From DSHP to DSIP – The Collapse of Creative Financing in Medicaid
Over the past decade, states have used Section 1115 waivers not only to reshape service delivery, but to creatively finance critical system-level investments. Two of the most important tools in this effort—Designated State Health Programs (DSHPs) and Designated State Investment Programs (DSIPs)—allowed states to receive federal Medicaid matching funds for state-supported initiatives that, while not direct Medicaid services, contributed to broader Medicaid goals.
In April 2025, CMS officially closed the door on both mechanisms.
What did DSHP and DSIP programs deliver?
These were state-funded programs or investments not typically eligible for Medicaid reimbursement, but which states could include in waiver applications as part of budget neutrality calculations. In exchange, CMS would provide matching funds, often funneled into system improvements such as:
Public health infrastructure
Behavioral health and crisis response systems
IT upgrades and data exchange platforms
Workforce development and training
Housing support or care transitions infrastructure
These flexibilities gave states the financial leverage to drive cross-sector partnerships and pilot new care models that required startup capital.
Why Is CMS Ending Them?
According to CMS, DSHPs and DSIPs are no longer consistent with the statutory purpose of Medicaid or the objectives of Section 1115 demonstrations. From the April 2024 CMS policy release:
“These arrangements, which often lack a direct benefit to Medicaid enrollees, divert federal resources from core Medicaid services and do not meet our criteria for allowable expenditure authority.”
This decision is part of a larger CMS effort to refocus Medicaid funding on services that are directly connected to access, coverage, and health outcomes for Medicaid-eligible individuals. The message is that Medicaid should not be used to prop up broader state health reform agendas that are not grounded in the Medicaid benefit structure.
Case Example: New York
Few states have relied on DSHP/DSIP structures as heavily—or as successfully—as New York.
What New York Did
Used DSHPs and DSIPs to finance its Medicaid Redesign Team (MRT) reforms.
Supported public hospital investments, workforce development, and value-based payment initiatives.
Leveraged federal dollars to underwrite transformation efforts beyond the Medicaid benefit, including state-funded health programs and delivery system reforms.
What’s at Risk
New York could face a multi-billion-dollar budget gap as matching funds evaporate.
Planned investments in behavioral health crisis systems and safety-net infrastructure are now under question.
Providers and community organizations may lose access to transformation funding that supported data integration, workforce pipelines, and equity initiatives.
Why This Matters for Other States
New York is not alone. States like Massachusetts, Arizona, and Illinois have used DSHPs and DSIPs to test bold ideas, shore up infrastructure, or smooth transitions to managed care. These tools also gave states political room to experiment—using savings to justify services that Medicaid might not normally cover.
Without these mechanisms:
Startup funding for new initiatives becomes harder to secure.
Non-clinical interventions—such as job training or housing-related supports—may be dropped, even if they reduce long-term Medicaid costs.
State public health and Medicaid systems become more siloed, weakening cross-sector collaboration.
Strategic Implications
This change narrows the financial toolbox for Medicaid innovation. Going forward, states will need to:
Self-finance system-level investments or identify alternative funding sources (e.g., philanthropy, ARPA funds, behavioral health block grants).
Justify every dollar within a Medicaid framework, aligning initiatives tightly with coverage, eligibility, and benefit criteria.
Revisit value-based care investments to ensure compliance with CMS’s tightened standards.
How to Adapt
For states:
Rebuild budget neutrality strategies using traditional services or waiver-based savings.
Invest in waiver documentation and data analysis to show alignment with CMS goals.
Evaluate existing waivers to identify where DSHP/DSIP-dependent funding must be replaced or phased out.
For providers and CBOs:
Anticipate funding disruptions and diversify revenue streams.
Partner with Medicaid managed care plans to embed services within covered benefits.
Reframe formerly DSHP-funded initiatives as Medicaid-aligned pilots with documented return on investment.
Looking Ahead
The end of DSHPs and DSIPs does not mean the end of innovation—but it does mean states will need to be more precise, disciplined, and outcomes-driven in how they design and finance Medicaid demonstrations.
In the final post in this series, we’ll look at where the field goes from here—and how stakeholders can shape the future of Medicaid innovation in alignment with evolving federal priorities.
