CMS is ending $2.7 billion in Medicaid spending on programs not directly tied to healthcare services.
DSHPs and DSIPs have used creative interpretations of federal rules to secure Medicaid funding.
The phase-out of these programs began in 2017 due to misalignment with Medicaid's core mission.
CMS is open to consulting with states on alternative federal funding options for these programs.

‘Overly creative’ programs tally up to $2.7B in spending that will end, according to CMS.

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Medicaid will end $2.7 billion in spending for state programs that duplicate other services or are not directly tied to health care, according to the U.S. Centers for Medicare & Medicaid Services (CMS).

The agency sent a letter notifying state Medicaid administrators to end mounting expenditures on programs that distract from Medicaid’s core mission or serve as “an overly creative financing mechanism to skirt state budget responsibilities.”

CMS is aiming at two types of programs, known as designated state-funded health programs (DSHPs) and designated state investment programs (DSIPs). They are funded by states, but they use “creative interpretations” of a federal rule to qualify for federal Medicaid funding, the agency’s announcement said.

“DSHPs and DSIPs are essentially a tap on the federal treasury for programs that states have determined are priorities outside of the federal commitment to the Medicaid program,” the CMS announcement said. “These programs do not tie directly to services provided to Medicaid beneficiaries.”

The announcement came out as elected officials in Washington, D.C., medical groups and health care advocacy groups have sounded the alarm about potential cuts to Medicaid as federal leaders in the White House and Congress debate the nation’s spending.

What type programs?

The CMS news release included examples:

$11 million in grants to a labor union in New York to reduce costs of health insurance for certain childcare providers
$241 million for a program in New York for non-medical in-home services, such as housekeeping
$17 million for a California student loan repayment program
$20 million in grants to high-speed internet for rural healthcare providers in North Carolina
$3.8 million for a diversity in medicine initiative in New York

Where the money comes from

CMS said the programs involve a regulation known as 1115 demonstration authority, named for section 1115(a) of the Social Security Act. In the past, states approved DSHPs, but the programs did not qualify for Medicaid funds and states did not use Medicaid money to pay for them, according to a letter to state Medicaid directors from Drew Snyder CMS Deputy Administrator and Director of the Medicaid & CHIP Services. CHIP is the Children’s Health Insurance Program.

CMS in 2005 began authorizing states to draw federal Medicaid matching money for DSHPs. States with approved DSHP authority include Arizona, California, Hawaii, Massachusetts, New York, North Carolina, Oregon and Washington.

Once approved for federal Medicaid matching funds, states would cover the programs and use “freed up” state money as Medicaid matching money or for other state purposes. “In other words, these demonstrations can effectively function as a technique to reduce states’ overall funding obligation by allowing federal funds to supplant existing state funds for services not otherwise covered by Medicaid,” Snyder said in the letter.

Phasing out

In the past, congressional oversight committee and the U.S. Government Accountability Office have questioned whether DSHPs served eligible populations and were properly aligned with federal and state financial partnerships to administer Medicaid.

A phase-out began in 2017, with CMS ruling the programs did not make a compelling case that DSHPs needed federal money for programming previously operated by the states, the CMS announcement said.

The Medicaid announcement did not specifically name the administration of former President Joe Biden. However, the announcement stated DSHPs and DSIPS grew from approximately $886 million in 2019 to almost $2.7 billion this year. Those programs have a cost to the federal government without a sustainable state contribution, according to CMS.

Snyder said CMS leaders are available to consult with states if the state directors believe services in DSHPs and DSIPs may qualify for other federal matching funds under their state plans.