Medicaid work requirements begin by January 1, 2027. What behavioral health providers need to know.

What changed

The 2025 budget reconciliation law (Public Law 119-21, signed July 4, 2025) added a community engagement requirement to Medicaid, at section 1902(xx) of the Social Security Act. CMS refers to the law as the Working Families Tax Cut legislation.

CMS published the implementing rule, Medicaid Program; Community Engagement Requirement for Certain Individuals (CMS-2454-IFC), as an interim final rule on June 3, 2026. It took effect July 31, 2026, and the new regulations sit at 42 CFR 435.550 through 435.563.

States that cover the expansion group must implement the requirement no later than January 1, 2027. CMS's fact sheet says that's 43 states and the District of Columbia. A state can start earlier. A state making a good-faith effort to comply can receive a temporary exemption, which CMS expects to grant for up to six months at a time, and all such exemptions must end by December 31, 2028.

Who it applies to

The requirement applies to adults in the Medicaid expansion group, generally ages 19 through 64, and to similar adults covered through certain section 1115 demonstrations. Each month, these adults must meet one of the following:

• work at least 80 hours;
• complete at least 80 hours of community service or a work program;
• be enrolled in an educational program at least half time;
• reach 80 hours through a combination of the above; or
• have monthly income of at least 80 times the federal minimum wage (about $580 a month in 2026).

Separately, the same law moves most expansion adults to eligibility renewals every six months, starting with renewals that begin on or after January 1, 2027.

The exemptions that matter for behavioral health

Several groups are excluded. Two matter most for behavioral health and substance use disorder (SUD) providers:

• Medically frail individuals. The law defines this group to include people with a substance use disorder and people with a disabling mental disorder, among others.
• Participants in a drug addiction or alcohol treatment and rehabilitation program, as defined in the Food and Nutrition Act of 2008. States may set a minimum time commitment for treatment participation to count.

The details matter:

• Under CMS's rule, the condition must significantly impair the person's ability to meet the requirement. A diagnosis alone may not be enough. This test applies to the medically frail categories, not to the treatment program exclusion.
• People in stable recovery (five years or more) are not covered by the SUD medical frailty category. People in early and sustained recovery (less than five years) are.
• CMS did not further define "disabling mental disorder" in the regulation, so states will draw that line in their own condition lists.
• A separate, optional short-term hardship exception can cover people during an inpatient stay, including a psychiatric hospitalization.

How states will decide who is exempt

States must check their own data first and can't ask the person for more information if that data is enough. For medical frailty, that means:

• Claims and encounter data from the past 12 months. States compare diagnoses on claims against their list of qualifying conditions. CMS encourages using ICD-10 diagnosis codes together with procedure, drug and place-of-service codes, and says a social Z code (such as homelessness) can't be used on its own.
• Reverification at least every 12 months.
• Provider documentation or certification as another accepted source when data isn't enough.
• Self-attestation under penalty of perjury is an option states may accept through December 31, 2027. Starting January 1, 2028, states may accept it only once per enrollment period.

CMS's own implementation guidance includes an opioid treatment program illustration. It pairs the time commitment of daily methadone clinic visits, shown on claims through the HCPCS code for methadone administration (H0020) and the methadone drug code, with other services and documented effects on the person's ability to work.

What happens when someone doesn't meet the requirement

States verify compliance at application, at each renewal, and more often if they choose. If a state can't confirm compliance or an exemption, it must send a notice. The person then has 30 days to show compliance or an exemption, and enrolled people keep coverage during that window. If they don't, and they don't qualify for Medicaid another way, the state must deny or end coverage, with advance notice and fair hearing rights.

What this means for your program

The rule doesn't put any new requirement on providers directly, and exemption decisions belong to the state. But because states check claims data first, what your program documents and bills can affect whether clients are identified automatically or have to prove an exemption themselves. In practice, that points to a few priorities:

• Code diagnoses accurately and completely on every claim, including bundled and HCPCS-based billing such as OTP services. A client whose qualifying diagnosis hasn't appeared on a claim in the past 12 months may not be picked up automatically. Codes must always reflect clinically documented, current conditions; never add or keep a diagnosis to affect a client's eligibility.
• Document functional impairment, not just the diagnosis, since the exemption turns on whether the condition significantly impairs the person's ability to meet the requirement.
• Be ready to provide documentation quickly when a state or a client requests proof of treatment participation or a qualifying condition.
• Help clients respond to notices within the 30-day window, and encourage them to keep their contact information current with the state Medicaid agency.
• Watch your state's details: its start date, its list of qualifying conditions, and any minimum time commitment for treatment program participation.

What to update in your policies

• Clinical documentation: require that assessments and treatment plans record functional impairment and its effect on work, school or other activities.
• Coding and billing: require current diagnosis codes on every claim, with periodic review so qualifying diagnoses don't lapse.
• Release of information: review consent forms and procedures for sharing treatment information with the state Medicaid agency. 42 CFR Part 2 consent rules apply to substance use disorder records shared beyond normal claims, in addition to HIPAA.
• Client support: add a procedure for helping clients respond to Medicaid notices and renewals, including who on staff is responsible.
• Intake: capture Medicaid status, renewal dates and current contact information.
• Staff training: train clinical, billing and front-desk staff on the exemptions and the 30-day notice window.

Details vary by state, so check your state Medicaid agency's guidance as it's released.

Sources

1. CMS, "Medicaid Program; Community Engagement Requirement for Certain Individuals" (CMS-2454-IFC), 91 FR 33348, June 3, 2026. federalregister.gov
2. CMS, CMCS Informational Bulletin on the community engagement requirement, December 8, 2025. medicaid.gov
3. CMS, Community Engagement Interim Final Rule overview slides, July 2026. medicaid.gov
4. CMS, "Implementing Medical Frailty Under Community Engagement" (slides, 2026). medicaid.gov
5. CMS, fact sheet on the interim final rule, June 2026. cms.gov
6. CMS, MACPro implementation guide, Community Engagement for Certain Adults (state minimum time commitment for treatment programs). medicaid.gov
7. Medicaid.gov, Community Engagement resources for states. medicaid.gov

Checked against the primary sources listed above as of October 29, 2026. Rules and dates can change; confirm current requirements before acting. This article is general information, not legal advice.