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Statement on Steamlining Federal Grant Waivers to States by Dr. John Callahan
Assistant Secretary for Management and Budget
U.S. Department of Health and Human Services

Chairman McIntosh, Chairman Horn and distinguished members of the Subcommittees, thank you for the opportunity to discuss the process used by the Department of Health and Human Services to consider waivers of Federal law and regulations. We are pleased that your Subcommittees are interested in hearing about how State requests for statutory waivers are reviewed, and thank you for your leadership in advancing effective government.

The waiver of Federal law and regulations has been an important component of this Administration’s efforts to ensure both State flexibility and accountability. As you know, the Secretary has the authority in certain circumstances to waive Federal statutory provisions or departmental regulations. This authority allows the Secretary to enable States to experiment and conduct research by demonstrating innovative programs or policies. At the same time, the process enables the Secretary to evaluate the waivers rigorously, while stewarding Federal expenditures through the mechanism of budget neutrality.

The approval of an unprecedented number of waiver requests by this Administration has provided great opportunities for the States to be laboratories for exciting new health and human service ideas. We believe that the lessons learned from these program waivers and research and demonstration waivers have been constructive and we are looking forward to continuing to work with the States to use waiver authority to help them achieve our common program goals. In the Administration for Children and Families (ACF) we have learned that the most effective ways to move welfare recipients into work is to emphasize "work first" approaches in implementing welfare reform. This knowledge helped shape our national perspective on welfare reform. In Medicaid, our extensive experience with waivers on mandatory enrollment in managed care programs led to a change in national policy allowing mandatory enrollment without the need for a waiver. These are just two examples of how State waivers and evaluations have led to changes at the national level.

Although the waiver requests we have granted have had a significant role in shaping our program strategies for addressing the needs of low-income children and families, the process of granting waivers has certain serious responsibilities attached to it. They include ensuring that flexibility and the opportunity to develop new knowledge do not hamper accountability for both program purposes and funding. Cost neutrality is a key concern, as well as acquiring through valid research the means to pinpoint the success or lack of success in approaches. Finally, we must never lose sight of this Department’s responsibility to families who depend on our programs for assistance, and on Medicaid for health coverage and who deserve to be protected when they become subject to demonstrations.

Waiver Policy

Use of an effective waiver process is a critical policy tool. The Department has procedures and policies in place to assure waivers are granted efficiently while maintaining the fiscal and programmatic integrity of various programs. It is critical to remember that HHS has a fiduciary and programmatic responsibility to evaluate each waiver separately on its merits. This is important for three reasons. First, Medicaid, child welfare services, and child support enforcement programs are different in each State. It is therefore often difficult to determine the effect that the same or similar policies would have in each State. For example, State’s proposals usually have different goals that translate into variations in eligibility definitions, benefit coverage, service delivery systems and cost. Second, a waiver program that is budget neutral or cost effective in one particular State may not be in another. Therefore, issues of budget neutrality or cost-effectiveness must be resolved separately for each State. Finally, as we noted, our paramount concern is assuring that we focus on each waiver separately to assure we protect all vulnerable populations. Waivers that change benefits or make large programmatic changes must be carefully assessed to assure families and children are protected. Given the range of possibilities in both the specifics of waiver proposals and the circumstances of different States, it is very difficult to make generalizations about existing waivers and important to assess each request individually. Time limits on the review of Section 1115 demonstration waiver requests would adversely affect our ability to maintain the fiscal and programmatic integrity of the Medicaid program by reducing the Secretary’s and States’ ability to negotiate the details of the waiver request.

Overview of Waivers

The Administration is committed to using the Secretary's waiver authority to:

• Increase State flexibility.
• Test innovative service delivery options.
• Expand health care coverage to populations currently uninsured, within the limits of budget neutrality.

Several sections of the Social Security Act give the Secretary authority to grant waivers of certain statutory provisions in ACF programs and in the Medicaid program. The most commonly used authorities are:

• Medicaid, Welfare, and Child Support Research and Demonstration Waivers: Section 1115 of the Social Security Act (SSA) allows approval of experimental, pilot, or demonstration projects to promote the objectives of various programs authorized in the SSA, including Medicaid, the old AFDC program, and the child support enforcement program. These demonstration projects, which are referred to as "research and demonstration waivers," often involve expansions of eligibility, and are therefore subject to strict budget neutrality standards, in which the overall cost to the Federal government must not exceed what would have been spent in the absence of the waivers granted.
• Child Welfare Waivers: Section 1130 authorizes the Secretary to approve up to 10 child welfare demonstration projects per year. These projects involve the waiver of provisions of the Title IV-B and Title IV-E child welfare, foster care and adoption assistance programs and related regulations, while preserving the eligibility and procedural protections of the child and family. These projects have cost neutrality provisions and provide for the rigorous evaluation of the project's results. Twenty-five waivers have been granted under this authority since 1994.
• Refugee Assistance Waivers: The refugee resettlement waiver authority is found in the regulations at 45 CFR 400.300. States most frequently request a waiver of regulations that limit the use of funding for social services and targeted assistance to refugees, who have been in the U.S. for less than five years. Seven waivers have been granted under this authority since 1997.
• Medicaid Program Waivers: Section 1915(b) of the Social Security Act provides a much more narrow authority than the Section 1115 research and demonstration waivers discussed above. These program waivers allow States to waive statewideness, comparability of services, and beneficiary freedom of choice with respect to Medicaid providers, so long as the projects also meet a test of cost-effectiveness. The cost of Medicaid managed care waiver projects must not exceed the cost of Medicaid fee-for-service.
• Medicaid Home-and Community-Based Waivers: Section 1915 (c) of the Social Security Act allows States to request waivers of certain Federal requirements to allow development of home and community-based treatment alternatives to institutional care so long as these alternatives cost no more than it would to provide the same care in an institutional setting.

Process for Waiver Review and Approval

The Administration has made State flexibility a high priority and has worked extensively with States to create agreements on waiver process and procedures. In an attempt to streamline the process and increase State flexibility, the Department and the National Governors Association (NGA) agreed on policies and procedures for reviewing Section 1115 research and demonstration waivers in 1994. The purpose of this agreement was to facilitate review at a time when there was increasing demand to process waiver requests. The agreement encourages States to develop research and demonstration projects. In the General Considerations portion of that agreement, the Department and NGA agreed that, "to facilitate the testing of new policy approaches to social problems, the Department will:

• Work with States to develop research and demonstrations in areas consistent with the Department's policy goals;
• Consider proposals that test alternatives that diverge from that policy direction; and
• Consider, as a criterion for approval, a State's ability to implement the research or demonstration project.

This document also laid out principles related to evaluation, duration, cost neutrality, and State notice procedures. Copies of this agreement are appended to my testimony as Tab A.

Our commitment to increasing State flexibility has meant that States have had the authority to test innovative practices in both their Medicaid and ACF programs on a scale never before permitted by any other administration. Because of the broad scope of activities proposed in Section 1115 research and demonstration waivers, each waiver must be carefully reviewed in each agency.

ACF Process

Prior to the enactment of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), HHS used waiver authority extensively to provide States with flexibility in running their welfare programs. On average, it used to take the Department four months from receipt to approval of a welfare waiver and many requests were approved in two months. Waivers were required to be cost neutral over the life of the demonstration and an experimental design was used for costs and evaluation.

In 1995, with the goal of shortening the review time, ACF developed and announced an expedited 30-day review and approval process for proposals for waivers that addressed five specified strategies for helping welfare recipients become self-sufficient: 1) work requirements, 2) time limits for those who can work, 3) requirements for minor parents, 4) improving payment of child support, and 5) subsidized employment programs. Several States applied under this process. However, applicant States typically sought approval of a wide array of provisions extending beyond those that could not be handled under the expedited process effect on time. Extending expedited review beyond these five areas would have been detrimental to maintaining the fiscal and programmatic integrity of the program. After States implemented Temporary Assistance for Needy Families (TANF), there was less of a need for welfare waivers due to the vast flexibility provided in the welfare reform legislation. Copies of the expedited guidance are appended to my testimony as Tab B.

For both welfare reform and child support waivers, the ACF process includes:

• technical assistance prior to formal submission
• provision for adequate State public notice of pending waiver requests
• review of applications by analysts focusing on costs and programmatic impact
• comments consolidated into State issue papers including discussion of cost neutrality
• negotiation of issues and provisions

• issuance of approvals/denials

The process for child welfare waivers is similar to the welfare reform process. However, as reflected in the statute's limitation on the number of projects that may be approved (ten per year) and the strict requirements in the law about the need for designs that assure cost neutrality and a rigorous evaluation of effectiveness, they are very focused on learning about new cost-effective approaches that contribute to the improvement of child welfare services. For this reason, the process includes a preference for policies and service program alternatives that differ from other demonstration projects. Additionally, priorities identified in the statute, such as kinship care, overcoming barriers to adoption and addressing parental substance abuse, as well as other major issues in the field, are identified in the announcements for the demonstrations. Approvals generally take about four months.

In the case of refugee resettlement waivers, ACF's Office of Refugee Resettlement is responsible for the review process. All such waiver requests are reviewed to determine whether the waiver will advance the primary goal of the refugee program, which is to achieve economic self-sufficiency and social adjustment within the shortest possible time after arrival. In most instances, a decision to approve or disapprove is made within 60 days of receipt of the request.

HCFA Process

In HCFA, the review process differs depending on the type of waiver requested. Approvals and renewals for Section 1915 program and home and community-based waivers are time-limited. Section 1915(f) of the SSA specifies time limits for approving these waivers. The Secretary must either deny the waiver request or ask for additional information within 90 days of the date of the State's submission of a waiver application. During this time frame, a review team must review the details of the waivers requested, and provide feedback and follow-up questions to the State. When these questions are sent to the State, the 90-day clock stops. Upon receipt of the additional information, the clock restarts, terms and conditions are negotiated, and a waiver is deemed granted on the 90^th day, unless the Secretary denies the waiver request before the 90^th day.

Both types of waivers contain statutory cost effectiveness requirements. Program waivers must demonstrate that the cost of the care system proposed under the program waiver does not exceed what Medicaid costs (combined State and Federal) would have been in the absence of the waiver. These waivers are approved for two years and may be renewed for subsequent two-year periods. Under home and community-based waivers, the cost of the care provided in the community must not exceed the cost of caring for the same beneficiary in an institutional setting.

Section 1115 Demonstration waivers are generally granted for five years and may be extended for an additional three years. Approval time has varied from three months to two years. As with ACF research and demonstration waivers, various groups within the Administration work as a team to evaluate research and demonstration proposals. There is not a 90-day review clock for the research and demonstration waiver proposals, but the review process is similar to the Section 1915, process in that a Departmental team reviews the proposal, initiates discussions with the State, and follows many of the steps discussed above. The Administration and the NGA agreed that there would be a cost neutrality component to Section 1115 research and demonstration projects in the 1994 agreement. This means that the financing for health care reform demonstrations under Section 1115 is calculated by comparing the Federal cost under the demonstration to what Federal costs would have been had there been no demonstration. This requires establishing a base year of costs (usually the last pre-demonstration year) and agreeing to a projection methodology to estimate how much costs will increase over the duration of the project. However for research and demonstration waivers budget neutrality establishes a cap on Federal expenditures, whereas in 1915(b) waivers, the test is whether, in the Secretary's estimation, the managed care program will save money.

Overall Review Process

Research and demonstration waiver requests often raise complex issues that require time and attention to evaluate fully. While the goal of waiver requests is to try different approaches to program administration, all of this must be done in the context of our need to protect vulnerable families while meeting our fiduciary responsibilities. The complexity of many welfare reform research and demonstration waiver proposals is a case in point. Some of these proposals contained extraordinary policy, legal, or program evaluation issues and took long periods of time to resolve. As I have noted, even in the case of the expedited review process for AFDC waivers that was announced in 1995, many provisions in the packages of reforms proposed by the States fell outside of those covered by the 30-day approval time frame making the process of limited use.

We have upheld the President's commitment to expeditious review of Medicaid and ACF-related proposals. However, new policy initiatives may require development of new decision criteria to evaluate the proposal. For example, as you know, there has been heightened concern in the Administration -- concern which we know is shared in the Congress and in the advocacy community -- about children with special health care needs in capitated, managed care programs. Policy concerns such as these can delay approvals or renewals of State programs, as we review the plans to ensure that vulnerable populations are protected. Finally, our two decades of experience with managed care waivers has made the Department better able to work with States to ensure that they are aware of contract requirements for managed care organizations or necessary protections for special needs populations.

Furthermore, we have taken steps to expedite our existing processes. In 1995, HCFA published the Proposal Guide for Section 1115 State Health Care Reform Demonstrations to inform States of guidelines for approval of Section 1115 research and demonstration proposals. In addition, this year, we also revised our pre-print application for 1915 (b) program waivers with the hope of speeding the approval process. The 1915 (c) home and community-based waiver application was also revised at this time. In conjunction with the revisions to the pre-print application, we also convened a conference with State agency representatives to familiarize them with the new application. A copy of this guide is appended as Tab C.

Summary of Waivers Granted

ACF Waivers Pre-Welfare Reform

Prior to passage of the 1996 welfare reform law, HHS worked with almost all States to help them reform their welfare systems through the Section 1115 waiver process. Since the beginning of the Clinton Administration, we have approved 78 welfare reform demonstrations in 43 States. The details of each waiver were unique but major themes across these demonstrations included:

• Linking Personal Responsibility to Benefits - Demonstrations in Michigan, Oregon, Utah and other States included changes to the exemption criteria for the 1988 Family Support Act's Job Opportunities and Basic Skills Training (JOBS) program -- most often requiring more recipients to engage in work activities. A number of demonstrations such as those in Delaware, New Hampshire and Virginia included changes in the sanctioning rules. Additionally, Georgia, Indiana, Maryland, Ohio and other States sought authority to link benefit receipt to personal responsibility in additional areas such as school attendance for dependent children, receipt of appropriate immunizations or health screenings for young children and strengthened requirements for cooperation with child support enforcement. Many of the demonstrations in this category--over 20--were aimed at strengthening child support enforcement.

• Making Work Pay - A very common approach in many State efforts, including such States as Connecticut, Illinois, Minnesota, and Vermont, was to increase the amount of income an individual can earn and still retain some welfare benefit. In addition, State demonstration projects increased the resource/asset limits for welfare families and included waivers that increased vehicle asset limits, allowing families to own reliable automobiles to use for work and other family needs. A number of these demonstrations included extensions or expansions of transitional Medicaid and child care benefits.

• Time Limits - To promote personal responsibility, waivers allowing for various time limits on the receipt of cash assistance were approved in 23 of the welfare reform demonstration projects such as in Connecticut, Florida, and Virginia.

ACF Post-PRWORA

After enactment of welfare reform, only a small number of pending welfare waivers of limited scope were granted under the provisions of Section 415. The 1996 statute broadened States’ flexibility so that most States did not require waivers for their programs. The waivers that were granted gave States greater flexibility in assuring that families obtain needed medical assistance and in simplifying the administrative burden of providing medical assistance to qualified low-income families. They also included a waiver to allow passing through child support collections to welfare families.

The child support waivers that continue to be granted under Section 1115 cover such areas as waiving the application and fee for non-welfare cases in order to expedite services; a fatherhood project to help fathers increase their incomes and child support compliance; and a project to test several initiatives such as evaluating paternity acknowledgment practices. Four waivers, in addition to the child support related waivers in welfare reform, have been granted under this authority.

Child welfare waiver demonstration projects test a wide range of new approaches to the delivery of child welfare services that will provide valuable knowledge to improve the delivery and effectiveness of services to vulnerable children and families. Key requirements of the demonstrations are that they may not waive legal protections for children in foster care and their families and that they may not impair a child or family's eligibility for benefits under Title IV-E. The projects must also be cost-neutral to the Federal government and must provide for an evaluation by an independent contractor, using a scientifically rigorous evaluation design, such as random assignment. These waivers are generally processed within four months.

The waivers provide States with greater flexibility to use Title IV-E funds for services that can facilitate safety and permanence for children. They are intended to further the purpose of parts B and E of Title IV to achieve positive results such as: assuring the safety and protection of children; enhancing and enriching child development; providing permanency for children; strengthening family functioning and averting family crises; providing early intervention to avoid out-of-home placement; reducing the time that children are separated from their families; speeding the process by which children unable to return home are adopted; or preparing young people in foster care for independent living. Among the projects approved to-date are capitated payment models, in which an array of services is provided under a fixed-price arrangement and system reform projects. Other projects are focused on increasing adoptions; developing assisted guardianship models that enable kin to become legal guardians for children in their care; addressing the needs of parents with substance abuse problems; and providing more intensive service options to special populations to prevent foster care placements.

Medicaid Program Waivers, Home and Community-Based Waivers, and Research and Demonstration Waivers

Since the beginning of the Clinton Administration, DHHS has approved almost 300 program waivers under Section 1915(b) (new programs, renewals, and modifications), and over 20 research and demonstration project waivers under Section 1115 authority. In addition, over 240 home and community-based waivers (Sec.1915 (c)) are in operation.

Section 1915 (b) Program Waivers

Under freedom-of-choice waivers, States can establish primary care case management programs, require Medicaid beneficiaries to choose among managed care plans, and selectively contract with hospitals, nursing facilities, or other providers. States use this flexibility to target managed care systems to their high-risk populations and to purchase services in a cost-effective manner. States are taking full advantage of the flexibility to design managed care programs for their Medicaid populations. Approximately 300 freedom-of-choice programs are up and running in almost every State.

States have also developed managed care programs to target a number of specific priorities. For example, the Kansas Primary Care Network (PCN), which was established in 1984, was one of the first managed care programs to provide physician case management to beneficiaries. Under this program, the State assigns each Medicaid beneficiary in the seven most populous counties to a physician case manager. The case manager is responsible for managing all of the recipient;s health care. Over 30 percent of the State's Medicaid eligibles are now enrolled in this PCN program. State assessments have shown the program to be cost effective as well as providing better access to services for the participating Medicaid beneficiaries.

Section 1915(c) Home and Community Based Services Waivers

Home and community based services waivers give States the ability to establish home and community based care programs that provide services to beneficiaries in the community setting rather than in nursing homes and hospitals. Home and community based services programs allow States to manage care provided to the elderly and disabled populations in an efficient manner while increasing the consumer's satisfaction with the services provided.

States have made extensive use of this authority as well. Over 240 programs are now operating. Every State is currently serving developmentally disabled and aged individuals under a home and community based services program. States are also serving people with HIV/AIDS, those with traumatic head injury, and medically fragile children. The Administration is justifiably proud of its record in encouraging States to move people from institutions into appropriate community settings.

Service Delivery and Financing Demonstrations

Medicaid's research and demonstration authority, Section 1115 of the Social Security Act, gives States much broader opportunities to develop and test new and innovative ideas. States can use this authority to develop sub-state and statewide demonstrations of new approaches to health care financing and delivery.

This Administration has approved over 20 statewide Section 1115 Medicaid demonstrations, and several more sub-state demonstration projects. Several additional States have submitted proposals that are currently being reviewed. This Administration has approved more statewide demonstrations than any previous Administration. We have actively encouraged States to develop innovative reform demonstrations including managed care approaches working with the private sector and public health providers.

For example, Hawaii QUEST creates a public purchasing pool that arranges for health care through capitated managed care plans. The Hawaii QUEST program provides seamless coverage to people previously covered through Federal and State programs and the uninsured by building on the State's unique exemption to the Employee Retirement Income Security Act (ERISA) granted by Congress in 1983. The Medicaid income eligibility level has been expanded to 300 percent of the Federal Poverty Level and categorical requirements were eliminated. The proposal was submitted on April 19, 1993 and approved on July 16, 1993. The program was implemented on August 1, 1994.

A second example is Vermont. The Vermont Health Access Plan expands eligibility to uninsured Vermonters with incomes under 150 percent of the Federal Poverty Level, implements a managed care system, and extends a prescription drug benefit to the State's lower-income Medicare beneficiaries. Approximately 90,000 individuals, including 26,000 previously uninsured, will be covered. The proposal was submitted on February 24, 1995 and approved on July 28, 1995. The program was implemented on January 1, 1996.

In addition, the Administration has approved smaller, more targeted Section 1115 demonstrations. Some of these demonstrations provide preventive services to children, test extended family planning services, and establish alternative delivery systems.

Conclusion

The U.S. Department of Health and Human Services is committed to the waiver process and to allowing States to improve programs through research and state flexibility with appropriate accountability to the taxpayer and safeguards for affected families and children. I know we all agree that waivers are an important part of our policy development process and provide wonderful opportunities for States to help their citizens in innovative ways. Both the Clinton Administration in general, and HHS in particular, are committed to working with States to develop programs that work. Our critical job is to assure that waivers can expand and change programs constructively while maintaining protective safeguards to assure that families and children are suitably supported while States explore various policy options.