In a June 11 letter to state Medicaid directors, the Centers for Medicare and Medicaid Services (CMS) preliminarily implemented Working Families Tax Cut legislation (WFTCL) provisions on budget neutrality and certification for Medicaid Section 1115 demonstrations. These provisions were set to begin in 2027.
The WFTCL adds budget neutrality requirements for Section 1115 demonstrations. The chief actuary of CMS cannot approve a Section 1115 waiver application, amendment, or renewal without certifying that the waiver will not increase federal Medicaid expenditures compared with the expenditure without the waiver beginning Jan. 1. 2027.
This letter provides states with early notice of changes to budget neutrality ahead of rulemaking. CMS expects to provide additional details, guidance, and technical assistance to states before Jan. 1, 2027. If a final rule is not in effect at that time, CMS will apply the approach described in the letter on a provisional and temporary basis until the final rule is in effect.
Key Changes
Budget Neutrality Determination: States no longer will submit analyses of “with waiver” and “without waiver” expenditures but will submit analyses of projected financial impacts of individual demonstration activities. The chief actuary will certify the budget neutrality of a demonstration prior to approval.
Budget Neutrality Expenditure Limit: There will be no expenditure limits or budget neutrality cap, as waivers expected to increase federal Medicaid expenditures will not be approved.
Hypothetical Expenditures: The current approach of hypothetical expenditures will not continue and be replaced with Medicaid Authorizable Populations and Services (MAPS). MAPS are defined as populations and services that the state otherwise would cover, subject to forthcoming CMS guardrails. MAPS would include substance use disorder, severe mental illness, and re-entry services service. The payment terms for MAPS must be consistent with the payment terms available under the Medicaid state plan or other authority under title XIX.
Costs Not Otherwise Matchable: States can continue to use Section 1115 demonstrations to pay for services that are not otherwise covered in Medicaid, such as investments in social determinants of health and uncompensated care pools. However, these payments must be offset by other budget neutrality savings in the demonstration.
Budget Neutrality Monitoring: Instead of quarterly and annual reporting on budget neutrality, states will monitor key indicators and program outcomes and manage the demonstration within CMS guardrails. CMS will use new special terms and conditions to monitor expenditures.
Demonstration Savings and Savings Rollover into Subsequent Renewal Period: MAPS activities will not generate savings. Demonstration savings plus rollover savings for the current demonstration are limited to five years and could be used to offset current demonstration costs.
Contact Director of Policy Rob Nelb, MPH, at rnelb@essentialhospitals.org or 202.585.0127 with questions.
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