Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts
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Glenn Hegar
Texas Comptroller of Public Accounts
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A Review of the Texas Economy


Texas and the 1115 Medicaid Waiver Action Needed to Ensure Federal Aid

By David Green, Spencer Grubbs and Joyce Jauer Published August 2019

Texas’ health and human services (HHS) programs provide medical and social assistance for millions of Texans and represent the state’s second-biggest expenditure after public education.

For the 2018-19 biennium, the Legislature appropriated nearly $79 billion for these functions, including $33.5 billion in state funds, $43.8 billion in federal funding and $1.6 billion in other revenue. Within the HHS portion of the budget, Medicaid is the largest program by far, accounting for $61.8 billion or nearly 80 percent of the total.

Medicaid pays for acute health care, including physician visits, hospitalization, drug and lab expenses, as well as long-term care for eligible low-income individuals and families and aged and disabled Texans. Medicaid is jointly funded by state and federal governments and administered by the states. States have broad flexibility to determine Medicaid eligibility, benefit levels, cost-sharing requirements and provider payments. Beyond this flexibility, the federal government often grants “waivers” to states that wish to diverge from standard requirements when they can demonstrate that doing so will further some public good.

Texas currently holds a Medicaid waiver for its Healthcare Transformation and Quality Improvement Program. This program — commonly called the 1115 Medicaid waiver, as Section 1115 of the Social Security Act allows the federal government to approve waivers for experimental, pilot or demonstration projects — is an important funding source for the state’s hospitals and other health care providers.

The 1115 Medicaid waiver program will provide Texas with up to $25 billion between 2018 and 2022, but it’s currently set to expire during the next two years. If the waiver isn’t renewed, many “safety net” hospitals and providers will face financial uncertainty, particularly in rural Texas and other areas with high numbers of uninsured patients and uncompensated care costs.

The Texas Health and Human Services Commission (HHSC) plans to negotiate with the federal government to extend the waiver; without it, vulnerable populations could lose access to vital health care resources.

The 1115 Waiver in Texas

Texas’ 1115 Medicaid waiver represents an augmentation of the state’s Medicaid managed care program, which attempts to control health care costs through contractual arrangements with private insurance companies. It consists of two funding pools, a supplemental payment program that pays hospitals for uncompensated care (UC) delivered to patients without insurance and the Delivery System Reform Incentive Payment Program (DSRIP), which provides funding for innovative health care initiatives, largely for Medicaid recipients, the uninsured and low-income patients.

The initial waiver was approved in December 2011, while the current one was renewed in December 2017. Texas’ original waiver was designed as a bridge to Medicaid expansion required by the 2010 Affordable Care Act. That requirement, however, was ruled unconstitutional by the U.S. Supreme Court in 2011, making the expansion optional for states. Texas remains one of 14 states that opted not to expand Medicaid, arguing that its managed care system is better equipped to contain health costs and support vulnerable populations.

Texas’ current 1115 Medicaid waiver is a five-year, $25 billion program with costs shared between federal and local governments; Washington absorbs about 60 percent of costs. Note that, while Medicaid is supported by federal and state money, in the 1115 program counties and local hospital districts provide the matching funds needed to attract federal dollars.

The pool of federal funding available through the UC portion of the 1115 waiver is scheduled to fall from $3.1 billion in 2019 to $2.3 billion annually from 2020 through 2022. UC funding will end entirely on Sept. 30, 2022 (the end of the 2022 federal fiscal year) if the waiver expires. DSRIP funding will fall from $3.1 billion annually in 2019 to $2.5 billion in 2021, and end entirely on Sept. 30, 2021 (Exhibit 1).

Uncompensated Care

UC payments reimburse health care providers for the cost of providing services to Medicaid recipients and uninsured patients, including hospital stays, physician fees, clinic visits and outpatient drug costs. UC funding helps offset an average $6.6 billion in uncompensated health care provided in Texas each year.


Federal Fiscal Year UC DSRIP Total
2012 $3.7 $0.5 $4.2
2013 3.9 2.3 6.2
2014 3.5 2.7 6.2
2015 3.4 2.9 6.3
2016 3.1 3.1 6.2
2017 3.1 3.1 6.2
2018 3.1 3.1 6.2
2019 3.1 3.1 6.2
2020 2.3* 2.9 5.2
2021 2.3* 2.5 4.8
2022 2.3* 0.0 2.3

* UC pool limit amounts for federal fiscal years 2020-22 are placeholder amounts, pending reassessment of hospital uncompensated charity care. The UC limits are expected to increase at the conclusion of the Texas Health and Human Services Commission and U.S. Centers for Medicare and Medicaid Services pool-sizing exercise in September 2019.

Sources: U.S. Centers for Medicare and Medicaid Services, Texas Health and Human Services Commission and Texas Comptroller of Public Accounts

According to John Henderson, president/CEO of the Texas Organization of Rural and Community Hospitals (TORCH), rural hospitals in particular depend heavily on UC funding provided under the 1115 Medicaid waiver. A 2018 TORCH survey found that the average rural Texas hospital provides about $2 million a year in uncompensated care, but federal UC payments help cover most of these losses.

Delivery System Reform Incentive Payment Program

DSRIP makes incentive payments to providers for improvements to health care quality and delivery that also can accommodate more patients. To earn these payments, providers in each of the state’s 11 health care regions collaborate through regional healthcare partnerships to develop a plan for improvements. Once its plan is approved by HHSC, the partnership measures and reports its outcomes to earn DSRIP payments for qualifying hospitals in its region.

By design, DSRIP is intended to scale down over time rather than becoming a permanent funding stream.

“For all states, CMS [the U.S. Centers for Medicare and Medicaid Services] never intended DSRIP to be a long-term program,” says Lisa Kirsch, the Dell Medical School’s senior policy director at the University of Texas at Austin. With the limited years of funding, she says, Texas is incentivized to engage in a more collaborative, strategic effort to improve health and access to care as well as measure performance.

Texas’ DSRIP program is the nation’s largest, serving about 12 million Texans and providing payments for at least 300 Texas providers and more than 1,400 participating projects. Of Texas funding for DSRIP in the 2014 through 2017 federal fiscal years, 40 percent went for low-income and/or uninsured patients, 20 percent for Medicaid recipients and 35 percent for other types of patients, such as those with Medicare or other insurance. (The remainder supported various program features such as technology improvements.)

From its 2011 inception through October 2018, DSRIP has paid Texas providers $13.7 billion, including $9.3 billion to hospitals and $2.2 billion to community mental health centers (Exhibit 2).

DSRIP funds a wide range of projects addressing various health outcomes. The most common project goals include the control of diabetes and high blood pressure and reductions in emergency department visits and congestive heart failure readmission rates. From 2014 to 2017, about 90 percent of these projects achieved their goals.

“DSRIP has enabled a lot of community-based care throughout the state, getting people the care they need to hopefully avoid preventable hospital admissions or uncontrolled chronic conditions,” says Kirsch. “The program has included hospitals, academic health science centers, local health departments and community mental health centers, and has been flexible to pay for services for Medicaid enrollees, the uninsured and others.”


Provider Type DSRIP Payment for Federal Fiscal Years 2012-2018 (In millions of dollars)
Local Health Departments $597.4
Physician Practices $1,666.4
Community Mental Health Centers $2175.0
Hospitals $9302.3

Source: Texas Health and Human Services Commission


According to the Urban Institute, an estimated 4.7 million nonelderly Texans (those younger than 65) lacked health insurance in December 2018, about 19 percent of the state’s total nonelderly population. By this measure, Texas has the highest uninsured rate in the country. In particular, 32 percent of Texans aged 19 to 34 are uninsured.

The poor in Texas’ rural areas are more likely to go without insurance. The Georgetown University Health Policy Institute reports (PDF) that 36 percent of low-income adults living in Texas’ small towns and rural areas are uninsured, versus 29 percent of those in urban settings.

This large share of low-income, uninsured persons in rural areas is particularly burdensome to the relatively few hospitals that serve them. Of 164 rural hospitals in Texas in 2013, 21 have closed permanently or temporarily since then, and several more are in financial distress. The organization reports that more than a fourth of rural hospital revenue comes from supplemental payment programs, and many more could close without the 1115 waiver UC funds.

DSRIP Success Stories

In Wise County, two DSRIP projects have improved diabetes monitoring and reduced readmission rates for patients with congestive heart failure. The county’s Total Diabetes Care program employs two full-time nurse educators who provide diabetic education and monitoring services in one-on-one and group settings.

In three years, the program significantly improved primary care monitoring of diabetic patients, reducing the incidence of long-term complications and costs associated with the disease. After establishing a chronic disease education and management program, the area’s hospital readmission rates for congestive heart failure fell by almost 50 percent from 2012 to 2017.

In Medina County, a DSRIP-funded, nurse-staffed advice line has reduced potentially preventable admissions and emergency department visits, according to an external quality review.

And in November 2013, the Golden Plains Community Center in Borger used DSRIP funding to create an affordable care clinic designed to divert patients from unnecessary visits to the emergency room. Initially, the clinic operated in a hallway connected to the emergency room and served 96 patients in its first month. The clinic grew steadily and moved to an offsite location in 2018; it now sees about 600 patients each month.

Uncertainty for hospitals

Texas’ health care delivery system faces several challenges as the 1115 Medicaid waiver winds down.

First, DSRIP funds will expire completely at the end of 2021, potentially ending a series of innovative health services and programs that have helped many Texans who sorely needed them. Some of these services aren’t sustainable without continued funding.

Second, changes in the methodology used to calculate the uncompensated care pool — the maximum funding available under the program — negotiated in the 2017 waiver will affect total UC funding and the distribution of payments to individual hospitals. Beginning in 2020, UC costs will apply only to hospital costs for uncompensated charity care and services provided to low-income patients. Importantly, it will no longer cover the difference between the actual cost of a service and the reimbursement paid.

As the Texas Hospital Association outlines it, this change could cause children’s hospitals to receive less funding, since they usually serve a larger share of Medicaid recipients than uninsured patients.

Furthermore, CMS will reduce available UC funds to Texas hospitals by a share of the payments they receive through the Medicaid Disproportionate Share Hospital (DSH) program. DSH is an annual allotment of federal funds to hospitals that serve a disproportionately high share of uninsured patients; this change could reduce their funding by an estimated $600 million each year.

Other states including California, Indiana and Maryland have renewed their 1115 waivers in recent years. FN

For more information on Texas’ 1115 waiver program, visit the Health and Human Services Commission.