Trump Administration Uses Arcane Budget Neutrality Rules to Squeeze State Medicaid Waivers
The Trump administration is deploying a new administrative mechanism to restrict state-level Medicaid programs, threatening healthcare coverage for millions of low-income Americans. Citing authority under President Trump's signature tax-and-spending law, the One Big Beautiful Bill Act, the Centers for Medicare & Medicaid Services (CMS) has implemented strict new "budget neutrality" rules that tighten limits on federal Medicaid spending under state waivers.
The first major target of this policy is Arkansas. In mid-August 2026, federal officials informed Arkansas that they would not renew the state’s 13-year-old hybrid Medicaid expansion waiver for a standard five-year term. Under the waiver, which covers roughly 200,000 low-income Arkansans, the state buys private Affordable Care Act marketplace plans for Medicaid enrollees (the "private option") rather than placing them in traditional fee-for-service Medicaid.
While the private option cut the state's uninsured rate in half, it ended up costing more than traditional Medicaid. CMS told state officials that the waiver does not comply with the new budget neutrality rules taking effect in January 2027, which are designed to reduce federal spending by capping waiver costs. Arkansas is now scrambling to negotiate a temporary two-year extension to avoid a chaotic transition that could leave enrollees with access to fewer doctors.
The administration’s aggressive enforcement of the budget neutrality rules has alarmed healthcare experts and state officials. Over a dozen states have key Medicaid waivers expiring on December 31, 2026, including Georgia and California. Robert Nelb, director of policy at America’s Essential Hospitals, warned of the wider consequences:
"There is a real concern that this will put added burdens on states up front and slow down new innovations in Medicaid. Many long-standing waivers that have been renewed multiple times are now at risk..."
Critics view the new waiver rules as part of a coordinated effort to shrink the Medicaid program, which is also facing massive cuts and mandatory work requirements under the One Big Beautiful Bill Act (as detailed in Federal Court Clears Trump's Medicaid Work Requirements, Denying States' Bid for Injunction).