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CMS Releases Formal Approach to Ensure Medicaid Demonstrations Remain Budget Neutral

CMS Releases Formal Approach to Ensure Medicaid Demonstrations Remain Budget Neutral
Agency reinforces commitment to transparency and controlling costs; provides new tool

Today, the Centers for Medicare and Medicaid Services (CMS) released a letter to State Medicaid Directors that clearly describes CMS’s current approach to calculating budget neutrality expenditure limits for Medicaid section 1115 demonstration projects. Medicaid demonstration projects allow states to design innovative ways to better serve the nation’s more than 65 million Medicaid recipients. In response to longstanding concerns raised by the Government Accountability Office (GAO), this letter marks the first time that CMS has formally outlined how states must calculate budget neutrality for demonstration projects, in order to strengthen fiscal accountability. The guidance also comes a day after Administrator Seema Verma testified before the Senate Homeland Security and Government Accountability Committee on improper payments in the Medicaid program, which often result in higher federal spending.

The Social Security Act authorizes Medicaid demonstrations, if they are likely to promote the objectives of Medicaid. However, CMS will only approve them if federal Medicaid spending is estimated to be “budget neutral.” The calculation of the budget neutrality spending limits—and how CMS monitors demonstration costs—is the subject of the letter.

“CMS welcomes smart new approaches to coverage and delivering care through Medicaid demonstration projects, but we won’t approve them without a careful analysis of their impact on taxpayers. Federal spending on the program has increased, growing by over $100 billion between 2013 and 2016,” said CMS Administrator Seema Verma. “Today’s guidance is a comprehensive explanation of how CMS and our state partners can ensure that new demonstration projects can simultaneously promote Medicaid’s objectives and keep federal spending under control.”

Controlling Costs

Budget neutral demonstration projects will not result in federal Medicaid spending that exceeds what it would likely have been absent the demonstration. Currently, budget neutrality spending limits are one key component of CMS and state negotiations about proposed demonstration projects, and are listed in the special terms and conditions that govern each approved project. CMS currently subjects each demonstration to limits on the amount of federal Medicaid funding the state may receive over the course of the demonstration, based on projections of the amount the state would likely have received in the absence of the demonstration. The overarching goal of CMS’s approach to budget neutrality is, therefore, to limit federal fiscal exposure resulting from the use of section 1115 authority in Medicaid.

New Tool for States

The State Medicaid Director letter also announces a new monitoring tool to support a more streamlined and standardized approach to expenditure reporting for Medicaid demonstrations.

The tool is a standardized budget neutrality reporting form that consolidates financial data for each demonstration into a unified report, to reduce redundancy—while, at the same time, strengthening and enhancing CMS reviews. States will upload the tool into the Performance Metrics Database & Analytics system as they currently do for their other monitoring and evaluation reports.

CMS intends to require states to use the tool as a condition of demonstration approval and will soon provide states with a schedule of training dates outlining completion and submission of the tool.


In detailing how CMS determines budget neutrality and approves demonstrations, the Agency is reinforcing its commitment to transparency. Another notable effort to increase transparency—the Medicaid and Children's Health Insurance Program (CHIP) Scorecard—launched in June 2018.

The Scorecard offers taxpayers insights into how their dollars are being spent and the impact those dollars have on health outcomes. 

The CMS agenda to transform Medicaid has three core tenets: state flexibility, accountability and program integrity. Today’s guidance supports all of these tenets.

CMS continues to revise and improve its approach to budget neutrality for Medicaid demonstrations and will determine if additional guidance is needed as implementation continues.


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