States that use Section 1115 Medicaid demonstrations for home and community-based services or other disability expansions face a tighter federal budget test starting Jan. 1, 2027, according to a Nov. 5, 2026 KFF analysis of CMS's June guidance. KFF researchers Amaya Diana and Elizabeth Hinton say the new rules may make it harder to renew or expand certain HCBS 1115 initiatives unless states can show offsetting savings.

What changed in federal law and CMS guidance

The 2025 reconciliation law put Section 1115 budget neutrality into statute for the first time and required the CMS Chief Actuary to certify that a demonstration will not raise federal Medicaid spending compared with the program without the waiver. CMS spelled out how it plans to apply that test in State Medicaid Director Letter #26-003 (June 11, 2026). The policies take effect Jan. 1, 2027, even if a final rule is still pending.

KFF highlights several shifts from older practice:

  • Prospective actuarial review. Instead of setting a spending limit and checking neutrality mainly after the demonstration ends, CMS will demand a rigorous financial-impact analysis of each activity before approval.
  • MAPS vs. 1115-only. Former "hypothetical" expenditures give way to "Medicaid Authorizable Populations and Services" (MAPS). Both the service and the population must be coverable under another Medicaid authority to sit outside budget neutrality. Some HCBS, health-related social needs and infrastructure costs may become "1115-only" and need savings offsets.
  • Administrative costs count. Budget neutrality math will include administrative spending that was often left out before.
  • Savings are harder to bank. Rollover savings would be limited to the period they accrue or the next demonstration period, and CMS has signaled managed care will not generate budget-neutrality savings the way states once used them.

CMS also says states should use state-plan or 1915 authorities where they can, rather than defaulting to 1115.

Early signals: Arkansas ARHOME and reentry waivers

KFF reports that Arkansas was told CMS will not approve a renewal of its ARHOME waiver — which enrolls expansion adults in Marketplace plans — under the new budget-neutrality rules. The state is seeking a temporary two-year extension while it redesigns the delivery system. Separately, CMS approved five community-reentry waivers in late September 2026 (D.C., Louisiana, Maine, Minnesota and Nevada); reentry service costs tied to the site of care can count as MAPS, but infrastructure dollars supporting those waivers generally will not.

Twenty-seven tracked 1115 waivers are due to expire by the end of 2027, KFF notes, so renewals in the next year will show how strictly CMS applies the Chief Actuary test. Mid-demonstration amendments would trigger a full review under the new rules, which may discourage states from changing active waivers.

What this means for providers and DSPs

Provider agencies and DSPs rarely file 1115 applications themselves, but they live with the results. States that built HCBS expansions, continuous eligibility, workforce add-ons or social-needs benefits through 1115 authority may have to move pieces onto 1915(c) waivers or the state plan — or find new savings — when those demonstrations renew. Alabama's Community Waiver Program renewal, already before CMS with comments closing Nov. 6, is one early HCBS test of the same budget-neutrality statute.

Watch for CMS's forthcoming budget-neutrality rulemaking (expected early 2027) and for how renewals treat HCBS-only demonstrations. If states cannot certify savings, services that exist only under 1115 could shrink, shift authorities, or stall while CMS and the Chief Actuary negotiate.