June 11, 2026
Dear State Medicaid Director:
Section 1115(a) of the Social Security Act (the Act) gives the Secretary of Health and Human Services (Secretary) authority to approve experimental, pilot, or demonstration projects that arefound by the Secretary to be likely to assist in promoting the objectives of the Medicaid program. These demonstrations give states additional flexibility to design and improve their programs and help the federal government and states evaluate state-specific policy approaches to better serve Medicaid populations. Section 71118 of Public Law 119-21, which the Centers for Medicare & Medicaid Services
(CMS) refers to as the Working Families Tax Cut (WFTC) legislation, adds budget neutrality for Medicaid section 1115 demonstration projects as a new statutory requirement at subsection 1115(g) of the Act. New subsection 1115(g)(1) of the Act requires that, beginning January 1, 2027, the Secretary may not approve an application for (or an amendment or renewal of) a Medicaid section 1115 demonstration project unless the Chief Actuary of CMS certifies that such project is not expected to result in an increase in the amount of federal Medicaid expenditures compared to the amount that such expenditures would otherwise be in the absence of such project. New subsection 1115(g)(2) of the Act describes the treatment of current demonstration period budget neutrality savings during the subsequent demonstration renewal period. Section 1115(g) of the Act is applicable to Medicaid section 1115 demonstration projects in all states, the District of Columbia, and all territories; this section is not applicable to Children’s Health Insurance Program (CHIP) section 1115 demonstration projects. While budget neutrality is a key component of the review of 1115 demonstrations, the Secretary will approve a proposed section 1115 demonstration only if he determines that it is likely to assist in promoting the objectives of the Medicaid statute. CMS performs a case-by-case review of each state proposal for section 1115(a) demonstrations.