Author: Will Humble

In Part 1, we walked through why Arizona built AHCCCS differently, using managed care from the start instead of fee-for-service.

AHCCCS 101 (Part 1 of 4): AHCCCS’ Origin Story – Why Arizona Built Medicaid Different

That raises the next logical question: how did and does Arizona get permission to design its Medicaid program this way? Remember – Arizona can’t just do what it wants because the federal government pays more than ½ of the cost for Medicaid – so the authorizing statute built some structure around how states can and can’t experiment with how they run their programs.

The federal government allows flexibility from the mainline approach to Medicaid, but only through specific tools. The two most important are Section 1115 waivers and State Plan Amendments, often called SPAs.

A Section 1115 waiver is a permission slip from CMS to try something new. It allows a state to waive certain rules in federal Medicaid law. Normally, states must follow detailed requirements about who is eligible, what services are covered, and how care is delivered and paid for.

A waver gives the state some room to step outside those rules and test a different approach. That’s what Arizona did back in 1982 when it asked for a waiver to use managed care instead of fee for service reimbursement for most populations (Native Americans being the exception)

But waiver flexibilities come with conditions. A waiver must still support Medicaid’s core purpose to provide coverage and care for required populations. Waivers are also supposed to be a real experiment (not just a policy preference) and when the state applies for a waiver they have to measure their results and report back.

Arizona’s recent H2O (Housing and Health Opportunities) waiver is a good example. It allows AHCCCS to cover certain housing-related services for members with high needs. The idea is that stable housing can improve health and reduce costly medical care. But Arizona has to track outcomes and show whether the approach actually works.

AHCCCS Tackling Housing Instability with Their New ‘H2O’ Program

A State Plan Amendment is different. Every state has a Medicaid state plan, which acts as the rulebook for the program. A SPA is simply a change to that rulebook. These changes still have to follow federal law, so they don’t require an experiment or formal evaluation like waivers do so SPAs are usually more routine and quicker to approve.

A simple way to think about it is this: a SPA updates the program within existing rules, while a waiver allows the state to test something outside those rules.

The process is fairly structured for both waivers and SPAs. AHCCCS develops a proposal and sends it to CMS. CMS reviews the request and can approve it, deny it, or ask the state to revise parts of it.

For waivers, there’s also a public comment period at both the state and federal level. In practice, many approvals involve back-and-forth negotiation before CMS signs off.

One concept that often causes confusion is “budget neutrality.” For 1115 waivers, the state has to show that the proposal will not cost the federal government more than what Medicaid would have cost without the waiver.

That doesn’t mean spending can’t change. But it does mean the aggregate cost to the feds won’t be higher. For example, with the H2O waiver they can spend more on housing support if they can show that it reduces other costs (e.g. hospitalizations).

Timing also differs between the two tools. SPAs are often approved in a few months. Waivers usually take a lot longer because of the added complexity, negotiations, and federal review (and the financial assessment).

If CMS doesn’t agree with a proposal, it rarely ends with a flat rejection. More often, CMS partially approves the request or requires changes before moving forward. States then revise and resubmit. Arizona uses both tools regularly.

Arizona Section 1115 Demonstration Waivers

Arizona Medicaid State Plan Amendments

Waivers are used for broader system changes like housing supports or delivery system reforms. SPAs are used for more routine updates, like adjusting payment methods or adding services that already fit within federal rules.

The key takeaway is simple. SPAs are for changes within the rules. Waivers are for testing new ideas outside the rules.

In Part 3, we’ll move from policy to practice and walk through how AHCCCS works day to day… how people enroll, how they get assigned to a health plan etc.