The January 1, 2027 deadline for Medicaid community engagement requirements is approaching quickly. But one of the most consequential implementation questions under H.R. 1 may not be how states verify work. It may be how they determine who should never have to meet the requirement at all.
Under Section 71119 of H.R. 1, certain Medicaid adults must generally demonstrate at least 80 hours per month of employment, education, community service or other qualifying activities, unless they qualify for an exclusion or exception. States must begin implementation by January 1, 2027 unless they implement earlier.
Among the statutory exclusions are people who are “medically frail or otherwise have special medical needs,” including individuals who are blind or disabled, have a substance use disorder, disabling mental disorder, certain physical, intellectual or developmental disabilities, or a serious or complex medical condition.
On its face, that sounds relatively straightforward. CMS’s interpretation has made it considerably more complicated.
From medical condition to functional impairment
In its June interim final rule, CMS determined that belonging to one of H.R. 1’s medical-frailty categories is not necessarily enough. An individual’s physical, mental or behavioral health condition must also significantly impair the individual’s ability to comply with the community engagement requirement.
The distinction is important. A serious diagnosis does not automatically establish medical frailty under the CMS rule. States may have to determine what that condition means functionally for an individual beneficiary.
In September, CMS offered states a potential roadmap. Its optional three-tier model allows states to use existing claims and encounter data to identify some individuals prospectively. Tier 1 encompasses conditions where available coding can demonstrate significant impairment; Tier 2 combines diagnoses with information such as utilization, comorbidities, pharmacy data or durable medical equipment; and Tier 3 involves cases requiring individualized review because available data are insufficient.
CMS specifically encourages use of claims, managed-care encounters, HIE/EHR information, health data utilities and other reliable sources to make determinations without requiring beneficiaries to submit additional documentation whenever possible.
That approach could reduce beneficiary burden, but it also underscores a difficult reality: diagnosis and functional capacity are not the same data point.
Now the courts are being asked to decide
That distinction is at the center of not one, but two pending federal challenges.
In June, a multistate coalition sued the federal government in the U.S. District Court for the District of Massachusetts, arguing that CMS exceeded what Congress authorized by adding the functional-impairment requirement to the statutory medical-frailty exclusion. The states argue that Congress established categorical protections for medically frail individuals and that CMS’s additional two-part test creates administrative costs and puts otherwise eligible beneficiaries at risk of losing coverage.
A federal judge declined on July 30 to preliminarily block the rule, finding the states had not demonstrated the necessary irreparable harm at that stage. Importantly, that was not a final determination that CMS’s interpretation is lawful. The court expedited the case, with further proceedings scheduled ahead of implementation.
Then, on September 18, 2026, five Medicaid beneficiaries, physician organizations including the American College of Physicians and American Academy of Pediatrics, and the City of Columbus filed a separate lawsuit in federal court in Maryland. Taylor et al. v. Kennedy Jr. et al. similarly argues that Congress did not require people who fall within the medical-frailty categories to prove separately that their condition prevents or significantly impairs their ability to satisfy community engagement requirements. The case also challenges CMS’s treatment of people with substance use disorder who have been in stable recovery for five or more years.
The litigation therefore goes directly to a critical implementation question: Did Congress create categorical medical-frailty exclusions, or did it authorize CMS to require an additional functional assessment?
For now, states must prepare under the CMS rule while the courts consider that question.
Some states already have a head start
States are also entering 2027 from very different starting points.
Georgia has the longest current operational experience through Georgia Pathways, its Section 1115 demonstration, which has required qualifying activities for certain adults since 2023. Other states have moved toward earlier implementation in 2026, while the large majority are preparing for the January 2027 federal deadline.
Nebraska has also moved ahead of the national timetable, providing an early example of operational verification under the new environment. Montana, Arkansas and Iowa have likewise pursued or prepared for implementation ahead of January 2027, although their approaches and enforcement timelines differ.
But an important distinction should not be lost: experience administering a work requirement does not necessarily mean a state has implemented CMS’s new medical-frailty functional-impairment framework. That framework was not issued until June 2026, with CMS’s more detailed tiered implementation guidance arriving September 8. States therefore remain in varying stages of translating medical conditions, functional status and available administrative and clinical data into an operational exclusion process.
Medical frailty may become an interoperability test
The implementation challenge extends well beyond eligibility systems.
The evidence necessary to identify a medically frail person may reside in claims, managed-care encounters, pharmacy records, EHRs, HIEs, functional assessments or other systems. CMS itself acknowledges that making these data usable for eligibility determinations requires coordination among state eligibility, Medicaid, clinical, data and IT operations.
That creates an important opportunity for states and health plans: identify exclusions prospectively, using information already available, rather than putting the burden on beneficiaries and providers to recreate evidence the healthcare system already possesses.
The lawsuits may ultimately determine where CMS can draw the legal line around medical frailty. But regardless of the outcome, one thing is becoming increasingly clear: Implementing Medicaid work requirements is quickly becoming as much a data and interoperability challenge as an eligibility-policy challenge.
If you need to explore this or any other relevant questions, such as who has the information needed to establish functional impairment, where does that information reside, and how can it reach the eligibility process without creating another manual documentation burden, reach out to Centauri to speak with one of our experts.
Dawn Carter, MHA, CPC, CRC, CPMA, CDEO, CPCO
Senior Director, Health Policy and Regulatory Affairs
Centauri Health Solutions, Inc.