Budget Neutrality in KanCare

Megan Leopold
Fiscal Analyst

Iraida Orr
Principal Research Analyst

Connor Stangler
Research Analyst

KanCare is the program through which Kansas delivers Medicaid, a joint federal and state program that provides health and long-term care services to qualifying individuals. If states wish to waive certain federal requirements in order to carry out new initiatives, they can submit an application to the Centers for Medicare and Medicaid Services (CMS), the federal agency that oversees Medicaid. CMS may waive compliance with certain Medicaid requirements under Section 1115(a) of the Social Security Act. This is known as an “1115 waiver.”

In 2012, Kansas submitted an 1115 waiver to implement KanCare as a Medicaid reform initiative, which included managed care contracts for all medical programs and services. The application was approved, and the first KanCare 1115 waiver took effect January 1, 2013, and lasted until December 31, 2017, with a one-year extension granted through December 31, 2018. Following a reapplication process, a second 1115 waiver was approved beginning January 1, 2019, and ending December 31, 2023.

Budget Neutrality

Medicaid is a partnership between the State and the federal government, with the federal government paying for approximately 60.0 percent of Medicaid expenditures in Kansas and the State paying the remaining 40.0 percent. For CMS to approve each 1115 waiver, Kansas must demonstrate that the project will be budget neutral for the federal government. For a waiver to be budget neutral, it must not result in greater Medicaid costs to the federal government than would be expected without the waiver. To ensure budget neutrality, CMS places a limit on the amount of federal Medicaid funding for which Kansas is eligible over the course of the five-year 1115 waiver project. Kansas must agree to limit spending to stay within the range of budget neutrality and return any federal funds received that exceed the agreed-upon cap.

When KanCare was implemented, CMS estimated the existing Kansas Medicaid program would have cost the federal government $1.0 billion more if the 1115 waiver were not in place. This enabled Kansas to spend an additional $1.0 billion in federal funds over the course of the five-year waiver and remain within the boundaries of budget neutrality. At the same time, CMS estimated that, based on anticipated spending increases and policy changes over the course of the five-year waiver, Kansas would be approximately $568.0 million below the budget neutrality cap when the waiver ends on December 31, 2023.
What Impacts Budget Neutrality

Budget neutrality is based on how much is being spent per Medicaid program member per month. To calculate this, CMS sorts the population served by Medicaid into two groups. One group is made up of adults and children and the other is aged-blind-disabled and long-term care. A maximum per member per month amount is calculated for each of the two groups. For this reason, membership increases or decreases do not significantly impact budget neutrality unless there is a large increase or decrease within a high-cost eligibility group.

Budget neutrality is impacted by most changes to KanCare, including any policies that increase the capitation payments made to KanCare managed care organizations (MCOs). Examples of expenses that do count toward the budget neutrality cap include:

  • Any changes to the rates paid to Medicaid providers;
  • The addition of new Medicaid-covered codes or services; and
  • Provider assessments used to draw down federal matching funds, such as the Health Care Access Improvement Program.

Some expenditures that do not impact budget neutrality include:

  • Changes to client obligations, such as changes to the protected income level;
  • Changes to the Program for All-Inclusive Care for the Elderly (PACE). [PACE is not included under the 1115 waiver];
  • School-based services funded with Medicaid dollars (these programs operate outside of the 1115 waiver);
  • Medicaid Expansion would not influence budget neutrality, as it would operate under a separate budget neutrality cap; and
  • Provider rate increases paid outside MCO capitation payments [i.e. Strengthening People and Revitalizing Kansas (SPARK) distributions and the 2021 retroactive $15/day nursing facility rate increase].

Corrections to the Kansas Budget Neutrality Cap

Due to the way CMS calculated the State’s budget neutrality cap, several costs were underestimated, ultimately reducing the amount Kansas can spend before reaching the budget neutrality cap. One such cost was an increase to the MCO privilege fee that reduced the State’s cumulative budget neutrality cap by an estimated $234.0 million. Another underestimated cost was the anticipated expenditures for the adult and child population groups. At the time, CMS was calculating Kansas’ budget neutrality cap, the State had placed a temporary pause in eligibility redeterminations for the adults and children group. This came during the processing of new applications for other population groups. This had the effect of lowering the anticipated expenditures by $139.5 million for the adult and child population group.

KDHE is in the process of submitting a proposal to CMS to correct the above issues. If CMS accepts the proposal, the budget neutrality cap is expected to be raised, increasing the amount Kansas is eligible to spend. This follows a prior proposal that KDHE made to CMS in September 2020 after noticing a technical error in the State’s budget neutrality calculation. This proposal was accepted by CMS, and the budget neutrality cap was raised; however, the amount Kansas is allotted to spend on each of the two population groups was not increased.