backOMB Proposes Government-wide Overhaul of Federal Financial Assistance
On May 29, 2026, the Office of Management and Budget (OMB), joined by more than 40 federal grant-making agencies, published a broad-based proposed rule to comprehensively revise the policies and requirements for grants, cooperative agreements, and other forms of financial assistance across the federal government – with significant implications for stakeholders that rely on these critical funding streams. The proposed effective date is October 1, 2026, and public comments are due by July 13, 2026.
The proposed rule purports to: (1) “improve transparency, accountability, and oversight” to prevent misuse or mismanagement of federal taxpayer dollars; (2) clarify that OMB’s current financial management policies and requirements have binding effect as regulations; and (3) reduce the administrative burden on recipients of federal financial assistance. Future changes adopted by OMB would apply government-wide under a “Uniform Grants Regulation” framework, without the need for separate agency rulemaking.
Expanded Role of Political Appointees
The proposed rule would establish a new pre-issuance review process to ensure proposals selected for funding are consistent with applicable law, federal agency priorities, and the national interest. Senior political appointees conducting these reviews would determine whether the awards advance the administration’s policy priorities and do not support any discriminatory or impermissible purpose. The proposed rule also emphasizes that “peer review remains advisory and does not replace agency discretion.”
Federal agencies “retain ongoing programmatic discretion … to terminate a discretionary award that is not effective at achieving program goals or Federal agency priorities” under the proposed rule, and an agency also may terminate an award it determines is no longer in the federal government’s interest, consistent with law. Similar policies would apply to award suspension.
New Standards for Review and Approval
The proposed rule seeks to broaden the range of recipients and “prioritize institutions demonstrating rigorous and reproducible scholarship,” while incorporating benchmarks to measure the performance of “Gold Standard Science” (referencing President Trump’s May 23, 2025 executive order). Agencies also are directed to weigh “institutional commitment to research integrity” in making award decisions.
The proposed rule would “institutionalize needed reforms” to avoid “unlawful discrimination” and align with President Trump’s executive orders and current agency guidance. Specifically, it would prohibit federal awards from being used to fund, promote, or facilitate diversity, equity, and inclusion (DEI) policies or practices that violate applicable federal laws. It also would prohibit federal awards from being used to promote “gender ideology” or to facilitate the transition of a child under 19 years of age from one sex to another.
A new government-wide rule would prohibit the use of federal funds to support collaborations with "covered foreign countries" or "covered foreign entities," unless expressly authorized by statute or approved by an agency head. E-Verify program participation would be required to confirm the eligibility of employees and contractors working under a federal award. The proposed rule also directs agencies to condition awards on maximizing the use of U.S.-produced items to the greatest extent practicable and consistent with law.
Additionally, the proposed rule would require all discretionary funding opportunities to be publicly announced, increase conflict-of-interest disclosure requirements, and eliminate “burdensome policy requirements.” It also would ban the use of fixed amount awards unless authorized by law, encourage multi-year awards when practicable, and require award recipients to submit justifications for any payment request prior to issuance.
Opportunity for Comment and Self-assessment
OMB and participating agencies are requesting comments on all aspects of the proposed rule, with a particular interest in policies not required by statute that may be removed to reduce administrative costs. The proposed rule notes that commenters should not address the indirect cost rate negotiation system, as no changes have been proposed, and none will be considered in this rulemaking.
Stakeholders also should carefully assess how their current federal financial assistance awards and future funding proposals may be impacted, as well as opportunities for (re)alignment with the administration’s policies and priorities.
Reporter, Todd Tuten, Washington, DC, +1 202 626 3731, ttuten@kslaw.com.
OIG Identifies Concerns with Medicare Advantage Organization Prior Authorization Denials
On June 11, 2026, the HHS Office of Inspector General (OIG) published two reports finding that the largest Medicare Advantage Organizations (MAOs) had higher post-acute care prior authorization denials than their peers and that many denials are reversed on appeal. The reports cover long-term acute care hospitals (LTCHs) and inpatient rehabilitation facilities (IRFs) in one study, and skilled nursing facilities (SNFs) in the other. Both reports raise serious concerns that MAOs are improperly denying and delaying access to medically necessary care by inappropriately denying prior authorization requests.
Prior Authorization Denials for Long-Term Acute Care and Inpatient Rehabilitation
The OIG examined prior authorization requests processed in June 2024 by 19 MAOs, a sample accounting for 29.3 million enrollees and roughly 86% of all MA enrollment. The 19 MAOs denied nearly two-thirds of LTCH admission requests and more than half of IRF admission requests during the study month. The OIG found that three of the largest MAOs by enrollment had the highest denial rates. When the OIG looked at appeals, the MAOs overturned 43% of IRF denials and 36% of LTCH denials. The OIG expressed concern about the impact on enrollees’ health while waiting for the MAO’s decision and noted that enrollees often have to wait in an acute-care hospital while the request is processed.
The OIG report noted that the use of contractors to perform initial review of prior authorization requests may be one factor in the high percentage of denials that were later overturned on appeal. The OIG found that naviHealth denied LTCH and IRF requests at a higher rate than MAOs who processed the requests internally and other contractors and that the contractor denials were more likely to be overturned on appeal than denials issued by MAOs.
The OIG recommended that CMS regularly collect prior authorization data that includes contractor information and service type and determine why there is a wide variation between MAO LTCH and IRF denial and overturn rates and act as necessary to resolve problems.
Prior Authorization Denials for Skilled Nursing Facility Admission
The OIG report found that when enrollees and providers appealed SNF denials, MAOs overturned 95% of appeals in favor of enrollees. The data from June 2024 revealed that the 19 MAOs in the review denied 12% of SNF requests for admission, and enrollees appealed 18% of denials. The report highlighted that naviHealth, a MAO contractor, processed 50% of requests for admission and denied 14% (a higher denial rate than MAOs who processed requests internally). MAOs overturned 97% of appeals that were initially denied by naviHealth.
The OIG recommended that CMS regularly collect prior authorization data and act to address the high rate of appealed denials that are being overturned. The OIG also recommended that CMS address the underlying reasons for variations in SNF denials across contractors and MAOs and review reasons for the difference in nursing home and non-nursing home resident SNF denial rates.
The LTCH and IRF report is available here, and the SNF report is available here.
Reporter, Taylor Whitten, Sacramento, +1 916 321 4815, twhitten@kslaw.com.
CMS Issues Guidance on New Budget Neutrality Requirements for Section 1115 Medicaid Demonstration Projects
On June 11, 2026, CMS issued new guidance that will change how states obtain and maintain approval for Section 1115 Medicaid Demonstration Projects (1115 Waivers or demonstration). The guidance, released via State Medicaid Director Letter (SMDL) #26-003, implements section 71118 of Public Law 119-21, referred to as the “Working Families Tax Cut”” legislation (WFTC), commonly known as the One Big Beautiful Bill Act. Beginning January 1, 2027, and prior to any Waiver approval, the Chief Actuary of CMS must certify that any new, amended, or renewed 1115 Waivers will not increase federal Medicaid spending above what it would have been without the project. CMS is preparing a notice of proposed rulemaking to propose revisions to 42 C.F.R. Part 431, Subpart G, implementing Section 1115. However, CMS states it will begin applying the new budget neutrality requirements on a provisional and temporary basis starting in 2027, whether or not a final rule has taken effect.
The SMDL represents a fundamental shift in how CMS evaluates budget neutrality for 1115 Waivers. Under the current methodology, CMS compares projected “with waiver” expenditures against projected “without waiver” expenditures to establish a budget neutrality cap, and monitors compliance retrospectively over the life of the demonstration. CMS states in the SMDL that the current methodology is “not based on actuarial methods” and has therefore permitted certain demonstrations with claimed savings that are, in the agency’s view, theoretical. Under the new approach required by section 1115(g), the Chief Actuary of CMS must provide an independent actuarial certification that the demonstration is not expected to increase federal Medicaid expenditures prior to the Secretary’s approval. This prospective certification requirement contrasts markedly with the current retrospective budget neutrality assessment. Notably, CMS states that under the new framework there would be no expenditure limits or budget neutrality caps, but demonstrations projected to increase federal expenditures would simply not be approved. As a result, CMS anticipates that mid-course corrections and periodic rebasing that takes place under the current oversight framework would become unnecessary.
Redefining Expenditures and Demonstration Activities
A central feature of the proposed framework is the classification of demonstration activities into two categories that inform the budget neutrality calculation.
The first category, “Medicaid Authorizable Populations and Services” (MAPS), encompasses activities associated with populations and services the state could otherwise have implemented through the Medicaid state plan or other Title XIX authority. Under the new methodology, MAPS expenditures count as zero for budget neutrality purposes because they represent expenditures that would have been permissible without an 1115 Waiver. CMS also includes within MAPS certain “different site of service” expenditures, such as coverage of services in institutions for mental diseases for individuals with substance use disorder, serious mental illness, or serious emotional disturbance, as well as pre-release services for justice-involved individuals (excluding infrastructure costs).
The second category consists of “section 1115-only” activities, or activities that could not otherwise be implemented through the state plan or other Title XIX authority. This second category drives the budget neutrality determination under the proposed framework.
The SMDL signals a significant departure from CMS’s longstanding use of “hypothetical” expenditures in budget neutrality calculations. Under the current approach, CMS permits states to include in the “without waiver” estimate certain expenditures for populations or services that the state could have—but did not—cover under the state plan, effectively generating paper savings that offset demonstration costs. CMS indicates it would no longer use this definition of hypothetical expenditures. Because section 1115(g) uses “and,” not “or,” when referring to “populations and services,” MAPS applies only when the specific combination of both population and services could otherwise have been covered under the state plan. This is a significant technical distinction: Some activities currently approved as “hypothetical” expenditures would not qualify as MAPS. For example, certain social determinants of health expenditures currently are authorized under the section 1115 authority as “hypothetical” expenditures in demonstration approvals. In particular, providing Medicaid services for a population that is not otherwise eligible under the state plan or other Title XIX authority would not qualify, even if those specific services are otherwise available under the state plan for other populations. Additionally, infrastructure funding for reentry demonstrations and health-related social needs (HRSN) demonstrations would be classified as section 1115-only activities rather than hypothetical expenditures.
For section 1115-only activities, states would be required to provide rigorous quantitative analyses—actuarial, economic, statistical, or comparable—of the financial impacts of each activity, including associated administrative costs, which represents a change from the current approach that generally does not require states to account for administrative expenditures attributable to demonstration activities. These analyses would generally be conducted on a per-member-per-month basis or percentage cost basis, except for lump-sum amounts. For new demonstrations, only prospective analyses would be required. For renewals, states would need to provide both a historical analysis covering the current demonstration period and a prospective analysis for the upcoming period. CMS states that it does not intend to prescribe a specific type of analysis and that states would not be required to engage an actuary for their submissions; however, the analyses must be sufficiently rigorous to support the Chief Actuary’s certification. The net financial impact across all section 1115-only activities determines whether the demonstration satisfies the budget neutrality requirement. If the projected net impact is less than or equal to zero, the Chief Actuary can certify the demonstration. If the projected net impact exceeds zero, the demonstration would not be approved unless sufficient rollover savings exist from prior periods.
Rollover Savings
The SMDL describes a revised approach to demonstration savings and rollovers. Under the proposed framework, savings generated during a current demonstration period would roll over only into the immediately following renewal period, not beyond, and would be limited to the current demonstration period or the most recent five years, whichever is shorter. Temporary extension periods would not be included in the savings calculation. Notably, the CMS’s prior 15% cap on rollover savings imposed under the 2024 SMDL would no longer apply. CMS also describes a savings transition period: for the first renewal after January 1, 2027, states would be permitted to use savings calculated under the current methodology. After this transition period, rollover savings would be calculated exclusively under the new methodology.
Demonstration Amendments
The SMDL addresses the treatment of amendments under the new framework. For amendments to existing demonstrations that have not previously been certified by the Chief Actuary, states would need to provide analyses for all demonstration activities for the entire current period, effectively triggering a comprehensive review. For amendments to demonstrations that have already received certification, only the amended or directly affected activities would require additional review. CMS notes that a state that files an amendment after January 1, 2027, but before its next renewal would not generate the maximum rollover savings that might otherwise be available under the current methodology, creating an incentive for states to carefully consider the timing of post-enactment amendments.
Authorities Deemed Budget Neutral
In a policy shift, CMS states that it no longer anticipates deeming certain expenditure authorities as budget neutral. Under prior guidance, CMS excepted certain demonstration expenditures from budget neutrality limits, not requiring states to demonstrate savings, by deeming them budget neutral. These included waiver-only initiatives, former foster care youth coverage, U.S. Territory demonstrations, the Tribal Health Choice Pathway, and single managed care plan authority. Under the proposed approach, all of these previously deemed authorities would be required to satisfy the section 1115(g) budget neutrality requirements through the same classification and certification process applicable to all other demonstration activities.
Reduced Reliance on Section 1115
The SMDL also announces CMS’s intent to propose that demonstration periods not exceed five years, with limited exceptions for fiscal quarter alignment. CMS encourages states to reduce their reliance on section 1115 authority where alternative Medicaid authorities are available to accomplish the same objectives.
Monitoring and Evaluation
CMS states that it would employ new budget neutrality monitoring special terms and conditions and would require corrective actions if actual expenditures substantially deviate from the projections underlying the Chief Actuary’s certification. States would need to demonstrate sustained evaluation findings showing that the demonstration is achieving its stated goals and improving health outcomes. CMS indicates it may decline to approve a renewal if evaluation findings indicate that the demonstration is not meeting its objectives, adding an outcomes-based dimension to what has historically been a purely fiscal compliance exercise.
Next Steps for States
States should begin assessing budget neutrality calculations and which demonstration components qualify as MAPS versus section 1115-only activities. States that have historically relied on hypothetical expenditures to generate paper savings face the most significant exposure under the proposed framework, as their existing financing strategies may no longer be viable. The SMDL creates an immediate need for states to build additional time into renewal and amendment planning to accommodate the Chief Actuary certification process, which introduces a new procedural step with uncertain timelines. Several implementation questions remain unanswered, including how CMS will apply the new requirements to pending renewal applications and what specific documentation standards will ultimately be required by regulation.
States should look to the forthcoming NPRM for further details and guidance. The SMDL is available here.
Reporter, Robert Stenzel, Washington, D.C., +1 202-626-2943, rstenzel@kslaw.com.
Also in the News
Vice President JD Vance Refers Governor Tim Walz and AG Keith Ellison to the National Fraud Enforcement Division
On June 8, 2026, Vice President JD Vance referred Minnesota Governor Tim Walz and Attorney General Keith Ellison to the DOJ’s National Fraud Enforcement Division for a potential criminal investigation into alleged misconduct within Minnesota’s social services programs. The referral stemmed from a 205-page report released by the House Committee on Oversight and Government Reform, chaired by Republican Congressman James Comer. The Report alleges that documents and testimony obtained by the Committee demonstrated a “consistent pattern” that “fraud warnings were elevated to the most senior levels of the Minnesota state government,” and “meaningful corrective action was delayed or avoided, and payments continued long after credible signs of fraud emerged.” The referral recommended that the National Fraud Enforcement Division investigate potential bad actors within the Minnesota administration, the extent of Governor Walz’s and AG Ellison’s personal knowledge of the alleged fraud, whether Governor Walz made false public statements, the legitimacy of the retaliation allegations, and whether the alleged misconduct violated federal criminal or civil laws.
A copy of the referral letter is available at the following links: Part I and Part II. The full report is available here.
Editors: Chris Kenny and Ahsin Azim
Issue Editors: Gregory Fantin and Morgan Cronin