processes   
For populations covered under an HAO demonstration, CMS will not require compliance with 
the effective date of eligibility prescribed under 42 CFR 435.915.  Instead, states may propose 
to not provide retroactive eligibility, as well as to establish a prospective effective date of 
coverage  for example, to coincide with enrollment in a managed care plan or a Qualified 
Health Plan (QHP).  States also could propose to conduct an individuals first regularly-
scheduled renewal of eligibility prior to the end of the 12-month renewal called for in 42 CFR 
435.916(a)(1), in order to align with the open enrollment period for Exchange coverage.  In 
addition, states may propose to not comply with the requirement to operate Hospital 
Presumptive Eligibility (HPE), described in section 1902(a)(47)(B) of the Act and 42 CFR 
435.1110, under an HAO demonstration, although states implementing an HAO 
demonstration can elect to offer such coverage to individuals covered under an HAO 
demonstration.1   
   
States will be expected to implement other processes, in particular those designed to ensure 
coordination with enrollment in other Medicaid categories, as well as coverage through an 
Exchange at initial application and as changes in beneficiaries circumstances require 
transition between programs.  These include use of income methodologies based on modified 
adjusted gross income (MAGI); use of a single streamlined application for all insurance 
affordability programs, which may include revisions to accommodate state-specific criteria 
included in the states HAO demonstration (42 CFR 435.907(a) or (b)); increased availability 
of, and primary reliance on, electronic verification (42 CFR 435.948  435.956); streamlined 
data-driven renewal processes (42 CFR 435.916(a)); and coordination between enrollment in 
Medicaid and coverage through the Exchange (42 CFR 435.1200).  CMS also expects that 
states will recognize applicants and beneficiaries authorized representatives (42 CFR 
435.923), make timely determinations of eligibility (42 CFR 435.912), provide adequate 
notice of a grant, denial or termination of eligibility, or other adverse actions (42 CFR 
431.210  431.214 and 435.917), and provide electronic notification in accordance with each 
individuals election (42 CFR 435.918).  As part of this demonstration, states may develop 
eligibility and enrollment policies that will improve upon the administrative efficiency of 
these processes, e.g., by periodically checking electronic data sources between regular 
eligibility renewals; however, we expect that the federal requirements governing these 
                                                 
1 HPE requires states to provide benefits for individuals determined presumptively eligible by a participating 
hospital for coverage for a temporary period pending completion of a regular application and determination of 
eligibility by the state agency.  Page 7  State Medicaid Director 
 
fundamental components of states eligibility and enrollment systems will apply to coverage 
under an HAO demonstration.   
 
2.  Benefits 
 
Benefit Package   
For populations covered under an HAO demonstration, states generally will be expected to 
align coverage with the individual health insurance market, such as QHPs offered through the 
Exchange in the state or in another state.  Additionally, CMS may consider other benefit 
proposals providing comprehensive coverage that meet larger health reform and Medicaid 
objectives. 
 
To promote access to a benefit package that includes coverage of important services not 
otherwise required in traditional Medicaid, such as mental health and substance use disorder 
treatment and a minimum set of preventive services, and to ensure comparability of benefits 
with the individual market, states electing to participate in this demonstration initiative 
generally will be expected, at a minimum, to provide coverage of items and services in the 
categories of EHBs, as implemented by CMS in regulations at 45 CFR part 156, subpart B 
and 45 CFR 155.170.  The categories of EHBs are (1) ambulatory patient services; (2) 
emergency services; (3) hospitalization; (4) maternity and newborn care; (5) mental health and 
substance use disorder services, including behavioral health treatment; (6) prescription drugs; 
(7) rehabilitative and habilitative services and devices; (8) laboratory services; (9) preventive 
and wellness services and chronic disease management; and (10) pediatric services, including 
oral and vision care, which generally are not applicable for the populations that would be 
covered under an HAO demonstration.  For example, states may select (a) the EHB-
benchmark plan used for plan years beginning in 2017 by another state in its entirety or (b) 
select their own EHB-benchmark plan used for plan years beginning in 2017 and replace 
coverage of any of the categories of EHB with coverage from another states 2017 EHB-
benchmark plan or (c) select a set of benefits to become their new EHB-benchmark plan.  It is 
important to note that states also will generally be expected to cover state-mandated benefits 
that are considered EHB as part their benefit package.  Specifically, states should take into 
account both the EHB-benchmark plan benefits and benefits required by state action taking 
place on or before December 31, 2011.  Additional details on how states can identify which 
items and services within the ten categories will be considered EHB, consistent with the 
regulations implementing EHB for the individual health insurance market, are provided in 
Appendix C.   
 
Under this initiative, state proposals will not be expected to meet additional Alternative 
Benefit Plan (ABP) wrap-around service requirements such as, for example, coverage of non-
emergency medical transportation (NEMT) and early and periodic screening, diagnostic and 
treatment services (EPSDT) for individuals age 19-20 included in this demonstration.  States, 
however, may choose to cover these benefits in addition to EHB.     
 
Subject to certain limitations, states also will have the opportunity under this demonstration to 
provide, at their discretion, coverage of other items and services in addition to EHB to 
improve health outcomes for beneficiaries, enhance coverage and address certain health 
determinants to promote independence.  Coverage of additional items and services could, for  Page 8  State Medicaid Director 
 
example, be based on benefits found in sections 1905(a), 1915(c), 1915(i), 1915(j), 1915(k) or 
1945 of the Act.2  In addition, if a state elects to include nursing facility services in the benefit 
package, the state will generally be expected to offer home and community-based services.   
 
Provider qualifications generally should be defined for benefits not already covered by the 
state.  However, Medicaid funds may not be used for reimbursement of room and board, 
except for certain facility-based services, and funds in this demonstration cannot be used to 
supplant or duplicate funds from other federal programs.  Expenditure authority to cover 
services provided to patients in an IMD also is available if the state meets the program 
requirements under section 1115 of the Act, as outlined in the State Medicaid Director Letters 
(SMDLs), Strategies to Address the Opioid Epidemic issued on November 1, 2017, available 
at https://www.medicaid.gov/federal-policy-guidance/downloads/smd17003.pdf and 
Opportunities to Design Innovative Service Delivery Systems for Adults with a Serious 
Mental Illness or Children with a Serious Emotional Disturbance available at 
https://www.medicaid.gov/federal-policy-guidance/downloads/smd18011.pdf. 
 
Federally Qualified Health Centers   
CMS is also providing states with flexibility regarding the coverage of and payment for 
federally qualified health center (FQHC) services as part of the states value-based payment 
(VBP) reform efforts.  Under this demonstration initiative, states pursuing the value-based 
payment option may cover services consistent with section 1905(a)(2)(C) of the Act, or may 
propose to otherwise determine what services provided by FQHCs will be covered, similar to 
QHP coverage of services provided by FQHCs.  States not exercising this flexibility would 
still be expected to comply with the requirements applicable to Medicaid state plan coverage 
and reimbursement rules at section 1905(a)(2)(C) of the Act. 
 
States also may be permitted to select a methodology for FQHC payments.  Under a state 
plan, section 1902(bb) of the Act requires reimbursement for the required services under 
section 1905(a)(2)(C) of the Act using a Prospective Payment System (PPS) or using an 
Alternative Payment Methodology (APM) if agreed upon by the health center.  As an 
additional alternative, states could propose a VBP methodology consistent with regulations 
applicable to QHPs at 45 CFR 156.235(e).  When proposing VBP methodologies, states 
should include reasonable, auditable performance targets and anticipated payment rates based 
on those targets, in their initial application or request a subsequent demonstration 
amendment.  Additionally, we would expect the state to describe how the states VBP strategy 
for FQHCs relates to other VBP arrangements or delivery system reform in the state.   
 
Other Applicable Federal Benefit Standards   
Any benefits covered under this demonstration in addition to EHB also would be expected to 
comply with the certain standards applicable to EHB.  Specifically, benefits would be 
expected to comply with the requirements of the Paul Wellstone and Pete Domenici Mental 
Health Parity and Addiction Equity Act of 2008 (MHPAEA), as implemented in 45 CFR 
147.160 and 146.136; non-discrimination standards defined in 45 CFR 156.125; and other 
applicable standards related to coverage of items and services as EHB found at 45 CFR 156, 
                                                 
2 Enhanced match for 1915(k) and 1945 is dependent upon the covered population being covered in the state plan 
and all program rules for the respective authorities being followed.  Page 9  State Medicaid Director 
 
as will be specified in the applicable STCs.  Additional details on the EHB standards can be 
found in Appendix C. 
 
Prescription Drugs and the Medicaid Drug Rebate Program   
With respect to drug coverage under this initiative, it is important to note that states may be 
provided with flexibility to offer formularies under an HAO demonstration similar to those 
provided in commercial health insurance markets, consistent with the EHB 
requirements.  This flexibility exists because prescription drug coverage would not be covered 
under the state plan, but instead would be covered under section 1115(a)(2) expenditure 
authority for individuals covered by an HAO demonstration.  This means that the open 
formulary requirements in section 1927 that apply to state plan drug coverage do not 
apply.  Under this initiative, we would not make the open formulary requirements in section 
1927 of the Act applicable as a term and condition of the demonstration as we have done in 
other demonstrations when section 1115(a)(2) expenditure authority has been used.  While the 
open formulary requirements in section 1927 thus would not apply, and drugs could be made 
available under a limited formulary, such as in accordance with EHB rules applicable in the 
individual market, the obligation under section 1927(b) of the Act for a drug manufacturer 
with a drug rebate agreement to pay rebates would apply.  Section 1115(a)(2) provides that 
expenditures made under its authority are to be regarded as expenditures under the State 
plan.  Therefore, the requirement in section 1927(b) of the Act to pay rebates on drugs for 
which payment was made under the State plan would apply, even though the drugs would 
not be covered under the state plan, and the beneficiaries would not be regarded as eligible 
under the state plan.3  States would also be free to negotiate supplemental rebates with 
manufacturers in exchange for the inclusion of their drugs on the states formulary.  States 
wishing to continue to meet the coverage requirements of section 1927 of the Act would be 
free to do so.   
 
CMS notes that if states elect the flexibility to establish formularies, CMS will expect states to 
comply with EHB requirements regarding prescription drug benefits. These requirements will 
help ensure that states have robust formularies in place.  In addition, to ensure that this 
demonstration supports CMSs objectives related to the treatment of HIV and opioid use 
disorders (OUD), CMS expects states to provide coverage of (1) substantially all drugs for 
mental health (that is, antipsychotics and antidepressants) consistent with Medicare Part D 
coverage; (2) substantially all antiretroviral drugs (including PrEP) consistent with Medicare 
Part D coverage, and (3) all forms, formulations, and delivery mechanisms for drugs approved 
by the Food and Drug Administration (FDA) to treat OUDs for which there are rebate 
agreements in place with the manufacturers.  Additional coverage requirements may be 
negotiated between the state and CMS.  In addition to coverage requirements, CMS will 
expect states to comply with drug utilization review, state reporting, and program integrity 
requirements generally consistent with those of section 1927. 
 
 
 
 
                                                 
3 We note that expenditures under section 1115(a)(2) of the Act are treated as expenditures under the State plan 
for other purposes as well (e.g., in calculating disproportionate state hospital (DSH) payments).  Page 10  State Medicaid Director 
 
3.  Premiums and Cost-Sharing 
 
States may propose under an HAO demonstration may propose to not be required to comply 
with restrictions on premiums and cost-sharing imposed under sections 1916 and 1916A of 
the Act and 42 CFR 447.50  447.56.  Instead, states will have broad flexibility to propose 
alternative premiums and cost sharing structures.  We would expect states to adhere to two 
overarching limitations: 
1.  Aggregate out-of-pocket costs incurred by beneficiaries covered under the 
demonstration would not exceed 5 percent of the beneficiarys household income, 
measured on a monthly or quarterly basis.   
2.  Premiums and cost-sharing charges for tribal beneficiaries as well as individuals 
needing treatment for substance use disorder and individuals living with HIV, as 
well as cost-sharing charges for prescription drugs needed to treat mental health 
conditions, would not exceed amounts permitted under the statute and implementing 
regulations.  States similarly would not be permitted to suspend enrollment for such 
individuals for failure to pay premiums or cost-sharing, even if authorized for other 
individuals under the demonstration. 
CMS does not expect other restrictions on premiums and cost-sharing that are imposed under 
the statute and regulations to be needed for HAO demonstrations.  For example, we expect 
that, if consistent with promoting the objectives of the Medicaid program, states could charge 
premiums and cost-sharing above the maximum levels set forth in the regulations, impose 
higher cost-sharing charges on non-emergency services provided in a hospital emergency 
department, and suspend individuals who fail to pay a required premium after a grace period 
as long as the aggregate out-of-pocket costs incurred by beneficiaries does not exceed the 5 
percent limit.  
States would be expected to calculate the 5 percent limit on a monthly or quarterly basis and 
would be expected to explain how they would ensure that beneficiaries do not incur cost-
sharing that exceeds the 5 percent limit.  States would be expected to count toward the 5 
percent aggregate cap premiums and cost-sharing incurred by a spouse, children and other 
members of the beneficiarys household, as defined in 42 CFR 435.603(f), in determining the 
aggregate of total premiums and cost-sharing for purposes of the 5 percent limit. 
 
States will be expected to provide the beneficiary and public notice of premiums, cost-sharing 
and similar charges under the demonstration, consistent with the notice requirements 
described in 42 CFR 447.57, without regard to whether or not the state is required to provide 
notice to, or obtain CMS approval of, such charges.   
 
4.  Delivery Systems, Payment Models and Managed Care 
 
Delivery System Reform and Payment Models   
CMS encourages states applying for this demonstration to implement payment and delivery 
system reforms to improve the effectiveness of coverage, improve health outcomes and reduce 
the cost of health care.  States generally will have broad flexibility in the type of delivery 
system(s) and payment models adopted for an HAO demonstration.  In general, states will be  Page 11  State Medicaid Director 
able to use any combination of fee-for-service and managed care delivery systems and will 
have flexibility to alter these arrangements over the course of the demonstration, as long as 
the states design supports the demonstration hypothesis and is determined to advance the 
objectives of the Medicaid program.  States are encouraged to propose innovative plan 
designs consistent with the expectations set forth in this guidance and will be able to leverage 
employer sponsored insurance, the individual health insurance market or align with a 
coverage program designed under an applicable complementary section 1332 waiver.   
States are encouraged to address state laws that inhibit choice and competition in their health 
care system  such as certificate of need laws and laws limiting providers scope of practice or 
imposing unnecessarily restrictive supervisory requirements  which undermine efforts to 
generate greater efficiencies in the delivery of quality care.  The Departments of Health and 
Human Services, Labor, and the Treasury issued a report, Reforming Americas Healthcare 
System through Choice and Competition,4 in December 2018 that describes the influence of 
state and federal laws, regulations, guidance, and polices on choice and competition in health 
care workforce, provider, and insurance markets and identifies actions that states or the 
federal government could take to develop a better functioning health care system.  As part of 
their implementation plan, states with demonstrations approved under this guidance will be 
expected to review the recommendations in this report and assess their current competitive 
landscape to determine whether anti-competitive barriers in the state have impeded access or 
increased Medicaid costs, and develop a plan to address the identified barriers.  We will 
prioritize applications that demonstrate that the state has taken or is taking steps to address 
state barriers to competition.  We also will consider proposals that drive greater efficiency and 
improved outcomes from other providers, such as rural health clinics, which are entitled to 
higher reimbursement rates under the Act, in order to achieve increased state flexibility and 
improved outcomes.  As part of the demonstration application, states will need to explain the 
payment or delivery system reforms they will apply to achieve the desired outcome.  Delivery 
system reforms that have significant financial implications will still need to go through the 
formal amendment process. 
In order to promote alignment with Medicare and commercial payers, CMS encourages states 
to consider implementing models similar to those developed by CMS Center for Medicare & 
Medicaid Innovation (CMMI) into their HAO demonstration and to explain in their 
application the models chosen.  States should review payment and delivery system models 
that have been tested by CMMI and show promising results, and consider how to use those 
strategies as part of their HAO demonstration to improve quality and control costs.  This does 
not necessarily require that states apply for and be participants in CMMI models (although 
CMS encourages states to do so), but could take the form of state-developed models that are 
aligned with CMMI payment and delivery system strategies.  To promote further alignment, 
measures of quality and cost used in the CMMI models should also be integrated into the 
states quality strategy.  CMS will provide technical assistance to states regarding selection of 
models and applicability to their HAO demonstration.  
4 https://www.hhs.gov/sites/default/files/Reforming-Americas-Healthcare-System-Through-Choice-and-
Competition.pdf  Page 12  State Medicaid Director 
 
Managed Care  
Under the HAO initiative, states will not need separate state plan or Medicaid waiver 
authorities to operate the delivery system for populations covered under the demonstration.  
States utilizing a managed care delivery system to serve populations under an HAO 
demonstration generally will be expected to meet specified managed care statutory 
requirements under sections 1903(m) and 1932 of the Act that provide beneficiary protections, 
facilitate beneficiary decision making, support access to services, monitor program 
administration, ensure efficient use of funds, and measure the quality of the delivery system.  
However, states may be given flexibility to propose alternative approaches in the application 
template to meet the statutory provisions that differ from those set forth in 42 CFR part 438.   
   
For example, while states will be expected to meet the statutory requirements that managed 
care rates be actuarially sound and the regulatory requirements pertaining to the development 
of capitation rates, states will have the opportunity under an HAO demonstration to 
demonstrate actuarial soundness without requiring prospective CMS review ordinarily 
required under 42 CFR 438.7(a).  Alternative approaches to ensuring actuarially sound rates 
are explained in section D.1 of this guidance on Oversight.  Similarly, states will be expected 
to certify that their managed care plans have the capacity to meet the states standards for 
access to care and availability of services.  However, states will have the opportunity under 
this demonstration to adopt alternative approaches to network adequacy, access to care, and 
availability of services to those required under 42 CFR 438.68.  Potential alternatives are 
explained below in section B.5 of this guidance, relating to Access to Care and Availability of 
Services.  Regardless of the approach elected, all states implementing an HAO demonstration 
will be required to submit routine data reports as described in the discussion of Monitoring 
and Evaluation in section D.3 of this guidance. 
 
States seeking to implement other, alternative approaches to meeting the statutory 
requirements for managed care in addition to the areas of access to care and rate certification 
that are not consistent with the regulations in 42 CFR part 438 will need to include the 
alternative approach(es) in their demonstration application, including establishing alternative 
standards subject to CMS approval and providing reasonable evidence that the alternative 
approach meets the statutory requirements of 42 CFR 438.  Absent inclusion of an alternative 
approach in the approved STCs, the regulatory provisions in 42 CFR part 438 will be applied 
to HAO demonstrations. 
 
Managed Care Contract Review   
States seeking to implement managed care in a manner that differs from the statutory and 
regulatory requirements also may propose to exercise additional flexibilities in the 
administration of their managed care plan contracts, particularly for contract amendments, 
during the demonstration period for an HAO demonstration.  A state would be expected to 
submit its initial managed care contracts to CMS for review and approval, and to submit 
subsequent amendments to CMS.  However, we do not anticipate requiring approval of 
contract amendments prior to their execution.  Any amendments would be expected to be 
consistent with the terms of the HAO demonstration, as well as statutory and regulatory 
requirements that otherwise would apply to Medicaid coverage.  CMS will monitor managed 
care contract amendments to ensure compliance with the terms of the demonstration and legal 
requirements.  If the monitoring finds that a states managed care contracts are not consistent  Page 13  State Medicaid Director 
 
with the terms of the demonstration, CMS would work with the state to bring it into 
compliance before initiating corrective action, which could include deferral or disallowance of 
costs, or termination of the demonstration.  For states that would prefer the certainty that 
comes with approval, CMS also would allow states to seek formal approval for contract 
changes. 
 
Consistent with current requirements, states would be expected to incorporate the potential 
impact of substantive contract amendments into the capitation rates paid to managed care 
plans.  Additional information on state responsibilities related to contract amendments that 
modify managed care capitation rates are explained in the section D of this guidance. 
 
State Directed Payments   
States also will have the opportunity to direct managed care plans expenditures, consistent 
with the requirements of 42 CFR 438.6(c).  However, unlike the current process, which 
requires CMSs prior approval, under an HAO demonstration, CMS intends to assess 
compliance with the regulatory requirements through ongoing monitoring.  States will be 
expected to have clear documentation that any direction of managed care plans expenditures 
is based only on delivery and utilization of services to Medicaid beneficiaries covered under 
the contract or outcomes and quality of the delivered services during the rating period 
associated with the directed payment.  If CMS were to find that states payments are not 
compliant with the state direct payment requirements (i.e., 42 CFR 438.6(c)), CMS may take 
corrective action, which could include deferral or disallowance of costs or termination of the 
demonstration, consistent with the STCs.  If a state intends to make pass-through payments or 
supplemental payments to providers, rather than using state directed payments, the 
supplemental payments would need to be explicitly authorized in the states HAO 
demonstration and paid to providers outside of the managed care capitation rates.   
 
5.  Access to Care and Availability of Services 
 
States will need to ensure, and will be expected to regularly report, that services covered 
under an HAO are available and accessible to beneficiaries in a timely manner.  States will 
have several options, depending on whether services are furnished under the demonstration in 
a fee-for-service, managed care, or alternative delivery system. 
 
1.  Fee-for-Service.  We will primarily consider two approaches to ensuring access to care 
through fee-for-service in HAO demonstration applications: 1) Comply with section 
1902(a)(23) of the Act and implementing regulations at 42 CFR 431.51, which allow a 
beneficiary to obtain services from any qualified institution, agency, community 
pharmacy, or person who undertakes to provide such services; or 2) restrict a 
beneficiary (except in emergency circumstances) to obtaining services from any 
provider or practitioner who provides services in compliance with the states written 
standards for reimbursement, quality, and utilization of covered services, provided that 
the states standards are consistent with accessible, high-quality delivery, and efficient 
and economic provision of covered services.  
 
CMS, in collaboration with the Health Resources and Services Administration (HRSA), 
will work with states electing option 2 above to identify appropriate metrics for  Page 14  State Medicaid Director 
 
measuring any impact on FQHCs.  Data for these metrics would be included in the 
quarterly and annual monitoring reports discussed in section D.3 of this guidance.  If the 
data reported indicates a negative impact on the capacity of FQHCs in the state to serve 
Medicaid beneficiaries and other uninsured or underinsured patients, CMS will engage 
with the state to determine the cause of the decline and determine whether corrective 
action, which may include coverage of FQHC services consistent with Medicaid state 
plan coverage requirements and reimbursement rules, may be necessary.  Further, in 
order to ensure continuity of care for high need populations, including but not limited to 
individuals with HIV, opioid use disorder and mental health, the state would need to 
develop a plan to prevent disruptions in treatment for these individuals as a result of any 
changes in network participation that occurs from implementation of a VBP strategy.  
 
2.  Managed Care.  We will primarily consider two approaches to ensuring access to care 
through managed care delivery systems in HAO demonstration application: 1) 
Document compliance with regulatory access requirements in 42 CFR part 438, in 
which states must establish quantitative standards to ensure that managed care plans 
provider networks have adequate capacity to serve beneficiaries; or 2) instead of 
complying with the provider-specific network adequacy standards in 42 CFR 438.68(b), 
establish alternative standards subject to CMS approval and provide reasonable 
evidence of enrollee access to care and satisfaction.  For example, 42 CFR 438.206(a) 
requires that states ensure that managed care plans provider networks for services 
covered under the contract meet the standards developed by the state in accordance with 
42 CFR 438.68.  Likewise, 42 CFR 438.207(a) requires managed care plans to provide 
supporting documentation that the managed care plans have the capacity to serve the 
expected enrollment in accordance with the states standards, including the standards at 
42 CFR 438.68.  Under an HAO demonstration, we would consider modifications to 
these standards to require the state and managed care plans to demonstrate, for example, 
direct measures of access are meeting the state-established standards.  Under both 
options to measure and monitor access, corrective action would be required if 
satisfactory access is not confirmed.  
 
3.  Alternative Approach.  Through the flexibility offered under this demonstration, states 
may also propose an alternative approach to their delivery system that leverages the 
private insurance market or coverage programs designed under an applicable 
complementary section 1332 waiver.  In this instance, states may propose alternative 
approaches to measuring and ensuring sufficient access to care, including any of the 
standards described above.  States seeking to implement an alternative approach will 
need to provide advance notice of the approach to the public for comment as well as to 
CMS, consistent with the transparency requirements described in 42 CFR part 431, 
subpart G and, where applicable, the states tribal consultation.   
 
States participating in the HAO initiative will be held accountable for the accessibility of 
services to beneficiaries served under an HAO demonstration, and states will be expected to 
timely report on various measures designed to ensure beneficiaries have meaningful access to 
services, including (1) mandatory reporting on certain of the Adult Quality Core Set measures 
of access to primary and preventive care; (2) quarterly reporting of continuous performance  
indicators selected by CMS (including indicators relating to access); and (3) providing  Page 15  State Medicaid Director 
 
evidence demonstrating beneficiarys health care experiences, including timely access and 
barriers to care.  These reporting requirements are discussed more fully below.   
 
6.  Fair Hearing Rights 
 
As part of an HAO demonstration, states will have the opportunity to not implement fair 
hearing processes as required under section 1902(a)(3) of the Act and are encouraged to 
improve upon those processes.  Certain of the regulatory requirements governing the 
Medicaid fair hearing processes, however, which are constitutionally protected, necessarily 
would apply to any fair hearing process afforded to individuals applying for or receiving 
coverage in an HAO demonstration.  These requirements include, but are not limited to, such 
basic elements as the right to advance notice of a termination or other adverse action; clearly 
explaining the reason for the action; a timely fair hearing before an impartial arbiter; the 
opportunity to be represented by counsel at the hearing and to present evidence, including the 
right to call witnesses; the right to know opposing evidence and cross examine witnesses; and 
a requirement that the tribunal hearing the case prepare a record of the evidence presented, 
make a decision based solely upon the evidence presented at the hearing, and produce written 
findings of fact and reasons for its decision.  Other requirements rooted in laws other than the 
Medicaid statute, such as accessibility requirements for individuals living with disabilities or 
individuals with limited English proficiency, also would apply to an HAO demonstration 
under section 1115(a)(2) authority.   
 
7.  Other Flexibilities   
 
CMS has prepackaged into the HAO initiative a suite of flexibilities that we expect 
generally could be made available through its use of section 1115(a)(2) authority.  A list 
of provisions that we expect states would have the flexibility not to apply under an HAO 
demonstration is provided in Appendix A.  The statutory requirements that we expect will 
apply to any demonstration under the HAO initiative also are listed in Appendix A.  
States may request additional flexibilities not addressed in Appendix A in their 
application, though such requests may delay approval of a states application for an HAO 
demonstration.   
 
Beneficiary protections afforded under other applicable federal statutes also will apply to 
HAO demonstrations, including those under title VI of the Civil Rights Act of 1964, section 
504 of the Rehabilitation Act of 1973, the Americans with Disabilities Act of 1990, the Age 
Discrimination Act of 1975, and section 1557 of the PPACA.  
 
8.  Tribal Protections 
 
Under this demonstration initiative, CMS expects that states will provide key protections 
afforded to tribal and IHS-eligible beneficiaries, IHS providers, and certain other Indian health 
providers under title XIX of the Act.  Protections that CMS expects states will make 
applicable under an HAO demonstration, as a condition of approval, include the protections 
related to premiums and cost sharing under sections 1916(j), 1916A(b)(3)(A)(vii), and 
1916A(b)(3)(B)(x) of the Act, as implemented at 42 CFR 447.56(a)(1)(x) and 447.56(c)(2); 
and the protections related to managed care under section 1932(h) of the Act, as implemented  Page 16  State Medicaid Director 
 
at 42 CFR 438.14.  Under an HAO demonstration, CMS will expect states to apply these 
protections even when other provisions of sections 1916 or 1916A would not otherwise apply 
to premiums or cost-sharing imposed under the demonstration, or when states implement 
Medicaid managed care under the HAO demonstration, rather than under section 1932.   
 
The 100 percent FMAP under section 1905(b) of the Act for services received through an 
IHS facility (including an IHS facility operated by an Indian tribe or tribal organization) will 
be available under an HAO demonstration just as it is available in the absence of an HAO 
demonstration.  CMS will determine whether a service available under an HAO demonstration 
is received through an IHS facility (including those operated by tribes and tribal 
organizations) for purposes of section 1905(b) in a manner consistent with the CMS 
interpretation of the statute described in the February 26, 2016 State Health Official Letter 
(SHO Letter #16-002).  Further, as discussed in section C.3 of this guidance, expenditures for 
services received through an IHS facility will be excluded from data used to set the base 
period cap. 
 
CMS takes seriously concerns expressed by tribal leaders about how implementation of 
section 1115 demonstrations may affect tribal beneficiaries.  Consistent with 42 CFR 
431.408(b) and the CMS Tribal Consultation Policy, states developing HAO demonstration 
applications will be expected to hold meaningful consultation on a government-to-government 
basis with federally recognized tribes located in their state, in order to develop the details of 
how an HAO demonstration would be implemented and apply to tribal beneficiaries.  In 
particular, under 42 CFR 431.408(b), states with federally recognized Indian tribes, Indian 
health programs, and/or urban Indian health organizations must consult with tribes and solicit 
advice from Indian health programs and urban Indian health organizations in the state, prior to 
submitting a demonstration application to CMS, if the demonstration would have a direct 
effect on Indians, tribes, Indian health programs, or urban Indian health organizations.   
 
C. Financing and Shared Savings  
 
1.  Budget Neutrality 
 
CMS requires that section 1115 demonstrations be budget neutral, which means that the 
proposed demonstration cannot cost the federal government more than federal Medicaid costs 
would be in the state, absent the demonstration.5  The HAO initiative described in this 
guidance is aimed at giving states broad flexibility to design and operate demonstrations that 
improve access to high quality services, while holding states accountable for managing their 
programs in a cost-effective manner, and each state demonstration approved under the HAO 
initiative will operate under a budget neutrality agreement that will limit FFP under section 
1115(a)(2) of the Act on an annual basis over the life of the demonstration.  These amounts 
will be determined prior to approval of the demonstration.  States with demonstrations 
approved utilizing an annual aggregate or per capita cap approach will manage their programs 
under these caps and assume risk for costs exceeding the annual cap.  Total computable 
expenditures in excess of the annual cap will not be eligible for FFP (except in limited 
                                                 
5 See August 22, 2018 CMS letter to State Medicaid Director (SMD # 18-009), RE: Budget Neutrality Policies for 
Section 1115(a) Medicaid Demonstration Projects,https://www.medicaid.gov/federal-policy-
guidance/downloads/smd18009.pdf.   Page 17  State Medicaid Director 
 
circumstances specified below relating to annual savings offsets).  Aggregate cap states 
that efficiently manage their programs within their annual aggregate cap may be eligible 
to utilize a portion of available savings for reinvestment in their Medicaid programs, 
limited to ensure overall federal savings under the demonstration.    
 
2.  Setting the Annual Budget Neutrality Cap  
 
Each participating state will elect to operate its demonstration under either an annual 
aggregate cap or a per capita cap.  CMS will calculate the annual aggregate or per capita cap, 
which will limit the amount of total computable expenditures eligible for FFP under the 
demonstration.  To set the annual aggregate or per capita cap, CMS will use the most recently 
available eight consecutive quarters of expenditure data to determine a base year amount.  
CMS will trend the annualized base amount forward to each demonstration year, consistent 
with the guidelines for trend rates outlined in the Trend Rate Calculation section of this 
guidance.  The CMS Office of the Actuary will participate in the development of the initial 
baseline and any subsequent adjustments. 
 
Aggregate Cap 
For a state electing the aggregate cap option, an annual aggregate cap will be calculated based 
on the total computable amount of prior year expenditures attributable to populations and 
services included in the states demonstration, subject to the expenditure exclusions described 
below.  CMS will trend this amount forward to the demonstration year annually without 
regard to changes in Medicaid enrollment.  Total computable expenditures in excess of the 
annual cap will not be eligible for FFP (except in limited circumstances specified below 
relating to annual savings offsets).  If a state claims FFP for unallowable excess 
expenditures, such claims are subject to deferral in accordance with 42 CFR part 430.40 
and/or disallowance in accordance with 42 CFR part 430.42.  If a states total computable 
demonstration expenditures are less than the annual aggregate cap, the state may be eligible to 
qualify for shared savings reinvestment opportunities described below.  As an alternative to 
shared savings, the amount by which total computable demonstration expenditures are less 
than the annual aggregate cap for a demonstration year (annual savings) can be used to offset 
any expenditure amounts that exceed its aggregate cap for the subsequent three demonstration 
years.  Please note that the sum of 1) savings used to generate shared savings reinvestment 
expenditures and 2) savings used to offset future excess expenditures cannot exceed the total 
annual savings for a particular demonstration year. 
     
To ensure program investment, adequate provider rates, and an accurate annual cap amount, 
aggregate cap states must spend (combined federal and state share) a minimum of 80% of 
their aggregate cap annually or they will have their aggregate cap reduced for subsequent 
demonstration years.  If a states total computable expenditures for any demonstration year are 
below this 80% maintenance of effort (MOE), future aggregate cap amounts will be reduced 
by the dollar amount state expenditures are below the MOE.  For example, a state with a total 
computable aggregate cap of $50,000,000 for a demonstration year has a $40,000,000 MOE 
for that same demonstration year (80% of $50,000,000).  If the state only reports $35,000,000 
total computable expenditures for that demonstration year, the states aggregate cap will be 
reduced by $5,000,000 for future demonstration years.    
  Page 18  State Medicaid Director 
 
Aggregate Cap Calculation - Illustrative Example 
 
  Base Year      Demo Year 1   Demo Year 2  
FY 17  FY 18  FY 19  FY 20 
Total Computable         
Adult Group  $50,000,000  N/A  $51,500,000  $55,000,000 
Expenditures 
       
Trend Factor  N/A  2.0%  2.0%  2.5% 
       
Aggregate Cap  N/A  $51,000,000  $52,020,000  $53,320,500 
       
Amount 
N/A  N/A  $520,000i  ($1,670,500)ii 
(Over)/Under Cap 
 State demo expenditures are below annual aggregate cap.  FFP is available for all approved demonstration expenditures.  
Additionally, the state can choose either or a combination of 1) utilizing the annual savings to offset expenditure amounts that 
i exceed the cap over the next three demonstration years, and/or, 2) subject to the state qualifying, utilizing the applicable 
percentage of the $520,000 annual savings (which consists of both state funds and FFP) for the Shared Savings Reinvestment 
opportunity described below. 
 State demo expenditures for Demo Year 2 exceeded the aggregate cap.  FFP is not available for $1,670,500 in state demo 
expenditures.  However, if the state chooses not to use its shared savings reinvestment opportunity in Demo Year 1, it can utilize 
iiits $520,000 annual savings from Demo Year 1 to offset the $1,670,500 in excess expenditures in Demo Year 2.  If the state 
chooses to do so, FFP will not be available for $1,150,500 in Demo Year 2 expenditures ($1,670,500 minus $520,000).      
 
Reinvestment of Shared Savings (only applicable to aggregate cap demonstrations)  
 
When annual state expenditures remain below the annual aggregate or per capita cap, both the 
state and federal government achieve savings by spending less on Medicaid expenditures than 
projected.  In addition to this savings, recognizing the added risk states will assume under an 
aggregate cap model, states that efficiently manage their programs within the annual 
aggregate cap may also qualify to receive between 25 and 50 percent of the federal savings in 
the form of FFP for specified Medicaid reinvestment expenditures (discussed further below), 
as approved by CMS.  To qualify for this opportunity, states must spend less than the annual 
aggregate cap and meet the reporting and quality performance criteria discussed below.  Note 
that states are not eligible for shared savings in the final year of a demonstration.  However, if 
CMS approves a demonstration renewal, shared savings achieved in the last year of the ending 
demonstration can be carried forward to the first renewed demonstration year.   
  
Qualifying for Shared Savings.  To be eligible to receive shared savings, states participating in 
an HAO demonstration will be expected to establish baseline measurements of access and 
quality of care performance and fulfill two performance criteria: 
 
1.  Performance maintenance:  Demonstrate that access to and quality of care for the 
beneficiaries enrolled in the demonstration remains at or above the level established 
in the base year, based on the reported measures and consumer access survey 
conducted by the state; and,   
2.  Performance improvement:  Achieve certain performance benchmarks on the set of  Page 19  State Medicaid Director 
 
mandatory quality and access to care measures that represent key domains from the 
CMS Adult Core Set of quality measures, as described below and in Appendix D.    
 
States that meet the performance maintenance criterion may be eligible for 25 percent of the 
federal savings.  States may be eligible for up to an additional 25 percent of the federal 
savings depending on the extent to which they meet the performance improvement criterion.  
 
To qualify for the share of savings based on performance improvement, states must meet the 
performance maintenance criterion and either perform at the 75th percentile or improve by 
three percent over the states prior year performance on a portion of those measures.  
Performance benchmarks will be set nationally across all states reporting selected Core Set 
measures. 
 
States that demonstrate performance attainment at the 75th percentile or a three percent 
improvement on thirteen or more of the required measures will be eligible for an additional 
25 percent of shared savings (for a total of 50 percent shared savings).  States that are able to 
demonstrate performance attainment at the 75th percentile or a three percent improvement on 
seven to twelve of the required measures will be eligible for an additional 12.5 percent of 
shared savings (for a total of 37.5 percent shared savings).  A listing of the annual quality 
and access reporting requirements is located in Appendix D. 
 
Portion of Federal Savings Available to State 
  
Federal Savings 
Criteria  Potentially 
Available to State 
1.  Maintain performance (No decline in access to or 
25 percent 
quality of care) 
2.  Maintain performance and, with respect to 7-12 of 
the 25 required measures, demonstrate either 
37.5 percent 
 3% improvement; or 
 Performance at 75th percentile 
3.  Maintain performance and, with respect to 13 or 
more of the 25 required measures, demonstrate either 
50 percent 
 3% improvement; or 
 Performance at 75th percentile 
 
 
Unless the state has complete baseline information for purposes of performance measurement 
and performance-based incentive payments for the demonstration population at the time its 
HAO demonstration is approved, it is important to note that the base year for this purpose 
could be 1-2 years after implementation of the demonstration.  One year would be needed to 
collect baseline data, and additional time would be required to assess that baseline data against 
future year data to determine whether the state would qualify for shared savings.  
  Page 20  State Medicaid Director 
 
Use of Shared Savings.  After CMS determines that a state has qualified for shared savings 
under the demonstration, we anticipate exercising expenditure authority for reinvestment 
during the states next demonstration year in programs which could include matching state 
expenditures up to a percentage for existing state-funded health programs that have not 
previously qualified for federal funding (limited to 30% of the total amount eligible for shared 
savings reinvestment) or for new health-related initiatives targeting the demonstration 
population or other Medicaid beneficiaries that would not otherwise be eligible for matching 
funds under the state plan or another demonstration.6  Examples of initiatives that could be 
funded with matching funds through shared savings include providing Medicaid services for 
populations not currently covered by the states state plan or another demonstration, such as 
supported work or service coordination; paying for services not included in the state plan or 
another demonstration for Medicaid beneficiaries, such as pre-vocational services; initiatives 
designed to improve the quality of and access to care provided to Medicaid beneficiaries; and 
allowable benefits and services designed to address certain social determinants of health.  For 
programs or initiatives funded through shared savings to be eligible, CMS will need to 
determine that they will be likely to promote the objectives of the Medicaid program.  For 
examples of initiatives that may be considered to promote the objectives of the Medicaid 
program, see https://www.medicaid.gov/medicaid/section-1115-demo/about-1115/index.html.  
Any shared savings for which a state may be eligible based on its performance in a particular 
demonstration year would be expected to be available to states for the next three years only, 
including into a new demonstration period if the three-year period extends into a new 
demonstration period and CMS has approved a demonstration renewal.  Shared savings 
should not be used to supplant or duplicate other federal funding. 
 
In some cases, states may seek to use a portion of the shared savings expenditure authority to 
invest in existing state-funded programs.  For example, the state may be operating state-
funded tobacco cessation program that supports many Medicaid beneficiaries.  Earning federal 
share for investing in this program would free existing state resources that states could choose 
to reinvest in expanded services or benefits for other Medicaid enrollees, including mandatory 
state plan populations not covered under this demonstration. 
 
Below is an illustrative example of the shared savings reinvestment calculation.  The example 
assumes that the state has elected to operate its HAO demonstration under an aggregate cap, 
which is calculated at $60 million for the year; the states actual total computable 
expenditures for the year are $50 million; and the states regular FMAP is 60 percent.  The 
example also assumes that the state is eligible for the increased 90 percent FMAP for newly-
eligible individuals (which begins in calendar year 2020) and that the states performance (in 
accordance with the criteria described above) results in 50 percent of the federal share of 
savings being available to the state for additional expenditures. 
 
 
 
 
                                                 
6 CMS has previously announced that it would no longer accept demonstration proposals that rely on federal 
matching funds for designated state health programs due to concerns that the policy could result in increased federal 
expenditures. This policy remains in effect outside of this demonstration opportunity, in which a state has generated 
both federal and state savings through participation in the HAO initiative.  Page 21  State Medicaid Director 
 
Shared Savings Reinvestment Calculation  Illustrative Example (60% FMAP State) 
 
  Total     
Computable  State Share  Federal Share  
Expenditures  
Demonstration Expenditures for       
Newly Eligible Adults (90%  $50,000,000  $5,000,000  $45,000,000 
FMAP) 
       
Aggregate Cap  $60,000,000  N/A  N/A 
Savings Achieved Relative to       
Aggregate Cap  $10,000,000  $1,000,000  $9,000,000 
       
Shared Savings Percentage  N/A  N/A  50% 
Additional Amount Eligible for       
Shared Savings Reinvestment  $7,500,000  $3,000,000ii  $4,500,000  
(60% FMAP)i 
iii
  Shared Savings Reinvestment expenditures are matched at existing matching rates applicable to the specific expenditures.  For 
purposes of this example, CMS assumes the Shared Savings Reinvestment Expenditures are matched with a 60% FMAP.   
i   States that are eligible for Shared Savings Reinvestment expenditures remain required to fund the non-federal share of those 
expenditures.  Note:  Subject to the 30% limit described above, any amount the state was already spending prior to the 
iidemonstration on existing state-funded health programs that are approved as Shared Savings Reinvestment expenditures would 
represent a continuing state investment of funds, not a new state investment.        
  For a state to access the full $4,500,000 federal share available for Shared Savings Reinvestment Expenditures, it must 
expend $7,500,000 (total computable) on existing state-funded health programs or new health-related initiatives at 60% FMAP, 
iiias approved by CMS.  The state is still required to fund the non-federal share of the expenditures and states should use existing 
processes to claim FFP for the expenditures on the Form CMS-64. Any unused shared savings authority available for a 
particular demonstration year is available to states for the next three years only, including into a new demonstration period if the 
three-year period extends into a new demonstration period and CMS has approved a renewal.   
 
In this example, the state has generated $10 million of total savings ($60 million aggregate 
cap minus $50 million in demonstration expenditures), reflecting $9 million in savings for the 
federal government and $1 million for the state.  The federal share of the savings achieved ($9 
million) is available to the state in federal matching expenditures for the next three years for 
reinvestment, as specified above.  Fifty percent of $9 million equals $4.5 million.  Thus, in 
this example, the state may be eligible for up to an additional $4.5 million in federal matching 
funds for a demonstration determined by CMS to be likely to promote the objectives of the 
Medicaid program.  To draw down all of the $4.5 million available to it at 60% FMAP, the 
state would need to spend $3 million in state funds, yielding a total of $7.5 million total 
computable funds for the additional services provided by the state through the shared savings 
component of the demonstration.   
 
Per Capita Cap 
Under the per capita option, CMS will determine a per capita base amount for each eligibility 
group included in the demonstration by dividing the total amount of prior year expenditures 
for each group by the actual number of enrolled individuals for that group for the period.   Page 22  State Medicaid Director 
 
CMS will trend each base amount forward to the demonstration year, multiply each trended 
base amount by the number of respective enrollees for the applicable demonstration year, and 
then sum these amounts to create an overall per capita cap.  Total computable expenditures in 
excess of the annual overall per capita cap based on actual enrollment will not be eligible 
for FFP.   
 
Per Capita Cap Calculation  Illustrative Example 
 
  Base Year     Demo Year 1  Demo Year 2 
FY 17  FY 18  FY 19  FY 20 
Total Computable         
Adult Group  $50,000,000  N/A  $51,500,000  $55,000,000 
Expenditures 
       
 
N/A  2.0%  2.0%  2.5% 
Trend Factor 
       
Adult Group  10,000  N/A  10,200  11,000 
Enrollment 
       
Per Capita 
$5,000  $5,100  $5,202  $5,332.05 
Amount 
       
Per Capita Cap  N/A  N/A  $53,060,400  $58,652,550 
       
Amount 
N/A  N/A  $1,560,400  $3,652,550 
(Over)/Under Cap 
  
 
3.  Calculating Base Period Amounts and Data Requirements 
 
Overview 
Calculating accurate base period expenditure amounts is crucial for ensuring the financial 
integrity of the initiative for states and CMS.  States report Medicaid expenditures to CMS 
quarterly through the Form CMS-64, which will serve as the basis for calculating base period 
expenditures for aggregate or per capita caps.  To ensure an appropriate cap for the base year 
of an HAO demonstration, states seeking approval of an HAO demonstration will need to 
demonstrate that their eligibility, enrollment and claims systems and processes yielded 
accurate data upon which the base year amount for their funding under either an aggregate or 
per capita cap model is determined.  If a state cannot make such demonstration, CMS will 
work with the state to identify and correct any deficiencies so that reliable data can be 
generated.  In the event that problems with the integrity of the data used for the base period 
expenditures are identified after the base amount for a states aggregate cap or per capita cap 
is calculated, CMS will work with the state to make appropriate adjustments to the base 
amount.   
  Page 23  State Medicaid Director 
 
Determining Base Period Expenditures 
Except for newly covered populations as described in the next section, CMS will calculate an 
annual base amount by annualizing the most recently available eight consecutive quarters after 
December 31, 2016, of finalized CMS-64 expenditure data.  CMS will review and validate 
this data to ensure the accuracy of reporting and that such reported expenditures are 
representative of expenditures attributable to the base period.  If necessary, CMS will adjust 
base period amounts to ensure accuracy and fiscal integrity.        
 
Data Availability 
Currently, the Form CMS-64 collects expenditure information by eligibility category only for 
the adult group.  In instances when CMS does not have CMS-64 expenditure data necessary to 
determine base period expenditures by eligibility group for groups that were previously 
covered and that will be covered under an HAO demonstration, states must provide at least 
two years of auditable expenditure data for the relevant population and services that ties 
directly to expenditures reported on the Form CMS-64.  The state must obtain an external 
independent audit to validate the expenditure data and demonstrate how the data ties directly 
to the states expenditures reported on the CMS-64 for the base period.   
 
Newly Covered Populations 
For newly covered populations for which there is insufficient historical claims experience, 
CMS will determine a base amount by estimating annual expenditures relying on 1) the 
national average of Medicaid expenditures for the population and services, 2) geographic 
specific factors, and 3) other information necessary to ensure the accuracy of the estimate.  
CMS will consider commonly-used adjustments for new populations, including pent-up 
demand, acuity or health status, and adverse selection.  CMS may also consider data provided 
by the state relating to the newly covered population.  After two years of state expenditures 
are available, CMS will re-base the estimate if actual state expenditures are 3 percent or more 
below or above the initial year cap amount, or if the medical loss ratio is outside required 
levels for states using managed care for the newly covered population (either too low or too 
high).  If the expenditures exceed the estimate by 3 percent or more, the state must also 
demonstrate to CMS that the excess expenditures were due to circumstances beyond the 
states control.     
 
States that elect the aggregate cap option for a newly covered population (one that the state did 
not provide coverage during some past period) must start their demonstrations with the per 
capita cap model for at least two years, and then may transition to the aggregate cap model 
once satisfactory base enrollment data is available to calculate an accurate aggregate cap.      
 
Excluded Expenditures 
The following will be excluded from data used to set the base period cap:  Medicaid 
Disproportionate Share Hospital (DSH) payments; state administrative expenditures; 
expenditures for public health emergencies; expenditures for services received through an 
IHS facility, whether operated by the IHS or by an Indian tribe or tribal organization, that can 
be federally matched at 100 percent under section 1905(b) of the Social Security Act; and 
certain supplemental and pool payments (as detailed below).    
 
  Page 24  State Medicaid Director 
 
Supplemental and Pool Payments 
As applicable, CMS will include standard fee-for-service supplemental payments and 
managed care pass-through payments in data used to set the base period cap by allocating 
these expenditures to the populations included in the demonstration.  The allocation will be 
based on the percentage of base payments, on a service-specific basis, made for these 
populations during the base period.  For example, if a state made $4 million in inpatient 
hospital supplemental payments or managed care pass-through payments during the base 
period for all Medicaid populations and $100 million in Medicaid inpatient hospital base 
payments, 50 percent of which was paid for a population to be covered under an HAO 
demonstration, then $2 million in inpatient hospital supplemental payments or managed care 
pass-through payments would be included as base period expenditures.   
 
CMS will exclude certain temporary supplemental payments made under section 1115 
authority from base period expenditures including, but not limited to: Designated State Health 
Program (DSHP) payments, Delivery System Reform Incentive Payments (DSRIP), and 
Uncompensated Care Cost (UCC) Payments.  Additionally, CMS intends to monitor existing 
and proposed section 1115 payments to ensure compliance with overall budget neutrality and 
the annual caps under an HAO demonstration.           
    
Applicability of Expenditures to a Base Period and Demonstration Year 
For purposes of calculating base period caps and complying with the applicable cap on an 
annual basis, expenditures will generally be applied to a particular demonstration/base year 
based on the date the payment is made, consistent with 45 CFR 95.13(b).   
 
Enrollment Changes and Annual Caps 
CMS will adjust the base amount or subsequent annual caps to adjust for state flexibilities that 
could significantly affect enrollment to ensure that states do not achieve savings from 
disenrolling individuals.   
 
Compliance with Annual Caps 
Total computable demonstration expenditures eligible for FFP will be limited to the aggregate 
or per capita cap on an annual basis (except in limited circumstances specified in the 
Aggregate Cap section above relating to annual savings offsets).  If a state claims FFP 
for unallowable excess expenditures, such claims are subject to deferral in accordance with 42 
CFR part 430.40 and/or disallowance in accordance with 42 CFR part 430.42.  
 
Improving the Accuracy and Fiscal Integrity of Annual Aggregate or Per Capita Caps 
To ensure accuracy of annual caps, ensure overall fiscal integrity, and preserve state 
flexibility, CMS may modify the financing requirements in section C of this guidance through 
future guidance as necessary.  
 
Special Circumstances Adjustment 
Recognizing the dynamic health care landscape in which state Medicaid programs are 
operating, CMS will provide states with the opportunity to propose updates to an approved 
HAO demonstration to account for any changes to projected expenditures or enrollment in the 
current demonstration year due to unforeseen circumstances out of the states control, such as 
a public health crisis or major economic event.  Under such circumstances, states will have the  Page 25  State Medicaid Director 
 
opportunity to submit new information and relevant data, describe the circumstances and 
proposed amendment, and renegotiate relevant STCs.  The data provided by the state will be 
validated by the CMS Office of the Actuary in consultation with other appropriate federal 
entities.   
 
Calculating Base Period Amounts for Demonstration Extensions 
If a state seeks to extend an approved HAO demonstration, providing a new demonstration 
period, CMS would follow the process explained above to re-calculate the base period 
expenditures needed to establish a new aggregate or per capita cap associated with the new 
demonstration period.  This would be consistent with the policy established for budget 
neutrality calculations for demonstration extensions set forth in the August 22, 2018, CMS 
letter to State Medicaid Director (SMD # 18-009), Re: Budget Neutrality Policies for Section 
1115(a) Medicaid Demonstration Projects,https://www.medicaid.gov/federal-policy-
guidance/downloads/smd18009.pdf.    
 
4.  Trend Rate Calculation  
 
For states implementing a per capita cap model, the per capita caps determined for the base 
year will be increased by a growth factor based on the lesser of the growth rate in the state 
over the prior five years and by the medical care component of the consumer price index for 
all urban consumers (CPI-M).  Because states opting to implement an aggregate cap model 
assume greater risk due to the uncertainty in enrollment, the annual aggregate cap determined 
for the base year will be increased by the lower of growth rate in the state over the prior five 
years and CPI-M plus one-half of a percentage point (CPI-M + .5%).   
 
5. Implications of Reaching or Exceeding the Annual Budget Neutrality Cap 
 
Regardless of the type of annual budget neutrality cap being utilized under an HAO 
demonstration, states will be expected to remain apprised of demonstration expenditures in 
relation to the cap on federal spending.  States will be expected to notify CMS as soon as 
possible if demonstration expenditures are expected to exceed the annual cap, so corrective 
actions can be initiated. CMS would offer technical assistance in these circumstances. 
 
D. Oversight 
 
The HAO initiative is intended to provide significant flexibility for states in designing and 
implementing demonstrations under an aggregate or per capita cap, and participating states 
projects will be subject to robust oversight.  States will be expected to demonstrate that their 
eligibility, enrollment and claims systems and processes yielded accurate data upon which the 
base year amount for their funding under either an aggregate or per capita cap model is 
determined, and states will be expected to participate in program integrity efforts that include a 
strong focus on assuring appropriate use of expenditures qualifying for an increased FMAP.  
States also would be expected to develop and provide a quality strategy program and report 
annually in accordance with CMS guidance. (See Appendix E for details on the key elements of 
a quality strategy and performance assessment.) In addition, states would be expected to report 
quarterly on metrics that comprise the continuous performance indicators, as well as quarterly 
and annually on other quality and performance metrics and qualitative information that align  Page 26  State Medicaid Director 
 
with the states implementation and monitoring plans to be approved by CMS after the 
demonstration is approved.  These oversight activities would be complementary and not 
duplicative.  Participating states will also be expected to design and conduct an interim and 
summative evaluation in accordance with guidance that CMS will provide.  States could be 
subject to a deferral of funding, as described in the STCs, if the state did not submit timely and 
complete deliverables, such as monitoring data and evaluation reports, or failed to make 
adequate progress on information technology (IT) systems and data development and submission 
important to the states demonstration implementation and CMS oversight. 
 
1.  Program Integrity 
 
CMS has an important responsibility to ensure that states continue to make accurate Medicaid 
eligibility determinations and that states receive appropriate federal funds for Medicaid 
expenditures, including for populations covered under HAO demonstrations.  CMS places a 
particular emphasis on this responsibility for populations whose expenditures qualify for an 
increased FMAP.  The Government Accountability Office (GAO) and the HHS Office of 
Inspector General (OIG) have conducted several studies or audits of expenditures for 
individuals enrolled in the adult group.7  CMS has examined these and other audit findings 
and recommendations and issued guidance explaining the measures states need to take in 
order to ensure the integrity of state eligibility, enrollment and claims processes.  Consistent 
with the CMCS Informational Bulletin, Oversight of State Medicaid Claiming and Program 
Integrity Expectations, published on June 20, 2019,8 we will expect states seeking approval of 
an HAO demonstration to provide documentation demonstrating compliance with program 
integrity provisions in 42 CFR part 455 and systems capacity to make accurate and timely 
determinations of eligibility and renewals, and to accurately categorize individuals as newly 
eligible or not newly eligible so that claims for FFP are paid at the statutorily authorized 
matching rate.  We expect that the documentation provided will reflect the states 
comprehensive test plans, including an end-to end-testing strategy, demonstrating such 
operational capacity and up-to-date training materials, policies and procedures for the agency 
workforce. 
 
Eligibility Reviews 
CMS has multiple tools to oversee the accuracy of Medicaid and CHIP eligibility 
determinations, including through the Payment Error Rate Measurement (PERM) and the 
Medicaid Eligibility Quality Control (MEQC) programs, which play a critical role in ensuring 
the accuracy of eligibility determinations and payment.  The July 2017 rule established a new 
harmonized Medicaid eligibility oversight process that meets the requirements of section 
1903(u) of the Act through a combination of the PERM program and a revised MEQC 
program, where there will be PERM reviews and state conducted MEQC pilots as part of a 3-
year cycle.  The PERM reviews will focus on measuring erroneous payments due to 
ineligibility and will calculate an eligibility improper payment rate.  While the MEQC pilots 
                                                 
7 CMS Needs to Better Target Risks to Improve Oversight of Expenditures, GAO-18-564 (Aug 2018); Additional 
Efforts Needed to Ensure that State Spending is Appropriately Matched with Federal Funds, GAO-16-53 (Oct 
2015); California Made Medicaid Payments on Behalf of Newly Eligible Beneficiaries who did not meet Federal 
and State Requirements, OIG A-09-16-02023 (February 2018); New York Did Not Correctly Determine Medicaid 
Eligibility for Some Newly Enrolled Beneficiaries, OIG A-02-15-01015 (January 2018). 
8 Available at https://www.medicaid.gov/federal-policy-guidance/downloads/cib062019.pdf.  Page 27  State Medicaid Director 
 
will focus on areas not addressed through PERM reviews, such as negative cases and 
understated/overstated liability, as well as permit states to conduct focused reviews of areas 
identified as error-prone through the PERM program.  This creates a complementary approach 
to ensuring accuracy of the eligibility determination process.   
 
Populations covered under this demonstration initiative will be included in the reviews 
conducted under PERM and MEQC.  As determined necessary, states participating in this 
demonstration may also be subject to the enhanced monitoring of Medicaid eligibility 
determinations outlined in the 2018 CMS Medicaid Program Integrity Strategy and other 
relevant regulatory or sub-regulatory guidance. 
 
Fiscal Integrity, Operations, and Oversight 
Certain fiscal integrity provisions of section 1903 of the Act, such as rules regarding FFP 
rates, eligibility errors, and the requirement for states to fund the non-federal share of 
expenditures, will apply to HAO demonstrations, and states should use existing processes to 
claim FFP for demonstration expenditures.  In addition to monitoring and evaluation activities 
described later in this guidance, CMS also intends to continue its standard financial oversight 
activities for demonstration expenditures, including, but not limited to, establishing with the 
state budget neutrality parameters, and tracking actual expenditures, consistent with the State 
Medicaid Directors Letter #18-009, entitled, Budget Neutrality Policies for Section 1115(a) 
Medicaid Demonstration Projects; quarterly CMS-64 expenditure reviews; focused financial 
management reviews; and deferrals and disallowances of claims for FFP.  Please note that any 
services claimed at increased FMAP or other matching rates are subject to additional scrutiny. 
     
Federal Review of Managed Care Capitation Rates 
As stated previously in Section B of this guidance, states generally will be expected to meet 
both statutory and regulatory requirements that managed care capitation rates be actuarially 
sound in order to ensure that beneficiaries receive covered services without overspending state 
and federal tax dollars.  However, states will be given additional flexibility in how the 
capitation rates are ultimately approved by CMS.  CMS expects that states would use one of 
two options available to states to demonstrate and document that capitation rates are 
actuarially sound: 
 
Option 1: Federal Actuarial Review 
 
CMS to complete an actuarial review, consistent with existing procedures: 
1.  States develop capitation rates consistent with the requirements of 42 CFR part 
438 and CMS Managed Care Capitation Rate Development Guide; and  
2.  CMS conducts an actuarial review of the actuarys rate certification in order to 
issue an actuarial opinion about the actuarial soundness of the capitation rates.  
 
Additionally, states submit to CMS a final set of managed care capitation rates supported 
by a rate certification at least 30 days prior to the start of a rating period and make all 
modifications to managed care capitation rates on a prospective basis.  
 
  Page 28  State Medicaid Director 
 
Option 2: Fiscal Integrity through Transparency, Medical Loss Ratios, and Audits  
 
The requirements of 42 CFR 438.7(a),9 would not apply and CMS would eliminate the 
prospective federal review, and rely on more transparency, use of medical loss ratios 
(MLRs) with remittance, and additional independent financial audits to assure that the 
managed care capitation rates are actuarially sound.  Under this option, CMS would 
expect states to submit an actuarys certification that the managed care capitation rates 
are actuarially sound, and likely would accept such a certification if the following 
conditions are met: 
 
1.  Capitation Rate Transparency  
 
a.  States develop capitation rates annually consistent with the requirements of 
42 CFR 438 and an enhanced CMS Managed Care Capitation Rate 
Development Guide, which establishes a specific outline for the rate 
certification and required tables to document assumptions and data used for 
the capitation rate development. 
 
b.  The rate certification is publicly displayed on the state Medicaid agencys 
website at least 60 days prior to the start of the annual rating period and 
notify CMS of the display location.  Any changes to these capitation rates 
(e.g., contract amendments) would be clearly identified in a rate amendment 
certification, which would be provided to CMS and posted on the state 
Medicaid agencys website at least 30 days prior to making the change in 
rates. 
 
2.  Components of the Rate Development 
 
a.  The states managed care capitation rates are based only upon approved 
Medicaid services covered under: 
1)  The Medicaid state plan; 
2)  A section 1115 demonstration;  
3)  A section 1915 waiver; and  
4)  Additional services deemed by the state to be necessary to comply with 
the requirements of MHPAEA, as implemented in 42 CFR part 438, 
subpart K, 42 CFR 440.395, and 45 CFR 147.160 and 146.136, as 
applicable. 
 
b.  The states managed care capitation rates are based only upon the expected 
utilization and delivery of services for the time period and the population 
covered under the terms of the states contract with the managed care plans. 
 
c.  The states managed care capitation rates may not include any pass-through 
                                                 
9 This provision of the regulations requires states to submit to CMS for review and approval, all risk-based managed 
care plan rate certifications concurrent with the review and approval process for managed care plan contracts. 
  Page 29  State Medicaid Director 
 
payments or supplemental provider payments.  To the extent that the state 
intends to make pass-through payments or supplemental payments to 
providers, CMS would expect that the payments would be explicitly 
authorized in the states section 1115 demonstration and paid to providers 
outside of the managed care capitation rates. 
 
3.  Use of an MLR with Remittance 
 
a.  The states contract with each managed care plan requires remittance based 
on a corridor around the MLR defined in 42 CFR 438.8. 
 
b.  States will have flexibility in establishing the exact requirements of the 
remittance associated with each managed care plans MLR; consistent with 
guidelines developed by CMS.  Remittances will be required by plans if the 
MLR falls below the 85 percent level, with the federal share of such 
remittances to be returned by the state to CMS; states will be required to pay 
remittances to plans if MLR is above 95 percent (see Appendix F).  
However, remittances required to be paid by the state in excess of the 
annual cap will not be eligible for FFP.  States and managed care plans will 
need to calculate and reconcile remittances more quickly than otherwise 
required in 42 CFR 438.8.  Specifically, states will need to calculate and 
reconcile each managed care plans MLR and report calculations to CMS 
within 12 months of the rating period. 
 
4.  Use of Audits 
 
The state will be expected to meet enhanced requirements for receiving and 
reviewing audited financial reports for managed care plans.  Regulations at 42 
CFR 438.3(m) require states to contractually require managed care plans to 
submit to the state audited financial reports specific to the Medicaid contract on 
an annual basis.  In addition, states and managed care plans will need to ensure 
that: 
 
a.  The financial audit is conducted by an independent entity in accordance with 
generally accepted accounting principles and auditing standards and be of 
sufficient detail that the state and managed care plan can reconcile the data 
used for the MLR calculations to the information reported in the independent 
financial audit; and 
 
b.  The audited financial reports, as well as documentation reconciling the data 
used for the MLR, are submitted to CMS within 12 months of the end of the 
rating period. 
 
2.  Quality Strategy and Performance Assessment 
 
Under an HAO demonstration, CMS may grant states significant programmatic and 
administrative flexibility to more efficiently operate their programs within the approved  Page 30  State Medicaid Director 
 
demonstration expenditure cap.  This greater flexibility would enable states to redesign their 
Medicaid programs to ensure beneficiaries receive appropriate services in the most cost-effective 
manner that promotes the objectives of the Medicaid program.  In turn, states will be expected to 
ensure accountability for the health and well-being of the Medicaid beneficiaries enrolled in this 
demonstration.  To demonstrate accountability, states will be expected to develop and maintain a 
written quality strategy for assessing access to care, quality of care, and the health outcomes of 
beneficiaries covered under this demonstration. 
 
Discussed more fully in Appendix E, the quality strategy will be expected to contain specific 
objectives, defined as measurable performance targets, for different segments of the 
demonstration population.  Because measurement is critical for quantifying performance, we 
would expect that central to the quality strategy will be mandatory reporting of 25 quality and 
access measures drawn from the CMS Adult Core Set that are either included in the CMS 
Medicaid and CHIP Scorecard10 or are feasible for states to report, either because they are 
derived from administrative data sources like claims and encounter data or are currently reported 
by at least 25 states.  These measures will be adjusted for the population covered under an HAO 
demonstration and are described in Appendix D. 
 
The Adult Core Set currently includes 33 measures targeting specific clinical domains of high 
priority for the adult Medicaid population: (1) Primary Care Access and Preventive Care, (2) 
Maternal and Perinatal Health, (3) Care of Acute and Chronic Conditions, (4) Behavioral Health 
Care, and (5) Long Term Services and Supports (see Appendix D for the list of 2020 Adult Core 
Set measures).  It also includes the Consumer Assessment of Healthcare Providers and Systems 
(CAHPS) Health Plan survey. Vetted and updated annually through robust stakeholder 
engagement with states, health plans, providers, consumer advocates, and measurement experts, 
the Adult Core Set will provide a snapshot of health care quality within the demonstration based 
on key indicators of health care access and quality for the beneficiaries served in the 
demonstration.  CMS may identify additional measures that we would expect would be added to 
the required Core Set reporting as well as additional measure domains, such as specialty care.  
Recognizing that states already have established quality measurement and improvement 
initiatives underway, states may also include any other quality measures used to monitor access 
and quality of care for beneficiaries in the demonstration.   
 
States with managed care or alternative private market delivery systems can leverage existing 
quality strategies, quality assessment and performance improvement (QAPI) requirements, and 
external quality review to fulfill these requirements.  However, states would be expected to 
integrate all beneficiaries covered by this demonstration model  even if they receive their care 
through fee-for-service  into these quality strategies.  Although the reporting under the quality 
strategy would be distinct from the other monitoring and evaluation activities required generally 
for all demonstrations, the quality strategy would need to be closely coordinated with these other 
monitoring and evaluation activities.   
 
 
 
                                                 
10 Information on the Medicaid and CHIP Scorecard is available at https://www.medicaid.gov/state-
overviews/scorecard/index.html.   Page 31  State Medicaid Director 
 
3.  Monitoring and Evaluation 
 
General Monitoring Requirements  
CMS remains committed to monitoring and evaluation in order to understand the outcomes 
and the impacts of the state innovations being demonstrated.  CMS is undertaking efforts to 
help states monitor the elements of their programs, while giving them the flexibility to adapt 
to changing conditions in their states.  In addition to the quality strategy and measurement 
described above, we would expect states to provide timely and accurate T-MSIS data in order 
to be able to participate in the HAO initiative.  CMS may also consider annual site visits as an 
additional monitoring strategy.  As with all demonstrations authorized under section 1115 of 
the Act, states will be required to develop monitoring plans and submit performance metrics 
for quarterly and annual monitoring reports.  Quarterly and annual monitoring reports will 
consist of both narrative updates and qualitative and quantitative data on pre-determined 
metrics.  CMS is developing metrics and other parameters specifically for the HAO initiative 
and will work with each state implementing an HAO demonstration to ensure that the metrics 
and other parameters to be used are appropriate to the states demonstration and that the state 
understands the expectations and is prepared to report in accordance with CMS guidance.  
CMS will also leverage metric sets and monitoring strategies already being implemented for 
1115 demonstration types that a state may opt to include under an HAO demonstration, 
including, for example, community engagement, SUD and SMI / SED demonstrations.   
 
The metrics selected would need to reflect the major elements of the demonstration, and 
uniformity in the metrics and the availability of national specifications will be considered to 
support cross state monitoring and evaluation.  States would be expected to independently 
verify their metric data.  CMS will combine these programmatic metrics with general metrics 
aimed at monitoring beneficiary enrollment, the overall functioning of the demonstration and 
the reporting under the Quality Strategy and Performance Assessment.  
 
We expect that states will comply with other monitoring and reporting requirements, 
consistent with regulations in 42 CFR 431.420 and 431.428.  State monitoring reports will be 
required to provide sufficient information to document key challenges, underlying causes of 
those challenges, and strategies for addressing those challenges, as well as key achievements 
and the conditions and efforts that lead to those successes.  States will be expected to engage 
an independent assessor to conduct a mid-point assessment of the demonstration, and to 
provide recommendations for mid-course corrections for the states consideration.  This 
information, along with the states plan for responding to the recommendations will be 
provided to CMS.    
 
Continuous Performance Indicators   
It will be critical for both states and CMS to know as soon as possible if beneficiary access to 
care is being adversely affected by one or more elements of the demonstration.  Toward that 
end, CMS has designed a set of continuous performance indicators composed of 13 metrics 
which participating states will be expected to report to CMS and post on the states website on 
a quarterly basis.  The metrics selected are not intended to provide a comprehensive 
understanding of the demonstration or monitor the states progress in meeting the 
demonstrations goals and objectives.  Rather, the continuous performance indicators are 
intended to provide CMS and the state with a timely indicator of potential issues impacting  Page 32  State Medicaid Director 
 
beneficiary access to coverage or care, so that needed adjustments can be made.  These 
indicators fall into one of four categories: enrollment, retention, access to care, and financial 
management.  A list of the specific metrics and specifications for this continuous performance 
indicator system is found in Appendix H. 
 
A change in a given metric, in and of itself, may not provide definitive evidence that there is a 
serious problem with the demonstration requiring adjustment.  Instead, a decline, or in some 
cases an uptick, in one or more metrics signals the need for CMS to engage with the state to 
determine the cause(s) of the change and whether corrective action is needed.  If the state, 
with technical assistance from CMS, is not able to identify and correct the problem, CMS may 
direct the state to engage an independent assessor to conduct a rapid cycle evaluation of one or 
more elements of the demonstration within 60 days of such CMS direction.  The purpose of a 
rapid cycle evaluation is to identify recommendations for policy and/or operations to reverse 
the change in the continuous performance indicators and other monitoring and evaluation 
findings.  If the problem is not remedied, CMS may initiate corrective action, which could 
include deferral or disallowance of costs, or termination of the demonstration consistent with 
the STCs. 
 
Specific details related to monitoring and reporting for each states demonstration will be 
discussed with states and described in the demonstration STCs.  
  
Budget Neutrality Monitoring 
The characteristics of the budget neutrality test for each section 1115 Medicaid state 
demonstration are determined as part of CMS and state negotiations that culminate in the 
demonstrations STCs.  STCs for HAO demonstrations will include a section describing the 
monitoring of budget neutrality, general financial requirements and corrective actions in the 
event that actual spending exceeds the specified caps.  The STCs will describe the process by 
which the state should perform the respective calculations, as well as how to report the 
expenditures to CMS, and reconciliation processes.  
 
Per each demonstrations STCs, states will be required to submit to CMS quarterly monitoring 
reports within 60 days of the end of each quarter, as well as an annual report within 90 days of 
a demonstration years completion.  These reports are required to include fiscal reporting to 
assist in the determination of whether or not the demonstration is tracking as budget neutral.  
In the event that a state is found to have exceeded its annual budget neutrality expenditure 
limit(s), states will be required to return excess funds to CMS.  States will be required to 
return funds by entering a negative adjustment to expenditures claimed on their CMS-64 
reports (OMB 0938-1265).  Please note that all participating states are subject to overall 
budget neutrality as well as annual budget neutrality caps, as described above in section C, 
Financing and Shared Savings.   
 
To support more efficient, timely and accurate review of states budget neutrality 
submissions, CMS has developed a standardized budget neutrality reporting form, known as 
the Budget Neutrality Workbook (BN Workbook).  Specifically, this BN Workbook 
consolidates into a unified report a standard set of financial data.  The standardization of the 
reporting methodology, together with automation of the reporting submission supports:  
  Page 33  State Medicaid Director 
 
  Consistency of evaluation; 
  Streamlined communication methodology between states and CMS; 
  Increases in reporting accuracy; and 
  Reduced timeframes required for monitoring and evaluation. 
 
The new Budget Neutrality Workbook automates the entire submission process.  By 
incorporating the BN Workbook into the Medicaid section 1115(a) Performance Metrics 
Database & Analytics (PMDA) workflow, submissions are parsed and validatednotifying 
the state of any upfront potential problems with their submissions, reducing downstream 
communication, and subsequent needs for clarification or modifications to the BN 
Workbook.  The BN Workbook has been formulated for use for the entire life span of 
demonstrations.  This allows reuse of the same document, with updates for the quarterly 
period being reported, and discards the need to produce different documents for each 
quarterly or annual submission.  
 
The PMDA application, which is used for BN Workbook submission, will historically retain 
all financial data and related documents, reducing the number of duplicate records required 
and the need for respondents to retain records. 
 
Evaluation 
Per 42 CFR 431.424, and the demonstration STCs, states will be required to submit for CMS 
review and approval an evaluation design.  The evaluation design is expected to be robust and 
rigorous and consider the use of comparison groups and advanced statistical analyses 
(including impact analyses).  A rigorous cost analysis will be required as a component of the 
evaluation design.  The evaluation design must include an assessment of health outcomes, in 
addition to the quality metrics described above, of individuals that have been enrolled in and 
subject to the provisions of the demonstration, and will be required to conduct robust, 
independent program evaluations.  Evaluations must be designed to determine whether the 
demonstration is meeting its objectives, as well as the impact of the demonstration on 
Medicaid beneficiaries.   States will be required to submit for CMS approval a draft 
evaluation design no more than 180 days after demonstration approval.  CMS will provide 
technical assistance and will encourage states to leverage existing CMS guidance related to 
evaluation of section 1115 demonstrations, including specific hypotheses, outcomes, data 
sources, and comparison groups for alternatives to Medicaid policies that might be tested 
under an HAO demonstration.  As the state modifies its program, the state will be required to 
re-submit to CMS an evaluation design which adequately represents the programmatic 
elements modified. 
 
State evaluation designs will be expected to include a discussion of the evaluation questions 
and hypotheses that the state intends to test, including whether and how the additional 
flexibilities provided through an HAO demonstration enable states to more efficiently 
administer their Medicaid programs.  The hypothesis testing should include, where possible, 
assessment of both process and outcome measures, and proposed measures should be selected 
from nationally-recognized sources and national measures sets, as well as state-defined 
measures of program efficiency.  The evaluation design should use both quantitative and 
qualitative methods, and will need to identify comparison groups and appropriate statistical 
analyses to evaluate the impact of the demonstration.  Evaluation designs should also include  Page 34  State Medicaid Director 
 
descriptions of multiple data sources to be used, including but not limited to multiple 
stakeholder perspectives, surveys of beneficiaries, claims data, and survey data.  States 
participating in this demonstration opportunity must agree to cooperate with, and provide any 
data or other information requested by CMS for purposes of evaluating the demonstration. 
 
Consistent with other section 1115 demonstrations, states participating in the HAO initiative 
also will be required to submit an interim evaluation report and a summative evaluation 
report.  The interim report should identify any programmatic changes and recommendations 
based on the evaluation.  A new evaluation design which reflects changes made based on the 
interim report findings should be submitted to CMS for the purposes of the summative 
evaluation report.  
 
Changes made in the implementation plan, or through an amendment or renewal, likely will 
require a corresponding update to the monitoring plan and/or evaluation design.  CMS would 
work with the state to make needed updates, which would be subject to CMS approval.   
 
If CMS undertakes a federal evaluation to further understand the effectiveness and impacts of 
the HAO demonstration, the state is expected to comply with all requirements, consistent with 
42 CFR 431.424(f).  
 
E. Demonstration Application and Amendments 
   
Application 
Demonstrations under the HAO initiative will generally be approved for an initial five-year 
period from the date of implementation.  CMS will provide an application template to support 
states in providing a complete application.  The template will help to guide states in describing 
how each states demonstration project will support the objectives of the Medicaid program 
using the approach outlined in this guidance.  The template also will facilitate provision of 
accurate data needed to develop a demonstration budget agreement.   
 
More specifically, the application template will enable states to provide the following 
information in a streamlined manner: 
 
  Check-off list of flexibilities with regard to applicability of Medicaid provisions that the 
state intends to implement;  
  Administrative program requirements lists of compliance standards typical to section 
1115 demonstrations, for example, with federal civil rights laws, non-supplanting other 
federal programs and non-duplicating funding, and program performance standards; 
  A description of the populations covered, income standard and other conditions of, or 
limitations on, eligibility required for coverage under the demonstration; 
  A description of the proposed health care delivery system, eligibility requirements; 
eligibility and enrollment process (if different from the process for other MAGI 
populations) benefit coverage, and cost-sharing (premiums, copayments, and 
deductibles) required of individuals who will be covered under the demonstration;  Page 35  State Medicaid Director 
 
  Demonstration that the state has, or has a plan for developing, the IT systems capability 
needed to support the demonstration and meet the reporting requirements;  
  Data described in section C. Financing and Shared Savings (including enrollment data 
for each category of beneficiary who received health care coverage under the Medicaid 
program prior to the implementation of the demonstration);  
  Baseline performance data on the mandatory subset of the Medicaid Adult Core Set 
quality measures described in Appendix D.  If the population under this demonstration is 
newly eligible, the state should include a plan and timeline for how it will collect the 
required quality and access data that will establish the baseline for the demonstration; 
  Baseline data on the continuous performance indicators in Appendix H;  
  Written documentation of the states compliance with the public notice requirements at 
42 CFR part 431, subpart G, with a report of the issues raised by the public during the 
comment period and how the state considered those comments when developing the final 
demonstration application submitted to CMS;  
  The research hypotheses that are related to the demonstrations proposed changes, goals, 
and objectives, and a general plan for testing the hypotheses, including, if feasible the 
identification of appropriate evaluation indicators; and 
  A transition plan for if the demonstration is terminated or not renewed.   
 
Transparency  
CMS supports state public input processes that provide a meaningful opportunity for 
consideration of the views of Medicaid beneficiaries, applicants, and other stakeholders and 
allows states to gather input that may support continuous improvement of the program.  
Applications for an HAO demonstration are subject to all relevant public notice and transparency 
requirements, including those described in 42 CFR part 431, subpart G.  Where applicable, states 
will also be required to comply with the states tribal consultation process and describe how the 
state is responding to comments received through the tribal consultation process. 
 
Implementation Plan  
Within 90 days after application approval, each state will submit for CMS approval an 
implementation plan that will provide detailed information on the states approach to 
implementing its approved demonstration, including key milestones of what the state will 
achieve, by when and how, as well as a program integrity plan.  CMS will provide a template for 
the states implementation plan.  
 
Transition of Existing Demonstrations to an HAO Demonstration 
States with existing section 1115 demonstrations that cover populations eligible to be covered in 
an HAO demonstration may also propose to transition coverage and other features of those 
existing demonstrations into the HAO demonstration.  The application template provided by 
CMS will accommodate such proposed transitions.  CMS will work with states interested in such 
a transition to ensure a seamless conversion of coverage into an HAO demonstration and orderly 
close-out of the existing section 1115 demonstration in a manner consistent with the STCs for 
the existing demonstration.  As needed, CMS will help states develop a framework and key 
milestones for conversion, including implementation of the phase-out process of the existing  Page 36  State Medicaid Director 
 
demonstration, determining the appropriate public notification process for the planned 
conversion, and guidance on the development of the HAO demonstration application to 
effectuate the conversion of coverage.  In advance of formal submission, CMS can work with 
states to identify potential program changes necessary for the state to accomplish its goals and 
objectives for the transition of coverage into an HAO demonstration. 
 
State Flexibility During the Demonstration Period 
States with an approved demonstration may make administrative and programmatic changes to 
their program without prior approval from CMS, provided that the planned change is consistent 
with the authorities approved in the STCs for the demonstration, unless the change has the 
potential to substantially impact enrollment.  If the change has the potential to substantially 
impact enrollment, CMS will work with the state to determine whether an adjustment in the 
aggregate or per capita cap initially approved may be required.  If new authority is needed, or the 
state seeks to make a change to its HAO demonstration that is not consistent with the approved 
STCs, the state would need to submit a formal demonstration amendment, and comply with the 
transparency requirements in 42 CFR part 431, subpart G.   
 
The HAO initiative seeks to provide states with broad flexibility to operate a demonstration 
project to maximize health outcomes for Medicaid beneficiaries in a cost-effective, 
administratively efficient manner for the state, thereby generating savings for other initiatives 
benefiting the states Medicaid program.  In order to maximize their ability to make such 
administrative and programmatic changes after an HAO demonstration is approved, without need 
for additional CMS approval, states can include a range of policy options they may implement 
over the course of the demonstration in their initial application.  This will ensure that the 
transparency requirements in the regulations have been met, and that CMS has approved the 
range of policy options as having a valid demonstration purpose and promoting the objectives of 
the Medicaid program.  For example, a state may want to include minimum and maximum 
premium and other cost-sharing charges that may be imposed under the demonstration, as well as 
the initial premiums and cost-sharing to be imposed, or propose several EHB-benchmark plans it 
may adopt at a later date, or optional benefits it may eliminate.  This would enable the state to 
titrate the amount or premiums or cost-sharing charged, or benefits covered, over the course of 
the demonstration period more easily.   
 
States seeking to make a change to the policy, design, or operation of a demonstration that is 
authorized under the approved STCs will need to reflect the change in the states implementation 
plan.  Although prior CMS approval will not be needed for changes authorized under the STCs, 
states would be expected to provide CMS with at least 60 days advance notice of a planned 
change.  Further, for any such changes which may impact beneficiaries, plans, providers or other 
stakeholders, states will be expected to provide at least 60 days advance public notice and a 
meaningful opportunity to comment, as well as follow the states tribal consultation process, 
prior to revising the states implementation plan or implementing the change.   
 
The notice provided to the public would include a clear description of the planned change as well 
as the anticipated impact on beneficiaries, plans, providers and other stakeholders.  We would 
expect that the public notice process generally described in 42 CFR part 431, subpart G would be 
followed, including posting in a conspicuous location on the states website; publication in the 
newspapers of widest circulation; distribution through other mechanisms, such as an electronic  Page 37  State Medicaid Director 
 
mailing list of interested parties; consultation with the Medical Care Advisory Committee 
established by the state in accordance with 42 CFR 431.12; and sufficient time to enable the state 
to make changes in response to comments received.  If the state revises a planned change in 
response to public comments, the state would be expected to provide CMS with written 
notification of the revisions at least 30 days prior to implementation.    
 
Advance notice of an adverse action to individual beneficiaries affected by a change in 
demonstration policy, such as a state reducing or eliminating a benefit, also would be required in 
accordance with 42 CFR part 431, subpart E, and any applicable STCs.  
 
Advance public notice or tribal consultation would not be expected for administrative changes 
only minimally impacting stakeholders.  CMS will work with each state to define in the STCs 
when an administrative change would be considered to have a minimal versus meaningful impact 
on stakeholders and when advance notice and tribal consultation would be required. 
 
Any changes to a states program after initial implementation of the demonstration must be 
reflected in the implementation plan.  States will be expected to post on their website, and 
provide to CMS, an updated implementation plan on a quarterly basis, along with the quarterly 
monitoring report discussed in section D.3, above.  If no changes are made in a given quarter, the 
state would certify that it had made no changes.  Some changes may require a corresponding 
update to the monitoring plan and/or evaluation design, discussed in section D.3, above.  CMS 
would work with the state to make needed updates, which would be subject to CMS approval.   
 
As noted, changes to an implementation plan consistent with the approved STCs for the 
demonstration will not require CMS approval.  However, if CMS believes that a particular 
change is not authorized under the approved STCs or other applicable federal laws, CMS may 
notify the state that it may not implement the change as planned, but must submit an amendment 
and obtain CMS approval of the amendment, in accordance with its STCs.  Similarly, if CMS 
believes that a particular change may substantially impact enrollment such that an adjustment to 
the aggregate or per capita cap may be needed, CMS may notify the state that it may not 
implement the change as planned, but must delay implementation until CMS and the state have 
agreed upon an appropriate adjustment.   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Page 38  State Medicaid Director 
Conclusion 
While nothing in this letter represents final approval of any program or is binding on any state or 
any Medicaid recipient, CMS hopes this information is helpful and looks forward to continuing 
to work with states to consider and implement innovative solutions to improve their Medicaid 
programs.  CMS is available to provide technical assistance to states, as well as to preview 
states draft section 1115 proposals to help ensure states have the best chance possible of 
meeting federal requirements.  Questions and comments regarding the HAO initiative may be 
directed to Judith Cash, Director, State Demonstrations Group, at 410-786-9686. 
Sincerely, 
Calder Lynch  
Director 
Cc: 
National Association of Medicaid Directors  
National Academy for State Health Policy  
National Governors Association  
American Public Human Services Association  
Association of State and Territorial Health Officials  
Council of State Governments  
National Conference of State Legislatures  
Academy Health  
National Association of State Alcohol and Drug Abuse Directors  Page 39  State Medicaid Director 
 
Appendix A:  Flexibilities Table 
 
Flexibilities Available Under the HAO Initiative 
 
Flexibility  Associated Statutory and Regulatory 
Provisions (states can request that 
these provisions not apply to an HAO 
demonstration) 
ELIGIBILITY   
Flexibility to elect income standard best suited to  Section 1902(a)(10)(A)(i)(VIII); 42 
state at, above or below 133 percent FPL.  (Income  CFR 435.119 
standard of at least 133 percent FPL is required for 
increased FMAP for adults with income at or below 
133 percent FPL in accordance with sections 
1905(y) and 1905(z) of the Act.) 
Ability to limit eligibility to defined subset of  Section 1902(a)(1); 42 CFR 431.50 
individuals described in adult group, based on 
Section 1902(a)(10)(A)(i)(VIII); 42 
geographic or other criteria.  (Eligibility for all 
CFR 435.119 
individuals described in the adult group is required 
for increased FMAP in accordance with sections 
1905(y) and 1905(z) of the Act.) 
Flexibility to receive FMAP for services rendered  Section 1903(i)(26) 
to the adult group without having to provide such 
coverage through benchmark or benchmark-
equivalent coverage 
Ability to impose additional eligibility  Section 1902(a)(8); 42 CFR 
requirements to further objectives of Medicaid  435.911(c)(1)  
program 
Section 1902(a)(10); 42 CFR 435.119 
Flexibility to establish prospective enrollment for  Section 1902(a)(8); 42 CFR 
eligible applicants   435.911(c)(1) 
Flexibility to eliminate retroactive eligibility   Section 1902(a)(34); 42 CFR 435.915 
Flexibility to eliminate hospital presumptive  Section 1902(a)(47)(B); 42 CFR 
eligibility   435.1110 
Flexibility to provide continuous eligibility up to 12  Section 1902(e)(14)(C); 42 CFR 
months  435.603(g) 
42 CFR 435.916(d)  Page 40  State Medicaid Director 
 
Flexibility  Associated Statutory and Regulatory 
Provisions (states can request that 
these provisions not apply to an HAO 
demonstration) 
Ability to renew eligibility of new beneficiaries  Section 1943 
prior to regular 12-month renewal in order to align 
Medicaid renewal cycle with Marketplace  42 CFR 435.916(a)(1) 
BENEFITS   
Broad flexibility in benefit package design,  Section 1902(a)(10)(B); 42 CFR 
including but not limited to flexibility to offer drug  440.230, 440.240 
formularies similar to those provided in the health 
insurance markets, consistent with the EHB 
requirements 
No requirement to provide mandatory state plan  42 CFR 431.53 (authorized by section 
services or required Alternative Benefit Plan  1902(a)(4)) 
services  including NEMT, EPSDT, and nursing 
Section 1902(a)(10)(A); 42 CFR 
facility services  not included in Essential Health 
440.210, 440.220 
Benefits 
Section 1902(a)(10)(B); 42 CFR 
440.230, 440.240 
Section 1902(k), 1937; 42 CFR 440.300 
Flexibility to determine appropriate amount,  Section 1902(a)(10)(B); 42 CFR 
duration and scope of covered benefits  440.230, 440.240 
Flexibility relating to FQHC covered services  1905(a)(2)(C) 
COST-SHARING AND PREMIUMS   
Ability to charge premiums at all income levels  Sections 1902(a)(14), 1916 and 1916A; 
42 CFR 447.55, 447.56 
Broad flexibility to impose cost-sharing, including  Sections 1902(a)(14), 1916 and 1916A 
non-emergency use of the emergency room, up to  (other than section 1916A(b)(1)(B)(ii) 
aggregate limit equal to 5 percent of beneficiaries  and (b)(2)(A)); 42 CFR 447.52, 447.53, 
income and subject to protections for populations  447.56(a) - (e) 
specified in the guidance 
Section 1916(f) 
Broad flexibility to target premium and cost- Sections 1902(a)(14), 1916 and 1916A; 
sharing charges, except with respect to the  42 CFR 447.56(b)  
aggregate limit on premiums and cost-sharing 
charges equal to 5 percent of beneficiaries income  Section 1916(f)  Page 41  State Medicaid Director 
 
Flexibility  Associated Statutory and Regulatory 
Provisions (states can request that 
these provisions not apply to an HAO 
demonstration) 
PROVIDER PAYMENTS AND ACCESS TO   
CARE 
Greater flexibility in rate-setting and payment  Section 1902(a)(30) 
methodologies 
Flexibility in amount of DSH payments made to  Sections 1902(a)(13) and 1923 
hospitals 
Flexibility in application of claims review prior to  Section 1902(a)(37) 
payment of providers 
Flexibility to use alternative access standards in  Section 1902(a)(23) and (30) 
fee-for-service and managed care environments 
42 CFR 438.68 
Flexibility to reimburse FQHCs with a VBP  Section 1902(a)(10)(A); 42 CFR 
440.230, 440.240; Section 1902(bb) 
MANAGED CARE DELIVERY SYSTEM   
Flexibility in delivery system requirements  Section 1902(a)(1), (a)(10)(B), (a)(23), 
(a)(30)(A) 
Elimination of prior CMS approval for rate  42 CFR 438.3(a), 438.6(c)(2)(i), 
certification, contract amendments, retroactive rate  438.7(a), 438.7(c)(2), 438.806(b) 
adjustments, and directed payments   
Flexibility in allowing alternative approaches to  42 CFR part 438  
achieve statutory requirements for managed care 
 
delivery systems  
 
FAIR HEARINGS   
Flexibility to streamline fair hearing processes  Section 1902(a)(3); 42 CFR part 431 
within constitutional due process protections  subpart E 
ADMINISTRATIVE FLEXIBILITY   
Ability to make many program changes without  Section 1902; 42 CFR part 430 subpart 
prior CMS approval, consistent with the terms of  B 
this guidance  Page 42  State Medicaid Director 
 
 
Key Statutory and Regulatory Requirements Expected to be Applicable Under the HAO 
Initiative 
 
Description of Statutory and Regulatory  Statutory and Regulatory Provision(s) 
Requirements  Expected to be Applicable under the HAO 
Initiative 
FINANCING   
FMAP and other FFP matching rates  Sections 1905(b), (y), (z), (aa), (cc); 42 CFR 
parts 432 and 433 
Limitation on non-state federal share  Section 1903; 42 CFR parts 430 and 433, 
financing and availability and extent of FFP;  except as specified above  
compliance with expenditure reporting and 
budgetary requests   
PROGRAM INTEGRITY   
Medicaid Eligibility Quality Control  Section 1903(u); 42 CFR part 431 subpart P 
(MEQC) 
Payment Error Rate Measurement program  Improper Payments Information Act of 2002 
(PERM)   (P.L. 107-300); 42 CFR part 431 subpart Q 
Exclusion of providers  Sections 1902(a)(39), and (61), 1903(q); 42 
CFR part 455 subpart A 
Establishment and operation of Medicaid 
fraud control unit independent of the single 
Section 1902(a)(64) 
state agency 
Mechanism for beneficiaries to report fraud 
and abuse 
All other applicable program integrity  42 CFR part 455 and other provisions 
regulations unless explicitly provided 
otherwise in the special terms and conditions 
of the states demonstration. 
ELIGIBILITY AND ENROLLMENT   
PROCESSES 
Use of single streamlined application,  Section 1943; 42 CFR 435.907, 435.910, 
verification and renewal processes  435.912, 435.916, 435.923, 435.945-960 
BENEFICIARY PROTECTIONS    Page 43  State Medicaid Director 
 
Description of Statutory and Regulatory  Statutory and Regulatory Provision(s) 
Requirements  Expected to be Applicable under the HAO 
Initiative 
Protection of beneficiary information and  Section 1902(a)(7) and 42 CFR part 431 
confidentiality  subpart F 
Assistance with application and renewal,  42 CFR 435.908 
including for individuals who are limited 
English proficient. 
Five percent limit on aggregate premiums  Section 1916A(b)(1)(B)(ii) and (b)(2)(A); 42 
and cost-sharing   CFR 447.56(f) 
No premiums or cost sharing charges for  Sections 1916(j), 1916A(b)(3)(A)(vii), and 
tribal beneficiaries  1916A(b)(3)(B)(x); 42 CFR 447.56(a)(1)(x) 
and 447.56(c)(2) 
Prohibition on discrimination on the basis of  Protections afforded under other federal 
race, color, national origin, sex, religion,  statutes and implementing regulations, 
national origin, disability, and age.  including Title VI of the Civil Rights Act of 
1964, Section 504 of the Rehabilitation Act 
of 1973, the Americans with Disabilities Act 
of 1990, the Age Discrimination Act of 1975, 
Section 1557 of the Affordable Care Act; 42 
CFR 435.901 (regarding eligibility 
determinations and the provision of 
information; and as to state laws prohibiting 
religious discrimination).  
BENEFITS   
Limitation on payments with respect to care  Section 1905(a)(29)(A), 42 CFR 435.1010 
or services for any individual who is an 
inmate of a public institution 
Limitations on payments with respect to  Section 1905(a)(29)(B), 42 CFR 435.1010 
coverage of services for individuals residing 
 
in IMDs except for statutory and regulatory 
exceptions to the exclusion and expenditure 
authority to cover services provided to 
individuals residing in an IMD if the state 
meets the section 1115 program requirements 
as outlined in the State Medicaid Director 
Letters, Strategies to Address the Opioid 
Epidemic, issued on November 1, 2017, and 
Opportunities to Design Innovative Service 
Delivery Systems for Adults with Serious  Page 44  State Medicaid Director 
 
Description of Statutory and Regulatory  Statutory and Regulatory Provision(s) 
Requirements  Expected to be Applicable under the HAO 
Initiative 
Mental Illness or Children with a Serious 
Emotional Disturbance, issued on November 
13, 2018.   
MANAGED CARE DELIVERY   
SYSTEMS AND CERTIFICATION 
STANDARDS  
Statutory requirements must be met as well  Sections 1903(m) and 1932 of the Act 
as regulatory requirements pertaining to the 
development of capitation rates.  However, 
states may have flexibility to achieve goals 
of statute through approaches alternative to 
those prescribed in Medicaid regulations at 
42 CFR part 438 
Standards for provider screening and  Sections 1902 (a)(77), (a)(78), and (kk); 42 
enrollment   CFR part 455 subpart E 
Tribal protections related to managed care  section 1932(h) of the Act; 42 CFR 438.14 
under section 1932(h) of the Act 
OTHER   
All statutory and regulatory requirements   
applicable to state plan coverage that are not 
identified in either table in this Appendix 
will be expected to apply unless the state 
requests in its demonstration application that 
such a requirement not apply and CMS 
approves the request in the special terms and 
conditions 
 
 
 
 
 
 
 
  Page 45  State Medicaid Director 
 
Appendix B: Process for Transitioning Existing Section 1115 Demonstrations into a States 
HAO demonstration 
States with existing section 1115 demonstrations that cover populations eligible to be covered in 
an HAO demonstration may also propose to transition coverage and other features of that 
existing demonstration into an HAO demonstration.  The application template provided by CMS 
will accommodate such proposed transitions.  CMS will work with states interested in such a 
transition to ensure a seamless conversion of coverage into an HAO demonstration and orderly 
close-out of the existing section 1115 demonstration in a manner consistent with the STCs for 
the existing demonstration. 
As needed, CMS will help states develop a framework and key milestones for conversion, 
including implementation of the phase-out process of the existing demonstration, determining the 
appropriate public notification process for the planned conversion, and guidance on the 
development of the states HAO demonstration application to effectuate the conversion of 
coverage.  In advance of formal submission, CMS can work with states to identify potential 
program changes necessary for the state to accomplish its goals and objectives for the transition 
of coverage into an HAO demonstration in some of the following ways: 
  Analysis of the state's goals, objectives and program features implemented in the existing 
demonstration to discern the extent to which HAO demonstration coverage may vary in 
its impact on beneficiary eligibility for services and benefits, healthcare delivery, and/or 
cost-sharing requirements; 
  Analysis of the existing demonstration waiver and expenditure authorities to ensure that 
the state both retains, and is appropriately leveraging, the flexibilities available under an 
HAO demonstration to continue to meet the states intended goals for the population; 
and, 
  Analysis of the existing demonstration evaluation design to determine whether 
evaluation parameters may require revision to ensure the appropriate evaluation 
indicators are identified to understand the outcomes and the impacts of the state's 
intended goals for transitioning coverage of the population into an HAO demonstration. 
 
    Page 46  State Medicaid Director 
 
Appendix C: Summary of Implementation of the EHB Requirements in the Individual 
Health Insurance Market 
 
This appendix summarizes the standards for providing EHB, as implemented in 45 CFR 156.100 
through 156.125.  This is not intended to supersede any laws or regulations, and any conflict 
between this summary and the applicable legal authority should be resolved in favor of the legal 
authority.  For a complete description of the regulatory standards, please consult the cited 
regulations.  
 
EHB-Benchmark Plans in the Individual and Small Group Market 
 
To implement section 1302(b) of the PPACA for the individual and small group markets, HHS 
defines EHB based on a benchmark plan approach.  States selected from one of 10 base-
benchmark plans, identified at 45 CFR 156.100.  States were required at 45 CFR 156.110 to 
supplement their base-benchmark plan, if necessary, to ensure the ten EHB categories were 
being covered, and to ensure an appropriate balance among the EHB categories to ensure that 
benefits are not unduly weighted toward any category.  The supplemented base-benchmark plan 
established the states EHB-benchmark plan.  States most recently completed this process to 
establish EHB-benchmark plans for the 2017 plan year.  The 2017 EHB-benchmark plans 
continue to apply until the state makes a new selection under new benchmark plan selection 
options available for the 2020 plan year.  If a state does not make a new selection applicable in 
2020, the 2017 EHB-benchmark plan will continue to apply.  
 
Under the new options to be available for the 2020 plan year, states may select as their EHB-
benchmark plan the 2017 EHB-benchmark plan used by another state.  They also may replace 
the coverage in any of the 10 categories of EHB from their 2017 EHB-benchmark plan with the 
coverage of the same category from another states 2017 EHB-benchmark plan.  Finally, states 
may select a set of benefits to become their new EHB-benchmark plan.  Under any of these 
options, the state must ensure that the covered benefits are equal to, or greater than, to the extent 
any supplementation is required to provide coverage within each EHB category, the scope of 
benefits provided under a typical employer plan, defined at 45 CFR 156.111(b)(2)(i).  The scope 
of benefits also must not exceed the generosity of a set of comparison plans, identified at 45 CFR 
156.111(b)(2)(ii).  Finally, the EHB-benchmark plan must not have benefits unduly weighted 
towards any of the ten categories of EHB; must provide benefits for diverse segments of the 
population, including women, children, persons with disabilities, and other groups; and must not 
include discriminatory benefit designs that contravene the non-discrimination standards defined 
in 45 CFR 156.125. 
 
Individual and Small Group Market Insurance Coverage of EHB based on the EHB-Benchmark 
Plans 
 
To provide EHB, individual market health insurance coverage must provide benefits that are 
substantially equal to the EHB-benchmark plan, including covered benefits and limitations on 
coverage such as amount, duration, and scope.  Annual or lifetime dollar limits in the EHB-
benchmark plan may be converted to treatment limitations, consistent with 45 CFR 147.126.  
Additionally, the coverage may substitute actuarially equivalent benefits for those provided in  Page 47  State Medicaid Director 
 
the EHB-benchmark plan, other than the prescription drug benefit, consistent with 45 CFR 
156.115(b). 
 
In addition to the benefits covered by the applicable EHB-benchmark plan, pursuant to 45 CFR 
155.170(a)(2), any benefit required to be covered by state action taking place on or before 
December 31, 2011 must be covered and is considered an EHB. 
 
To provide EHB, coverage also must: provide coverage of the greater of one drug or the same 
number of prescription drugs covered by the EHB-benchmark plan in every United States 
Pharmacopeia (USP) category and class, subject to the prescription drug benefit requirements in 
45 CFR 156.122; comply with the MHPAEA requirements, as implemented in 45 CFR 146.136 
and 147.160; include preventive health services described in 45 CFR 147.130; cover habilitative 
services and devices as specified in 45 CFR 156.115(a)(5); and for benefits under the pediatric 
services category of EHB, provide coverage for enrollees until at least the end of the month in 
which the enrollee turns 19 years of age. 
 
EHBs may not include the following services: routine non-pediatric dental services, routine non-
pediatric eye exam services, long-term/custodial nursing home care benefits, or non-medically 
necessary orthodontia.   
 
EHB-Benchmark Plans in HAO Demonstration Coverage 
 
States currently are not required to select the same EHB-benchmark plan for ABP as they do for 
their individual and small group markets.  Similarly, CMS does not expect that states cover EHB 
under an HAO demonstration using the same EHB-benchmark used for other purposes.  Rather, 
states may select, for purposes of covering EHB under an HAO demonstration, any EHB-
benchmark plan that otherwise could have been selected for the states individual and small 
group insurance markets for plan year 2017, or that could be selected for such markets for plan 
years beginning in 2020 under current regulations.   
 
This includes the option to select from among the ten base-benchmark plans among which states 
selected for plan year 2017, supplemented as necessary, in accordance with 45 CFR 156.100 and 
110, and the option to select from among the options in 45 CFR 156.111.  Moreover, under any 
of the benchmark plan options (though it generally would not be applicable under the option at 
45 CFR 156.111(a)(3)), states may change which benefits are considered EHB under the 
benchmark plan they select by substituting benefits for those provided in the EHB-benchmark 
plan in a manner consistent with 45 CFR 156.115(b). 
 
Regardless of which option the state implements to select an EHB-benchmark plan for purposes 
of the HAO initiative, we expect the coverage a state provides under this demonstration initiative 
would be substantially equal to the EHB-benchmark, and would comply with the standards at 45 
CFR 156.100 through 156.125.  
 
Additionally, any benefits that must be covered by individual market health insurance in 
accordance with state action taking place on or before December 31, 2011 would be expected to 
be covered as EHB by Medicaid under an HAO demonstration.  
  Page 48  State Medicaid Director 
 
Appendix D: Annual Quality and Access Reporting Requirements for Aggregate and Per 
Capita Cap Demonstration Models  
 
Annual Quality and Access Measures 
Measure Name  NQF #  Measure  Mandatory 
Steward  Measure* 
Primary Care Access and Preventive Care 
Cervical Cancer Screening (CCS-AD)  0032  NCQA  Yes 
Chlamydia Screening in Women Ages 2124 (CHL-AD)  0033  NCQA  Yes 
Flu Vaccinations for Adults Ages 18 to 64 (FVA-AD)  0039  NCQA  No 
Breast Cancer Screening (BCS-AD)  2372  NCQA  Yes 
Screening for Depression and Follow-Up Plan: Age 18 and Older (CDF-AD)  3148  CMS  No 
Adult Body Mass Index Assessment (ABA-AD)  NA  NCQA  Yes 
Maternal and Perinatal Health 
PC-01: Elective Delivery (PC01-AD)  0469/2829  TJC  No 
Prenatal and Postpartum Care: Postpartum Care (PPC-AD)  1517****  NCQA  Yes 
Contraceptive Care  Postpartum: Ages 2144 (CCP-AD)  2902  OPA  Yes 
Contraceptive Care  Most and Moderately Effective Methods: Ages 2144  2903  OPA  Yes 
(CCW-AD) 
Care of Acute and Chronic Conditions 
Controlling High Blood Pressure (CBP-AD)  0018  NCQA  Yes 
Comprehensive Diabetes Care: Hemoglobin A1c (HbA1c) Poor Control (>9.0%)  0059  NCQA  Yes 
(HPC-AD) 
PQI 01: Diabetes Short-Term Complications Admission Rate (PQI01-AD)  0272  AHRQ  Yes 
PQI 05: Chronic Obstructive Pulmonary Disease (COPD) or Asthma in Older  0275  AHRQ  Yes 
Adults Admission Rate (PQI05-AD) 
PQI 08: Heart Failure Admission Rate (PQI08-AD)  0277  AHRQ  Yes 
PQI 15: Asthma in Younger Adults Admission Rate (PQI15-AD)  0283  AHRQ  Yes 
Plan All-Cause Readmissions (PCR-AD)  1768  NCQA  Yes 
Asthma Medication Ratio: Ages 1964 (AMR-AD)  1800  NCQA  Yes 
HIV Viral Load Suppression (HVL-AD)  2082  HRSA  No 
Behavioral Health Care 
Initiation and Engagement of Alcohol and Other Drug Abuse or  0004  NCQA  Yes 
Dependence Treatment (IET-AD) 
Medical Assistance with Smoking and Tobacco Use Cessation (MSC-AD)  0027  NCQA  No 
Antidepressant Medication Management (AMM-AD)  0105  NCQA  Yes 
Follow-Up After Hospitalization for Mental Illness: Age 21 and Older (FUH-AD)  0576  NCQA  Yes 
Diabetes Screening for People With Schizophrenia or Bipolar Disorder  1932  NCQA  Yes 
Who Are Using Antipsychotic Medications (SSD-AD) 
Follow-Up After Emergency Department Visit for Alcohol and Other Drug  3488*****  NCQA  Yes 
Abuse or Dependence (FUA-AD) 
Follow-Up After Emergency Department Visit for Mental Illness (FUM-AD)  3489*****  NCQA  Yes  Page 49  State Medicaid Director 
 
Diabetes Care for People with Serious Mental Illness: Hemoglobin A1c (HbA1c)  2607  NCQA  No 
Poor Control (>9.0%) (HPCMI-AD) 
Use of Opioids at High Dosage in Persons Without Cancer (OHD-AD)  2940  PQA  Yes 
Adherence to Antipsychotic Medications for Individuals with Schizophrenia (SAA- NA***  NCQA  Yes 
AD) 
Concurrent Use of Opioids and Benzodiazepines (COB-AD)  NA  PQA  Yes 
Use of Pharmacotherapy for Opioid Use Disorder (OUD-AD)**  3400  CMS  Yes 
Long Term Services and Supports 
 
National Core Indicators Survey (NCIDDS-AD)**  NA  NASDDDS/  No 
HSRI 
 
 * Measures in the Adult Core Set are considered mandatory for this demonstration model if they meet the following criteria: 
1) Measure is included in the Medicaid Scorecard or 2) are feasible for states to report either because they can reliably be 
reported using administrative data sources alone (like claims and encounter data) or as evidenced by the fact that at least 25 
states reported the measure in the 2019 Core Set reporting cycle of the 2018 Adult Core Set. 
** This measure was added to the 2020 Adult Core Set. More information on 2020 Updates to the Child and Adult Core 
Health Care Quality Measurement Sets is available at  https://www.medicaid.gov/federal-policy-
guidance/downloads/cib111919.pdf. 
*** The Adult Core Set includes the NCQA version of the measure, which is adapted from the CMS measure (NQF #1879). 
**** This measure is no longer endorsed by NQF but retained in the Adult Core Set following consultation with states, who 
reported that the measure concept remains important for the Medicaid adult population and no better measure currently 
exists. 
***** The NQF number for the FUA-AD and FUM-AD measures was previously listed as 2605. These measures now have 
separate NQF numbers but are the same measures included in the FFY 2019 Adult Core Set 
AHRQ = Agency for Healthcare Research & Quality; CMS = Centers for Medicare & Medicaid Services; HRSA = Health 
Resources and Services Administration; NA = Measure is not NQF endorsed; NCQA = National Committee for Quality 
Assurance; NQF = National Quality Forum; OPA = U.S. Office of Population Affairs; PQA = Pharmacy Quality Alliance; TJC 
= The Joint Commission. 
 
 
    Page 50  State Medicaid Director 
 
Appendix E: Key Elements of the Quality Strategy and Performance Assessment 
 
States that choose to pursue an HAO demonstration should develop a state Quality Strategy and 
Performance Assessment that is comprised of five key components laid out as a cohesive plan: 
(1) measurable goals, (2) interventions, (3) performance measures, (4) baselines and targets, and 
(5) rapid-cycle assessment and continuous quality improvement.  The Quality Strategy and 
Performance Assessment should address all populations covered under an HAO demonstration, 
even if they receive their care through a fee-for-service delivery system. 
 
 
1.  Identify objectives and articulate them as measurable goals.  The foundation of an 
effective Quality Strategy and Performance Assessment is a set of clearly defined 
objectives that are articulated as measurable goals that are meaningful for the 
population(s) covered in the demonstration.  In order to identify these goals, states should 
start with a data-based baseline analysis (e.g., cost, utilization patterns, health needs of 
target populations, quality of life issues facing beneficiaries, barriers to care, past 
performance) of the beneficiaries in this demonstration.  This analysis should help states 
identify opportunities for improvement by looking at the root causes of the issues and 
targeting quality improvement resources accordingly.  At a minimum, this baseline 
analysis should include the mandatory subset of the Medicaid Adult Core Set quality 
measures identified in Appendix D.  These are the measures that are in Scorecard and are 
feasible for states to report, either because they derived from administrative data sources 
or as evidenced by the fact that at least 25 states reported them to CMS as of the 2019 
Core Set reporting cycle, which reflects state reporting of the 2018 Adult Core Set.  
 
These specific measurable health care quality goals should drive the entire Quality 
Strategy and Performance Assessment: the interventions, payment model, and metrics 
should all be rooted in the specific goals identified.  States should consider how the 
interventions will help achieve these goals as well as how the performance measures 
will enable states to assess progress toward these goals.  Tools such as driver diagrams 
and run charts can help visualize some of these components together as pathways.  
 
2.  Identify the interventions that will help the state achieve these goals.  Under the HAO 
initiative, states will have broad flexibility in selecting the types of interventions that 
would advance their quality improvement goals.  However, the interventions selected 
should have a strong evidence base for driving progress towards the identified goals.  
 
States may wish to consult the Agency for Healthcare Research and Qualitys Health 
Care Innovations Exchange, an interactive database of innovative care models with 
demonstrated impact that is searchable by state, health care condition, patient 
population, and health care setting.  States may also wish to consult the Centers for 
Disease Control and Preventions 6|18 Initiative, a multi-state and multi-payer 
partnership targeting six common and costly health conditions  tobacco use, high blood 
pressure, health care-associated infections, asthma, unintended pregnancies, and 
diabetes  and, initially, 18 specific interventions that have been proven to be effective 
in improving health outcomes for individuals with these conditions.    
 
States may consider conducting several small tests of change and Plan-Do-Study-Act  Page 51  State Medicaid Director 
 
(PDSA) cycles to quickly identify which interventions have the greatest potential to 
impact change and drive progress towards the goals and aims of the states quality 
strategy.11  States can receive coaching and technical assistance in these types of quality 
improvement techniques by emailing MACQualityTA@cms.hhs.gov.  
 
3.  Measure and monitor progress toward these goals.  Once the objectives, goals, and 
interventions have been selected, the appropriate performance measures that can be 
directly tied to these goals and interventions should be selected.  At a minimum, these 
measures should enable the state to assess the impact of this demonstration on access to 
care and the quality and appropriateness of the care furnished to beneficiaries, including 
both underutilization and overutilization.  States should also annually survey these 
beneficiaries to understand their experience of care, including access and perceived 
barriers.  
 
These measures will allow a state to understand when an intervention has resulted in 
improvement as well as indicate if there is any slippage where quality improvement 
resources are not presently focused.  States should consider a blend of process and 
outcome-focused measures along with measures that can help to reflect unintended 
consequences of change, including to other parts of the system or other systems.  
 
States will be expected to collect and report the mandatory subset of the Medicaid Adult 
Core Set quality measures as noted in Appendix D.  These measures, along with the 
beneficiarys experience of care survey, will serve as the baseline for the demonstration 
and to measure impact of the demonstration on beneficiarys ongoing access to and 
quality of care.  In addition, these measures will be used to reward states on a pay-for-
performance basis.  The state may also use measures already in use by the state, if 
different from the Core Sets.  CMS will develop a set of tools that will aid states in 
selecting appropriate, standardized measures for specific settings of care that are also 
aligned with the Core Set.  
  
When selecting which measures to use, it is important to consider the rationale for 
selecting each measure and determine how each measure ties to the improvement goal 
or intervention.  This assessment will help the state identify which programmatic goals 
are and are not reflected with the available measures.  In addition, clarifying the 
connection from goal to measurement is useful in meaningfully conveying to 
internal/external stakeholders and to CMS what the state intends to achieve and how it 
will know that progress is occurring. 
 
In order to support alignment with federal programs, improve consistency and 
comparability in measurement, and minimize reporting burden, states are encouraged to 
consult the CMS measures inventory which includes the majority of the measures used 
in CMSs public reporting programs.   
 
                                                 
11 See https://www.medicaid.gov/medicaid/quality-of-care/downloads/qi-201-designing-interventions.pdf; 
https://www.medicaid.gov/medicaid/quality-of-care/downloads/qi-201-planning-and-doing.pdf;   Page 52  State Medicaid Director 
 
4.  Defining the starting point and targets for performance.  Using the data-based analysis, 
previous state performance on the Adult Core Set measures, and national benchmarking 
data, the state should identify baselines for each of the measures it intends to collect.  If 
states undertaking new initiatives or populations do not have baseline data for their 
measures, they should create a timeline for identifying and setting baselines.  
 
For the mandatory subset of the Medicaid Adult Core Set measures, CMS will set 
benchmarks nationally across all states reporting the given Core Set measures and 
organize them into quartiles.  To qualify for the performance-based portion of the shared 
savings, states will need to either achieve performance at the 75th percentile or 
demonstrate a 3 percent improvement over the prior year on a portion of those measures 
in order to qualify for the performance-based share of savings.  The reporting and quality 
performance requirements for shared savings is further described in the Financing and 
Shared Savings section of this guidance. 
 
States may choose to provide financial incentives to providers for absolute achievement, 
targeted improvement on metrics, or both.  There are multiple ways this can be 
accomplished.  The nature of the split between absolute achievement and targeted 
improvement will depend on the characteristics of the metric and the basic goals of the 
  
effort.12 States may also find CMSs guidance on shared savings to be useful to clarify 
state responsibilities on these financial incentives.13  
 
5.  Measure submission and use for rapid-cycle assessment and continuous quality 
improvement.  Quality improvement and measurement is best approached in cycles 
designed to continuously drive improvement in access to care, quality of care, and health 
outcomes.  Regularly monitoring performance assessment data and feeding it back to the 
health care providers and health plans participating in this demonstration is necessary in 
order to understand what measures of quality are improving (or not), and create the 
opportunity for developing and diffusing best practices, avoiding a repeat of problems 
and driving quality improvement more broadly.  
 
A critical element of transparency and feedback is the availability of appropriately 
structured, reliable and timely data that can support rapid cycle assessment to support 
mid-course corrections in interventions and to accelerate local learning and 
improvement.  States must collect and submit this performance measurement data to 
CMS and publish them on their website at least annually, with quarterly submission of 
data for performance measures derived from administrative data sources like claims. 
                                                 
12 For instance, a state may choose to align with CMSs Hospital Value-Based Purchasing incentive structure, which 
awards points for both achievement relative to a national benchmark and improvement based on a hospitals past 
performance, at https://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-
Instruments/HospitalQualityInits/Hospital-Value-Based-Purchasing-. Another approach would be to set a target of 
th 
90 percentile of national performance for it measures. In brief, providers earn the reward in one of two ways
either the provider meets this performance target, or the provider closes the gap between current performance 
(baseline) and this 90th percentile target by a pre-specified amount. 
13 https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/SMD-13-005.pdf   Page 53  State Medicaid Director 
 
Where the focus of the demonstration is less than statewide, the state must report these 
measures at the state and the demonstration levels: the difference between how a state is 
performing at the demonstration-level and at the state-level on a given measure is 
important information and provides context for understanding the demonstration-level 
performance. 
 
Relationship of Managed Care Requirements and Quality & Application to Fee-For-
Service 
Managed care has existing quality requirements at 42 CFR part 438 subpart E.  When developing 
this overall quality strategy, states should think broadly across all delivery systems, including but 
not limited to managed care.  States with managed care delivery systems can leverage existing 
quality strategies, QAPI requirements, and external quality review to fulfill these requirements.  
However, all beneficiaries covered by an HAO demonstration  even if they receive their care 
through fee-for-service arrangements in an otherwise managed care delivery system  will need 
to be integrated into these quality strategies, QAPI plans, and external quality review activities.  
 
Stakeholder Engagement and Transparency 
Stakeholder engagement in designing and implementing each of these components is critical. 
From consumers, to providers, to patients, multi-stakeholder approaches to quality are not only 
necessary for viability but have historically been a key to the success of quality improvement 
initiatives.  Stakeholder perspectives and values should be incorporated into this process from the 
initial conception of a quality improvement model, and should be reflected in the programmatic 
goals and measurement approaches. 
 
Technical Assistance 
Technical assistance on any aspect of these quality provisions, including the development of 
driver diagrams, measure selection, data collection and submission, and quality improvement 
approaches and techniques is available to states at no cost by emailing 
MACQualityTA@cms.hhs.gov. 
 
 
 
 
 
    Page 54  State Medicaid Director 
 
Appendix F: Guidelines for MLR Remittances 
 
Managed 
Care Plan  Minimal Remittance Required 
MLR 
Less than  The managed care plan must remit to the state 100% of:  
75%  a.  (.75 minus (the actual MLR)) multiplied by (total revenue) 
 
Additionally for being below 80%, the managed care plan must remit to the 
state no less than 80% of: 
b.  .05 multiplied by (total revenue) 
 
Additionally for being below 85%, the managed care plan must remit to the 
state no less than 50% of: 
c.  .05 multiplied by (total revenue) 
75% - 80%  The managed care plan must remit to the state no less than 80% of:  
a.  (.80 minus (the actual MLR)) multiplied by (total revenue) 
 
Additionally for being below 85%, the managed care plan must remit to the 
state no less than 50% of: 
b.  .05 multiplied by (total revenue) 
80% - 85%  The managed care plan must remit to the state no less than 50% of:  
a.  (.80 minus (the actual MLR)) multiplied by (total revenue) 
85% - 95%  The state and managed care plans do not need to make a remittance  
95% - 100%  The state must remit to the managed care plan no less than 50% of: 
a.  ((the actual MLR) minus .95) multiplied by (total revenue) 
100% - 105%  The state must remit to the managed care plan no less than 80% of:  
a.  ((the actual MLR) minus 1.00) multiplied by (total revenue) 
 
Additionally for being above 95%, the state must remit to the managed care 
plan no less than 50% of: 
b.  .05 multiplied by (total revenue) 
Greater than  The state must remit to the managed care plan 100% of: 
105%  a.  ((the actual MLR) minus 1.05) multiplied by (total revenue) 
 
Additionally for being above 100%, the state must remit to the managed care 
plan no less than 80% of: 
b.  .05 multiplied by (total revenue) 
 
Additionally for being above 95%, the state must remit to the managed care 
plan no less than 50% of: 
c.  .05 multiplied by (total revenue) 
 
 
 
 
  Page 55  State Medicaid Director 
 
Appendix G:  Schedule of Deliverables for the Demonstration 
 
Date   Deliverable  
30 days after approval  State acceptance of demonstration STCs, and Expenditure 
date by CMS   Authorities  
90 days after approval date  Implementation Plan 
90 days after approval date   Quality Strategy  
90 days after approval date   Baseline Quality & Access Measure Reporting and 
Beneficiary Access to Care, Barriers to Care and Experience 
of Care Survey results 
120 days after approval  Monitoring Protocol  
date 
180 days after approval  Evaluation Design 
date  
Quarterly Deliverables   Quarterly Monitoring Reports  
Due 60 days after end of  Quarterly Implementation Plan Update 
each quarter, except 4th  Quarterly Expenditure Reports   
quarter 
Annual Deliverables -  Annual Monitoring Reports  
Due 90 days after end of  Annual Quality and Access Measure Report 
each 4th quarter   Annual Survey of Beneficiary Access to Care, Barriers of Care 
and Experience of Care 
3 years after approval date  Mid-point Assessment 
1 year prior to the  Draft Interim Evaluation Report 
expiration of the 
demonstration, or with the 
demonstration extension 
application 
60 days after receipt of  Final Interim Evaluation Report 
CMS comments 
18 months following the  Draft Summative Evaluation Report 
end of the demonstration 
approval period 
60 days after receipt of  Final Summative Evaluation Report  
CMS comments 
Monthly Deliverables   Monitoring Call   Appendix H: METRICS FOR CONTINUOUS PERFORMANCE INDICATOR SYSTEM  
 
Access to care and availability of services 
Provider active participation: # providers enrolled with service claims for 3 or more 
beneficiaries 
1 
a)  Primary provider 
b)  Specialist provider  
Managed care states:  Provider availability by plan 
a)  Number of calls to state or plans call center indicating difficulty in finding 
2  provider or timely access to primary care services 
b)  Number of calls to state or plans call center indicating difficulty in finding 
provider or timely access to specialty care services 
Emergency department (ED) utilization 
3  a)  Total ED visits/number of member months in quarter 
b)  Total nonemergency ED visits 
Inpatient admissions/member months in quarter 
4  a)  Total 
b)  Avoidable 
Diabetes Short-Term Complications Admission Rate / Adult Core Set (PQI01-AD) (NQF 
5 
0272) 
Enrollment 
6  Total demonstration enrollment 
Retention at renewal 
a)  Total due for renewal  
7  b)  Percent successfully renewed 
c)  Percent terminated at renewal  
d)  Pending disposition 
8  Suspensions and lockouts (if applicable) 
9  Total pending applications 
Appeals and grievances 
Number of appeals requested/demonstration enrollment 
10  a)  Medicaid eligibility 
b)  Denial of benefits 
11  Number of grievances, by plan (managed care)/ demonstration enrollment 
Financing 
Claims processing (by plan if managed care) 
12  a)  The percentage total claims that were clean as submitted 
b)  Percentage of clean provider claims paid within (i) 14 days; (ii) over 45 days 
Medical loss ratio (MLR) (managed care)  
13  a)  Estimated for the quarter  
b)  Estimated year-to-date (YTD)