CMS Restricts Behavioral Health Exemptions in New Medicaid Work Rules

CMS Restricts Behavioral Health Exemptions Under 2026 Medicaid Work Rules

The Centers for Medicare & Medicaid Services has issued federal guidance restricting behavioral health exemptions under upcoming 2026 Medicaid work requirements, narrowing how states can excuse enrollees from community engagement mandates based on mental health conditions and substance use disorders. Under the framework established by federal statute, Congress explicitly excluded nine categories of individuals from ever having to demonstrate community engagement, including medically frail individuals and people participating in structured drug addiction or alcoholic treatment and rehabilitation programs.

Defining Medical Frailty and Functional Tests

According to federal regulatory design, the agency exercised discretion by declining to treat a mere clinical diagnosis as sufficient for medical frailty. The rule defines a medically frail individual as someone who has a qualifying condition—such as a substance use disorder, a disabling mental disorder, a serious or complex medical condition, blindness, or a disability impairing activities of daily living—whose condition significantly impairs their ability to meet the community engagement requirement. By this standard, according to the rule, an enrollee who can perform 80 hours a month of qualifying activities despite a condition does not qualify for the exemption.

Furthermore, the agency declined to adopt the broader medically frail definition currently used in Medicaid for benefit-package purposes. Unlike that older standard, the new rule prohibits states from adding exemption categories of their own. States must build auditable and justifiable lists of qualifying diagnoses (the rule anticipates ICD-10 code sets), but they cannot exempt every individual with a given condition without applying the functional test.

Substance Use Disorder Exemptions and Treatment Timelines

The regulatory text is most specific regarding addiction. According to the guidance, the substance use disorder exemption covers individuals in active treatment and in early or sustained recovery, but specifically carves out those in stable recovery. The agency defines stable recovery as five or more years, applying a clinical rationale that the risk of recurrence after five years approaches that of the general population, at which point work can help sustain recovery.

CMS declined to set a single federal definition of substance use disorder, noting that common references such as the DSM-5 and ICD-10 remain standard resources for states. For disabling mental disorders, the agency similarly directed states to evaluate whether a condition impairs the individual’s ability to comply. The Association for Behavioral Health and Wellness (ABHW) described the acknowledgment of resources like the Interdepartmental Serious Mental Illness Coordinating Committee (ISMICC) criteria, the DSM-5, and the ICD-10 as meaningful progress toward a clinically grounded approach. Furthermore, the regulation specifies that any information-sharing processes employed to validate addiction-related exemptions must adhere to 42 CFR Part 2, which is the federal standard safeguarding the privacy of substance use treatment records.

Administrative Burdens and Coverage Loss Risks

Implementation of work and reporting requirements introduces significant administrative hurdles for enrollees and state agencies alike. Past program rollouts, such as Arkansas’s earlier Medicaid work requirement experience, demonstrate how reporting rules can lead to widespread coverage loss. Data matching in Arkansas identified about two-thirds of enrollees as exempt, but among individuals required to actively report, roughly 70 percent failed to obtain an exemption or report compliance, resulting in more than 18,000 people losing coverage.

Behavioral health symptoms—including difficulty concentrating, low energy, anxiety, trouble planning, feeling overwhelmed, and difficulty managing stress—can interfere with navigating forms, online portals, notices, and deadlines. According to nchstats.com, coverage loss under these rules may not show unwillingness to work, but may show that someone could not complete an administrative process. Individuals with substance use disorders face heightened risks because addiction can affect work stability, housing, transportation, health, and access to documentation.

In addition, federal exemptions for treatment programs under the Supplemental Nutrition Assistance Program apply solely to participants in community mental health centers and private nonprofit treatment facilities, which together constitute less than 50 percent of all substance use disorder treatment centers nationwide. Many individuals with substance use disorders are not in treatment and lack a formal diagnosis, provider note, or treatment record. If proof is required to maintain coverage, individuals may fail work requirements and lose Medicaid before seeing a provider for diagnosis or treatment referral, potentially increasing the risk of relapse, overdose, emergency care, or involvement with the justice system.