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Issue #306

Sellers Dorsey Digest

October 1, 2026

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Federal News

OIG Releases Report Detailing Issues with MLR Reporting

On September 24, the Office of Inspector General (OIG) for the Department of Health and Human Services (HHS) released a report detailing the limitations in Medicaid managed care medical loss ratio (MLR) reviews conducted by CMS. The report reviewed data from 595 final MLR summary reports across 44 states for the 12-month rating period that ended in 2019. The OIG found that CMS conducted reviews of the four mandatory MLR data elements and did not review the six optional data points that states can provide. The OIG also found that  CMS did not follow up with states that submitted potentially inaccurate data. Finally, the OIG noted that the results of the CMS reviews were not shared widely with CMS staff. The OIG recommends that CMS create a process dictating what happens when a state submits potentially inaccurate data; that insights from reviews are shared with staff that support reviews of managed care plan capitation rates; and that CMS improve the efficiency and effectiveness of its MLR data reviews. In his response to the report, CMS Administrator Dr. Mehmet Oz noted that CMS has made substantial changes in recent years to improve this process since the 2019 rating period, including releasing an MLR Toolkit, implementing a standardized web portal for MLR summary report submission, and publishing MLR summary report data publicly (OIG, September 24).

AMA Pushes CMS to Keep 2027 Prior Authorization Deadline

Implementation readiness is becoming a key point of tension ahead of CMS’ 2027 electronic prior authorization requirements for non-drug services. While some health plans and electronic health record (EHR) developers are seeking additional time for implementation, the American Medical Association (AMA) is arguing that the current timeline should remain in place and that the focus should instead be on improving provider preparation. AMA pointed to gaps in training, testing, technical support, and communication about how electronic prior authorization will work in practice, and urged CMS to hold plans and EHR vendors accountable for addressing those issues before January 1, 2027. The debate comes as CMS continues to expand its prior authorization modernization efforts, including a separate proposal to apply electronic requirements to prescription drugs beginning October 1, 2027 (Inside Health Policy, September 25).

Two HHS Leadership Nominees Advance

HHS could soon fill two senior leadership roles that oversee departmental operations and policy development. The Senate Finance Committee advanced Gerard “Chris” Klomp’s nomination for deputy HHS Secretary by a 15 to 12 vote and Ge Bai’s nomination for Assistant Secretary for Planning and Evaluation by a 14 to 13 vote, sending both to the full Senate for consideration. If confirmed, Klomp would become the department’s second-ranking official and fill a position that has been vacant since February. Bai would oversee policy analysis, research and strategic planning through the Office of the Assistant Secretary for Planning and Evaluation (Fierce Healthcare, September 24).

CMS Announces Pledge to Improve Medicaid Quality Reporting and Health Outcomes

On September 25, CMS announced a new initiative, Investing in Health Outcomes (IHO), focused on revising how quality is measured in Medicaid. The IHO initiative is a voluntary pledge that states can join to move towards an outcome-oriented quality reporting approach with a focus on prevention, chronic disease management, and behavioral health.  Through this initiative, CMS aims to shift Medicaid quality strategy towards quantitative improvements in beneficiaries’ health outcomes while also reducing the volume of quality reporting requirements.  Another priority of IHO includes the advancement of digital or near-real-time data measurements, moving away from claims and chart abstraction where possible. As of September 24, 37 states have signed the pledge, including California, Georgia, New York, Utah, Illinois, Pennsylvania, and Tennessee. Participating states will work to incorporate the goals of the initiative into their state quality strategies and upcoming procurements. CMS also announced that it will hold workshops later this year to discuss measure prioritization, value-based arrangements, reduced reporting burden, and digital quality measurement in more detail (Inside Health Policy, September 25; CMS Newsroom, September 25).

PBM and Employer Health Plan Lobbyists Back Drug Patent Reform as PBM Policy Differences Persist

On September 12, the CEOs of ERISA Industry Committee (ERIC) and Pharmaceutical Care Management Association (PCMA), published a joint op-ed in the Washington Examiner urging Congress to pass legislation to close drug patent loopholes through the passage of two bills. The Eliminating Thickets to Improve Competition (ETHIC) Act aims to restrict the number of infringement actions a brand drug company can make to a single patent from each patent group and the Biosimilar Red Tape Elimination Act would codify the FDA’s removal of outdated interchangeability requirements for biosimilars. The FDA is already phasing out interchangeability requirements through regulatory action. Both groups are aligned in their goal to add additional guardrails to the patent system in support of generic drug manufacturers. Despite this, the two groups remain at odds over PBM regulation, with ERIC pushing for further action and PCMA urging the Department of Labor to rescind its proposed PBM disclosure rule, citing existing authority through the Consolidated Appropriations Act (Inside Health Policy, September 24).

Census Bureau Proposed Rule Would Eliminate Race, Ethnicity Questions in Census

The Census Bureau published a proposed rule on September 10 in the Federal Register that would revise the regulations for the decennial census count for population and housing. If finalized, the proposed rule would prohibit questions related to race, ethnicity, and sexual orientation as well as narrow the definition of “usual residence.” The new definition of usual residence could result in noncitizen immigrants, both undocumented and lawfully present, to be excluded from the census apportionment count. This count is used to determine the number of U.S. Representatives each state is allotted in Congress. Additionally, the proposed rule seeks to use tax records to determine “usual residence.” Individuals or households that do not file taxes could be excluded from the census count.

KFF notes that, if finalized, the rule could negatively impact public health research due to a lack of race and ethnicity data, making research on healthcare disparities challenging. The proposed rule could also impact redistricting, reducing political representation in Congress for states with large immigrant populations. The next decennial census will occur in 2030. The census has collected data on race and/or ethnicity since its inaugural count in 1790. During President Trump’s first term, he sought to exclude immigrants from the 2020 census through an executive order but was prohibited by successful legal challenges. The comment period for the Census Bureau’s proposed rule is open until October 13, 2026 (KFF, September 25).

State News

Nebraska Continues to Iterate on Medicaid Community Engagement Requirements

Nebraska’s implementation of Medicaid community engagement requirements has not gone smoothly, according to local advocacy group Nebraska Appleseed. Nebraska is the first state to implement community engagement requirements, launching seven months ahead of the January 1, 2027, statutory deadline. The state has around 70,000 Medicaid expansion enrollees who are subject to the new eligibility requirements. A spokesperson from the Nebraska Department of Health and Human Services stated that between July 1 and August 30, 643 Medicaid expansion enrollees lost coverage due to community engagement requirements. From May through July, the state processed 6,985 applications and denied 3,615, with 336 denials due to not meeting the requirements at application. Currently, the state has approved several short-term hardship exemptions, including one county with a severely high unemployment rate.

Importantly, CMS has notified Nebraska that it has 30 days to report how it will align its medical frailty policies with the federal requirements outlined in the interim final rule (IFR). The IFR was published after the state initiated implementation of community engagement requirements. The program director for healthcare access at Nebraska Appleseed has reported that the state’s call center wait times are over an hour and that many operational questions remain unresolved (Modern Healthcare, September 22).

Montana’s Implementation of Community Engagement Requirements Experiences Confusion, Pushback

Montana launched its Medicaid community engagement requirements on July 1, joining Nebraska and Arkansas in early implementation. Though the state has given Medicaid expansion enrollees until October 1 to comply with the new requirements, some Democratic state lawmakers argue that this timeframe is insufficient and that Montana should delay implementation until January 1, 2027. A state lawmaker explained that she has received dozens of calls from constituents who are confused about the new eligibility requirements, citing confusing messaging from the Department of Public Health and Human Services, which houses the state’s Medicaid agency. Moreover, agency staff told lawmakers during a legislative hearing on September 9 that only about 20 of 59 positions to implement community engagement requirements have been filled amid general staff turnover.

Verification processes are largely expected to be manual, putting the onus on enrollees and applicants to provide documentation that they either meet the requirements or are exempt. Ex parte processes, where the state accesses data sources that can assist with verification, are not expected to be implemented until next year. Despite lawmakers’ calls to delay the October 1 deadline, state health officials have indicated that they will not extend the deadline (KFF Health News, September 29).

States With Heavy SDP Reliance Face Larger Medicaid Adjustments

According to a recent Health Affairs analysis, states with the greatest reliance on Medicaid state-directed payments could face some of the largest financing adjustments under new federal payment limits. Nebraska, Louisiana, South Carolina, Iowa, Nevada, Arizona, Kentucky, New Mexico, Illinois, Tennessee, Florida, Georgia, North Carolina, Michigan and Mississippi each devoted more than 20% of fiscal year 2024 Medicaid spending to state-directed payments at or near average commercial rates. Beginning in 2028, H.R. 1 will require certain payment rates to be phased down to 100% of total published Medicare rates in Medicaid expansion states and 110% in non-expansion states. Across 36 states, the analysis estimates the policy could reduce annual Medicaid payments by more than $50B, with 17 states facing reductions equal to 10% to 25% of their Medicaid budgets. The findings point to potential pressure on provider reimbursement strategies and raise questions about how states will manage possible effects on provider participation and access to care (Stateline, September 24).

SPAs and Waivers

Waivers

  • 1115
    • District of Columbia
      • On September 23, CMS renewed the District of Columbia’s 1115 waiver, titled, “Whole-Person Care Transformation.” The District receives renewed authority to receive federal financial participation for providing beneficiaries with substance use disorder and/or a serious mental illness with covered Medicaid services while staying in an Institution of Mental Disease. The District receives new authority to provide coverage of certain pre-release services for eligible incarcerated individuals up to 60 days prior to release. or 90 days prior to release from a youth correctional facility. The waiver is effective from October 1, 2026, though September 30, 2031.
    • Louisiana
      • On September 23, CMS approved a new 1115 waiver for Louisiana, titled, “Louisiana Reentry Services Demonstration.” The state receives authority to provide coverage of certain pre-release services for eligible incarcerated individuals for up to 60 days prior to release. Louisiana will cover incarcerated individuals who have been diagnosed with a mental illness, substance use disorder, chronic condition or significant non-chronic clinical condition, or are currently pregnant or within a 6-8 week postpartum period. The waiver is effective from October 1, 2026, though September 30, 2031.
    • Maine
      • On September 30, CMS renewed Maine’s 1115 demonstration titled, “Maine’s Whole Person Care Waiver.” The state receives renewed authority to provide Medicaid services to eligible individuals diagnosed with substance use disorder residing in Institutions for Mental Disease. The state receives new authority to provide Medicaid services to eligible individuals diagnosed with a serious mental illness residing in an IMD; traditional healthcare practices provided through IHS or Tribal facilities to eligible Medicaid beneficiaries; and coverage of certain pre-release services for eligible incarcerated individuals up to 60 days prior to release, or 90 days prior to release from a youth correctional facility. CMS is not approving Maine’s five additional requests for Contingency Management, Transitions of Care Incentive Payments, Food is Medicine, Recuperative Care, and Structured Recovery Housing services at this time. The waiver is effective from October 1, 2026, through September 30, 2031.
    • Minnesota
      • On September 23, CMS approved a new 1115 waiver for Minnesota, titled, “Minnesota Reentry Services Demonstration.” The state receives authority to provide coverage of certain pre-release services for eligible incarcerated individuals for up to 60 days prior to release. Minnesota will cover incarcerated individuals who have been diagnosed with a mental illness, substance use disorder, chronic condition or significant non-chronic clinical condition, or are currently pregnant or within a 6-8 week postpartum period. The waiver is effective from October 1, 2026, though September 30, 2031.
    • Nevada
      • On September 23, CMS approved a new 1115 waiver for Nevada, titled, “Nevada Reentry Services Demonstration.” The state receives authority to provide coverage of certain pre-release services for eligible incarcerated individuals for up to 60 days prior to release, or 90 days prior to release from a youth correctional facility. Nevada will cover incarcerated individuals who are adults aged 21 and older who have been diagnosed with an intellectual or developmental disability, traumatic brain injury, or HIV, or who are pregnant or up to 12 weeks postpartum. The state will also provide pre-release benefits for children under age 21 or former foster care youth under age 26. The waiver is effective from October 1, 2026, though September 30, 2031.
    • Utah
      • On September 25, CMS approved a new 1115 waiver for Utah, titled, “Traditional Healing Demonstration.” The state receives authority to reimburse for traditional health care practices services offered through Indian Health Service (IHS) facilities, Tribal facilities, or urban Indian organization facilities to eligible Medicaid beneficiaries. The waiver is effective from October 1, 2026, through September 30, 2031.

SPAs

  • Services
    • Arizona (AZ-26-0002, effective January 1, 2026): Clarifies coverage policies for Federally Qualified Health Centers (FQHCs) and Rural Health Clinics (RHCs).
  • Payments
    • California (CA-26-0017, effective July 1, 2026): Updates payment methodology for licensed Acute Psychiatric Hospitals participating in the Specialty Mental Health Services (SMHS) program to account for additional staffing requirements.
    • Maryland (MD-26-0005, effective July 1, 2026): Updates payment methodology of Coordination of Community Services, the state’s targeted case management (TCM) program.
    • Wisconsin (WI-26-0013, effective June 16, 2026): In alignment with the 2025-27 biennial budget, removes supplemental DSH payments for in-state hospitals and updates the Rural Critical Care Supplement qualification criteria.

Most Read - September

New Study Suggests Medicaid Expansion Disenrollments Will Be Higher Than Previously Thought

A recent study published in JAMA Health Forum suggests that more Medicaid expansion enrollees will be at risk of disenrollment due to community engagement requirements than previously thought. Using the Current Population Survey Annual Social and Economic Supplement data from 2023 through 2025, researchers found that 19.8% of adults aged 18 to 64 living in Medicaid expansion states would be at risk of noncompliance with community engagement requirements because they were near the weekly 20-hour minimum threshold and/or reported variable hours.

As a result, up to 10 million individuals could lose Medicaid coverage compared to previous estimates of 4 million to 7 million. Risk of noncompliance varied for different groups for gender, race, education, and geography. Women had a 22% higher probability of being noncompliant compared to male adults. Hispanic and non-Hispanic Black adults of any race had a lower risk of noncompliance compared to non-Hispanic White individuals. Individuals with higher levels of education had a lower risk of noncompliance compared to individuals who did not hold a high school diploma.

Finally, risk varied substantially by state, with individuals in the West and Midwest generally at higher risk of noncompliance. Some states in the Northeast also had higher proportions of their population at risk. The researchers note that their results may be conservative due to some states planning to require more than one month of compliance with community engagement requirements at application (Health Payer Specialist, August 31).

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North Carolina Restarts Healthy Opportunities Pilot With $25M in Funding

North Carolina is set to restart its Healthy Opportunities Pilot after lawmakers approved $25M in one-time funding, compared with the $80M requested. The Medicaid program, which has been paused since June 2025, helps eligible beneficiaries with needs such as food, housing, and transportation. As the program resumes, food-related services are expected to return first, while transportation support will be more limited under the state’s new Medicaid waiver, including no standalone coverage for car repairs. The state is still determining when funding will roll out and which services will ultimately be available (NC Health News, September 8).

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CMS Outlines Three-Tier Approach for Medicaid Medical Frailty Exemptions

CMS outlined an optional three-tier framework states can use to identify Medicaid beneficiaries who qualify for the medically frail exemption from community engagement requirements, with Tier 1 based on existing claims and clinical data, Tier 2 requiring additional information on severity or functional status, and Tier 3 requiring manual review. Some conditions, including recent acute congestive heart failure, could qualify based on available data alone, while other cases may require additional information on a beneficiary’s health care use or functional limitations or a manual review. As part of that process, CMS generally requires states to use claims and encounter data from the prior 12 months, although it anticipates allowing a five-year lookback for substance use disorder because individuals in stable recovery for five or more years do not qualify under the SUD medically frail category. CMS also clarified that before January 1, 2028, states may accept self-declaration when reliable data are unavailable, but beginning on that date, self-declaration may generally be used only once during a beneficiary’s enrollment period. The AMA said the approach could reduce some documentation requirements but warned that claims data often do not show how a condition affects a person’s ability to meet the requirements, meaning many beneficiaries could still need manual review (Inside Health Policy, September 11; Medicaid, September 3).

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CMS Considers Next Steps on Medicaid Work Requirement Rule

CMS is reviewing more than 44,000 comments on its interim final rule implementing Medicaid work requirements as CMS considers next steps. The comment period closed July 31, and CMS said the feedback will inform its consideration of the rule, although CMS is not required to adopt changes requested by commenters. Stakeholders have raised implementation questions related to the medical frailty exemption, other exemptions, six-month renewals, and technology requirements. Several of those issues are also subject of litigation, with 25 states challenging provisions of the rule, including requirements related to the medically frail exemption. CMS has not indicated what, if any, additional rulemaking may follow, leaving several implementation details unresolved.

As CMS reviews comments, last week, the agency outlined a three-tiered approach for states to use as they work to shape their medical frailty exemption policies ahead of the January 1 start date for community engagement requirements. Although states can set the ICD-10 codes in each tier, including the codes which automatically qualify someone for the exemption, behavioral health advocates note that states must also weigh the potential for CMS audits. As a result, states may adopt a more conservative approach to medical frailty exemptions, which advocates worry may lead to coverage losses for individuals with behavioral health conditions.

Meanwhile, HHS’ Office for Civil Rights sent OMB an FAQ on August 24 addressing confidentiality requirements for substance use disorder records and exceptions to Medicaid community engagement requirements for certain individuals with substance use disorders (Inside Health Policy, September 17; Inside Health Policy, September 18).

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Democratic Doctors Caucus Urges CMS to Reconsider Medical Frailty Provisions

The Democratic Doctors Caucus, led by Oregon Rep. Maxine Dexter, wrote to CMS Administrator Dr. Mehmet Oz expressing significant concerns about the administrative burden the Interim Final Rule (IFR) implementing community engagement requirements will place on physicians. Under the IFR, providers will be responsible for determining whether an individual is medically frail, wherein an individual’s condition impairs their ability to comply with community engagement requirements. In addition to creating a burdensome documentation requirement for medically frail patients, the letter argues that most physicians are not trained to conduct individual assessments of their patients’ ability to work or engage in other qualifying activities. The letter urges CMS to revise the IFR in a manner more consistent with the underlying statute (Inside Health Policy, September 3).

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Sellers Dorsey Updates

New Webinar - From Policy to Practice: Operationalizing CMS Rules and the Compounding Effects of H.R. 1

As states, providers, and health plans navigate H.R. 1’s core Medicaid provisions alongside the rules CMS uses to implement them, understanding how these policies compound will be critical to planning for what comes next. On October 6 at 2 PM (ET), join Sellers Dorsey and leaders from across the country representing perspectives across plans, providers, and states for a discussion on operationalizing CMS rules and the cumulative impacts of H.R. 1, including advocacy and outreach strategies. Learn how your organization can engage with state and federal partners to sustain access and get actionable insights to navigate the financial, operational, and administrative changes ahead.
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