Medicaid Work Requirements Sees CMS Issue Interim Final Rule

On June 3, 2026, the Centers for Medicare & Medicaid Services (CMS) published an interim final rule with comment period entitled “Medicaid Program: Community Engagement Requirement for Certain Individuals” (the “Interim Final Rule” or “IFC”), 91 FR 33348, setting forth engagement or work obligations for both individual adults and states with respect to Medicaid.

What You Need to Know

• Work Requirements: The Interim Final Rule requires that certain adult Medicaid applicants and enrollees (aged 19 through 64), as a condition of Medicaid eligibility, meet an 80-hour-per-month work requirement through employment, education, work programs, or community service.
• Exemptions: The IFC’s exemptions include individuals who are pregnant, postpartum, disabled, medically frail, American Indian or Alaska Native, parents or caregivers of young children or people with disabilities, or already complying with similar requirements through the Supplemental Nutrition Assistance Program (SNAP) or the Temporary Assistance for Needy Families (TANF) program.
• Medically Frail: CMS interprets the “medically frail” exemption more narrowly than under existing Alternative Benefit Plan (ABP) and section 1115 regulations, requiring that qualifying conditions “significantly impair” the individual’s ability to comply with the work requirement.
• Enrollment Impact: CMS’s projections estimate that the IFC will reduce Medicaid enrollment by 2.3 million people in fiscal year (FY) 2027, rising to over 3 million in subsequent years.
• Key Dates: Comments regarding the Interim Final Rule must be received by CMS by July 31, 2026. Compliance with the new requirements must begin on January 1, 2027.

The IFC’s Impact on Medicaid Enrollment

Community engagement or work requirements have not historically been a condition of eligibility in the Medicaid program under Title XIX of the Social Security Act. Yet applicable individuals not enrolled in Medicare, in the 43 states and the District of Columbia that expanded Medicaid eligibility (as part of the Affordable Care Act (ACA)) to non-pregnant adults with income up to 133 percent of the federal poverty level, will be subject to the new community engagement/work requirements of the IFC. The requirements will also apply to certain individuals in section 1115 demonstration waivers covering similar populations.

The impact on enrollment is expected to be significant. Per CMS’s Regulatory Impact Analysis (RIA), the IFC is projected to reduce Medicaid enrollment by roughly 2.3 million in FY 2027 and 3.1 to 3.3 million in later years, 91 Fed. Reg. 33348, 33461. CMS expects a significant share of these disenrolled members to be exempt individuals who simply fail to document compliance. The CMS news release on the IFC cites a study from the Department of Health and Human Services’ (HHS’s) Office of the Assistant Secretary for Planning and Evaluation, asserting that “the new requirements could reduce poverty by as much as 2.9 million people, depending on a variety of conditions such as employment availability.”

We discuss the IFC, its obligations, and its implications below.

Background

In FY 2025, approximately 82.4 million individuals were enrolled in Medicaid, with approximately 20 million Americans enrolled in the adult group. Pub. L. 119-21, signed by President Donald Trump on July 4, 2025 (or the One Big Beautiful Bill Act, now referred to by CMS as the Working Families Tax Cut Legislation, or “WFTC Legislation”), added, in Section 71119, section 1902(xx) of the Social Security Act, 42 U.S.C. 1396(a), requiring states “to establish Medicaid community engagement requirements for certain individuals as a condition of eligibility for medical assistance.” Section 71119(d) of the WFTC Legislation directed CMS to publish an interim final rule with comment period (i.e., the IFC) for the purpose of implementing the requirements.

Before the enactment of section 1902(xx), Georgia and Arkansas launched Medicaid coverage expansion programs for low-income adults that included work requirements. These states declined to adopt the income-based eligibility expansion under the ACA, and instead used the 1115 demonstration authority to pursue expansions with additional eligibility requirements. However, implementation of these programs has met with significant challenges. Regarding Arkansas, a 2020 study found that the work requirement did not increase employment, while approximately 18,000 adults lost coverage in less than a year, though most of these enrollment losses were reversed after a court order halting the policy. The disenrolled individuals experienced adverse consequences, including medical debt, delayed care, and delayed medications, and many remained unaware of the requirements or of whether the policy remained in effect. The study also found that work requirements did not increase employment.

In Georgia, a 2025 GAO report found that administrative spending to implement the expansion program and work requirements nearly doubled spending on medical services. A publication of Georgetown University’s McCourt School of Public Policy also identified a number of significant operational challenges in Georgia’s program, including the burden of documenting qualifying activities, the complexity of reporting requirements, and the challenge of ensuring that potentially eligible individuals understand and complete the process.

Applicable Individuals

The IFC establishes a new § 435.551 to implement the statutory definition of “applicable individual” in the Social Security Act, as amended by the WFTC Legislation. With exceptions, the IFC’s community engagement/work requirements apply to:

• those eligible for, or enrolled under, the state plan adult group described in section 1902(a)(10)(A)(i)(VIII) of the Act, implemented at § 435.119 of the regulations, and
• those who are eligible to enroll or are enrolled under a waiver of the state plan authorized under Section 1115 that provides coverage that meets minimum essential coverage (MEC) requirements described in section 5000A(f)(1)(A) of the Internal Revenue Code and who are between the ages of 19 and 65, not pregnant, and not entitled to or enrolled for benefits under part A of title XVIII or enrolled for benefits under part B of title XVIII, and are not otherwise eligible to enroll under such plan.

Nonapplicable and Specifically Excluded Individuals

Section 435.554 lists specified excluded individuals, who include adults who are:

• pregnant or eligible for postpartum coverage in their state;
• former foster care youth;
• disabled;
• veterans with a total disability rating;
• medically frail or otherwise have special medical needs, as defined in section 1902(xx)(9)(A)(ii) (more on this below);
• American Indian and Alaska natives;
• parents, guardians, or family caregivers of children under 13 or people with disabilities;
• inmates of a public institution;
• participants in a drug or alcohol rehabilitation or treatment program; and
• individuals already complying with similar requirements through SNAP or TANF.

In addition, individuals who are eligible or enrolled in other mandatory or optional state plan eligibility groups are not “applicable individuals” subject to the community engagement requirement.

Definitions. Terms such as “Caretaker relative,” “dependent child,” “disabled individual,” “family caregiver,” “medically frail,” and more are explicitly defined in § 435.554.

The “Medically Frail” Exemption

The exemption for “medically frail” individuals is based on the use of this phrase in the ACA, which allowed such individuals to opt out of enrollment in ABPs. Regulations to implement this requirement established the categories for “medically frail” individuals that are repeated in the section 1902(xx) community engagement requirements, including individuals with disabling mental disorders, SUDs, serious and complex medical conditions, specified physical, intellectual, or developmental disabilities, and disability-based eligibility determinations. States have also exempted medically frail individuals from restrictions on eligibility and coverage for benefits under various section 1115 demonstration programs.

CMS used the IFC to significantly narrow the medically frail exemption relative to both the statutory text and the existing ABP and section 1115 regulatory framework. The IFC accomplishes this narrowing through three distinct moves, each discussed below.

First, CMS grafts a functional-impairment test onto the exemption. The statute defines medically frail individuals to include individuals with five categories of conditions: (i) blindness or disability; (ii) SUDs; (iii) disabling mental disorders; (iv) physical, intellectual, or developmental disabilities that significantly impair their ability to perform one or more activities of daily living; and (v) serious or complex medical conditions. The IFC requires an individual to be “medically frail” and restates the statutory categories, but also adds a non-statutory requirement for the medically frail individual’s condition to significantly impair the individual’s ability to comply with the community engagement requirement. Commenters and potential litigants may note that although the statute delegates authority to the HHS Secretary to define “medically frail,” it does not authorize the HHS Secretary to impose additional requirements or criteria for medically frail individuals to be exempt.

Second, CMS narrows the exemption for individuals with an SUD. The statute exempts individuals “with a substance use disorder” without qualification. Notably, Congress dropped the word “chronic,” which appeared in the ABP regulation at 42 CFR 440.315(f), to broaden the statutory exemption relative to the existing regulation. The IFC narrows it back by regulatory interpretation, disqualifying individuals with an SUD who have been in “stable recovery” for five or more years. This move raises a set of practical questions that the IFC does not answer: who determines whether an individual is in stable recovery, using what clinical criteria, and how does a fixed five-year cutoff square with the widely understood clinical reality that SUD is a chronic, relapsing condition? An individual treated as recovered today may relapse tomorrow, yet would have already lost the exemption.

Third, CMS caps the look-back period at 12 months. Where states have had significant flexibility to determine methodologies for identifying medically frail individuals in the ABP and 1115 demonstration context (generally using a range of strategies, including diagnoses, service utilization history, provider input, and self-identification), the IFC imposes a 12-month maximum on the look-back period for medical records and other information used to identify an individual as medically frail. That cap is significantly shorter than the 36 months recommended by multiple commenters and advocacy organizations. Shorter look-back windows systematically under-identify individuals with episodic or cyclical conditions, particularly mental health / SUD conditions, where an individual may have had a qualifying hospitalization or intensive service episode more than 12 months ago, but whose condition may or may not be stable, and who may or may not be currently participating in treatment.

Taken together, these three moves leave the IFC’s “medically frail” definition narrower than the ABP definition at 42 CFR 440.315(f). The practical consequence is that the same individual could be classified as medically frail for benefit-package purposes under the ABP but fail to qualify for the work-requirement exemption, creating operational complexity for states and for the managed care plans that must administer both frameworks. These interpretations may also be argued to diverge impermissibly from the statute.

Criteria for Demonstrating Community Engagement

Under § 435.552 of the IFC, an applicable individual demonstrates community engagement for a month if, for such month, the individual:

• works not less than 80 hours (includes self-employment, unpaid work, in-kind work, and family caregivers not otherwise excluded);
• completes not less than 80 hours of community service;
• participates in a work program for not less than 80 hours;
• is enrolled in an educational program at least half-time;
• engages in any combination of the aforementioned activities for a total of not less than 80 hours;
• has a monthly income that is not less than the applicable minimum wage requirement under section 6 of the Fair Labor Standards Act of 1938 (Federal minimum wage) multiplied by 80 hours; or
• is a seasonal worker (as described in section 45R(d)(5)(B) of the Internal Revenue Code of 1986) and has an average monthly income over the preceding 6 months that is not less than the applicable federal minimum wage multiplied by 80 hours.

Definitions. Section 435.552 sets forth specific definitions for community service, educational program, work, work program, and more.

Hardship Exceptions

The WFTC Legislation and the IFC provide that the state plan, or waiver of state plan, may excuse, upon request, an applicable individual who experiences a short-term hardship event during a month. Short-term hardships could include inpatient hospital services, nursing facility services, or services in an intermediate care facility for individuals with intellectual disabilities; an emergency or disaster in their county, as declared by the president; an unemployment rate in their county that is higher than average; or extended travel for medical services, for themselves or a dependent.

Steps States Must Take

Sections 435.556 through 435.562 discuss a state’s obligation to assess and verify compliance (or exception/exclusion) as well as noncompliance procedures, outreach, timing, reporting, and more.

• Identification: States must identify who is and is not subject to the IFC requirements, and who meets an exception.
• Verification: States must use all reliable information available to the state (including data from the Internal Revenue Service, SNAP, TANF, and exchanges) to verify compliance at application and renewal and, at the state’s option, at more frequent intervals.
• Outreach: States must conduct outreach to adults enrolled in Medicaid and who could be subject to the requirement, prior to implementing the new requirement; they must continue to conduct outreach to those who enroll in Medicaid or those whose coverage is renewed subject to the requirements.
• Notice: States must issue a notice of noncompliance, providing 30 calendar days to demonstrate a satisfactory showing of compliance or to demonstrate that the requirement does not apply to them.
• Noncompliance: States must act if individuals are found noncompliant or compliance cannot be verified.
• Reporting: States must submit data to CMS.
• Managed Care: States may delegate certain functions to managed care plans with conflict-of-interest safeguards. The IFC does not permit Medicaid managed care entities to determine compliance with the community engagement requirement, and it also restricts the delegation of certain activities, including formal noncompliance notices. For managed care organizations (MCOs), key questions include which functions can be delegated and whether the conflict-of-interest safeguards limit MCO involvement in medically frail determinations specifically. MCOs hold the richest claims and encounter data for ex parte identification of medically frail individuals, so any limit on the MCO role has direct operational consequences for exemption identification rates.
• State Flexibility: States may implement the requirement before January 1, 2027, if certain conditions are met, and may request a temporary good-faith effort exemption.

Comment Period and CMS’s Next Steps

Procedurally, as an IFC, this new regulation is effective July 31, 2026, and comments are also due July 31, 2026. CMS states that it is “committed to considering public input […] on all aspects of the IFC,” and that the agency will use public comments in “deciding the next steps following this IFC.” Next steps may include a “final final” rule and/or sub-regulatory guidance. However, the IFC provisions are binding regulations, and CMS is not obligated to issue further guidance. Moreover, recommendations for significant substantive changes should account for the statutory compliance date of January 1, 2027, and for CMS’s statutory obligations to enforce the new requirements.

Key Takeaways and Action Items

• States that provide Medicaid coverage to applicable individuals under section 1902(xx) of the Act must comply with the community engagement/work requirements no later than January 1, 2027, yet states may implement the requirement earlier.
• Section 1902(xx) of the Social Security Act and the IFC apply to all states that provide Medicaid coverage to “applicable individuals,” but exclude the territories.
• CMS will not approve a section 1115 demonstration that waives, in whole or in part, these community engagement requirements.
• Noncompliance by applicable individuals will result in disenrollment from, or denial of Medicaid eligibility for, the adult group or section 1115 demonstrations that include applicable individuals. However, an individual can reapply at any time and will be subject to compliance assessment procedures upon reapplication. States must provide a notice of noncompliance and 30 calendar days for the individual to demonstrate a satisfactory showing before disenrollment.
• The IFC aligns Medicaid with other public benefit programs, such as SNAP and TANF, which have similar work requirements. For SNAP, noncompliance can result in ineligibility after three months within a 36-month period; for TANF, noncompliance can result in reduction or termination of cash benefits.
• Managed care plans should review their existing medically frail identification processes and assess whether the IFC’s “significantly impair” standard and 12-month look-back period require changes to their screening criteria and data-matching protocols.
• States and plans should evaluate the comment opportunity carefully, particularly as to the medically frail definition, the SUD stable recovery exclusion, and the look-back period, because these are the provisions most likely to be revised in a subsequent final rule or challenged in litigation.
• Stakeholders should be aware that, since the IFC’s “medically frail” definition is narrower than the ABP definition at 42 CFR 440.315(f), the same individual could be classified as medically frail for benefit purposes but not exempt from the work requirement, creating operational and systems complexity.
• Stakeholders should submit comments regarding the IFC to CMS by July 31, 2026.