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objectives. Further, we expect that such policies will also have the effect of mitigating health disparities. Research shows that increasing Medicaid payments to providers improves beneficiaries’ access to health care services and the quality of care received.

As a condition of approval and ongoing provision of federal financial participation (FFP) in HRSN expenditures over this demonstration period of performance, DY 1 through DY 5, the state will in accordance with the STCs increase and (at least) subsequently sustain Medicaid fee- for-service provider base rates, and/or require any relevant Medicaid managed care plan to increase and (at least) subsequently sustain network provider payment rates. That rate increase must be at least two percentage points in the ratio of Medicaid to Medicare provider rates for one of the service categories that comprise the state’s definition of primary care, behavioral health care, or obstetric care, as relevant, if the average Medicaid to Medicare provider payment rate ratio for a representative sample of these services for any of these three categories of services for any delivery system operated by the state is below 80 percent. If the average Medicaid to Medicare provider payment rate ratio for a representative sample of these services for any of these three categories of services is below 80 percent for any delivery system operated by the state, the state must increase provider payment rates in accordance with the STCs.

Budget Neutrality

CMS has long required, as a condition of demonstration approval, that demonstrations be “budget neutral,” meaning the federal costs of the state’s Medicaid program with the demonstration cannot exceed what the federal government’s Medicaid costs likely would have been in that state absent the demonstration.7 The demonstration is projected to be budget neutral to the federal government, meaning the federal costs of the state’s Medicaid program with the demonstration cannot exceed what the federal government’s Medicaid costs in that state likely would have been without the demonstration. In requiring demonstrations to be budget neutral, CMS is constantly striving to achieve a balance between its interest in preserving the fiscal integrity of the Medicaid program and its interest in facilitating state innovation through section 1115 approvals. In practice, budget neutrality generally means that the total computable (i.e., both state and federal) costs for approved demonstration expenditures are limited to a certain amount for the demonstration approval period. This limit is called the budget neutrality expenditure limit and is based on a projection of the Medicaid expenditures that could have occurred absent the demonstration (the “without waiver” (WOW) costs). The state will be held to the budget neutrality monitoring and reporting requirements as outlined in the STCs.

Hypothetical Budget Neutrality Treatment

Under its current approach to budget neutrality, CMS generally treats expenditures for populations or services which could have otherwise been covered via the Medicaid state plan, or other title XIX authority, such as a section 1915 waiver, as “hypothetical” for the purposes of budget neutrality. In these cases, CMS adjusts budget neutrality to account for the spending which the state could have hypothetically provided through the Medicaid state plan or other title XIX authority. CMS does not, however, currently allow for budget neutrality savings accrual as

7https://www.medicaid.gov/medicaid/section-1115-demonstrations/budget-neutrality/index.html