In a move signaling a major shift in federal priorities, the Centers for Medicare & Medicaid Services (“CMS”) recently announced it will limit federal funding for state Medicaid initiatives that support services beyond direct medical care. New policy guidance indicates that CMS intends to narrow the scope of the federal-state Medicaid partnership, refocusing matching funds on core healthcare services delivered to Medicaid beneficiaries. The timing is notable, as Congress and state Medicaid leaders brace for the potential of more significant cuts to federal funding for Medicaid in the upcoming federal budget reconciliation process.
On April 10, CMS notified states that it will no longer approve new, or renew existing, state proposals for Section 1115(a) Demonstration Project expenditure authority to provide federal matching funds for state expenditures for designated state health programs (“DSHP”) and designated state investment programs (“DSIP”).
Section 1115 of the Social Security Act authorizes the Secretary of the U.S. Department of Health and Human Services (“HHS”) to waive any federal Medicaid requirements for demonstration projects that are “likely to assist in promoting Medicaid objectives.” Section 1115 waiver authority has long been a tool for states to expand coverage to populations or services not otherwise eligible for federal Medicaid matching funds and to reinvest savings in other Medicaid initiatives – provided the overall project remains budget neutral to the federal government. Budget neutrality is typically assessed against what projected federal expenditures would be without the waiver and is the subject of detailed negotiations between states and CMS.
Beginning in 2005, CMS allowed states to claim federal matching funds for certain existing, state-funded programs that would not otherwise qualify - designated as DSHPs. Although CMS sought to phase out these arrangements during the Trump administration in 2017, the Biden administration resumed approval of DSHPs and DSIPs in several states, including New York Arizona, California, Hawaii, Massachusetts, North Carolina, Oregon and Washington.
For many states, DSHP and DSIP were a key part of their broader strategies to address healthcare provider shortages, strengthen care delivery systems, and support vulnerable populations through upstream public health and health-related services interventions. The shift in federal policy leaves state Medicaid agencies, hospitals, health care providers, and community-based organizations facing a new set of tradeoffs about where and how to support Medicaid patients and their communities.
Approved programs must meet specific parameters established by CMS, including that they are population or public health focused and serve a community largely made up of low-income individuals, and the state must show that the “freed up” state funding is used for another demonstration initiative that will promote the objectives of the Medicaid program. Some of the recently approved programs include:
- $310 million in grant funds to support the training for primary care professionals who commit to practicing in an underserved area, and $17 million for a physician loan repayment program in California;
- $105 million to support caregivers and people with dementia through community-based supports and $20 million for non-medical services such as housekeeping, personal care, and case management for older adults in New York; and
- $20 million in telehealth infrastructure grants to rural healthcare providers to purchase equipment and high-speed internet access necessary to support telehealth services in North Carolina.
CMS explained that: “DSHPs and DSIPs have grown from approximately $886 million in 2019 to nearly $2.7 billion in eligible expenditures in 2025, representing increasing costs to the federal government without a sustainable state contribution.”
CMS’s policy announcement follows another policy change in early March, when CMS signaled it would evaluate state requests for federal Medicaid support for housing and nutrition services and supports on a case-by-case basis – rolling back broader flexibilities previously offered to state Medicaid programs to address health-related social needs.
The withdrawal of federal matching funds for Medicaid initiatives targeting health-related social needs, workforce development and infrastructure marks a significant shift in the federal-state partnership. States may now have to reassess or scale back innovative approaches that have shown promise in improving health outcomes and keeping low-income individuals – particularly older adults and children – out of institutional settings. At the same time, a growing body of research underscores the value of these investments in achieving long-term cost savings and better population health. It remains to be seen how CMS will handle discussions with states about their existing DSHP and DSIP authority or how states will respond in future Section 1115 waiver proposals and renewals. We will be tracking these developments closely in the coming months.