The Centers for Medicare and Medicaid Services (CMS) will restrict federal funds for state-based programs that go toward certain priorities like rural broadband and student loan repayments.
The department is looking to return to the “core mission of Medicaid” by rejecting, or not extending, federal matching fund requests for designated state health programs (DSHPs) and designated state investment programs (DSIPs) under section 1115 waiver authority.
“After reviewing these approvals, CMS has determined these programs were funded entirely without federal Medicaid funds prior to those approvals, and the addition of federal Medicaid funding does not render these programs as integral components of section 1115 demonstration programs,” the agency said in a letter (PDF) to states.
The government said it is worried states use “freed up” state dollars as a way to reduce overall obligation, and that these federal funds are either duplicative or do not always go to Medicaid members. Additionally, many previously accepted demonstrations are not new, innovative initiatives, as intended through the program, said CMS. During President Donald Trump’s first term, CMS voiced opposition (PDF) to this type of federal matching.
DSHPs and DSIPs have grown from $886 million in 2019 to nearly $2.7 billion in eligible expenditures in 2025, signifying a large increase for the federal government, the department said.
“While CMS will continue to work with states on innovative state section 1115 demonstrations, those demonstrations should be focused on improving health outcomes of the most vulnerable dependent on Medicaid,” the agency said.
DSHPs are simply a financing mechanism, said Morgan Craven, a director at healthcare research firm ATI Advisory.
“Services are not approved, disapproved or carried out because of DSHPs,” she said. “What it effectively does is reduce the burden of non-federal share for states. The funds come in because the programs exist, but there’s no Medicaid dollars that flow to those programs.”
States earn time-limited funding based on program expenditures that they might otherwise not be able to afford, allowing states to not divert funding from programs that can further population health. Now, states must figure out how to fill the funding gaps that remains.
"My gut reaction is that it will be a mixed bag," said Katharine Wibberly, director of the Mid-Atlantic Telehealth Resource Center, in an email to Fierce Healthcare. "This could negatively impact the ability for Medicaid recipients from receiving telehealth services if these recipients are not connected to other resources within the state who could fill that gap. On the other hand, there are quite a number of other resources that have been developed to address these particular issues, so it may really depend on the locality and how they handle the transition."
CMS highlighted five examples of federal matches that will not be accepted going forward, including $241 million to in-home services like housekeeping in New York, $20 million in grants to rural, high-speed internet in North Carolina and $17 million to a California student loan repayment program.
Attorneys told Fierce Healthcare CMS is within its legal rights to shift the priority of Medicaid state waivers and reject certain requests based on the administration’s objectives, and Congress does not need to impose itself.
“That said, it marks a meaningful policy shift—narrowing the scope of what counts as Medicaid-reimbursable, especially for social and infrastructure-related investments like broadband,” said Adam Herbst, partner at Sheppard Mullin Richter & Hampton.
Further, CMS said approvals should “not include expenditures associated with the provision of non-emergency care to individuals who do not meet citizenship or immigration status requirements to be eligible for Medicaid.”
The Trump administration has taken a markedly different approach to health equity and diversity, equity and inclusion through executive orders and other actions. This new letter does not deviate from the new approach, said Thomas Barker, adjunct professor of health law at George Washington University.
“I think you could probably say that some of the health equity waivers do advance DEI initiatives, so I’m not particularly surprised that CMS issued that letter,” he said. “And I would not be surprised if they did more and issued similar letters with respect to other waivers.”
Updated: April 14 at 9:45 a.m. ET