The Centers for Medicare & Medicaid Services (CMS) is moving to implement a strict new budget-neutrality requirement for Medicaid Section 1115 demonstrations.
CMS announced its plans on Thursday, stating that it was providing states with early notice of its intent to implement the budget neutrality requirement. The agency plans to apply the budget neutrality standards to approvals issued on or after Jan. 1, 2027, on a provisional, temporary basis if a final rule is not yet in place by that date.
Under the budget neutrality requirements, CMS would not approve new demonstrations, demonstration renewals or demonstration amendments, unless the CMS Chief Actuary certified them as budget neutral, which is to say that they are not expected to increase federal spending compared to the state’s Medicaid program without the demonstration.
“Medicaid works best when states can innovate and are held accountable for results,” CMS Administrator Dr. Mehmet Oz said in a statement. “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.”
The move is the implementation of a statutory requirement enacted by the Working Families Tax Cut (WFTC) legislation that also included an 80-hour work requirement for certain Medicaid beneficiaries.
CMS said that the new budget neutrality requirements would ensure consistent oversight and clear budget neutrality requirements, which would help states improve programs cost-effectively and ensure fiscal integrity, while lowering costs and improving outcomes.
In its announcement, CMS stated that the agency recognizes the changes could affect states unevenly, depending on the status of their demonstration approval and renewal processes.
“States with demonstrations up for renewal in 2027 may need to take additional steps,” the announcement read. “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.”
People who receive services through section 1115 waivers include some of the population receiving home- and community-based services, industry experts previously told Home Health Care News.
“1115 waivers have been a critical policy tool for states to design Medicaid programs that address the real-world needs of complex patient populations,” Kristen Palumbo, chief operating officer and chief compliance officer of Innovive Health, previously told HHCN. “These waivers allow for innovative approaches that reduce barriers to access and improve outcomes. Scaling back this flexibility would not only limit states’ ability to respond to local needs, but also risk destabilizing care for those who rely on it most.”
Medford, Massachusetts-based Innovive provides home-based skilled nursing services to patients with complex behavioral health needs.
CMS has previously taken action to limit some section 1115 demonstrations. In April 2025, the agency announced that it would no longer approve new federal funding for designated state health programs (DSHP) and designated state investment programs (DSIP) under section 1115 demonstration authority – which include some in-home non-medical services.