CMS Takes Bold New Approach to Stewarding Medicaid Demonstration Project Spending

CMS Takes Bold New Approach to Stewarding Medicaid Demonstration Project Spending

Plans to Update Section 1115 Medicaid Demonstration Budget Neutrality Policy Will Strengthen Accountability and Protect Federal Taxpayers

With nearly one-third of all federal Medicaid dollars flowing through demonstration projects, the Centers for Medicare & Medicaid Services (CMS) is issuing new guidance about its plans to strengthen budget neutrality standards for Medicaid section 1115 demonstrations. While states use demonstrations to test innovative ways to deliver care and improve health outcomes, the bounds of what is considered "budget neutral" have expanded over time to reflect evolving policy priorities and increased section 1115 demonstration spending. This new guidance previews CMS' plans to propose a rule that would ensure consistent oversight and clear budget neutrality requirements for proposed demonstration projects, which will help states cost-effectively enhance programs and ensure fiscal integrity, while lowering costs and improving outcomes.

"Medicaid works best when states can innovate and are held accountable for results," said CMS Administrator Dr. Mehmet Oz. "The budget neutrality requirements we plan to propose are designed to ensure that testing new ideas doesn't cost taxpayers more than current approaches, while improving health outcomes for the people we serve. We're committed to making this transition smooth for states."

Part of the Working Families Tax Cut (WFTC) legislation requires the CMS Chief Actuary 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 January 1, 2027, CMS will not approve new demonstrations, demonstration renewals, or demonstration amendments unless the CMS Chief Actuary certifies that the demonstration project is not expected to increase federal spending compared to the state's Medicaid program without the demonstration.

To aid state planning efforts, CMS is publishing this guidance to provide states with early notice regarding the changes to budget neutrality that CMS intends to propose to implement this new requirement. CMS expects to begin applying the approach described in this guidance to new demonstration, amendment, and renewal approvals until a final rule is effective, in light of the statutory language requiring the Chief Actuary's certification for these demonstration approvals on or after January 1, 2027.

Medicaid section 1115 demonstrations have long served as policy laboratories through which states might modify coverage or test new care models, subject to required evaluation standards. 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. Our planned guidelines would establish a more rigorous, transparent, and consistent quantitative framework for evaluating budget neutrality before demonstrations are approved.

The requirements we are developing are expected to:

• Implement the statutory requirement for an independent certification of a demonstration's budget neutrality by the CMS Chief Actuary;
• Ensure states clearly demonstrate how proposals will be budget neutral through improved beneficiary health outcomes;
• Maintain state flexibility to test new approaches within defined fiscal guardrails; and
• Strengthen accountability and support careful stewardship of federal dollars to deliver measurable value for patients and taxpayers.

CMS recognizes that these changes could affect states differently based on where they are in the demonstration approval and renewal process. States with demonstrations up for renewal in 2027 may need to take additional steps. CMS is committed to offering technical assistance to support a smooth transition as well as providing information on the updated review methodologies to be proposed in future rulemaking.

To view the State Medicaid Director Letter, visit: https://www.medicaid.gov/federal-policy-guidance/downloads/smd26003.pdf

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