View all blogs

Texas Receives 1115 Waiver Renewal

This week, our In Focus section reviews Texas’ 1115 Medicaid waiver renewal. After more than a year of negotiations, on December 21st the Texas Health and Human Services Commission (HHSC) received CMS approval to extend the state’s 1115 waiver.[1] The Texas Healthcare Transformation and Quality Improvement Program waiver was initially approved by CMS as a five-year demonstration waiver that began December 2011 and ended September 2016 and included $29 billion in funding.  The waiver authorized the expansion of Medicaid managed care while preserving federal hospital funding historically received as supplemental payments. The waiver created two new funding pools:  the Uncompensated Care (UC) payment pool and the Delivery System Reform Incentive Payment (DSRIP) pool.

In May 2016, Texas received a 15-month extension that continued the waiver through December 2017, during which time HHSC and CMS continued negotiations on a longer-term agreement. As a condition of the extension, HHSC was required to contract with an independent entity to evaluate the roles of Texas’ UC Pool and DSRIP program in the overall Medicaid system for paying hospitals. The study was conducted by Health Management Associates and submitted to CMS in August 2016.[2]

The new extension continues the waiver for an additional five-year period beginning October 2017 through September 2022. As with the initial waiver, the renewal includes three primary components:

  • Continuation of the statewide managed care program, which now covers more than 90 percent of all Medicaid enrollees and includes all 254 Texas counties;
  • Modification and continuation of the DSRIP program through September 30, 2021; and
  • UC funding to support hospitals and other providers for costs associated with treatment of indigent or low-income patients.

The State also received approval for other payment programs using the available Budget Neutrality provision under the waiver.  This includes the Network Access Improvement Program (NAIP), the Quality Incentive Payment Program (QIPP), and the Uniform Hospital Rate Increase Program (UHRIP).

The waiver includes multiple provisions and deadlines the State must meet in order to receive full funding, which is described in more detail below.

Financing Provisions and Requirements

The terms of the renewal include over $11 billion in DSRIP program funding and at least an estimated $13 billion for UC payments.  The DSRIP program is allotted $3.1 billion in Demonstration Year (DY) 7 and DY 8, decreasing to $2.91 billion in DY 9, $2.49 billion in DY 10, and $0 in DY 11.

Funding for UC is more complicated due to the waiver Special Terms and Conditions (STCs) that require the State to change the way UC costs and payments are calculated. Under the first two years (DY 7 and 8), UC funding will continue under the current methodology with approximately $3.102 billion available in each year. The STCs require the State to develop a new methodology for calculating costs and payments, which will determine the UC pool amount.  The actual amount of funding will be determined after Texas has submitted and CMS has approved the new protocol and cost data. If the State fails to meet the STC requirements, CMS will temporarily set the payment to a reduced default amount of $2.3 bill for DY 9-11.

  Demonstration YearUC FundingDSRIP Funding
DY 7: October 2017-September 2018$3,101,776,278$3,100,000,000
DY 8: October 2018 – September 2019$3,1010,776,278$3,100,000,000
DY 9: October 2019 – September 2020$2,334,323,270*$2,910,000,000
DY 10: October 2020 – September 2021$2,334,323,270*$2,490,000,000
DY 11: October 2021 – September 2022$2,334,323,270*$0
Waiver Extension Total (DY 7- DY 11)$13,206,522,366$11,600,000,000
Cumulative Total (DY 1 – DY 11)$33,888,622,386$26,118,000,000

DSRIP Program Provisions

Texas was the second state to receive authorization for the DSRIP program and is the largest funded program in the country to date.  The program provides financial incentives that encourage hospitals and other providers to achieve measurable improvements in quality of care and overall population health through innovative, collaborative programs and care strategies.  More than 250 providers participate in the program, including public and private hospitals, community mental health centers, local health departments, and physician groups affiliated with an academic science center.  The program includes more than 1,450 DSRIP projects that must meet pre-approved metrics, milestones and performance goals to qualify for payments. Current projects are approved based on a lengthy Program Funding and Mechanics (PFM) protocol document developed by HHSC and approved by CMS.

As part of the waiver extension proposal, HHSC submitted a revised PFM that incorporated significant changes to the DSRIP program to ensure projects continue to demonstrate progress and reflect plans for long-term sustainability when DSRIP funding is no longer available.  The December 21st approval required HHSC to continue working with CMS to finalize the PFM and other documents by January 20, 2018 to ensure the documents clearly demonstrate how the state will meet the following STC requirements:

  • Strengthen the measurement set used to measure and report progress on specific projects
  • Define and incorporate an attribution model for determining which individuals are included in the denominator used to measure project participation and performance
  • Assure the distribution of incentive funds is in proportion to the value of the activities associated with project bundles, and distribute funding within a project bundle proportionately across all required measures
  • Include a suitable and accountable performance measurement and payment methodology for incentive payments for providers that have high and/or maximized performance baselines
  • Require providers to link core activities to selected project measure bundles and outcome measures.

On January 19th, HHSC announced that CMS had approved the revised documents, including the PFM and the Measure Bundles Protocol. [3]  In its approval letter, CMS noted that Texas “has improved its measure bundles to focus more on outcome measures, added a robust and comprehensive attribution methodology, refined the process by which providers may distribute funding across measure bundles, included a suitable and accountable performance and payment methodology for providers with high or maximized performance baselines, and enhanced how providers will specify, link and report core activities to outcome.”[4]

The STCs also require HHSC to submit a draft transition plan to CMS no later than October 1, 2019, describing how the State will continue its delivery system reform efforts when DSRIP funding is no longer available and meet mutually agreeable milestones to demonstrate ongoing progress. The transition plan must be finalized by the end of March 2020.  In its January 19th approval letter, CMS proposed to meet with the state no later than June 30, 2018 to outline goals and expectations for the transition plan.

Uncompensated Care Pool and Payment Provisions

The most significant financing changes under the waiver will affect the uncompensated care payments for charity care. UC funding initially increases from $3.1 billion to $3.102 billion for the first two years of the waiver (DY7-8) with no changes required in the methodology or distribution of UC funding. However, beginning in DY 9, UC pool payments will be re-sized based on hospital charity care provided to individuals who are uninsured as reported on the Worksheet S-10 of the Medicare hospital cost report (Form CMS-2552-10). Under the current UC protocol, Texas calculates uncompensated care based on the cost of all services to Medicaid and uninsured patients minus all payments received.  UC pool payments are cost-based and currently include the difference between what Medicaid pays for a service and what Medicare would pay for the same service, i.e., the state’s “shortfall”.

To calculate payments, Texas uses the “UC Claiming Protocol and Application,” a data tool created by HHSC under the initial waiver. The UC application allows a broader definition of charity care than what is included in the Form S-10. As noted in the 2016 Texas Uncompensated Care study submitted to CMS, the S-10 data defines charity care based on the principles of the Healthcare Financial Management Association and does not include bad debt or Medicaid shortfall, costs that are currently allowed under Texas’ UC protocol. The report also notes that charity care is typically reported when a strict set of pre-defined conditions are met and bad debt is used as the default for other unreimbursed patient charges. Bad debt may often meet the requirements for charity care, but are not reported as such on the S-10 due to technical reporting requirements.

As a result of these changes, the amount of the UC funding pool is likely to be reduced beginning DY 9 and in subsequent years.  The STCs confirm that UC payments will no longer include amounts for the Medicaid shortfall as CMS prefers that reimbursement rates be adequate to cover Medicaid costs. The STCs also require HHSC to develop a new UC Payment Protocol which must take effect no later than September 1, 2019 (see timeline below for more details regarding development of protocol). HHSC announced at a public meeting they will continue to work closely with providers to ensure the protocol reflects actual costs to the greatest extent possible while meeting CMS requirements.

Beginning October 2019 and through the end of the waiver (DY 9-11), the UC pool size will be based on hospitals’ 2017 charity care costs as reported on the S-10.  HHSC emphasized the importance of accurate reporting and will work with providers to ensure they accurately report their charity care consistent with Medicare cost reporting principles. For providers and hospitals not required to complete the S-10 (mainly children’s, cancer, and rehabilitation hospitals, and Institutions of Mental Disease), an alternative methodology based on CMS-approved cost reports will be used to determine charity costs.

Timeline for Key UC and DSRIP Program Activities

The waiver STCs include specific deadlines for both UC and DSRIP program activities and identifies penalties that may be imposed if the state fails to meet the specified deadlines.  HHSC Commissioner Charles Smith acknowledged that some dates are aggressive but is confident the state will be able to comply and is committed to working with providers to ensure there are no disruptions in payments or program activities.  The tables below summarize key deadlines and applicable penalties if the state fails to meet CMS requirements related to the UC and DSRIP programs:

Uncompensated Care Modifications and Implementation Deadlines

TimeframeSTC Deliverable Requirements/HHSC ActivityApplicable Penalties for Non-Compliance[5]
February 2, 2018HHSC begins drafting UC reimbursement protocol
February 12, 2018HHSC shares draft UC reimbursement protocol with stakeholders
February 14 – March 21, 2018HHSC reviews and finalizes draft UC protocol
March 30, 2018HHSC must submit the draft UC funding and reimbursement protocol to CMSFailure to meet timeline will result in permanent reduction of UC expenditure by 20% for DY 7
July 1, 2018Expected CMS approval of UC protocol
July 31, 2018Upon receipt of CMS approval of UC Payment Protocol, HHSC must begin the necessary administrative rulemaking process by publishing notice of the proposed rulemaking and public hearing in the Texas RegisterFailure to meet timeline will result in permanent reduction of UC expenditure by 20% for DY 7
January 30, 2019HHSC must publish final administrative rules to implement the required UC pool distribution methodology, for an effective date of no later than September 30, 2019Failure to meet timeline will result in an additional 20 percent reduction of allowable UC expenditures for DY 8
May 1, 2019HHSC must submit draft revised UC application tools for all provider types to CMS for review and approvalAn additional 20 percent reduction of allowable UC expenditures for DY 8 if deadline is not met
August 31, 2019CMS must approve the revised UC tools for all provider typesAn additional 20 percent reduction of allowable UC expenditures for DY 8 if deadline is not met
September 1, 2019CMS finalizes the uncompensated charity care UC pool limit for DY 9-11
September 30, 2019Final effective date for Texas Administrative Code Rules on UC pool distribution methodology
October 1, 2019Implementation of new UC pool distribution methodologyAn additional 20 percent reduction of allowable UC expenditures for DY 9 if deadline is not met

DSRIP Program Modifications and Deadlines

TimeframeSTC Deliverable Requirements/HHSC ActivityApplicable Penalties for Non-Compliance
January 20, 2018HHSC will work with Texas DSRIP providers and CMS to finalize updates to the DSRIP RHP Planning Protocol and the Program Funding and Mechanics (PFM) Protocol. (Note: Protocols were approved by CMS January 19th).Federal funds will not be available until protocols are approved by CMS
October 1, 2019HHSC must submit a draft transition plan to CMS that includes how the state intends to sustain delivery system reform after DSRIP funding is discontinued, and/or how the state plans to phase out DSRIP funded activitiesFailure to submit the sustainability plan will result in a deferral of 10 percent of federal funds beginning in the next quarter and in all subsequent quarters until the requirement is met.
March 31, 2020Final DSRIP Transition Plan must be approved by CMS
October 1, 2021Federal Funds for DSRIP are discontinued

Approval of IGT Financing Methodology

Also of note, the waiver renewal appears to allow the state to continue its current method of financing Intergovernmental Transfer (IGT) payments.  Under both the UC and DSRIP pools, public IGT funds paid by public hospitals or other governmental entities are used to draw down matching funds under the waiver.  While CMS has previously expressed some concerns specifically regarding the use of burden alleviation as currently allowed, CMS appears to allow this method of finance, at least for the time being. STC 46 states “CMS may review at any time, the sources of the non-federal share of funding for the demonstration. The State agrees that all funding sources deemed unacceptable by CMS shall be addressed with the time frames set by CMS.”

In a public meeting on January 11th, HHSC Commissioner Charles Smith reiterated that the deadlines imposed by CMS are aggressive and will require public engagement. HHSC will be creating workgroups to engage stakeholders in the various initiatives and will continue to provide updates on the website.

Link to Texas Medicaid 1115 Waiver Renewal Approval

[1] See announcement and related documents at:

[2] Evaluation of Uncompensated Care and Medicaid Payments in Texas Hospitals and the Role of Texas’ Uncompensated Care Pool, August 26, 2016. Conducted by Health Management Associates on behalf of Texas Health and Human Services Commission.  Available at

[3] Documents have not yet been publicly posted at the time of publication, but will be available at:

[4] Letter of approval to Stephanie Muth, Texas Medicaid Associate Commissioner of Medicaid and CHIP, from CMS Director of System Reform and Demonstrations, dated January 19, 2018.

[5] Penalty reductions in UC expenditures are cumulative.