CMS Updates Its Budget Neutrality Policy

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

Manatt Health Partners Cindy Mann and Anne O'Hagen Karl co-authored an article for Health Affairs alongside the Robert Wood Johnson Foundation’s State Health and Value Strategies program's Heather Howard, in which they discussed the Centers for Medicare and Medicaid Services’ (CMS) new approach to its Medicaid budget neutrality requirements, as established in recent Section 1115 demonstrations approved in Arizona, Arkansas, Massachusetts and Oregon. 

In the article, the authors described CMS’ policy requiring Section 1115 demonstrations to be “budget neutral,” costing no more than would have been spent on the state’s Medicaid program without the demonstration. They noted, however, that this requirement has historically disrupted states’ abilities to test and sustain innovations necessary for advancing health equity, expanding coverage, enhancing quality and initiating reform. In response, CMS has recently worked with state Medicaid directors and leadership across the administration to address these issues and create new opportunities for those interested in investing funds that advance the objectives of the Medicaid program.  

Some of the significant changes to the budget neutrality policy include: 

  • “mid-course” corrections to budget neutrality caps; 
  • the use of national trend rate projections; 
  • addressing savings at renewal; 
  • carrying forward savings from prior demonstrations; and  
  • the use of “hypothetical” treatment of certain expenditures. 

The array of changes to the policy constitute a significant advance in CMS’ approach to 1115 demonstrations, the authors stated. “Although some issues remain,” they concluded, “CMS has largely succeeded in balancing the need for fiscal integrity in the Medicaid program with the desire to afford states the ability to create and sustain innovations that advance the core goals of the Medicaid program.”  



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