In letters to state Medicaid directors, the Centers for Medicare & Medicaid Services (CMS) has announced that it plans to update its approach to monitoring and approving spending under Medicaid section 1115 demonstration projects. Specifically, the agency is planning rulemaking on the topic, but it will provisionally apply its revised approach in 2027 if there is no final rule in place by then.
Section 1115 demonstrations allow states to test new policies in Medicaid that differ from federal requirements, often involving large federal expenditures. CMS officials said the updated framework is intended to bring greater transparency and consistency to how these projects are evaluated, particularly in areas where spending has grown significantly in recent years.
The agency said the revised policy will focus on Medicaid’s statutory goals, ensuring that demonstration spending is tied to measurable improvements in coverage, access, equity, and health outcomes. CMS also emphasized that the changes are designed to support state innovation while maintaining appropriate stewardship of federal funds.
“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,” CMS administrator Dr Mehmet Oz said in an agency press release.
Budget neutral
The Working Families Tax Cut (WFTC) legislation requires Medicaid section 1115 demonstrations to be budget neutral, or in other words that projects will not cost the government more than it would to deliver Medicaid programs the regular way.
As such, beginning January 1, 2027, CMS will “not approve new demonstrations, demonstration renewals, or demonstration amendments” until the CMS Chief Actuary confirms that the project will not cost the government more than the state’s Medicaid program without the demo.
The forthcoming guidelines would, for the first time, formalize a consistent framework for determining whether state demonstrations are budget neutral. While CMS has long required budget neutrality as a condition of approval, the standard has never been set in statute, and the agency’s methods for evaluation have shifted over time.
Tighter rules
According to CMS, the guidance would create a “more rigorous, transparent, and consistent quantitative framework” for assessing budget neutrality before demonstrations move forward. To that end, the framework would:
- Require independent certification by the CMS chief actuary confirming a demonstration is budget neutral;
- Hold states accountable for showing how proposals achieve budget neutrality through improved beneficiary health outcomes;
- Preserve state flexibility to experiment with new approaches within established fiscal guardrails; and
- Strengthen federal oversight to ensure responsible stewardship of federal dollars and measurable value for patients and taxpayers.
For state Medicaid directors and compliance officers, the announcement signals a shift toward tighter guardrails on demonstration financing, though CMS noted that states with existing approved demonstrations will continue operating under their current terms until renewal. These changes will reshape how states design, justify, and monitor demonstrations going forward.