Issue Briefs | Dec 2, 2022

Recent Updates to Section 1115 Waiver Budget Neutrality Policy: Overview and Implications for States

Patricia Boozang, Anne Karl, and Adam Striar, Manatt Health

Section 1115 Medicaid demonstrations are a powerful tool for states to pursue a range of innovative programs aimed at improving the health and well-being of Medicaid enrollees. While not required under federal law or regulation, longstanding federal policy requires that 1115 waivers be “budget neutral” to the federal government—in other words, demonstrations must not increase federal spending relative to a state not pursuing an 1115 demonstration. Though conceptually simple, budget neutrality policy has evolved over the years into a complex process that is burdensome to states and CMS.

During the summer of 2022, CMS began to roll out a series of changes to budget neutrality policy through state waiver approvals. These include significant changes to: the way that without waiver baselines are calculated; which trend rates are applied; how savings are rolled over across demonstration periods; which expenditures may be included as “hypothetical”; and processes for states to make mid-course changes to budget neutrality. This issue brief summarizes the key policy changes established through the Oregon and Massachusetts waiver renewals (and reinforced through the Arizona and Arkansas approvals) and discusses key implications for states.


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