New Policy Opens the Door for States to Address Drivers of Health in Medicaid

Health Highlights

Editor’s Note: In a new blog post for The Commonwealth Fund, Manatt Health explains “in lieu of” services (ILOS)—a new approach states can use to provide health-related services, such as housing or healthy food supports, to Medicaid managed care enrollees. The post, summarized below, discusses the California ILOS proposal that the Centers for Medicare & Medicaid Services (CMS) recently approved—and how that approval can serve as a model for other states looking to work with CMS to offer health-related services in Medicaid. Click here to read the full post.

Manatt Health also recently hosted a webinar, prepared in partnership with The Commonwealth Fund, examining the new ILOS regulatory framework and learnings from the California experience to inform other states seeking to advance social drivers of health (DoH) initiatives. Dan Tsai, the director of the CMS Center for Medicaid and CHIP Services, and Jacey Cooper, California’s Medicaid director, both participated. Click here to view the webinar free on demand and download a free copy of the presentation.


States have increasingly sought to use Medicaid to address social drivers of health (DoH)—factors such as healthy living environments or nutritious food that are outside of traditional health care but are among the largest contributors to health outcomes. To address DoH, Medicaid has mainly supported pilot initiatives (typically authorized under Section 1115 demonstrations), as well as care management and home- and community-based services for a relatively narrow group of qualifying beneficiaries.

Recently, CMS approved a proposal by California allowing the state—and potentially others—to use the “in lieu of” services (ILOS) regulatory authority to offer a robust menu of health-related services through managed care. ILOS allows health plans to pay for services that substitute for standard Medicaid benefits when it is medically appropriate and cost-effective to do so. Because ILOS is authorized under federal Medicaid managed care regulations and funded through managed care rates, no waiver is required.

As approved in California, ILOS can have a significant impact on the lives of Medicaid beneficiaries. The ILOS in that state include providing asthma remediation in the home and nutritious foods for people struggling with food insecurity and chronic health conditions, as well as supporting people who want to continue living in their community rather than in a nursing home. Eligible individuals enrolled in Medicaid managed care can access these supports from community providers contracting with managed care plans, mirroring the delivery and financing of medical services. The services are optional for managed care plans, but if they are offered, the cost of the ILOS is incorporated into managed care rates, as are any offsetting savings resulting from reductions in emergency department use, inpatient admissions and other Medicaid services.

As defined in federal regulations issued in 2016, ILOS must be medically appropriate and cost-effective substitutes for Medicaid services. Prompted by the California request, CMS agreed that the regulation did not require an ILOS to be a medical service or an immediate substitute for Medicaid services; it could be a preventive service. Additionally, CMS clarified that cost-effectiveness need not be measured on an individual basis but in the aggregate.

In the context of approving the California request, CMS made it clear that when states propose an ILOS, they will be expected to demonstrate through evidence that the service is likely to be cost-effective. Once an ILOS is approved, states will need to monitor cost-effectiveness and implement a process to document that the service is medically appropriate for the individual. Beneficiaries may not be required to accept an ILOS instead of a traditional Medicaid service and may appeal a denial of an ILOS.

CMS’s new ILOS policy, which CMS plans to review in guidance, represents a paradigm shift for Medicaid. While it does not open the door for Medicaid funding of all DoH interventions, the new policy advances DoH policy and holds great promise for improving health and promoting health equity.

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