CMS Provides Budget Neutrality Advice for Medicaid Demonstration Projects

CMS today released a formal guidance that outlines the federal payer’s approach to calculating budget neutrality for Medicaid section 1115 demonstration projects, “to strengthen fiscal accountability.”

Medicaid section 1115 provides an avenue for states to waiver from federal rules and test innovative approaches. A recent example of such a project would be the 5-year Medicaid work requirements launched earlier this year.

CMS approves section 1115 projects only if they are budget neutral for the federal government, which ensures limited federal fiscal exposure in Medicaid. This makes budget neutrality a vital consideration in CMS’ negotiations with states over specific terms prior to launching a demonstration project. Projects are subject to a budget neutrality test, subsequent to which limits are placed on a state’s federal funding for the period of the project.

Read more about Medicaid work requirements.

Alluding to the fact that federal spending on the demonstration projects had grown by more than $100 billion between 2013 and 2016, CMS Administrator Seema Verma said, “Today’s guidance is a comprehensive explanation of how CMS and our state partners can ensure that new demonstration projects can simultaneously promote Medicaid’s objectives and keep federal spending under control.”

Budget neutrality calculation requires use of the baseline or without waiver (WOW) expenditures. WOW is based on every eligible member’s spending per month. The per member per month (PMPM) approach shields the state from the risk for increased costs that are linked with increased enrollment, neither does it accrue savings from reduced enrollment. Multiplying the projected WOW PMPM costs with the monthly caseload is the estimated PMPM expenditure limit.

CMS has also provided state Medicaid directors direction on calculating budget neutrality expenses for demonstration extensions. This includes a comprehensive review of the expenditure in the prior demonstration period to ensure reporting accuracy, followed by any necessary adjustments to changes in waivers and expenditure authorities under the extension. To limit federal Medicaid spending, CMS implemented policies such as limited savings rollover and rebasing WOW baselines.

States will be provided a new monitoring tool that consolidates financial data for all demonstration projects to streamline reporting and avoid redundancy, to be uploaded to the Performance Metrics Database & Analytics system, which states currently use for their other reports.