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psychiatric care via psychiatric inpatient treatment and residential crisis stabilization, to include IMDs. Beneficiaries served in IMDs will have access to a full set of Medicaid benefits and will be subject to the same medical necessity requirements. Virginia would not reimburse for stays of more than 60 consecutive days and will maintain an average length of stay of 30 days or less across all applicable settings for eligible members. All Virginia Medicaid beneficiaries eligible for a mandatory or optional eligibility group receiving full Medicaid coverage, and between the ages of 21-64, will be eligible for acute inpatient stays in an IMD. Budget Neutrality

This demonstration project is being renewed and amended using CMS’s current approach to determining budget neutrality as described in CMS SMDL #24-003.3 However, CMS acknowledges that section 71118 of subchapter C of chapter 1 of subtitle B of title VII of Public Law 119-21, which CMS refers to as the Working Families Tax Cuts legislation, adds a new subsection (g) to section 1115 of the Act with budget neutrality requirements that will apply beginning January 1, 2027 to CMS approvals of section 1115 Medicaid demonstration project applications, renewals, or amendments.4 CMS issued state Medicaid Director Letter #26-0035 on June 11, 2026 to provide states with early notice regarding the changes to budget neutrality that CMS intends to propose to implement section 1115(g) of the Act, and expects to provide additional guidance to states on implementation of this provision.

Under SMDL #24-003, as a condition of demonstration approval, demonstrations must 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.6 The demonstration renewal is projected to be budget neutral to the federal government. 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 general financial requirements as outlined in the STCs.

Rebasing Without Waiver Baselines Under this demonstration, for existing Medicaid Expenditure Groups (MEGs) that were implemented, CMS calculated the WOW baseline by using a weighted average of the state’s historical WOW per-member-per-month (PMPM) baseline and its recent actual PMPM costs. The projected demonstration expenditures associated with each MEG in the WOW baseline (except MEGs with aggregate cost limits) have been trended forward using the President’s Budget trend rate to determine the maximum expenditure authority for the new approval period.

3 https://www.medicaid.gov/federal-policy-guidance/downloads/smd24003.pdf 4 https://www.congress.gov/bill/119th-congress/house-bill/1/text 5 https://www.medicaid.gov/federal-policy-guidance/downloads/smd26003.pdf 6 https://www.medicaid.gov/medicaid/section-1115-demonstrations/budget-neutrality/index.html