CMS Prepares States for Medicaid Section 1115 ‘Budget Neutrality’ Rule
States that are operating Medicaid section 1115 demonstration projects, especially with projects coming up for renewal in 2027, should prepare to take a close look at their budgets. The Centers for Medicare and Medicaid Services (CMS) recently issued guidance calling for these demonstrations to be “budget neutral” starting next year. CMS issued the guidance to prepare states about this topic as it soon expects to propose a rule to ensure clear budget neutrality requirements for proposed demonstration projects.
CMS’ intent with the guidance, and upcoming proposed rule, is to ensure that “testing new ideas doesn’t cost taxpayers more than current approaches,” said CMS Administrator Dr. Mehmet Oz. “We’re committed to making this transition smooth for states.”
The One Big Beautiful Bill Act (Pub. L. 119-21) requires CMS to certify that Medicaid section 1115 demonstrations are budget neutral, meaning they will not cost the federal government more than running Medicaid programs the usual way. Beginning Jan. 1, 2027, CMS will not approve new demonstrations, demonstration renewals or demonstration amendments unless the CMS Chief Actuary certifies that the project is not expected to increase federal spending compared to the state’s Medicaid program without the demonstration.
Although CMS has historically required budget neutrality as a condition of its approval of demonstrations, budget neutrality has never been required in statute, and CMS has applied shifting methodologies to determining budget neutrality over time. The guidance would establish a more consistent quantitative framework for evaluating budget neutrality before demonstrations are approved.
According to the guidance, once the new approach is implemented, states would classify demonstration activities as either Medicaid Authorizable Populations and Services (MAPS) activities or section 1115-only activities. The state must analyze the costs and savings impacts for each section 1115-only activity, inclusive of administrative costs, to determine the net financial impact of that activity. The net financial impact of the demonstration would be determined across all section 1115-only activities and used by the CMS Chief Actuary to certify budget neutrality. Overall, the budget neutrality process would consist of the following steps: (1) classification of activities; (2) financial impact analysis of each section 1115-only activity; (3) net financial impact of the demonstration; (4) determination and certification of budget neutrality by CMS; and (5) calculation of current period demonstration savings and consideration of rollover savings.
CMS said expects to provide even more details, guidance and technical assistance to assist states in preparing for this change before it takes effect next year. This procedural change stands to be quite substantial for the Medicaid program as about a third of all federal Medicaid dollars flow through demonstration projects, so we will be keeping an eye on how programs fare under the new processes.
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