Last week, CMS issued guidance previewing sweeping changes to how States may use one of the most powerful tools in their Medicaid policy toolkit: Section 1115 demonstration waivers. The changes, which take effect on January 1, 2027, will fundamentally alter how these waivers are evaluated, approved, and monitored, with significant implications for State Medicaid programs nationwide.
What Are Section 1115 Waivers?
Section 1115 waivers allow States to experiment with their Medicaid programs in ways that go beyond what federal law normally permits. Nearly every State uses at least one. They’ve been the vehicle for expanding coverage to new populations, testing managed care models, restructuring provider payments, and addressing social needs that affect health outcomes. In exchange for this flexibility, States have long been required to show that their experiments won’t cost the federal government more than it would have spent absent the waiver—a concept known as “budget neutrality.”
What’s Changing?
For the first time, Section 71118 of the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21) codifies the budget neutrality requirement in a statute and adds a critical new gatekeeper—the CMS Chief Actuary. Under the OBBBA, before any proposed waiver can be approved, the CMS Chief Actuary must formally certify that the waiver won’t increase federal spending. Historically, budget neutrality has been assessed after the fact, based on aggregate spending projections negotiated between States and CMS; and States have had the ability to (i) rebase their budget baselines to account for certain unanticipated increases in Medicaid spending and/or (ii) make mid-course corrections necessary to adjust the program to meet their spending and policy goals.
This shift from a retrospective review to a prospective determination is a significant and potentially detrimental change in demonstration waiver policy that could have a chilling effect on the longstanding goals and objectives of these innovative programs. Under the new approach, States must submit rigorous, activity-by-activity financial analyses demonstrating that each component of their waiver—including administrative costs associated with certain activities—won’t increase federal expenditures. States also will no longer be allowed to rebase their budgets mid-cycle or to make other mid-course corrections. Further, while applicable law has never provided a definitive timeline for agency approvals, CMS explicitly states there will be no fixed timeline for these reviews and anticipates multiple rounds of questions, creating new uncertainty for States considering program changes.
Tighter Rules on Savings and Spending
The proposed changes also significantly restrict how States can accumulate and use budget “savings” from prior waiver periods to fund and/or offset the costs of new initiatives in waiver renewal periods. Specifically: (i) the lookback window shrinks from ten years to five years, (ii) savings can only roll into the immediately succeeding renewal period (not beyond), and (iii) a prior alternative that allowed states to claim 15 percent of total Medicaid expenditures as available savings is eliminated entirely.
Finally, CMS is narrowing which waiver expenditures receive favorable budget treatment. Under the new approach, “hypothetical” expenditures would be replaced by Medicaid Authorizable Populations and Services (MAPS) activities. Under the new MAPS classification system, only activities where both the specific population and the specific services could have been provided under existing Medicaid authority will be treated as cost-neutral. This is a tighter standard than the current approach, which requires only that the population or the services be otherwise coverable.
What It Means for States
The practical effect of the new guidance is clear: States will face a more demanding, less flexible, and less predictable waiver approval process. Demonstrations will likely become more conservative in design. States that rely heavily on accumulated savings to fund innovative programs—particularly those addressing social determinants of health or serving hard-to-reach populations—will need to reassess their strategies. CMS is also explicitly encouraging States to migrate activities out of Section 1115 authority and into standard Medicaid authorities wherever possible.
Looking Ahead
CMS is developing formal regulations to implement these changes. Until a final rule takes effect, the guidance will apply provisionally to any approvals issued on or after January 1, 2027. States and stakeholders should begin evaluating their current waivers now to understand how these changes affect upcoming renewals, extensions, and amendments.
