Sneak Preview: CMS Urged To Lower Medicaid Section 1115 Expenses

(The following was excerpted from a recent Thompson Grants Compliance Expert article.) To address concerns raised in a recent Government Accountability Office (GAO) report about the rising costs under Medicaid section 1115 demonstrations, the Department of Health and Human Services (HHS) alluded to federal law effective Jan. 1, 2027, that will establish a detailed expenditure review for new and amended Medicaid demonstrations.

Section 1115 demonstrations allow states to test and evaluate new approaches for delivering services under Medicaid. HHS’ Centers for Medicare and Medicaid Services (CMS) may waive certain program requirements and approve new types of expenditures that would not otherwise be eligible for federal Medicaid matching funds for experimental, pilot or demonstration projects that promote the program’s objectives. As of May 2025, nearly every state had an approved Medicaid section 1115 demonstration.

CMS policy requires that demonstrations, which usually last five years, be budget neutral (i.e., the federal government should spend no more for Medicaid under a state’s demonstration than it would have spent without the demonstration). Approved demonstrations operate under a negotiated budget neutrality agreement that limits Medicaid spending over the life of the demonstrations. CMS generally bases this limit on projections of what the state’s existing Medicaid program would have cost the federal government absent the demonstration.

GAO found that according to CMS data, federal expenditures under Medicaid section 1115 demonstrations have risen dramatically, rising from $99 billion in 2013 to $194 billion in 2023. In 10 states, demonstration spending accounted for more than 75% of their total federal Medicaid spending, while in five of these states, demonstration spending accounted for 90% or more of their total federal Medicaid spending.

(The full version of this story has now been made available to all for a limited time here.)
Join us for our following Thompson Grants event:
Nonprofit Legal, Finance, & Grants Conference | Oct. 8-9, 2025 | Washington, D.C.