A New Federal Era for Medicaid Demonstrations: Why State Innovation May Be at Risk
Manatt Health’s new 1115 waiver pipeline tracker maps the state demonstrations potentially at risk as CMS introduces new policy.
Authors: Patti Boozang, Alice Lam and Nina Punukollu
Editor: Amanda Eisenberg
tl;dr
For decades, nearly every state has turned to a Section 1115 demonstration to innovate within their Medicaid programs. Forty-six states and Washington, D.C., run at least one, with creative ideas focused on meeting social needs, services for people re-entering communities from the criminal justice system, and coverage expansions. Roughly half of all Medicaid spending flows through demonstrations.
The Trump administration is poised to limit state demonstrations by pulling federal support from initiatives states have run for years, rescinding frameworks and rewriting budget neutrality through new June 2026 guidance flowing from H.R. 1.
With 27 states and 31 demonstrations up for renewal by the end of 2027 — plus new applications pending — the next 18 months will be the first major test of the administration’s 1115 agenda. Centers for Medicare & Medicaid Services (CMS) decisions will reveal whether these changes amount to a recalibration of waiver policy or a broader retreat from state-led Medicaid innovation.
The 80 Million Impact
Section 1115 is an innovation engine in Medicaid. Named for a provision of the Social Security Act, it lets states waive certain federal rules and fund things Medicaid wouldn’t otherwise cover — so long as the idea “promotes the objectives of the Medicaid program” and doesn’t cost the federal government more than it otherwise would have spent (i.e., it’s budget neutral). Section 1115 waivers have been used across administrations of both political parties to expand access, strengthen delivery systems, and address unmet health needs, such as:
Caregiver supports for medically vulnerable family members.
Pre-release services for people leaving jail or prison, so reentry doesn’t mean a relapse, overdose, or return to the emergency department.
Culturally appropriate care for Tribal communities.
Funding pools that support safety-net hospitals and other providers drowning in uncompensated care.
Section 1115 demonstrations are also historically one of the only ways a state can generate savings by running its program efficiently — which are then invested back into Medicaid to cover more enrollees or add new benefits.
What’s Changing
The Trump administration is reshaping 1115 policy in ways that, taken together, discourage states from pursuing demonstrations — and shrink the federal funding behind them. The policy change is rolling out across several fronts:
Withdrawing support for things states have long done. Over the past year, CMS has signaled it won’t back a series of initiatives states have relied on for years, effectively closing the door on renewals:
Health-related social needs (HRSN) services addressing social conditions like food insecurity or unstable housing that drive poor health. The guiding framework was rescinded in March 2025.
Financing for designated state health programs (DSHP) and designated state investment programs (DSIP): Longstanding state share funding mechanisms CMS said in April 2025 it does not intend to approve or renew.
Workforce initiatives, like student loan repayment and provider training, are off the table as of July 2025.
Continuous eligibility beyond the statutory requirement for children was also eliminated as a waiver option in July 2025.
Steering states away from waivers. Beyond specific initiatives, CMS is signaling heightened scrutiny across the board and encouraging states to rely on 1115 authority only where no other Medicaid pathway exists. For decades, 1115 has been where states innovate; the new posture treats it as a last resort rather than a first option.
A new approach to budget neutrality. In June 2026, CMS released its most consequential 1115 guidance to date: a State Medicaid Director Letter detailing how the CMS Chief Actuary must certify — before any new, renewed or amended waiver is approved on or after Jan. 1, 2027 — that a demonstration won’t increase federal spending. The guidance also demands more expansive cost analyses earlier, counting previously excluded administrative costs, and capping demonstrations at five years. Most significantly, it squeezes the savings states have long banked and reinvested: accumulated savings can roll over only into the first renewal after the current demonstration — not any later cycle. The reservoir that financed coverage expansions and new benefits for decades effectively drains after a single renewal. A formal proposed rule is expected later this year.
Taken together, these changes mean that the process gets more cumbersome and complex, the federal scrutiny sharper, the flexibility thinner, and the federal dollars scarcer. The likely casualties are the boldest uses of 1115: HRSN, delivery system reform and provider incentive programs.
What’s the State Impact?
The states that will become the first real test cases for this new policy are those with waivers expiring during the remainder of 2026 and 2027. Manatt Health’s Vital Signs, a new 50-state tracker, show 16 states with waivers expiring in 2026 and 11 in 2027 layered atop a stack of pending new applications. Each pending renewal and request will show, in practice, how the administration applies its new standards.
To date, the administration has approved only a narrow band of initiatives [mostly longstanding Institutions for Mental Diseases (IMD)/Substance Use Disorder (SUD) waivers] while leaning on short temporary extensions of three to 15 months to keep negotiating rather than issuing final decisions. This pattern will likely persist for at least some period: If a waiver is “easy” to approve to — meaning it’s aligned with CMS policy priorities and poses few budget neutrality challenges, it’s likely to be approved. Otherwise, CMS appears to be extending approval timelines to give states and the federal agency runway to understand and implement its new policy.
The end of 2026 is an inflection point, when 13 states have waivers expiring at once — putting reentry services, HRSN, contingency management, uncompensated care pools and Tribal health services on the table simultaneously. These are the cases to watch; how CMS rules on them will be the clearest signal yet of whether this is a recalibration or a broad and deep rollback of demonstration innovation and investment across states. A major open question is how quickly CMS and states will be able to negotiate this major policy shift and disruption to demonstrations.
Figure 1 States in Section 1115 Renewal Pipeline for 2026 and 2027
The Bottom Line
Innovation in Medicaid has always been a bottom-up story — states experimenting, learning from each other, and reinvesting in what works. The concern isn’t that CMS is asking tough questions about demonstrations. It’s that the new process will become too complex and cumbersome for states, end the ability to save and invest, and narrow the pathway to innovation in Medicaid. As the 2026 and 2027 test cases unfold, the fate of the next great Medicaid idea may depend less on whether a state can dream it up, and more on whether the federal government will let it try.
Want to go deeper? The full Manatt Health Vital Signs report, “A New Federal Era for Medicaid Demonstrations: State Waivers to Watch in 2026 and 2027,” includes state-by-state tracking tables mapping every demonstration in the pipeline.
Thanks for this thoughtful piece, and for your resource, "A New Federal Era for Medicaid Demonstrations: State Waivers to Watch in 2026 and 2027." My takeaway is that CMS is closing the traditional Section 1115 door. What was once Medicaid's innovation laboratory is becoming a much narrower approval process, where demonstrations must make a compelling, actuarially defensible case from the outset. Which raises the question: if you already know the outcome, what's the point of a demonstration?