What’s Changing in Medicaid Innovation – And Why It Matters
Over the past decade, Section 1115 demonstration waivers have served as a critical tool for state-level innovation in Medicaid. These waivers allowed states to test policies and practices outside federal norms—often to address social determinants of health, modernize outdated systems, or pilot whole-person care models.
Now, in a move that signals a shift in direction, the Centers for Medicare & Medicaid Services (CMS) and the U.S. Department of Health and Human Services (HHS) have issued new guidance that sharply narrows the scope of allowable demonstrations—and with it, the future of Medicaid innovation.
A New Chapter for Section 1115 Waivers
In April 2024, CMS and HHS announced that they would no longer approve federal Medicaid matching funds for Designated State Health Programs (DSHPs) and Designated State Investment Programs (DSIPs)—two financing mechanisms that states have relied on to fund public health initiatives, system infrastructure, and community-based partnerships. These programs often existed on the periphery of direct Medicaid services but were key to enabling scalable innovation.
The message from CMS is clear: Section 1115 demonstrations must return to Medicaid’s “core mission”—namely, services directly tied to coverage, access, and improved outcomes for Medicaid-eligible individuals.
According to CMS Administrator Chiquita Brooks-LaSure:
“Section 1115 demonstrations should be used to improve coverage and care—not to divert funding toward investments that lack a direct Medicaid connection.”
For the full fact sheet and policy announcement, visit:
Why It Matters
This is more than an administrative update—it represents a material shift in what CMS will and won’t support. For states and providers who have leaned on 1115 waivers to address systemic gaps—such as housing instability, food insecurity, or fragmented care delivery—the pathway forward now comes with tighter guardrails.
This policy change will:
Restrict the use of federal funds for non-Medicaid public health or social service initiatives
Require a clearer line of sight between demonstration goals and Medicaid-eligible beneficiaries
Reduce state flexibility in creatively addressing upstream health drivers and infrastructure needs
States that have used 1115 waivers to meaningfully integrate housing supports, community health workers, and cross-sector care coordination may now be faced with significant funding shortfalls—or forced to scale back effective programs.
Reframing Innovation
This doesn’t mean innovation is over—it just means the strategy needs to evolve. Going forward, states must be prepared to:
Anchor proposals in explicit Medicaid objectives
Quantify expected improvements in access, quality, or cost-effectiveness
Demonstrate that the services are delivered to or directly benefit Medicaid enrollees
Prepare to co-finance broader system initiatives without relying on DSHP/DSIP mechanisms
The KFF Medicaid Waiver Tracker provides a useful snapshot of where waivers stand across the country, including state-specific priorities and how they may be affected:
What to Watch
Will states attempt to reclassify social supports as medical interventions to retain funding?
How will CMS evaluate proposals that address structural drivers of health without a strict clinical framing?
Will new funding partnerships emerge to sustain the kinds of innovation that 1115 waivers once supported?
Bottom Line
For Medicaid stakeholders—states, provider agencies, managed care organizations, and health tech partners—this is a call to adapt. While the parameters may be narrowing, the urgency to build person-centered, community-based systems of care has never been greater.
The next posts in this series will highlight how specific states have used 1115 waivers to advance transformational goals—and what’s at risk as the funding landscape shifts.
