Health Law Daily Wrap Up, MEDICAID—CMS LETTERS: CMS concerns halt approval of new state proposals and renewals for DSHP, DSIP, (Apr 14, 2025)

By Susan L. Smith, JD, MA

CMS letter advises states that renewed concerns about the appropriateness of providing federal matching funds for state expenditures for DSHP and DSIP under Social Security Act §1115 demonstration authority, has resulted in its decision not to approve new state proposals or renew existing funding.

The CMS Deputy Administrator and Director (Administrator) has sent a letter to State Medicaid Directors regarding federal matching funds for state expenditures for designated state health programs (DSHP) and designated state investment programs (DSIP) to inform the states that, after reviewing the approvals of several demonstrations, it has determined that these programs were funded entirely without federal Medicaid funds prior to approvals and the addition of federal Medicaid funding does not render the programs as integral components of Social Security Act (SSA) §1115(a) demonstration programs. Federal DSIP and DSHP funding have appeared to serve primarily as a financing mechanism for states, resulting in increased federal expenditures, rather than being an integral part of an appropriate §1115 Medicaid demonstration. As a result of its findings, and because of CMS’ renewed concerns about the appropriateness of providing federal funding for these programs under the §1115 demonstration authority, it does not anticipate approving new state proposals of §1115 demonstration expenditure authority for federal DSHP or DSIP funding or renewing existing §1115 demonstration expenditure authority for federal DSHP or DSIP funding (CMS Letter to State Medicaid Directors, April 10, 2025).

Background. Federal DSHP funding has historically raised oversight concerns about its consistency with the federal-state financial partnership established under the Medicaid statute. Under these approvals, CMS makes these programs eligible for federal Medicaid matching funds through §1115 expenditure authority, effectively having the federal government share in the costs of funding these state programs. According to the Administrator, the demonstrations can function as a technique to reduce state’s overall funding obligations by allowing federal funds to supplant existing state funds for services not otherwise covered by Medicaid. The Administrator noted that, consistent with historical CMS approvals for DSHP, allowable DSHP expenditures under post-2022 approvals should not include expenditures associated with the provision of non-emergency care to individuals who do not meet citizenship or immigration status requirements to be eligible for Medicaid.

Programs not directly tied to Medicaid. Unlike traditional Medicaid matching funds, which are generally tied to claims for specific services provided to Medicaid beneficiaries, federal matching funds provided to support DSHP and DSIP have not necessarily been tied directly to services provided to Medicaid beneficiaries. The Administrator noted that, in general, documentation from DSHP claiming protocols have confirmed that federal DSHP funding is neither integral to a state’s §1115 demonstration supporting increased access for Medicaid beneficiaries nor a prudent federal investment. Examples include:

• grants to a labor union to reduce the costs of health insurance for certain child care providers,

• grants to high speed internet for healthcare providers to purchase equipment, high-speed internet access;

• $241M for a program in New York for non-medical in-home services, such as housekeeping;

• $17M for student loan repayment program; and

• $3.8M for a diversity in medicine initiative.

Next steps. The Center for Medicaid and CHIP Services (CMCS) will conduct direct outreach to states with existing DSHP and DSIP authority to emphasize that the time-limited authority for DSHP or DSIP will not be extended beyond the currently approved demonstration period or, when current DSHP or DSIP authority concludes before the end of the demonstration’s approval period, the current end date for such authority.

CMS is available to consult with states if they believe services currently supported in DSHPs and DSIPs qualify for federal matching funds under their state plans. CMS will continue to work with states to support innovative state section 1115 demonstrations that promote the objectives of Medicaid.

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