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Section 1115 Demonstration Budget Neutrality

Medicaid spending under Section 1115 demonstrations is required to be budget neutral, meaning that federal spending under the demonstration cannot exceed projected costs in the absence of the demonstration (referred to as the without-waiver baseline). If state spending under its demonstration is below the without-waiver baseline, the difference is considered savings. The state can use any accumulated savings to finance spending on populations or services that are not covered by Medicaid, referred to as costs not otherwise matchable (CNOM). The Centers for Medicare & Medicaid Services establishes the methods that states must use to demonstrate budget neutrality and, as part of the Section 1115 demonstration approval process, must approve any spending of budget neutrality savings on CNOM expenditures.

This issue brief reviews the sources and uses of Section 1115 demonstration budget neutrality savings based on MACPAC’s review of spending reported in fiscal year (FY) 2019. The brief concludes with a discussion of current policy issues related to Section 1115 demonstration budget neutrality.