Significance Our current understanding of how sleep is regulated is based upon the model of sleep homeostasis, which defines a variable called Process S as a measure of sleep need, and a so-called “flip-flop” model of state switching, which builds on a notion of a mutually antagonistic relationship between subcortical sleep-promoting and wake-promoting circuits. The neurobiological substrates of the interaction between the sleep switch and Process S are unknown. Our study identifies a previously unrecognized role of hypothalamic circuitry in tuning within-state brain activity or levels of arousal, which in turn determine the homeostatic drive for sleep.