CMS Plans Stricter Medicaid Waiver Spending Tests for 2027

The Centers for Medicare & Medicaid Services plans to apply stricter financial tests to Medicaid Section 1115 demonstrations beginning January 1, 2027. The change could require states to provide more detailed financial and program data before the agency approves new demonstrations, amendments or renewals.

CMS announced the planned approach on June 11, 2026, in a press release and State Medicaid Director Letter. The agency said Section 71118 of Public Law 119-21, which CMS calls the Working Families Tax Cut legislation, added a new budget-neutrality requirement to Section 1115 of the Social Security Act.

Under that requirement, the CMS Chief Actuary must certify that a Medicaid demonstration is not expected to increase federal Medicaid spending compared with what the federal government would have spent without the demonstration. The rule applies to Medicaid Section 1115 demonstrations in all states, the District of Columbia and U.S. territories. CHIP Section 1115 demonstrations are excluded.

What changes on January 1, 2027

CMS says the new statutory requirement will apply to new demonstrations, amendments and renewals approved on or after January 1, 2027. Current review practices are expected to continue for approvals issued before that date.

Section 1115 demonstrations allow states to test changes to Medicaid coverage, benefits, eligibility, delivery systems and financing that are not available through ordinary Medicaid authority. The new law does not create a simple nationwide spending cap. Instead, a demonstration expected to increase federal Medicaid expenditures would not receive approval under the planned framework.

CMS is preparing a proposed rule to establish the methodology. If a final rule is not effective by January 1, 2027, the agency says it expects to apply the approach in its June guidance on a provisional and temporary basis. CMS also says it could renegotiate budget neutrality for approvals made before the final rule takes effect if the final methodology changes.

How the financial review could become more detailed

The current approach generally compares projected spending with a waiver and projected spending without a waiver, using expenditure limits and later reviews of actual costs. CMS’s planned approach would instead rely on prospective actuarial, economic, statistical or comparable rigorous analysis of individual demonstration activities before approval.

States may have to identify each activity more precisely and provide details such as eligibility and service criteria, payment methodologies and payment rates. CMS says the information would allow the agency to isolate the financial effect of activities that can only be authorized through Section 1115.

The guidance divides proposed activities into two broad groups. Medicaid Authorizable Populations and Services, or MAPS, would cover populations and services a state could otherwise provide under its Medicaid state plan or another Title XIX authority. Section 1115-only activities would be those that could not otherwise be implemented under those authorities.

CMS says the analysis would include administrative costs connected with the demonstration, a change from the current approach. The agency also says certain Medicaid-authorizable activities involving substance-use-disorder treatment, serious mental illness and reentry could be treated as MAPS activities, including when the service is delivered at a different site such as an institutional or carceral setting. That does not categorically prohibit those services; it means their treatment and projected costs would affect the budget-neutrality analysis.

Why savings and renewals matter

CMS says the planned framework would reduce the amount of savings available to states under Section 1115 demonstrations. The agency describes a possible five-year limit on using savings from prior demonstration periods during a later renewal. That would be narrower than the current treatment of some legacy savings, which can extend to 10 years.

Programs that rely on projected savings to help finance services outside the standard Medicaid benefit structure could therefore have less financial flexibility. The effect would depend on the state’s application, the activities it proposes and the final methodology CMS adopts.

CMS’s letter also says that if a demonstration produces a net increase in federal expenditures during its current period, a state seeking renewal would need to show how the next period would be budget neutral. That could require changes to the demonstration.

What beneficiaries should expect

The June 11 guidance does not itself cut Medicaid benefits or terminate an existing demonstration. Beneficiaries should not expect an immediate change solely because CMS issued the guidance.

The largest near-term effects are likely to fall on states preparing new demonstrations, amendments or renewals that would require approval after January 1, 2027. Those states may need more detailed actuarial information and clearer descriptions of payment and service plans before CMS will approve proposed activities.

The next major checkpoint is CMS’s proposed rule, followed by public comment and a final rule. The practical impact will become clearer as states submit applications and CMS publishes approval terms, special terms and conditions, and monitoring reports.

Readers can track state Section 1115 applications, amendments, approvals and monitoring materials through Medicaid.gov’s Section 1115 Demonstrations page.

Sources

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