As part of its ongoing effort to reshape Medicaid policy and oversight, the Centers for Medicare & Medicaid Services (CMS) over the past few months has released a series of guidance documents in 2026 that collectively signal a more structured, fiscally rigorous approach to federal Medicaid funding. These changes will have a considerable impact on state innovation within the program.
In the most recent of these consequential directives, CMS outlines its plan to implement updated budget neutrality requirements for Medicaid Section 1115 demonstrations beginning in 2027.
To understand what this guidance means for states, health plans, and providers, 红领巾瓜报 (红领巾瓜报) senior principal Andrea Maresca caught up with Sara Singleton, Principal at Leavitt Partners, an 红领巾瓜报 Company, and Rob Buchanan, Senior Principal at 红领巾瓜报. Of particular interest was the need for significantly more robust modeling and financing strategies to provide the new prospective actuarial analyses required for approval.
A Shift in Federal Policy Direction
Q: CMS has issued several guidance documents this year, but why and how does the one on Section 1115 budget neutrality stand out?
Sara Singleton: This guidance reflects a broader shift toward increased federal oversight and a more standardized interpretation of budget neutrality. While Section 1115 demonstrations have always been required to be budget neutral in concept, CMS and states have historically relied on methodologies that allowed for flexibility and, in some cases, greater federal spending over time.
What鈥檚 different now is that Congress recently added a requirement that the CMS Chief Actuary certify that demonstrations will not increase federal expenditures relative to what Medicaid would otherwise spend. That requirement, combined with CMS鈥檚 implementing guidance, is driving a more prospective, and in theory, data-driven approach to evaluating demonstrations.
Q: How is the change from reviewing retrospective to prospective spending expected to affect Medicaid programs?
Sara Singleton: Historically, CMS often reviewed budget neutrality retrospectively against what鈥檚 called 鈥渨ithout waiver鈥� spending limits, which means the agency reviewed what spending would have been in the absence of the waiver program. Going forward, CMS is emphasizing prospective certification and signals an expectation that states will provide more rigorous actuarial analysis and activity-level financial modeling.
The implication is that states will need to demonstrate upfront and in much greater detail how each component of their demonstrations affect federal spending. This is a substantive change in expectations for documentation, analytics, and accountability.
Implications for Innovation, Including HRSN Initiatives
Q: Sara, you鈥檝e written previously about the opportunities to address health-related social needs (HRSN) through Medicaid. How does this new guidance intersect with those efforts?
Sara Singleton: The timing is important. Over the past several years, the number of states utilizing 1115 waivers to address HRSNs, such as housing instability, nutrition, and transportation, has significantly increased. Many of these waivers and additional research have proven what we have long known to be true鈥攖hat addressing HRSNs has a clear impact on health outcomes and costs.
The new budget neutrality framework raises the bar for states to demonstrate that new innovations in an 1115 waiver will reduce costs before the waiver can be approved. States will need to show not just that these services are beneficial, but that they also are financially sustainable within the federal budget neutrality test. That鈥檚 a higher evidentiary standard, particularly for newer or more complex interventions.
Q: Does that mean HRSN initiatives are at risk?
Sara Singleton: Not necessarily; however, it does mean states may need to rethink how they structure and justify them.
One key element in the guidance is the distinction between services that are already Medicaid-authorizable and those that are unique to Section 1115 demonstrations. CMS is signaling a preference for using existing authorities where possible. CMS鈥檚 preference and negotiations with states could lead states to shift some HRSN activities into managed care programs, including using in lieu of services, or state plan options.
For services that remain in 1115 demonstrations, the burden will be on states to build a more robust financial and policy case. That expectation could shape which interventions move forward.
Q: Rob, what are you hearing from states as they process this guidance?
Rob Buchanan: States recognize that Section 1115 demonstrations are critical tools鈥攖hey allow flexibility to test new delivery models and address complex population needs. In fact, every state has an 1115 demonstration, each with tailored initiatives that span coverage, benefits and services, workforce investments, and other programs. The pathway to approval and iteration of these programs is becoming more complex.
From a planning perspective, states will need to rethink how they approach the entire life cycle of a demonstration鈥攆rom concept development to modeling, implementation, and evaluation.
Q: Where are the biggest pressure points?
Rob Buchanan: 红领巾瓜报 consultants have identified three key areas.
First is analytics and actuarial capacity. The guidance calls for more rigorous financial projections and certification prior to approval, which means states need stronger data infrastructure and modeling capabilities earlier in the process.
Second is program design and prioritization. Because demonstrations that increase federal spending will not be approved, states may need to narrow their focus, phase in initiatives, or identify offsetting savings within the demonstration.
Third is timing and alignment. CMS has indicated it will begin applying this framework in 2027, even as rulemaking continues. States with renewals or amendments coming up in that window will need to move quickly to align with the new expectations.
Q: How should states begin adapting their strategies?
Rob Buchanan: We鈥檙e advising states to start with a few practical steps.
One is to reassess their current demonstration portfolios. Which components are most essential? Which are most likely to meet the new budget neutrality standard? That prioritization will be critical.
Another is to integrate policy, finance, and operations early. Under this framework, you can鈥檛 develop policy concepts in isolation. You need to understand the financial implications from the outset.
Finally, states should think about implementation pathways. For example, if certain services can be authorized through managed care or state plan options, that may provide more flexibility than relying solely on Section 1115 authority.
Q: Does this change how states should think about partnerships?
Rob Buchanan: Yes, the level of coordination required across Medicaid agencies, actuaries, managed care plans, providers, and community organizations is increasing.
States will need strong partnerships to both design workable demonstrations and execute them effectively. That includes building connections with community-based organizations, particularly for initiatives that address HRSNs, where implementation relies heavily on local networks.
Q: As we look toward 2027 implementation, what should states and other Medicaid-focused organizations be focused on now?
Rob Buchanan: The most important thing is to recognize that this is not a distant policy change. It鈥檚 an immediate planning issue and states should already be assessing how the new framework applies to their program.
Compliance with this guidance requires state Medicaid programs to have detailed data 鈥� specifically actuarial analyses that have a clear methodology and assumptions and documentation demonstrating the federal fiscal impact of each demonstration component. States must provide sufficient information for CMS鈥檚 Chief Actuary to evaluate and certify budget neutrality. Plans and providers should also be engaged because these changes will influence program design, reimbursement approaches, and operational expectations.
Sara Singleton: At a broader level, stakeholders should expect additional guidance from CMS. This is one piece of a larger policy agenda, and CMS plans to provide additional clarification through the federal rulemaking process as well as technical assistance to states.
红领巾瓜报, including 红领巾瓜报 companies Wakely and Leavitt Partners,聽is actively helping states, health plans, providers, and other stakeholders assess the implications of CMS’s proposed budget neutrality framework and prepare for upcoming section 1115 renewals and amendments, as well as other changes due to recent guidance on community engagement requirements, state directed payments, and program integrity. 红领巾瓜报 can support strategic assessments, renewal planning, demonstration redesign, financial modeling, actuarial coordination, federal negotiations, and implementation planning. Connect with 红领巾瓜报 to learn how we can support your organization in navigating the next phase of Medicaid Section 1115 demonstration and policy.
You can find more insights on the impact of federal Medicaid policy changes in, CMS Proposes New Budget Neutrality Framework for Medicaid Section 1115 Demonstrations and register for the next edition of 红领巾瓜报鈥檚 Summer Webinar Series: Understanding Work and Community Engagement Requirements and New Section 1115 Guidance