Medicaid Demonstration Cost Projections Show Billions in Potential Federal Spending Increases

The U.S. Government Accountability Office (GAO) has identified significant concerns regarding federal spending on Medicaid demonstrations, estimating that recent policy shifts could lead to billions of dollars in additional costs for the federal government. These demonstrations, designed to test innovative healthcare delivery methods, are intended to remain budget-neutral for federal funding. However, changes made by the Centers for Medicare & Medicaid Services (CMS) in how spending limits are calculated appear to be undermining this principle, potentially increasing federal outlays.

Medicaid demonstrations allow states to experiment with new ways of providing services, and they have become an integral part of the program. A core requirement for these demonstrations is that they should not result in increased costs for the federal government. To ensure this, CMS establishes spending limits for each demonstration based on projections of what would have been spent without the demonstration in place. The GAO’s analysis reveals that federal spending on these demonstrations has nearly doubled between 2013 and 2023.

A policy change implemented by CMS in 2021 aimed to strengthen budget neutrality by requiring states to use recent spending data rather than outdated historical projections when determining these limits. The GAO estimated that this approach could have saved the federal government approximately $123 billion across two specific demonstrations by ensuring more accurate projections. However, in 2022, CMS altered this policy, allowing spending limits to partially reflect these older, historical spending projections. This shift, according to GAO’s estimations, has led to a potential increase in federal spending of about $17 billion across three selected demonstrations.

Further exacerbating these concerns, CMS also began allowing spending limits in 2022 to incorporate costs for services addressing health-related social needs, such as housing assistance. Some of these expenditures, GAO notes, would not have been permissible under standard Medicaid rules and therefore could not have occurred without the demonstration. This allowance has led to an estimated increase in potential federal spending of nearly $4 billion across five demonstrations, without guaranteeing budget neutrality.

The GAO’s findings are based on an analysis of CMS expenditure data for Medicaid demonstrations. The office reviewed policy changes made between 2020 and 2024 and examined approval documents for six state demonstrations. Through this examination, the GAO was able to estimate the impact of CMS policy changes on federal spending.

In light of these findings, the GAO is recommending that CMS fully implement its long-standing recommendation from 2002 to utilize valid methods for ensuring budget neutrality. Additionally, the GAO advises CMS to cease allowing demonstration spending limits to include costs for services or populations that could not otherwise be covered under existing Medicaid authorities. The agency stated it will consider these recommendations as it moves forward with implementing new budget neutrality requirements.

For the public, these developments suggest that federal resources allocated to state Medicaid demonstrations may be increasing beyond original intentions. Residents can stay informed about how these federal spending shifts might impact the broader Medicaid program and their own healthcare access.

Article by Mel Anara, based upon information from the U.S. Government Accountability Office.

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