Each state administers its Medicaid program in accordance with its own state plan, which must be reviewed and approved by HHS, and must delineate, among other things, the groups of individuals to be covered, services to be provided, and methodologies for providers to be reimbursed. Within broad federal requirements, states have flexibility in deciding which individuals to cover and the range of medical services to provide in their Medicaid programs. For example, states generally must cover certain “mandatory” populations and benefits, such as low-income children and pregnant women and inpatient and outpatient hospital services, but they also have the option of covering “optional” categories of individuals and benefits such as children with higher family incomes. Additionally, coverage of certain institutional services is mandatory under Medicaid, while coverage of most home- and community-based services (HCBS) is optional for states. States may also choose from different delivery systems, such as fee-for-service or managed care. Under Medicaid, states pay health care providers based on provider claims for eligible services rendered to Medicaid beneficiaries. In addition to payments for covered services, states often make Medicaid supplemental payments to providers, which are typically lump sum payments that are separate from and in addition to payments made to providers using regular Medicaid payment rates. One type of supplemental payment states may make to hospitals is Disproportionate Share Hospital (DSH) payments. Congress created the DSH program to help hospitals serving Medicaid and uninsured patients offset their uncompensated care costs, within facility-specific and state-specific caps, or limits. States may also make other supplemental payments under their state plan, sometimes referred to as “Upper Payment Limit (UPL) payments,” to providers such as hospitals and nursing homes. These payments are based on the difference between the amount that Medicaid paid for services using regular Medicaid payment rates and the UPL, which is an estimate of what the federal Medicare program would pay for similar services.supplemental Medicaid payments to providers under section 1115 demonstrations. If a state wishes to change its Medicaid program in ways that deviate from certain federal requirements, it may seek to do so under the authority of an approved demonstration, outside its state plan. For example, section 1115 demonstrations can enable states to test new approaches to beneficiaries’ health care delivery to generate savings or efficiencies by expanding benefits to cover populations that would not otherwise be eligible for Medicaid or altering the Medicaid benefit package for categories of covered populations while still qualifying for federal matching funds.demonstrations are often approved to expand Medicaid coverage, HHS also allows states to make changes to their existing expenditure authorities, which can include limiting or ending previously approved coverage. To obtain approval under section 1115 of the Social Security Act, a state’s demonstration must, in the Secretary’s judgment, be likely to promote Medicaid objectives. While the expenditure authorities included in the States submit applications for section 1115 demonstrations to HHS for review by a federal review team, led by HHS. consist of negotiations, including the exchange of questions and answers between the review team and the state. If the demonstration is approved, HHS issues an award letter to the state and an approval specifying the Medicaid requirements that are being waived, the expenditure authorities approved, and the special terms and conditions. The special terms and conditions encompass the requirements for the demonstration, which include the conditions and limitations on approved expenditure authorities as well as specific reporting and evaluation requirements for the demonstration period. HHS typically approves an 1115 demonstration for an initial 5-year period that can be amended or extended. In general, HHS can withdraw a state’s authority to claim federal funding for expenditures in an 1115 demonstration under certain circumstances, including if the agency determines that the demonstration no longer promotes the objectives of the Medicaid program. The review team includes representatives from the Office of Management and Budget, other agencies within HHS as applicable, and HHS Secretarial Offices, including the Assistant Secretary for Planning and Evaluation and the Assistant Secretary for Financial Resources. were saving Medicaid funds through efficiencies under the demonstration, such as by implementing managed care. Each approved demonstration has a federal spending limit for purposes of determining budget neutrality. As specified in the special terms and conditions for each demonstration, yearly expenditure targets may be exceeded, but total spending over the time period of the demonstration must be at or under the overall limit. For many years, section 1115 demonstrations offered the only avenue for states to provide Medicaid coverage to childless adults, who were generally ineligible under the program, but this changed with the enactment of the Patient Protection and Affordable Care Act (PPACA) in 2010. PPACA brought significant changes to the Medicaid program, including giving states the option to expand Medicaid eligibility to nearly all adults with incomes at or below 133 percent of the Federal Poverty Level (FPL), thus removing the program’s historic exclusion of childless adults from Medicaid eligibility. States opting to cover newly eligible adults qualified for enhanced federal matching funds beginning January 1, 2014. In addition to providing states with the option to expand Medicaid, PPACA also provided new income-based subsidies to make private health insurance coverage more affordable for certain low- and moderate- income individuals. Specifically, PPACA required the establishment of health insurance exchanges in each state, where, starting January 1, 2014, eligible individuals can purchase health insurance coverage from participating plans. In addition, eligible individuals with low- and moderate-household income may qualify for federal subsidies for this coverage. Individuals with household income between 100 and 400 percent of the FPL may be eligible for federal premium tax credits and individuals with household income between 100 and 250 percent of the FPL may be eligible for cost-sharing reductions. Among the variety of coverage-related expenditure authorities approved or modified by HHS during our review period, there were certain prevailing themes. While HHS did approve some expenditure authorities that extended coverage to new populations or for new benefits, HHS also modified existing expenditure authorities in several states to end or limit coverage of low-income adults or premium assistance payments under states’ demonstrations, as new coverage options became available under PPACA. In addition, in almost half of the states we reviewed, HHS approved or modified expenditure authorities to provide HCBS to certain populations or to provide full Medicaid coverage to populations already receiving HCBS. (See app. I for coverage-related and other types of expenditure authorities approved in all 25 states.) In 20 of the 25 states we identified with recent approvals, HHS had approved new or modified existing expenditure authorities for Medicaid coverage, premium assistance, or both, for low-income adults; however, often the approvals were to limit the duration of this coverage as new coverage options became available under PPACA. Twelve of the 20 states had covered low-income adults not eligible for Medicaid prior to 2014 under demonstrations and then had opted to expand Medicaid coverage to low-income individuals starting January 1, 2014, as allowed under PPACA. In most of these 12 states, HHS modified states’ existing expenditure authorities to end their coverage of low-income adults or permitted them to allow this coverage to expire under their demonstrations as of December 31, 2013; in 2 states HHS approved new expenditure authorities allowing the states to start covering low-income adults but just until the end of 2013. Beginning in 2014, some of these populations would likely be covered under the states’ Medicaid plans. Three of the states that limited coverage had not opted to expand These Medicaid, as allowed under PPACA, at the time of our review.states received approval to modify their expenditure authorities to end Medicaid coverage for some individuals with incomes above 100 percent of the FPL under their demonstrations as of December 31, 2013, at which time these individuals could purchase coverage through the exchanges and may also qualify for federal subsidies for this coverage. These states were also approved to maintain coverage for certain individuals with incomes up to 100 percent of the FPL, who would not be eligible for the subsidies if they were to purchase coverage through the exchanges. Similar to coverage of low-income adults, HHS approved expenditure authorities for premium assistance in 7 of the 20 states during our review period, which often limited the duration of coverage under states’ demonstrations as new coverage options were made available through the exchanges.federal matching funds for different types of premium assistance payments, including those for employer-sponsored insurance and for individual private insurance—purchased either outside of or through the exchanges. Some states had expenditure authorities approved for more than one type of premium assistance. Appendix II provides information on the premium assistance programs included in the 1115 demonstrations we reviewed. Under these approvals, the states were allowed to claim Employer-sponsored insurance. Six of the seven states had existing expenditure authorities for premium assistance for employer-sponsored insurance, and during our review period, most received approval to shorten the time frames for this coverage to coincide with the implementation of the exchanges. For example, while Vermont’s demonstration is effective until December 2016, the state was approved to end premium assistance for employer-sponsored insurance on December 31, 2013, for several different populations. Idaho received approval to offer premium assistance for individuals with incomes above 100 percent of the FPL through December 31, 2013, after which time these individuals can purchase coverage through the exchange and may be eligible for federal subsidies for this coverage if they meet certain criteria. The state also received approval to provide premium assistance through September 30, 2014, to individuals with lower incomes, who would not be eligible for federal subsidies if they chose to purchase coverage through the exchanges. In contrast, some states received approval during our review period to extend or expand premium assistance for employer-sponsored insurance. For example, in September 2012, Utah—a state that had not expanded Medicaid as provided for under PPACA at the time of our review—received approval to expand income eligibility for its premium assistance program for employer-sponsored insurance for nonelderly workers from at or below 150 percent to at or below 200 percent of the FPL. Individual insurance.