On Friday, June 11 the Centers for Medicare and Medicaid Services (CMS) issued new guidance on the Secretary’s approach to implementing Section 1115(g) which was added to the Social Security Act by H.R. 1 – the President’s signature budget bill enacted last year. (Our explainer of the health provisions in the bill can be found here.)
The statutory language merely codified the concept of budget neutrality in Section 1115 waivers for the first time – a policy which has been in effect for many years but was not previously in the statute – and added a requirement that the CMS Chief Actuary certifies that waivers are budget neutral. CMS estimates that nearly 1/3 of all Medicaid spending flows through Section 1115 agreements.
Continuing an emerging pattern as CMS issues its interpretation of Medicaid provisions in H.R. 1 (see our statement on the work reporting requirement regulation and our blog on the state directed payment rule), the Trump Administration goes beyond H.R. 1 and makes clear that their intent with their new approach is to ensure that the federal government spends less on Medicaid by significantly modifying and restricting the budget neutrality requirement for section 1115 Medicaid demonstrations, rather than just codifying the existing policy that the federal government does not spend more under the waiver than it would have in the absence of a waiver. The new guidance states:
CMS’s intended approach to implementing Section 1115(g) is tied to CMS’S current policy goals…This includes an approach to budget neutrality that is expected to reduce overall expenditures in Section 1115 demonstrations thereby reducing federal outlays (p. 2, emphasis added).
Applicability: The new approach will apply to all new demonstrations, renewals, and amendments that are issued on or after January 1, 2027. This conforms with the statutory language. The guidance also makes clear that the concept of budget neutrality will not apply to Section 1115 demonstrations related to the Children’s Health Insurance Program (CHIP) which operates under a different, capped financing structure and has commonly used a concept of “allotment neutrality” in waivers. CMS also states that a proposed regulation will be issued in the future that will be modeled on the methodology described in the guidance, so that states should anticipate this new policy will be in effect even if the forthcoming regulation is not finalized by January 1, 2027.
Changes to the Budget Neutrality Methodology: The new guidance makes major changes to the current budget neutrality policy as described in guidance issued in 2024. For example, budget neutrality would be determined based on the net impact of projected increases and decreases in spending due solely to waiver activities that can be undertaken only through 1115 waivers (while entirely excluding the spending effects of all other waiver activities that can be adopted as part of a state plan or under other waiver authorities – these are designated as “MAPS” and were previously known as “hypotheticals”). This would prevent states from using savings generated by all waiver activities to offset the cost of “1115-only” activities that increase spending, as is typically the case for waivers in the past. As CMS states, “this approach would result in an overall reduction in savings available to states and would ultimately reduce federal expenditures under section 1115 demonstrations.”
Appendix B, which begins on p. 30, is the most specific part of the guidance and outlines some of the services that CMS considers “MAPS” which won’t have to show neutrality and those that are considered “Section 1115 only” which will have to be paid for by other savings.
In addition, under the existing policy, states may use up to 10 years of savings (up to 15% of projected Medicaid spending in the state) accrued over the course of previous demonstration periods to help satisfy the budget neutrality requirement when they renew their waiver. The new guidance would instead limit the use of accrued savings to only the most recent five years or those accrued in the current demonstration period (whichever is shorter). CMS similarly notes that this “approach is expected to give states access to less demonstration savings than would have been available under the current approach….” (As a transition, for states renewing an existing waiver, they would be able to rollover up to 5 years of savings using the existing budget neutrality methodology, rather than the new one, but only for the first renewal.)
States must also account for administrative spending as a consequence of the waiver activities – this is a change to the budget neutrality calculations that we have supported in the past, but in this context will only make it harder to achieve budget neutrality and indeed require more cuts.
Furthermore, there are numerous other technical changes that further tighten the budget neutrality requirement and will make it considerably more difficult for states to satisfy. This includes no longer permitting states to seek mid-demonstration adjustments to the without waiver spending baseline – in the event they may otherwise breach budget neutrality – due to higher-than-expected spending outside their control such as expensive new drugs entering the market, which has been allowed under existing policy. CMS indicates that monitoring of budget neutrality agreements by states within CMS guardrails “to be defined”. (p. 5) It also includes defining activities as meeting the MAPs definition (and therefore not being excluded from the budget neutrality calculation) only if both the affected population and the service could be undertaken under other authorities. In comparison, the existing policy only requires that the affected population or the service could already be taken up by the state.
Finally, the guidance specifies that some waiver activities will now be easier for states to undertake because they are MAPS and will not be part of the budget neutrality calculation. This includes certain inpatient services for patients with substance use disorders (SUD) and serious behavioral health issues and services for incarcerated individuals provided during a pre-release period. At the same time, the guidance specifies that other waiver activities will be more difficult to undertake – as they will be determined to be 1115-only activities – such as developing and maintaining the infrastructure necessary to support services addressing health related social needs (HRSN), which are allowed under the 2024 guidance subject to certain limits.
Which States Have Medicaid Waivers Expiring in 2027? Many states have Section 1115 waivers that expire in 2027; a complete list of states is available here. CMS also has a heavy workload with waivers expiring this year. These new requirements will also undoubtedly slow down an already slow process. (The new guidance states that “CMS would not have a fixed time frame for its review of budget neutrality” p. 16) States that have comprehensive waivers expiring in 2027 are sure to experience serious disruption as a consequence of the new approach – those include Arizona, Massachusetts, New York, Oregon, Utah and Vermont.
Transparency: Despite repeated claims by Secretary Kennedy of being committed to “radical transparency”the guidance provides no assurances that these vitally important negotiations will be subject to public scrutiny and comment. However, existing federal regulations (431.408 and 431.412) related to transparency and public comment for Section 1115 demonstrations do require that the impact of changes on states’ expenditures and the budgetary impact are part of the application that the public can comment on.
Conclusion: The budget neutrality guidance continues the pattern of the Trump Administration’s ongoing actions pushing cuts to federal Medicaid funding further than what Congress voted for. States that have significant Section 1115 waivers may have to contend with reductions in federal support at the same time that provider taxes used to fund state’s share of Medicaid spending are being restricted as well as loss of coverage due to the implementation of work reporting requirements in 2027. This is exacerbated by cuts in federal support for SNAP benefits and other effects of H.R. 1 that put state budgets in a vise.
The President’s explicit directives to use the tools of executive power to favor his friends and punish his political enemies as part of his approach to governing are another reason to worry about this new approach to Section 1115 waivers with some big blue states coming up for renewal. HHS Secretaries have always had enormous discretion in Section 1115 waivers and both parties have used them to some degree to promote policy aims and reward friends. But as we see every day, the Trump Administration has shattered norms of limitations on executive power and is already using Medicaid funds as a tool in the vendetta against certain Governors.