Medicaid and SCHIP Section 1115 Research and Demonstration Waivers

Medicaid and SCHIP Section 1115 Research
and Demonstration Waivers
Evelyne P. Baumrucker
Analyst in Social Legislation
Domestic Social Policy Division
Section 1115 of the Social Security Act provides the Secretary of Health and
Human Services (HHS) with broad authority to waive certain statutory requirements for
states to conduct research and demonstration projects that further the goals of Titles XIX
(Medicaid) and/or XXI (the State Children’s Health Insurance Program; SCHIP). States
use the Section 1115 waiver authority to cover non-Medicaid and SCHIP services, limit
benefit packages, cap program enrollment, among other purposes.
As of July 1 2008, there were 94 operational Medicaid and SCHIP Section 1115
waiver programs in 43 states and the District of Columbia. In FY2006 (the most recent
data available), Section 1115 waiver federal expenditures (for Medicaid and SCHIP)
totaled approximately $42.4 billion. Section 1115 waiver programs represented
approximately 24% of all federal Medicaid spending in the 50 states and the District of
Columbia for FY2006 (19% for SCHIP), and provided coverage to approximately 11.5
million enrollees — 2.5 million of whom were eligible only for a targeted benefit
package such as family planning or pharmacy benefits.1 This report provides background
information on the waiver authority, and will be updated when new data are available.

1 FY2006 waiver expenditure and enrollment estimates from the Centers for Medicare and
Medicaid Services (CMS) based on state-reported data, and are subject to change. Between
FY2001 (the earliest year for which CRS has access to Section 1115 expenditure estimates) and
FY2005, federal Medicaid waiver expenditures as a percentage of total Medicaid spending were
steady at approximately12-14%. In FY2006, there was a substantial increase in federal waiver
spending as a percentage of total Medicaid spending (i.e., almost 60% increase over the FY2005
totals). While there are several plausible explanations for this increase (e.g., ramp up of new and
renegotiated waivers, prior period adjustments, etc.) because waiver financing arrangements are
negotiated over a 5-year budget window it is hard to determine if the jump in federal expenditures
represents a step increase in overall federal waiver spending, or a one-time increase that will be
mitigated over the budget authority window. Analysis of future waiver expenditure trends will
help to clarify this question. Estimates do not include state experience under the 5 month
temporary Katrina waivers (described below).

Medicaid, authorized under Title XIX of the Social Security Act, is a federal-state
program providing medical assistance for low-income individuals who are aged, blind,
disabled, members of families with dependent children, or who have one of a few
specified medical conditions. The Balanced Budget Act of 1997 established SCHIP under
a new Title XXI of the Social Security Act. SCHIP builds on Medicaid by providing
health insurance to uninsured children in families with income above applicable Medicaid
income standards.
Section 1115 Waiver Authority
Section 1115 of the Social Security Act provides the Secretary of Health and Human
Services (HHS) with broad authority to conduct research and demonstration projects
under several programs authorized by the Social Security Act including Medicaid and
SCHIP. Section 1115 also authorizes the Secretary to waive certain statutory requirements
for conducting these projects without congressional approval. For this reason, the research
and demonstration projects are often referred to as Section 1115 “waiver” projects. Under
Section 1115, the Secretary may waive Medicaid requirements contained in Section 1902
(including but not limited to what is known as, freedom of choice of provider,
comparability of services, and state-wide access).2 The Secretary may also use the Section
1115 waiver authority to provide Federal financial participation (FFP) for costs that are
not otherwise matchable under Section 1903 of the Social Security Act. For SCHIP, no
specific sections or requirements are cited as “waiveable.” Section 2107(e)(2)(A) of the
Social Security Act states that Section 1115 of the act, pertaining to research and
demonstration waivers, applies to SCHIP. States must submit proposals outlining terms
and conditions for proposed waivers to CMS for approval before implementing these
In recent years, there has been increased interest among states and the federal
government in the Section 1115 waiver authority as a means to restructure coverage,
control costs, and increase state flexibility. Under current law, states may obtain waivers
that allow them to provide services to individuals not traditionally eligible for Medicaid
(or SCHIP), cover non-Medicaid (or SCHIP) services, limit benefit packages for certain
groups, among other purposes. Whether large or small reforms, Section 1115 waiver
programs have resulted in significant changes for Medicaid and SCHIP recipients
nationwide, and may serve as a precedent for federal and state officials who wish to make
statutory changes to these healthcare safety net programs.
While Section 1115 is explicit about provisions in Medicaid law that may be waived
in conducting demonstration projects, a number of other provisions in Medicaid law and
regulations specify limitations on how a state may operate a waiver program. For
example, one provision restricts states from establishing waivers that fail to provide all

2 Freedom of choice refers to a requirement that Medicaid beneficiaries have the freedom to
choose a provider. Comparability refers to a requirement that services be comparable in amount,
duration, and scope for persons in particular eligibility groups. A waiver of the statewideness
requirement allows states to provide services in only a portion of the state, rather than in all
geographic jurisdictions.

mandatory services to the mandatory poverty-related groups of pregnant women and
children; another provision specifies restrictions on cost-sharing under waivers. Other
features of the Section 1115 waiver authority include:
!Federal Reimbursement for Section 1115 Demonstrations. Approved
Section 1115 waivers are deemed to be part of a state’s Medicaid (or
SCHIP) state plan for purposes of federal reimbursement. Project costs
associated with waiver programs are subject to that state’s FMAP (or
!Financing and Budget Neutrality. Unlike regular Medicaid, CMS waiver
guidance specifies that waiver costs are budget neutral to the federal
government over the life of the waiver program. To meet the budget
neutrality test, estimated spending under the waiver cannot exceed the
estimated cost of the state’s existing Medicaid program under current law
program requirements.4 For example, costs associated with an expanded
population (e.g., those not otherwise eligible under Medicaid), must be
offset by reductions elsewhere within the Medicaid program. Several
methods are used by states to generate cost savings for the waiver
component: (1) limiting benefit packages for certain eligibility groups;
(2) providing targeted services to certain individuals so as to divert them
from full Medicaid coverage; and (3) using enrollment caps and cost-
sharing to reduce the amounts states must pay.
!Financing and Allotment Neutrality. Under the SCHIP program, a
different budget neutrality standard applies. States must meet an
“allotment neutrality test” where combined federal expenditures for the
state’s regular SCHIP program and for the state’s SCHIP demonstration
program are capped at the state’s individual SCHIP allotment (i.e.,
original allotments and funds made available through the redistribution
of unspent SCHIP funds). This policy limits federal spending to the
capped allotment levels.
!Application and Approval Process. There is no standardized process to
apply for a Section 1115 demonstration, but CMS has issued program
guidance that impacts the approval process. States often work
collaboratively with CMS to develop their proposals. Project proposals
are subject to approval by CMS, the Office of Management and Budget
(OMB), and the Department of Health and Human Services (DHHS), and
may be subject to additional requirements such as site visits before the
program may be implemented under the agreed upon terms and
!Duration. Waiver projects are generally approved for a five-year period,
however, states may seek up to a three-year extension for their existing

3 Section 1903 describes the conditions under which federal financial participation is available.
Section 1115(a)(2) stipulates that expenditures under a waiver are eligible for matching under
Section 1903. The same federal reimbursement rules apply to SCHIP waiver projects. As with
SCHIP state plan expenditures, SCHIP Section 1115 waiver programs are reimbursed at an
enhanced federal matching rate.
4 An exception was made by the Secretary for the Katrina waivers (i.e., all tests of budget and
allotment neutrality were waived).

waiver program under the same special terms and conditions (STC), and
an additional extension(s) under revised STC for the continuation of a
waiver project operating under an initial three-year extension.5
!Relationship of Medicaid/SCHIP Demonstration Waivers to Other
Statutes. Section 1115 waiver projects may interact with other program
rules outside of the Social Security Act; for example, employer-
sponsored health insurance as described by the Employee Retirement
Income Security Act (ERISA), or alien eligibility as contained in
immigration law. In cases like these, the Secretary does not have the
authority to waive provisions in these other statutes.6
!Program Guidance. The Secretary can develop policies that influence the
content of demonstration projects and prescribe approval criteria in three
ways: (1) by promulgating program rules and regulations;7 (2) through
the publication of program guidance (e.g., waivers must be budget
neutral);8 and (3) waiver policy may also be implicitly shaped by the
programs that have been approved (e.g., CMS approval of benefit
specific waivers). Legislative action may be required if Congress chooses
to further shape the Secretary’s authority over the content of the
demonstration programs, dictate specific Section 1115 waiver approval
criteria, or otherwise limit the Secretary’s waiver authority.
Program Types
As of July 1 2008, there were 94 operational Medicaid and SCHIP Section 1115
waivers in 43 states and the District of Columbia. In FY2006 (the most recent data
available), Section 1115 waiver federal expenditures (for Medicaid and SCHIP) totaled
approximately $42.4 billion. Section 1115 waiver programs represented approximately
24% of all federal Medicaid spending in the 50 states and the District of Columbia for
FY2006 (19% for SCHIP), and provided coverage to approximately 11.5 million
enrollees.9 Of the 11.5 million total Medicaid and SCHIP waiver enrollees, 2.5 million

5 The approval process associated with each type of extension is defined in statute at Section

1115(e) and at Section 1115(f) respectively.

6 For example, states may not provide benefits to qualified aliens as a part of a Section 1115
eligibility expansion without adhering to the five-year ban on alien access to federal assistance
as required by the Personal Responsibility and Work Opportunity Reconciliation Act (P.L. 104-


7 Program rules and regulations that meet specified rulemaking criteria are legally binding. To
date, CMS has not shaped Section 1115 waiver-related policy through program rules and
8 Unlike program rules and regulations, program guidance is not legally binding. Rather, program
guidance provides a framework for the process by which states may obtain approvals and the
principles under which states may operate their programs. Program guidance contains
authoritative interpretation and clarification of statutory and regulatory requirements. To date the
Secretary has only used guidance to shape Section 1115 waiver policy.
9 Estimates do not include state experience under the 5 month temporary Katrina waivers
(described below).

were only eligible for a targeted benefit package such as family planning benefits. There
are several types of operational waiver programs including:
!Comprehensive demonstrations. These demonstrations provide a broad
range of services that are generally offered statewide. Many of the
comprehensive waivers operate under combined title XIX and title XXI
authority and are financed with federal Medicaid and SCHIP matching
funds. Several also include a family planning and/or Health Insurance
Flexibility and Accountability (HIFA) component (see below). In
FY2008, there were 32 operational comprehensive state reform waivers
in 26 states.10 FY2006 state-reported enrollment estimates for these
waivers totaled approximately 8.1 million,11 at a federal cost of
approximately $38.4 billion. The SCHIP-financed portion of these
waivers extended coverage to approximately 475,376 enrollees at a
federal cost of $330 million. FY2006 enrollee estimates for the limited
benefits offered under a FP component totaled approximately 104,990.
!Family planning demonstrations (FP). In FY2008, there were 22 states
with stand-alone FP waivers to provide a limited benefit package
including family planning services and supplies for certain individuals of
childbearing age.12 FY2006 enrollment estimates for stand-alone FP
waivers totaled 2.4 million at a federal cost of approximately $1.4 billion.
Just over 1,000 of FY2006 enrollees were SCHIP-eligible with care
financed out of the SCHIP allotments.
!SCHIP and HIFA Waivers. Of the 20 states with SCHIP waivers in
FY2008, 14 have SCHIP waivers that were granted under the HIFA
initiative.13 HIFA demonstrations are designed to encourage states to

10 States include Alabama, Arizona, Arkansas (two programs), California (two programs),
Delaware, Florida (two programs), Hawaii, Indiana, Kentucky, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Mississippi, Montana, New York (two programs), Oklahoma,
Oregon, Rhode Island (two programs), Tennessee, Texas, Utah, Vermont (two programs),
Washington, and Wisconsin.
11 In states where multiple demonstration populations are covered under a comprehensive waiver
(e.g., the project includes a family planning component, a pharmacy-only component, an SCHIP
and/or a HIFA component, etc.), enrollee counts reported include enrollees for whom the state
reports expenditures associated with this population under the comprehensive demonstration
waiver project number.
12 States with stand-alone FP demonstrations in FY2008 included Alabama, Arkansas, Colorado,
Florida, Illinois, Indiana, Iowa, Louisiana, Massachusetts, Minnesota, Mississippi, Missouri, New
Mexico, North Carolina, Oklahoma, Oregon, Pennsylvania, South Carolina, Texas, Virginia,
Washington, and Wisconsin. In addition, there are six states that operated family planning
programs as a part of their comprehensive demonstration projects (i.e., Arizona, Delaware,
Maryland, Missouri, New York, and Rhode Island). Enrollment counts and expenditure estimates
associated with these six programs are included under the totals for the states’ comprehensive
demonstration projects.
13 States include Alaska, Arizona (HIFA), Arkansas (HIFA), California (HIFA), Colorado
(HIFA), Hawaii, Idaho (HIFA), Illinois (HIFA), Michigan (HIFA), Minnesota (HIFA), Missouri,
Nevada (HIFA), New Jersey (HIFA), New Mexico (2 programs one is a HIFA waiver), Oregon
(HIFA), Rhode Island, Texas, Utah (HIFA), Virginia (HIFA), and Wisconsin. Delaware, the

extend Medicaid and SCHIP to the uninsured, with an emphasis on
approaches that maximize private health insurance coverage and target
populations with incomes below 200% of the federal poverty level (FPL).
Under HIFA, states were encouraged to finance program expansions
using unspent SCHIP funds to, for example, extend coverage to one or
more categories of adults with children (typically parents of
Medicaid/SCHIP children, caretaker relatives, or legal guardians), and/or
pregnant women. Four states (i.e., Arizona, Michigan, New Mexico, and
Oregon) have approval to cover childless adults under their HIFA
waivers. The Deficit Reduction Act of 2005 prohibits new waivers that
would use SCHIP funds to provide coverage to nonpregnant, childless
adults. Recently the Administration has not renewed existing waivers that
permitted coverage of adults through SCHIP.14 In addition to expanding
coverage to new populations under SCHIP, some states use the SCHIP
Section 1115 authority for other purposes including modifying cost-
sharing rules (e.g., New Mexico), and requiring periods of no insurance
prior to SCHIP enrollment (e.g., Alaska and New Mexico). As of
FY2006, approximately 925,196 enrollees accessed services under
SCHIP and HIFA demonstrations at a federal cost of $675 million.
!Specialty services and population demonstrations. These demonstrations
generally include programs that provide cash to enrollees so that they
may directly arrange and purchase services that best meet their needs. In
addition, they include waivers to provide pharmacy benefits to persons
with specific conditions, such as HIV/AIDS. As of FY2008, there were

20 such operational programs in 15 states and the District of Columbia.15

In FY2006, these demonstrations covered approximately 37,473
individuals at a federal cost of approximately $441 million. Federal costs
for Pharmacy-only demonstrations totaled $1.5 billion in FY2006.
!Katrina/Multi-state Demonstrations. In response to the Hurricane Katrina
disaster, CMS allowed states to provide temporary eligibility for
specified Katrina evacuees so that such individuals could obtain state
plan services in a host state (i.e., a state that has been granted an
emergency Section 1115 waiver). Between September 2005 and March
2006 CMS approved 32 Katrina waivers that extended coverage to an
estimated 118,602 individuals at a federal cost of $1.63 billion.

13 (...continued)
District of Columbia, Louisiana, and Maine were granted HIFA waivers under Medicaid
authority. Enrollment and expenditure data reported here exclude HIFA waiver programs counted
as a part of the Comprehensive waiver group, but include HIFA waivers granted under the
Medicaid waiver authority.
14 For more information on SCHIP adult coverage waivers see CRS Report RL30473, State
Children’s Health Insurance Program: A Brief Overview, by Elicia J. Herz, Chris L. Peterson,
and Evelyne P. Baumrucker.
15 States include Alabama, Arkansas (3 waivers), California, Colorado, District of Columbia,
Florida, Georgia, Maine, Maryland (2 waivers), Massachusetts, New Jersey, Oregon, Rhode
Island, (2 waivers), South Carolina, and Vermont (2 waivers).