CMS’s interim final rule on Medicaid work requirements ties the serious mental illness and substance use disorder exemptions to a medically frail test built around the ability to work, and bars states from exempting people by diagnosis alone.
Key Takeaways
- The community engagement requirement created by the 2025 reconciliation law will condition Medicaid eligibility for the adult expansion group on 80 hours a month of work or comparable activity, with most states required to begin no later than January 1, 2027. People with serious mental illness and substance use disorders are among those Congress meant to shield through exemptions, but the value of those exemptions turns entirely on how CMS defines them.
- The interim final rule issued June 1 places the behavioral health carve-outs inside a medically frail category that requires both a qualifying condition and evidence that it significantly impairs the person’s ability to meet the requirement. The rule also prohibits states from adding their own exemption categories or from exempting anyone on the basis of diagnosis alone.
- The Association for Behavioral Health and Wellness, a trade group for insurers that manage Medicaid behavioral health benefits, praised the rule for citing clinical standards and permitting limited self-attestation, while KFF and other analysts read the same provisions as a tightening that could cost coverage. The Congressional Budget Office has estimated that the broader requirement will not meaningfully increase employment and will leave millions of people uninsured.
- The rule takes effect July 31, with a public comment period closing the same day, leaving states roughly six months to build verification systems and condition lists before the deadline. Whether the behavioral health exemptions reach the people they were written for will depend on how states translate the functional standard into day-to-day policy.
The federal government has now spelled out how millions of low-income adults with mental illness or addiction can keep Medicaid coverage under the work requirement that takes hold next year, and the answer is more demanding than the headline exemptions suggested. The Centers for Medicare and Medicaid Services (CMS) issued an interim final rule on June 1 implementing the community engagement requirement created by the 2025 budget reconciliation law (Public Law 119-21, which CMS calls the Working Families Tax Cut legislation and which its sponsors branded the One Big Beautiful Bill Act). The rule was published in the Federal Register on June 3 and runs to 135 pages.
Beginning no later than January 1, 2027, adults ages 19 to 64 enrolled through the Affordable Care Act expansion group must document at least 80 hours a month of work, community service, participation in a work program, or half-time enrollment in school, or show monthly income of at least the federal minimum wage multiplied by 80 hours ($580 in 2026). By CMS’s count, the requirement applies in 43 states and the District of Columbia, spanning full ACA expansion states along with partial-expansion or Section 1115 waiver programs such as Georgia and Wisconsin. The penalty for noncompliance is disenrollment.
The day after the rule was posted, the Association for Behavioral Health and Wellness (ABHW)—a Washington trade group whose members include Aetna, Carelon, Centene, Evernorth, Molina, Optum, and together cover roughly 200 million people—issued a statement characterizing the rule as adopting several of its recommendations and helping protect people with serious mental illness and substance use disorders. President and CEO Debbie Witchey said CMS had “listened to the behavioral health community.” The rule’s own text and early independent analysis complicate that reading.
How the Medicaid work-requirement rule defines the behavioral health exemptions
The statute lists nine categories of individuals who are explicitly excluded and never have to demonstrate community engagement. Behavioral health populations enter through two of them. The first is the medically frail or otherwise has special medical needs category, which Congress wrote to include people with a substance use disorder, a disabling mental disorder, a serious or complex medical condition, blindness or disability, or a disability that impairs activities of daily living. The second is a narrower exclusion for people participating in a drug addiction or alcoholic treatment and rehabilitation program.
Where CMS exercised discretion is in defining medical frailty, and it chose not to treat a diagnosis as sufficient. The rule defines a medically frail individual as someone who has one of the qualifying conditions and whose condition “significantly impairs” the person’s ability to meet the community engagement requirement. By the agency’s logic, a person who can perform 80 hours a month of qualifying activities despite a condition would not qualify. CMS declined to adopt the broader medically frail definition that already exists in Medicaid for benefit-package purposes, and, unlike that older standard, it prohibits states from adding categories of their own. States must build lists of qualifying diagnoses (the rule anticipates ICD-10 code sets) that are auditable and justifiable, but they may not exempt everyone with a given condition without applying the functional test.
The rule is most specific about addiction. CMS reads the substance use disorder exemption to cover people in active treatment and in early or sustained recovery, but it carves out those in stable recovery, which it defines as five or more years. Its rationale is clinical: the risk of recurrence after five years approaches that of the general population, and the agency argues that work can help sustain recovery. CMS declined to set a single definition of substance use disorder, noting that the DSM-5 and ICD-10 are the common references and that states may draw on them.
For disabling mental disorders, CMS again declined to write a federal definition, directing states instead to weigh whether a condition impairs the ability to comply. The agency noted that criteria from the Interdepartmental Serious Mental Illness Coordinating Committee (ISMICC), the DSM-5 and the ICD-10 are commonly used and may serve as resources, language ABHW described as meaningful progress toward a clinically grounded approach. The rule also confirms that any data sharing used to verify the addiction-related exemptions must comply with 42 CFR Part 2, the federal rule protecting the confidentiality of substance use treatment records.
The medical frailty definition: where health plans and analysts diverge
ABHW’s read emphasizes what states may do: lean on recognized clinical criteria, let beneficiaries use screening tools, and accept self-attestation when documentation is not readily available. KFF, the health policy research organization, emphasizes what the rule requires and forbids. In an analysis published June 2, KFF’s Jennifer Tolbert wrote that the rule adopts a more restrictive definition of medical frailty than states had expected, tying it to the ability to work and blocking states from exempting whole categories of patients. She warned the approach could leave more people “falling through the cracks and losing coverage.”
The self-attestation that ABHW highlighted is also more limited than the framing implies. By KFF’s reading of the rule, states may accept self-declaration of work or exemption status only through 2027, and only when reliable data are unavailable. For medical frailty specifically, a state may accept self-declaration just once during an enrollment period, so a beneficiary who self-attests at application will generally be asked for documentation at renewal. Earlier KFF research found that under New Hampshire’s prior waiver, adults who self-attested to medical frailty still had to obtain certification from a medical professional, a step enrollees found difficult to navigate.
Underlying the debate is a broader question about whether the requirement does what its supporters intend. CMS frames community engagement as a path out of isolation and dependency toward self-sufficiency. The Congressional Budget Office and KFF have countered that most adults subject to the requirement already work or face barriers to work, that employment is unlikely to rise meaningfully, and that the principal effect will be coverage loss running into the millions, much of it driven by paperwork rather than by anyone choosing not to work.
What the Medicaid work requirements mean for behavioral health plans and providers
ABHW’s interest in the rule is not abstract. Its members are the managed care organizations that states increasingly rely on to run Medicaid, including for behavioral health, and the rule devotes a section to the role plans may play in verification and to the conflict-of-interest limits that apply when they do. How exemptions are defined and verified shapes both the administrative load these companies carry and the size of the population that remains enrolled in the plans they operate. The trade group’s endorsement comes from organizations with direct operational and financial stakes in the outcome.
For providers, the functional standard raises the documentation stakes. Because a diagnosis alone will not establish medical frailty, clinicians treating patients with serious mental illness or addiction may be asked to attest that a condition impairs a patient’s capacity to work, and substance use treatment programs will have to manage exemption verification within the consent and disclosure limits of 42 CFR Part 2. The separate exclusion for people enrolled in a treatment program may prove simpler to document, though CMS left it to states to set what counts as participation.
States have little time. The rule is effective July 31, the same day the comment period closes (the docket is CMS-2026-2047 on regulations.gov), and most states must be operating the requirement by January 1. In the interval, they will write the diagnosis lists, build the data matches, and decide how generously to apply a functional standard that CMS has deliberately left them to interpret. That interpretation, more than the statute or the rule itself, will determine whether the exemptions Congress wrote for people with mental illness and addiction reach them, or whether, as analysts fear, some of those patients lose coverage in the gap between a diagnosis and proof that they cannot work.
