Order Code RS21054
January 27, 2006
CRS Report for Congress
Received through the CRS Web
Medicaid and SCHIP Section 1115 Research
and Demonstration Waivers
Evelyne P. Baumrucker
Analyst in Social Legislation
Domestic Social Policy Division
Summary
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. Two such
programs are Medicaid and the State Children’s Health Insurance Program (SCHIP).
Specifically, Section 1115 allows the Secretary to waive certain statutory
requirements to modify virtually all aspects of the programs as long as the changes
further the goals of Titles XIX (Medicaid) and/or XXI (SCHIP). 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 Medicaid coverage, control costs, and increase
state flexibility. States have used the Section 1115 waiver authority to cover non-
Medicaid and SCHIP services, limit benefit packages for certain groups, cap program
enrollment, among other purposes.
As of fall 2003, there were 68 operational (i.e., approved and implemented)
Medicaid and SCHIP Section 1115 waiver programs. In FY2003 (the most recent data
available), Section 1115 waiver federal expenditures (for Medicaid and SCHIP) totaled
$22.4 billion. Section 1115 waiver programs represented nearly14% of all federal
Medicaid spending in the 50 states and the District of Columbia for FY2003 (8% for
SCHIP), and provided coverage to approximately 9.5 million enrollees. Of the 9.5
million total Medicaid and SCHIP waiver enrollees, 2.4 million were eligible only for
a targeted benefit package such as family planning or pharmacy benefits. This report
provides background information on the waiver authority, and will be updated when
new data are available.
Background
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
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health insurance to uninsured children in families with income above applicable Medicaid
income standards. Each state defines the group of children who may enroll in SCHIP
using factors such as geography, age, income and resources, residency, disability status,
access to other health insurance, and duration of SCHIP eligibility. States provide SCHIP
children with health insurance that meets specific standards for benefits and cost-sharing,
or through their Medicaid programs, or through a combination of both.
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. Two of these programs are
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).1 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
programs.
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 Medicaid and
SCHIP 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, adapt their programs to the special needs of particular
geographic areas or groups of recipients, or accomplish a policy goal such as to
temporarily provide Medicaid assistance in the aftermath of a disaster2, 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 research and demonstration projects, a number of other provisions in
1 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.
2 For more information on Section 1115 emergency Medicaid waivers, see CRS Report RL33083,
Hurricane Katrina: Medicaid Issues, by Evelyne P. Baumrucker, April Grady, Jean Hearne,
Elicia J. Herz, Richard Rimkunas, Julie Stone, and Karin Tritz.

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Medicaid law and regulations specify limitations or restrictions on how a state may
operate a waiver program. For example, one provision restricts states from establishing
waivers that fail to provide all mandatory services to the mandatory poverty-related
groups of pregnant women and children; another provision specifies restrictions on cost-
sharing imposed under demonstration waivers. Other features of the Section 1115 waiver
authority:
! 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
enhanced-FMAP)3. Changes to these financing arrangements, even under
a Section 1115 waiver, would require congressional action.
! Financing and Budget Neutrality. Unlike regular Medicaid, CMS waiver
guidance specifies that costs associated with waiver programs must be
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
already covered under the state’s Medicaid program), must be offset by
reductions elsewhere within the Medicaid program. Several methods
used by states to generate cost savings for the waiver component: (1)
moving part of the Medicaid population into managed care; (2) limiting
benefit packages for certain eligibility groups; (3) providing targeted
services to certain individuals so as to divert them from full Medicaid
coverage; and (4) 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. This
policy limits federal spending to the capped allotment levels.
! 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
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 to this guidance on budget neutrality was made by the Secretary in the recent
approvals of Section 1115 emergency Medicaid waivers. For the Katrina waivers all tests of
budget and allotment neutrality were waived.

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immigration law. In cases like these, the Secretary does not have the
authority to waive provisions in these other statutes.5
! 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;6 (2)
through the publication of program guidance (e.g., the waiver program
must meet a budget neutrality test);7 and (3) waiver policy may also be
implicitly shaped by the programs that have been approved (e.g., CMS
approval of benefit specific waivers such as family planning 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 fall 2003, CMS classified Section 1115 waiver programs into five distinct
categories:
! Comprehensive demonstrations. These demonstrations provide a broad
range of services that are generally offered statewide. As of January
2003, there were 19 operational (i.e., approved and implemented)
Medicaid comprehensive state reform waivers.8 FY2003 state-reported
enrollment estimates for the comprehensive demonstration waivers
5 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-
193).
6 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
regulations.
7 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 only used guidance through public notices in the Federal Register, as well as
technical guidance distributed to state health officials and HHS regional officers or posted on the
CMS website to shape Section 1115 waiver policy.
8 States with comprehensive demonstration waivers include Arizona, Arkansas, California (Los
Angeles county), Delaware, District of Columbia, Hawaii, Kentucky, Maryland, Massachusetts,
Minnesota, Missouri, New York, Oklahoma, Oregon, Rhode Island, Tennessee, Utah, Vermont,
and Wisconsin.

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totaled approximately 7.0 million,9 and federal expenditures for these
programs were approximately $19.3 billion.
! Family planning demonstrations. These demonstrations provide family
planning services for certain individuals of childbearing age in 17
states.10 For the family planning demonstrations, FY2003 enrollment
counts for standalone waivers totaled 2.1 million, and federal
expenditures were approximately $384 million.11
! SCHIP and Health Insurance Flexibility and Accountability Initiative
(HIFA) Waivers. As of fall 2003, 12 states (14 programs) had
operational SCHIP and HIFA Section 1115 waivers.12 Nine of these 14
programs (in Arizona, Colorado, Illinois, Maine, Michigan, New Jersey,
New Mexico, New York, and Oregon,) are approved HIFA
demonstrations.13 HIFA demonstrations are designed to encourage states
to extend Medicaid and SCHIP to the uninsured, with a particular
emphasis on statewide approaches that maximize private health insurance
coverage options and target populations with incomes below 200% FPL.
Six of the nine HIFA programs (in Illinois, Michigan, New Jersey, New
Mexico, New York, and Oregon) are Medicaid/SCHIP combined
waivers. A combined HIFA waiver generally means that the state will
finance changes to its Medicaid program using unspent SCHIP funds. In
nine states14 with approved SCHIP waivers, coverage is expanded to
include one or more categories of adults with children, typically parents
of Medicaid/SCHIP children, caretaker relatives, legal guardians, and/or
pregnant women. Three states (Arizona, Michigan, and Oregon) also
9 In states where multiple demonstration populations are covered under a comprehensive waiver
project (e.g., the project includes a family planning component, a pharmacy-only component,
and/or a HIFA component, etc.), enrollee counts reported here include enrollees for whom the
state reports expenditures associated with this population under the comprehensive demonstration
waiver project number.
10 States with operational family planning demonstration waivers (stand alone waivers or family
planning waivers included as a part of their comprehensive demonstration project) as of January
2003 included Alabama, Arizona, Arkansas, California, Delaware, Florida, Maryland,
Mississippi, Missouri, New Mexico, New York, Oregon, Rhode Island, South Carolina, Virginia,
Washington and Wisconsin.
11 Arizona, Delaware, Missouri, New York, and Rhode Island report their family planning
demonstration enrollees and expenditures as a part of their comprehensive demonstration
waivers. FY2003 state-reported expenditures for Florida were reported as a part of the state plan
expenditures. FY2003 state-reported expenditures for Maryland were reported as a part of the
state’s Title XXI state plan expenditures. Mississippi’s family planning waiver was implemented
on October 1, 2003.
12 State with operational SCHIP and HIFA waivers as of fall 2003 included Arizona, Colorado,
Illinois, Maine, Michigan, Minnesota, New Jersey, New Mexico (two waivers), New York,
Oregon, Rhode Island, and Wisconsin (2 waivers).
13 States with operational HIFA waivers included Arizona, Colorado, Illinois, Maine, Michigan
New Jersey, New Mexico, New York, and Oregon.
14 States included Arizona, California, Colorado, Illinois, Minnesota, New Jersey, Oregon, Rhode
Island, and Wisconsin.

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cover childless adults under their SCHIP waivers. In addition to
expanding coverage to new populations under SCHIP waivers, some
states have used this authority for other purposes. For example, New
Mexico modified its cost-sharing rules for targeted low-income children
under its Medicaid program. FY2003 state-reported enrollment and
expenditure data show that SCHIP and HIFA demonstrations covered
almost 318,000 individuals at a federal cost of approximately $1.4
billion.15
! Pharmacy plus demonstrations. These demonstrations provide
comprehensive pharmacy benefits for low-income seniors and
individuals with disabilities with income at or below 200% FPL.16 The
demonstrations may provide pharmaceutical products, assist individuals
who have private pharmacy coverage with high premiums and cost
sharing, or provide wraparound pharmaceutical coverage to bring private
sources of pharmacy coverage up to the level of desired demonstration
benefit coverage. Enrollees will not be eligible for the comprehensive
Medicaid benefits available under the state’s Medicaid plan. In FY2003,
there were six approved Pharmacy Plus waivers.17 Enrollment counts
totaled approximately 117,000 at a federal cost of approximately $1.2
billion.18
! 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 also include waivers to provide pharmacy benefits to
persons with specific conditions, such as HIV/AIDS. In FY2003, there
were 11 such operational programs in eight states.19 These
demonstrations covered just under 11,000 individuals at a federal cost of
approximately $100 million.20
15 FY2003 state-reported expenditure data were not available for New Mexico. FY2003 state-
reported enrollment data were not available for New York. Oregon’s comprehensive waiver
project includes a HIFA component. Enrollee counts for whom the state reports expenditures
associated with this population under the comprehensive demonstration waiver project number
are not included here.
16 The August 3, 2004 proposed regulations for the MMA Part D prescription drug benefit
suggest that Pharmacy Plus waivers will become obsolete in 2006.
17 As of fall 2003, states with approved Pharmacy Plus waivers included Florida, Illinois, Indiana,
Maryland, Wisconsin, and South Carolina.
18 Maryland reports its pharmacy expenditures as a part of the state’s comprehensive
demonstration program.
19 States with specialty service and population demonstration waivers as of January 2003 included
Arkansas (two waivers), Colorado (two waivers), District of Columbia, Florida, Maine (two
waivers), New Jersey, Oregon, and Wisconsin.
20 FY2003 state-reported enrollment data were not available for Wisconsin.
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