Missed Opportunities: Using Medicaid Section 1115 Projects to Improve the Health of Medicaid and Medicare...

Policy Points Medicaid Section 1115 demonstration projects have been used to test innovative strategies to modify Medicaid programs but must demonstrate "budget neutrality" with respect to federal Medicaid expenditures. But this limitation ignores the intertwined nature of Medicaid and Medicare. Extending Section 1115 budget neutrality policies to include Medicare expenditure savings could create incentives to develop novel Medicaid policies that could improve the health of Medicare beneficiaries and lower Medicare expenditures as well.

Medicaid Section 1115 demonstration projects are widely used to test innovative policies but are subject to "budget neutrality" limits so that federal expenditures do not exceed what the federal government would have spent if the project was not adopted. Potential savings to Medicare are not considered, despite the fact that millions of beneficiaries are enrolled in both programs and virtually all middle-aged Medicaid beneficiaries will eventually enroll in Medicare.

Relevant federal policies are analyzed to examine the potential impact of expanding Section 1115 budget neutrality policies to include potential Medicare savings.

Historically, budget neutrality policies were not set by statute but were administratively established. Allowing Medicare savings to be counted is a more holistic approach to budgeting that would allow states to develop innovations like Medicaid long-term care or diabetes prevention policies that have repercussions for Medicare. However, in 2025 Congress approved an amendment (Section 71118) that limits budget neutrality calculations to Medicaid savings alone.

While there is a reasonable policy basis to include Medicare savings in Section 1115 budget neutrality calculations to improve health for millions of Medicare beneficiaries and to increase federal savings, this would require modifying the limitations imposed by Section 71118.