E&C Republicans Raise Concerns over Changes to Budget Neutrality Requirements for Medicaid Demonstrations

Washington, D.C. — House Energy and Commerce Committee Chair Cathy McMorris Rodgers (R-WA), Subcommittee on Health Chair Brett Guthrie (R-KY), and Subcommittee on Oversight and Investigations Chair Morgan Griffith (R-VA), on behalf of the Health and Oversight Subcommittee Republicans, sent letters to the Centers for Medicare and Medicaid Services (CMS) and Government Accountability Office (GAO) regarding changes to budget neutrality in parts of the Medicaid program. 


  • Section 1115 of the Social Security Act allows states to pilot distinct approaches within their Medicaid programs to address their unique population health care needs while adhering to the principle of budget neutrality. These demonstrations are intended to foster state-driven innovation and accountability in the utilization of federal funds, promoting efficiency and alignment with the broader objectives of Medicaid, which include providing essential health care services to low-income individuals and families. 
  • A pivotal requirement for these demonstrations, grounded in the clause “must not result in increased cost to the Federal Government under part A of such title” from Section 1115 of the SSA concerning Medicaid waivers, aligns with the principle of budget neutrality.  
  • This principle has been long interpreted and administered by CMS to mean that federal spending under a demonstration cannot exceed projected costs in the absence of the demonstration, a concept referred to as the without-waiver baseline.  
  • If state spending under its demonstration is below the without-waiver baseline, the difference is considered a savings. The state can use any accumulated savings to finance spending on populations or services that are not otherwise covered by Medicaid, referred to as “costs not otherwise matchable” (CNOM). 
  • This policy was first articulated by the Carter administration.  
  • The Clinton administration was the first to issue detailed publicly available guidance on how states were to comply with the budget neutrality requirement. All subsequent administrations, except the Biden administration, have issued formal publicly available guidance on budget neutrality. 
  • The Biden administration altered the calculation of budget neutrality during the Summer of 2022, with modifications to the Special Terms and Conditions concerning how states utilize Section 1115 demonstrations to fund health-related social needs, Designated State Health Programs, and the process of updating budget neutrality mid-demonstration, meaning that such calculations are no longer budget neutral. 


“The Committee is concerned about the lack of transparency and consistency in how CMS, under the Biden administration, determines policy development and compliance with budget neutrality requirements.”


“The Committee is also concerned about the potential for fraud, waste, and abuse in the calculation and application of states’ budget neutrality limits under Section 1115 Medicaid waivers.”

CLICK HERE to read the full letter to CMS Administrator Chiquita Brooks-LaSure. 


“We write today to request that the U.S. Government Accountability Office (GAO) conduct a review of recent changes the Centers for Medicare & Medicaid Services (CMS) has made related to the budget neutrality requirement for Medicaid demonstrations. Demonstrations approved under section 1115 of the Social Security Act (‘Section 1115 Demonstrations’ or ‘demonstrations’) allow states to test new approaches in Medicaid, including spending for costs that would not otherwise be eligible for federal matching funds.” 

The Chairs requested GAO conduct an analysis of the following: 

1. Changes in CMS’s approach to assessing budget neutrality and setting spending limits for section 1115 demonstrations over the past ten years; 

2. What is known about the implications of recent changes on federal spending; and, 

3. Changes to policies and procedures for ensuring transparency around budget neutrality in section 1115 demonstration approvals. 

CLICK HERE to read the full letter to GAO Comptroller General Gene Dodaro.