Sebelius: Arizona doesn’t need waiver to cut 250,000 people from AHCCCS

Arizona officials who spent nearly a year railing against the federal government for not allowing the state to cut its Medicaid rolls got some startling news Tuesday: Federal permission isn’t necessary for the state to drop 250,000 people from the Arizona Health Care Cost Containment System.

In a letter to Gov. Jan Brewer on Tuesday, U.S. Health and Human Services Secretary Kathleen Sebelius said Arizona could simply choose to not renew the agreement under which the feds provide matching funds for 250,000 childless adults in the system, known by the initials AHCCCS. The end of the agreement would effectively allow Arizona to drop those patients from AHCCCS on Sept. 30, when the agreement expires.

However, the news from the federal government does not mean Arizona has a clear path to cut patients from the program. A lawsuit probably will follow any attempt to make such cuts.

In her letter, Sebelius said the cuts would not violate the maintenance-of-effort provision in the Patient Protection and Affordable Care Act, the landmark health care law passed by Congress in 2010, which prohibits states from reducing Medicaid eligibility.

The revelation comes as Brewer was awaiting word from HHS on whether Sebelius would approve the state’s request for a waiver to allow the state to drop 280,000 people from AHCCCS. Brewer’s budget plan includes a $541 million cut from dropping the AHCCCS patients starting on Oct. 1.

But because Arizona is operating under a waiver that began when voters approved Proposition 204 in 2000, the state does not need a waiver to drop most of those people from AHCCCS. The ballot measure expanded AHCCCS coverage to include all childless adults who make up to 100 percent of the federal poverty level.

“I do want to make you aware that the (maintenance-of-effort) provision in the Affordable Care Act does not require Arizona to renew its demonstration as is, beyond its expiration date on Sept. 30, 2011,” Sebelius wrote. “Any reduction in eligibility associated with the expiration of your demonstration … would not constitute an MOE violation.”

In a press release, Brewer called the letter “an encouraging development” for the state as it seeks flexibility from the Affordable Care Act.

“Secretary Sebelius’ letter clearly indicates that Arizona may take the steps it requires to manage its Medicaid program and balance its budget without violating MOE requirements,” Brewer said. “I appreciate the timeliness of the secretary’s correspondence, as well as her pledge for continued cooperation as Arizona seeks the best means to serve its citizens while meeting its fiscal obligations. I look forward to meeting with Secretary Sebelius in the near future.”

It was not clear why state officials did not realize earlier that a waiver was unnecessary, nor why HHS did not inform the state sooner that the waiver was unnecessary. Brewer submitted her waiver request to HHS on Jan. 25, but she and lawmakers had sought to cut AHCCCS for nearly a year. The budget passed by the Legislature and signed by Brewer in March 2010 cut about 310,000 people from AHCCCS, but the cuts were restored when Congress approved additional temporary funding for state Medicaid programs.

“Our Medicaid folks are aware that this provision was going to expire. But obviously we applied for the waiver request thinking that would be necessary,” Brewer spokesman Matthew Benson said.

Sebelius wrote the letter in response to a letter Brewer sent her on Feb. 3. In that letter, Brewer complained that Sebelius’ recent suggestions for how states could cut Medicaid costs provided few opportunities for Arizona, which she said had already used every method Sebelius suggested.

Under guidelines set by HHS and the Centers for Medicare and Medicaid Services, Arizona still must establish a phase-out plan in which it provides for people who would face immediate harm from the loss of their coverage. The state must also determine whether the people being cut from AHCCCS are still otherwise eligible for Medicaid coverage.

Arizona will be permitted to cut only 250,000 of the 280,000 people Brewer sought to remove from the AHCCCS. The state will still be required to cover 30,000 parents of children who are on AHCCCS.

Benson did not say whether Brewer would still seek to drop the 30,000 parents from AHCCCS coverage.

“We’re going to continue studying this letter and what it means for the state,” Benson said. “There are a lot of things yet to be determined.”

And when the full Affordable Care Act goes into effect in 2014, Arizona will be required to provide coverage once again to the 250,000 AHCCCS patients who are likely to be cut. The health care act requires all state Medicaid programs to cover anyone who earns up to 133 percent of the federal poverty level.

The state may have a green light from HHS, but it likely will have a court battle on its hands over whether the proposed cuts violate Proposition 204. The ballot measure required the state to cover all people who earn up to 100 percent of the federal poverty level using money from a settlement with tobacco companies and other “available funds.”

Brewer and Republican lawmakers argue that no funds are available due to the budget deficit, which is estimated to be $1.2 billion in the fiscal year 2012, and that the state is therefore permitted under Proposition 204 to drop patients from AHCCCS.

“That has been our position,” Benson said.

Sebelius also offered HHS’s assistance in establishing a provider tax on hospitals to help fund Arizona’s Medicaid program. The Arizona Hospital and Healthcare Association was long resistant to the idea, but recently came out in support of a tax to prevent deep cuts to AHCCCS.

“We are also available to work with you on the possibility of adopting a provider fee, as we have done with several other states,” Sebelius wrote. “I realize that the (hospital) association’s proposal is in an early stage, but I want to assure you that the full resources of our department are available to you as you and the association work to structure this fee in a fiscally responsible and permissible manner.”