The Centers for Medicare & Medicaid Services (CMS) is taking action to preserve the core mission of the Medicaid program by putting an end to spending that duplicates resources available through other federal and state programs or isn’t directly tied to healthcare services.  Mounting expenditures, such as covering housekeeping for individuals who are not eligible for Medicaid or high-speed internet for rural healthcare providers, distracts from the core mission of Medicaid, and in some instances, serves as an overly-creative financing mechanism to skirt state budget responsibilities. 

CMS sent a letter to states today notifying them that it does not intend to approve new or extend existing requests for federal matching funds for state expenditures on these two types of programs — designated state health programs (DSHP) and designated state investment programs (DSIP).  DSHPs and DSIPs are state-funded health programs that, without “creative interpretations” of section 1115 demonstration authority, would not have qualified for federal Medicaid funding.

Federal DSHP funding has historically raised oversight concerns from Congressional oversight committees and the Government Accountability Office (GAO) about whether DSHPs were linked to eligible populations and aligned with the federal-state financial partnership established under the Medicaid statute.  In 2017, CMS took action to phase-out these expenditures, noting “demonstrations have not made a compelling case that federal DSHP funding is necessary to support the continuation of important programs previously operated by the state, and federal DSHP funding is inconsistent with the overall federal-state financial relationship under the Medicaid statute.” DSHPs and DSIPs have grown from approximately $886 million in 2019 to nearly $2.7 billion in eligible expenditures in 2025, representing increasing costs to the federal government without a sustainable state contribution.

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. These programs do not tie directly to services provided to Medicaid beneficiaries. A few examples include: 

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

As CMS continues to focus on the statutory objectives of the Medicaid program and improving health outcomes for the most vulnerable, the agency is refocusing its resources on Medicaid programmatic goals. To ensure this vital safety net continues to be available in the future, CMS is taking this action to safeguard the financial health of the Medicaid program. 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.