26 States vs. CMS: The Fight Over Medicaid Work Rules

With Medicaid work reporting requirements set to take effect in a few months, 26 states are suing CMS to block a rule they say breaks the law.

Authors: Patti Boozang, Julian Polaris and Kinda Serafi

Editor: Amanda Eisenberg

tl;dr

• On June 29, 26 states sued the Centers for Medicare & Medicaid Services (CMS) to block key parts of its new rule implementing Medicaid work reporting requirements, arguing the rule rewrites what Congress passed and reverses a year of CMS’s own guidance, just months before states have to go live.

• The states want a court order by July 31 to freeze three key provisions and pause the Aug. 31 deadline for notifying beneficiaries. Their alternative offer: delay implementation six months for everyone.

• In addition to seeking an emergency order this month, they’re asking the court to throw out the challenged provisions entirely — a ruling that could reach every state, not just the 26 that sued.

• If the lawsuit is unsuccessful, CMS itself estimates that the rule will cause 2 million to 3 million people to lose coverage each year.

The 80 Million Impact

Imagine being a state official overseeing implementation of work reporting requirements as a condition of Medicaid eligibility for the first time. Since passage of the statute imposing this new requirement a year ago, your team has dedicated significant time and resources to meet the Jan. 1, 2027, deadline for implementation, including rebuilding eligibility IT systems, revising program guidance, application and renewal forms, and beneficiary notices, and hiring and training staff— activities conducted in reliance on CMS guidance interpreting the law’s requirements. And then, six months from implementation, the rules you’ve been building toward shift dramatically.

That is the backdrop for the lawsuit 26 states¹ filed on June 29 against CMS, challenging key elements of the agency’s June 3 interim final rule (IFR) implementing H.R. 1’s Medicaid work reporting requirements. Their lawsuit argues that some provisions are contrary to the plain language of H.R. 1, contradict guidance CMS repeatedly gave states over the last year and fail to give states clear notice of their obligations.

Legally, the case is about regulatory overreach. Practically, even if CMS has the legal authority to impose this rule in theory, the timing raises concerns for states’ ability to adhere to statutory implementation deadlines when the operational rules keep changing. People, states and providers all may pay the price — even though the details are unsettled.

The Key Complaints

The dispute comes down to how CMS decided in its IFR that states should identify who must comply with or is exempt from the work reporting requirement and how they prove it. Three changes are at the center of the states’ complaint:

• Medical frailty. The statute says work requirements don’t apply to someone who is “medically frail.” Unlike the statute, CMS’ rule restricts that exclusion to individuals’ whose condition limits their ability to meet work requirements, effectively turning categorical protection into a functional test.

• Hardship exceptions. Congress allowed flexibility for individuals affected by emergencies. The rule narrows that flexibility, again tying it to emergencies that affect an individual’s ability to comply with work requirements, such as working 80 hours a month or participating in qualifying activities like school or community service.

• Verification and data use. The rule restricts how states can rely on existing data and self-attestation, pushing toward more documentation, even when reliable information already exists.

If implemented, these limitations are likely to significantly increase the number of individuals who are subject to work requirements, as well as the number of eligible individuals who lose coverage due to procedural issues — a common occurrence when some states previously voluntarily experimented with work requirements.

What the States Are Asking For

The states have asked the federal district court for an emergency order by July 31 that would freeze the three provisions above and pause the Aug. 31 deadline to notify beneficiaries about the new requirements in maintaining coverage — at least for the 26 states that sued. The urgency is that several states say they must lock their notices by the end of July to hit that August deadline.

The states have floated a way out of the courtroom scramble: They’ll hold off on the emergency request if CMS agrees to delay the Jan. 1, 2027, go-live deadline by six months and pushes back the notice deadline accordingly. In other words, give states time to do this right and the fight over timing goes away.

Beyond the emergency motion, the full lawsuit asks the court to throw out the challenged provisions altogether for all states, not just for the 26 plaintiffs. It also targets pieces of the rule that bite later, including new limits on letting people attest to their own medical frailty status, a timing trap in the hardship exception and a compressed renewal process that could force states to cut beneficiaries off sooner than Congress intended.

Why the States Say the Rule Breaks the Law

The states are making three arguments:

• The rule rewrites the law that Congress passed by adding new limitations beyond the statutory text. For example, lawmakers protected medically frail people as a category, as noted above. CMS turned that protection into a case-by-case test of whether someone’s condition keeps them from working, a hurdle Congress didn’t put in the statute.

• CMS reversed its own guidance. For nearly a year, the agency told states one thing. The final rule says another, without explaining the about-face or accounting for the money states already spent building systems around the earlier instructions and the short timeframe states now face before the implementation deadline.

• States didn’t get fair warning. Changing the rules this close to the deadline, with steep financial penalties attached, doesn’t give states the clear heads-up the Constitution requires when federal dollars come with federal strings.

Implementation Risks

States have already spent months building systems based on earlier federal guidance: designing workflows, coding eligibility logic and drafting new applications, renewal forms, and notices. Now they are being asked to pivot quickly in response to new interpretations, all while facing firm deadlines: on Aug. 31, beneficiary notices must be sent, and on Jan. 1, 2027, work reporting requirements must be operational.

This creates a lose-lose dynamic for states. If states move forward under the new rule, they risk spending scarce time and resources building systems around requirements that may later be overturned, while significantly increasing the risk of coverage losses among eligible beneficiaries, including medically frail people who may struggle to satisfy new documentation or functional-capacity tests. If states instead stick with prior guidance, they risk being found out of compliance with federal expectations and exposed to significant federal audit penalties for failing to implement work requirements in accordance with the IFR. That threat looms large considering CMS’ recent full court press on program integrity issues, as well as an H.R.1 provision that increases the financial penalties for state errors on Medicaid eligibility and enrollment.

The Bottom Line

The states have asked the court to rule by July 31. A decision that either freezes the challenged provisions and pauses the Aug. 31 notice deadline, or lets them stand, is likely to occur by late July, with any appeal to follow.

Underneath the legal machinations of the lawsuit are challenging operational realities for states. A change this big can’t be done well on this timeline. There were always huge implementation risks under the plain language reading of the law, and the IFR changes make compliant, on-time, and smooth implementation impossible — putting millions of our nation’s sickest Medicaid expansion enrollees at risk.

1. The 26 plaintiff states are: Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, Washington and Wisconsin.