New CMS Guidance on “In Lieu Of” Services

Manatt Health

On January 4, the Centers for Medicare & Medicaid Services (CMS) issued a new State Medicaid Director Letter on how states can use “in lieu of” services (ILOS) authority, including to address social drivers of health. ILOS authority, which was formally established by regulation in 2016, allows Medicaid managed care plans to pay for alternative services instead of standard Medicaid benefits without the need for waiver approval, when it is medically appropriate and cost-effective to do so. Some states already use ILOS to cover a wide range of services not included in their state plans. For example, a state might allow chiropractic treatment in lieu of physiotherapy, or allow mobile crisis services as an alternative to inpatient psychiatric treatment. The new CMS guidance is significant in two ways:

1. Opening the Door to Addressing Social Drivers of Health via ILOS: States have increasingly sought to use Medicaid to address social drivers of health—factors such as unhealthy living environments or lack of nutritious food that fall outside of traditional healthcare, but are among the largest contributors to health outcomes. Starting in 2022, California was the first state to adopt ILOS at scale to address social drivers of health, allowing a holistic approach to care for people with complex health and social needs through Medicaid managed care. This new CMS guidance more formally opens the door to all states wishing to adopt a similar strategy. Specifically, the guidance clarifies that ILOS can be preventive in nature and do not need to be immediate substitutes to standard Medicaid benefits as long as they advance the objectives of the Medicaid program and have precedents for approval in Medicaid. As such, a wide range of services can be offered as ILOS, including—using examples from California—nutritious meals, asthma remediation, and supports to allow people to remain or return to their communities, including housing deposits, sobering centers, housing navigation and tenancy support services, day habilitation, caregiver respite, home modifications, and personal care and homemaker services. ILOS authority offers a stable funding source for these services, as costs are accounted for in managed care rates.

2. New Guardrails and Requirements for Most ILOS: The new CMS guidance establishes financial guardrails, enrollee protections, medical appropriateness standards, and new evaluation, monitoring, and oversight requirements for most ILOS (excluding ILOS used to cover stays in institutions for mental diseases, which have their own pre-existing limitations in federal law and regulations). These newly formalized guardrails will apply regardless of whether ILOS are related to social drivers of health and will thus apply retrospectively to states’ ILOS already in place. Most notably, the guidance requires state actuaries to establish and annually certify the projected costs of ILOS relative to total managed care capitation as part of annual rate certification submissions to CMS. The guidance indicates that CMS may not approve ILOS that are expected to have costs of more than 5% of managed care capitation, and includes new evaluation and reporting requirements, which are particularly robust for ILOS that have costs exceeding 1.5% of capitation. The guidance also requires states to take a retrospective look at their actual ILOS costs once the services have been delivered.

States interested in pursuing this authority will need direction from CMS on open questions as well as clarity in regard to implementation and the potential for unintended consequences.