Rethinking The Budget Neutrality Requirement for Medicaid 1115 Demonstrations

By: Anne O'Hagen Karl | Cindy Mann
– Health Affairs

Manatt Health Partners Cindy Mann and Anne Karl co-authored a Health Affairs article alongside the Robert Wood Johnson Foundation’s State Health and Value Strategies program’s Heather Howard discussing the challenges created by current Medicaid budget neutrality policy for Section 1115 demonstrations as well as potential actions the Centers for Medicare & Medicaid Services (CMS) could take to protect the fiscal integrity of the Medicaid program while also allowing all states to embark on and sustain innovations that are central to advancing the goals of Medicaid. 

In the article, the authors explain how federal policy requires Section 1115 demonstrations to be “budget neutral,” meaning they cost the federal government no more than what would have been spent without the demonstration. “While seemingly straightforward, the policy has evolved into a complex and opaque set of calculations that do not reflect actual Medicaid cost growth or states’ need for flexibility to respond to dynamic and often unpredictable drivers of health care costs,” the authors stated. This policy has resulted in inequities across states, as some use banked budget-neutrality savings to invest in their Medicaid programs, while others are left unable to innovate without offsetting cost cuts. “Budget neutrality policy can have a significant negative impact on states’ abilities to launch and sustain innovations, including investments in populations, providers, and services that have long suffered from disinvestment.” The article then describes two alternatives for restructuring budget neutrality to ensure that the policy enables states to address health equity and innovate to improve care for enrollees.



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