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, long-standing 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 the Centers for Medicare & Medicaid Services (CMS).

During the summer of 2022, CMS began to roll out a series of changes to budget neutrality policy through several state waiver approvals, finally unveiling a comprehensive policy through recent approvals in Oregon and Massachusetts. Changes include significant alterations to the way states 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 midcourse changes to budget neutrality.

In an issue brief prepared for the Robert Wood Johnson Foundation’s State Health and Value Strategies program, Manatt Health summarizes key policy changes and discusses key implications for states.

To read the full issue brief, click here.