Reconciliation 3.0 Stalls; Senate Advances Government Funding Through December

Medicaid Cuts Remain Out, but Reconciliation 3.0 Faces Delays

The outlook for a third budget reconciliation package has weakened since our last update. Importantly, the proposal still does not include instructions for additional Medicaid funding cuts, a key concern for many providers. However, Senate Republicans were unable to secure enough support for a budget resolution before leaving for the August recess. After discussions with President Trump, they agreed to postpone consideration until at least September. While Senate leaders continue to argue that additional defense and other spending priorities will eventually require a reconciliation bill, the package's prospects before the November elections now appear increasingly uncertain.

Senate Approves CR, Setting Up House Negotiations 

Meanwhile, the Senate overwhelmingly approved a bipartisan continuing resolution (CR) that would fund the federal government through December 11, while the House has already passed a CR running through December 4. Given the broad bipartisan support for avoiding a shutdown, some version of a CR is widely expected to pass before the October 1 funding deadline. The remaining question is whether the House accepts the Senate bill or negotiates changes before a final package is sent to the President.

Senate CR Would Block Controversial OMB Grant Rule

Of particular importance to nonprofit organizations and service providers, the Senate bill includes language championed by Senate Appropriations Committee Chair Susan Collins (R-ME) that would block implementation for the duration of the CR of OMB's proposed overhaul of federal grantmaking rules. The proposed rule would give federal agencies significantly greater authority to change grant conditions, terminate awards, or withhold funding, raising concerns that grant decisions could become politicized. The Senate provision would prevent the administration from finalizing those changes while the stopgap funding measure remains in effect, setting up a likely year-end debate when Congress revisits government funding. 

What Comes Next?

For now, the CR appears considerably more likely to become law than Reconciliation 3.0. Senate leaders have acknowledged that September will be crowded with funding negotiations and other legislative priorities, making it difficult to move a major reconciliation package before the election. The delay could also complicate consideration of a potential Budget Reconciliation 4.0 later this year, as Congress may have limited time to simultaneously pursue both a revived Reconciliation 3.0 effort and a new FY 2028 budget resolution. For providers, the immediate focus remains government funding and preservation of the Senate language temporarily blocking OMB's proposed changes to the federal grantmaking process.

Medicaid in Focus: Program Integrity Efforts Continue as Court Allows Work Requirements to Move Forward

Congress Keeps Spotlight on Medicaid Oversight

As federal agencies and states begin implementing the Medicaid provisions of H.R. 1, Congressional attention remains focused on program integrity, eligibility verification, and fraud prevention. During a recent Senate Budget Committee hearing, Republican lawmakers emphasized concerns about improper enrollment, federal spending, and the effectiveness of current oversight efforts, while Democrats raised concerns about the impact of the law's Medicaid provisions on coverage, provider finances, and access to care. Together, the discussions signal that Medicaid oversight and enforcement will remain key priorities as Congress monitors implementation and considers future policy changes.

Court Declines to Halt Work Reporting Requirements

A federal judge recently declined to block implementation of H.R. 1's Medicaid work and community engagement requirements while litigation challenging the policy proceeds. A coalition of states had sought an injunction, arguing that implementation would impose significant administrative and technology costs, but the court found insufficient grounds to stop the requirements before they take effect.

What It Means for Providers

The ruling does not resolve the case, and the underlying legal challenge will continue, including questions about how medical frailty exemptions are interpreted and administered. For now, however, states must continue preparing for implementation under the statutory timeline established by Congress. Providers should expect planning activities, beneficiary outreach, exemption determinations, and other administrative processes to move forward while the litigation works its way through the courts. We will continue monitoring both the lawsuit and federal guidance, as the outcome could have important implications for enrollment, coverage continuity, and provider operations.

Nursing Home Risk-Based Surveys Expanding Nationwide

On July 16, CMS announced the nationwide implementation of its Risk-Based Survey (RBS) process for nursing homes beginning September 8, 2026, following several years of testing and evaluation. Under the new approach, qualifying facilities will receive a streamlined recertification survey that uses smaller sample sizes and fewer survey activities while continuing to assess compliance with Medicare and Medicaid requirements. CMS has stated that the goal is to improve the efficiency and effectiveness of nursing home oversight and allow survey agencies to focus more resources on facilities with higher risk indicators.

What’s Changed

The nationwide rollout represents an important development in the ongoing discussion around survey and certification reform. Supporters view the initiative as a way to reduce regulatory burden for high-performing facilities and help states address survey backlogs and resource constraints. At the same time, stakeholders have emphasized the importance of maintaining consistency in survey practices and ensuring the qualification criteria are applied fairly across states. CMS will also recognize qualifying facilities on Nursing Home Care Compare, providing consumers with an additional indicator of strong performance. 

The Impact and Outlook

The change is expected to have a relatively limited initial reach, with CMS estimating that approximately 12% of nursing homes nationwide currently meet the eligibility criteria. Nevertheless, the RBS model signals a shift toward a more targeted, data-driven approach to oversight, one that seeks to balance accountability with recognition of sustained quality performance. As implementation moves forward, providers, regulators, and consumers alike will be watching closely to assess the program's impact on both survey operations and resident outcomes.

CMS ABA Toolkit Signals Increased Oversight of Autism Services

Guidance for States, Not New Federal Rules

CMS has released a new Medicaid and CHIP Applied Behavior Analysis (ABA) Toolkit aimed at “helping states strengthen oversight of autism services, improve program integrity, and address concerns about fraud and inappropriate billing.” The toolkit is not a new regulation, mandate, or clinical guideline, and CMS states that it does not reduce coverage requirements or direct states to limit medically necessary care. Instead, it offers states suggested approaches for reviewing provider qualifications, medical necessity standards, utilization management, and program integrity practices.

However, States Likely to Increase Scrutiny

While the toolkit does not create new requirements, it signals the areas CMS expects state Medicaid agencies to examine more closely. The guidance highlights concerns related to high service-hour authorizations, supervision levels, telehealth use, documentation, and billing practices. As a result, states may revisit authorization processes, auditing practices, and other oversight activities. Some stakeholders worry the guidance could be used to justify tighter limits on services, while CMS maintains the goal is to support individualized, evidence-based care and protect access to medically necessary treatment.

What It Means for Providers

For ABA providers, the most immediate impact is likely to be increased scrutiny rather than new compliance obligations. The toolkit points to several areas that may draw attention from regulators and payers, including extensive service hours without clear clinical justification, inadequate supervision, weak documentation, and unclear billing practices. Providers should view the release as a signal to review compliance, documentation, and medical necessity protocols now, as state oversight and audit activity may increasingly focus on these issues.

Court Blocks HUD's FY 2026 Homelessness Funding Changes

A federal district court has vacated HUD's FY 2026 Continuum of Care (CoC) Notice of Funding Opportunity (NOFO), stopping the agency from implementing major changes to homelessness funding priorities. The lawsuit, brought by the National Alliance to End Homelessness and other nonprofit and local government partners, argued that HUD unlawfully issued the new funding criteria without the required public notice-and-comment process. The court agreed, setting aside the FY 2026 NOFO and all associated deadlines. While the ruling does not prevent HUD from pursuing similar policy changes in the future, it cannot move forward under the current NOFO.

Implications for Housing, Shelter, and Service Providers

The decision is significant for organizations who operate shelters, provide supportive services, and develop or manage housing programs in partnership with municipalities that depend on CoC funding. The vacated NOFO included a $1.3 billion set-aside that would have shifted funding toward temporary housing and treatment-focused programs, creating uncertainty for providers built around permanent housing solutions. For now, the ruling preserves existing funding structures and provides stability for communities serving people experiencing homelessness. HUD must now decide whether to appeal the ruling or issue a new NOFO through a legally compliant process, leaving many communities awaiting guidance on the next funding cycle.

Proposed Head Start Reforms Spark Debate Over Flexibility and Accountability

Administration Proposes Major Regulatory Changes

The U.S. Department of Health and Human Services has proposed a significant overhaul of the Head Start program, arguing that reducing federal requirements and increasing state and local flexibility could lower administrative costs and expand access. The proposal would shift responsibility for areas such as staffing ratios, group sizes, transportation, and certain program requirements to states, while the administration estimates the changes could create up to 236,000 additional Head Start slots nationwide. The proposal is now open for public comment for 60 days.

Supporters and Critics See Different Impacts

Administration officials contend that the changes would reduce red tape, allow programs to better respond to local needs, and preserve resources for direct services. However, critics question whether reducing federal oversight could weaken long-standing quality, safety, health, and educational standards that have been central to the program's model. The National Head Start Association has urged stakeholders to evaluate the proposal based on whether it can expand access while maintaining accountability and outcomes for children and families.

Impact for Providers

While the proposal directly affects Head Start programs, its effects could extend to a broad range of providers serving children and families. Changes to enrollment capacity, workforce requirements, state oversight, and service expectations may influence partnerships across the early childhood, health care, and human services sectors. For providers, this proposal is worth watching because it reflects a broader policy debate over the balance between federal standards and local flexibility, with potentially significant implications for how services are delivered and measured in the future.