1115 waivers must be budget neutral; i.e., not cost more than if there had been no waiver. States predict what their costs in Medicaid would have been if there was no waiver and compare those to estimates of Medicaid costs if there IS a waiver.
The difference is the estimated waiver savings. These savings come from places like moving Medicaid fee for service care to Medicaid managed care. In the original 1115 waiver, historical savings from Medicaid managed care put in place before the waiver were also negotiated to be included, and to generate waiver savings. Waiver savings, in turn, are available for approved waiver expenditures, like:  DSRIP and the UC pool.
CMS has told HHSC that if it reduces the UC or DSRIP pool, remaining waiver savings could still be available for other innovative programs.
Two things to note about Texas’ waiver renewal: 1) CMS has been trying to pare down assumptions about savings in its California and New York negotiations. 2) The Executive Commissioner noted that if CMS reduces Texas’ current UC and DSRIP “pools” or funding (now at about $6.2B/year); CMS has said that the wavier savings could be used for other innovative projects. What’s that mean? We don’t know how and whether the election results will affect CMS waiver positions; but, here’s an estimate of budget neutrality savings. If we take out what we think CMS will keep in for DSRIP and for UC, and any other waiver-based programs like NAIP, the remainder could be available for other innovative programs.

CMS has identified policy for revising its historical methodology for calculating budget neutrality (BN) for an 1115 waiver.[1]  Historically, BN has been determined over the life of a waiver allowing net savings to accumulate over time. While BN savings have allowed states to test innovative approaches to improve healthcare delivery as well as expand coverage, CMS is concerned that accumulated savings under these agreements have increased exponentially and continue to grow rapidly. Under the adjusted BN policy CMS is reforming the treatment of the primary financial mechanisms driving excess growth in accumulated savings, while allowing for state accrual of savings for time-limited periods. The areas of methodological adjustments are:

Limited savings rollover
* Transitional phase-down of newly accrued savings
* Rebasing Without Waiver (WOW) baselines
* Limiting growth of UPL diversion
Savings Rollover
* Under previous policy states have been allowed to rollover savings from one demonstration period to the next without limitation. Under the adjusted BN policy states will only be permitted to rollover accumulated BN savings from the most recent five years of the demonstration.
Phase-Down of Savings
*For the first five years of the demonstration 100% of BN savings will be permitted to accumulate and be carried forward.
*Starting in the 6th year a continual 10% phasedown will be applied to savings in each demonstration year until savings are reduced to no less than 25% of the amount of savings realized based on the original baseline.
*Phasedown will be applied at extension to all demonstrations and CMS will determine the “age” of the intervention which may include pre-1115 history.
Rebasing WOW Baseline
*CMS will rebase WOW baselines to recent cost trends at the next extension period starting on or after January 2021.
*Then at each extension WOW PMPM cost estimates will be adjusted to match recent actual PMPM costs from the prior demonstration period.
*Currently PMPM cost trends use the lower of the state historical trend or the President’s budget trend.
Limiting Growth of UPL Diversion
*CMS’ adjusted BN policy will provide states with the choice to either rebase UPL diversion estimates based on their current levels of FFS utilization or carry-forward UPL without growth at each extension.

[1] CMS All-State SOTA Call:  Budget Neutrality for Section 1115(a) Medicaid Demonstrations – New Adjustments in Methodology, May 12, 2016