In June, the Centers for Medicare & Medicaid Services (CMS) issued new guidance that substantially changes how states demonstrate and CMS reviews budget neutrality for Medicaid Section 1115 demonstration waivers. “Budget neutrality” is the federal government’s financial standard for approving state proposals 1115 waivers. Specifically, state Medicaid Agencies (SMAs) must show that an 1115 waiver is not expected to cost the federal government more than Medicaid would cost without it.
Establishing budget neutrality for waivers has long been federal policy, but the 2025 law the One Big Beautiful Bill Act made budget neutrality a legal requirement and established more rigorous review requirements. The June guidance details these requirements, which take effect January 1, 2027. Although the new guidance is a substantial change for many services authorized through 1115 waivers, it does not materially change the budget neutrality treatment of Medicaid pre-release services in Medicaid reentry waivers. The underlying treatment of Medicaid reentry waiver services remains largely the same as it has been historically. The guidance does, however, make significant changes to budget neutrality for infrastructure spending associated with reentry and other types of waivers.
This issue brief is written primarily for State Medicaid agency staff who work on waiver policy, and describes how the new budget neutrality guidance applies to Medicaid reentry waivers. Other audiences with interest in reentry waiver policy may also find this issue brief helpful.
If your state is implementing an 1115 Medicaid reentry waiver, the HARP State Technical Assistance Center (STAC) is ready to help. Register today!