On August 22, 2018, CMS issued a State Medicaid Director Letter, SMD #18-009, providing formal guidance for the first time on how states must calculate budget neutrality for Medicaid demonstration projects (the CMS Letter). CMS previously allowed states to determine budget neutrality on their own when creating experimental, pilot or demonstration projects under Section 1115 of the Social Security Act. These projects are meant to give states flexibility in developing specific policies to design and improve their projects. However, longstanding concerns about improper payments led CMS to issue the CMS Letter containing formal requirements last week.
The Social Security Act permits Medicaid demonstrations that likely will promote the program’s objectives, but CMS approval requires federal spending to be “budget neutral.” For a project to be budget neutral, it cannot result in more federal Medicaid spending than otherwise would have been paid without the demonstration.
According to CMS’s press release, CMS Administrator Seema Verma stated, “CMS welcomes smart new approaches to coverage and delivering care through Medicaid demonstration projects, but we won’t approve them without a careful analysis of their impact on taxpayers. Federal spending on the program has increased, growing by over $100 billion between 2013 and 2016,” and that the CMS Letter “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.”
While the parameters of budget neutrality are specified in each demonstration’s terms and conditions, the CMS Letter reviews its formulas for calculating projected expenditures, which serve as the basis for demonstration expenditure limits. Those formulas incorporate, among other things, historical expenditures from the past five years for affected Medicaid populations, trend rates projecting future expenditures, and hypothetical expenditures (CMS adjustments budget neutrality into account for the spending which the state could have hypothetically provided through Medicaid). CMS expects to adjust its budget neutrality formulas to better reflect each state’s historical measures.
The CMS Letter also introduced a new reporting tool that consolidates financial data onto one form that states then upload to the Performance Metrics Database & Analytics System. States already use this system for other monitoring and evaluation reports. The reporting tool is a condition of demonstration approval, and CMS will soon announce training for using the tool.
CMS’s press release announcing the new budget neutrality guidelines in the CMS Letter is available here.
