H.R.1’s Medically Frail Exemption Runs Through Your Clinicians

When we first wrote about H.R.1 in August, the argument was about budgets: Medicaid churn squeezes revenue, and workforce spend is the first line finance reaches for. Since then the federal rule has been tested in court, states have published their choices, and the part that matters most to behavioral health organizations has come into focus. It is the medically frail exemption, and it works differently from how most summaries describe it.

A diagnosis is not the exemption

H.R.1 requires many adults in the Medicaid expansion population to show 80 hours a month of work, community service, a work program or half-time education (or equivalent income) to keep coverage. The law exempts people who are medically frail and lists substance use disorders and disabling mental disorders among the qualifying conditions. Many explainers stopped there and told readers that clients with SUD or serious mental illness are exempt.

The interim final rule CMS issued on June 1, 2026 (published June 3; comments closed July 31) reads it more narrowly. Under 42 CFR 435.554(c)(5), the exemption covers a person whose physical, mental or behavioral health condition “significantly impairs the individual’s ability to comply with the community engagement requirement.” That makes it a two-part test: the condition has to exist, and it has to impair the person’s ability to meet the requirement. A client with a documented diagnosis who is holding down a full-time job is not medically frail under this rule.

Three more details matter for behavioral health:

• Stable recovery is carved out. The SUD category excludes “an individual in stable recovery,” which the rule defines as five or more years in recovery.
• Treatment participation is a separate exclusion. People participating in a drug or alcohol treatment and rehabilitation program are excluded without the impairment test. States decide which programs count and may set a minimum time commitment.
• States build the condition list. Each state’s list of qualifying conditions must be “auditable, justifiable, and consistent with the definitions,” which in practice means diagnosis code sets. For disabling mental disorders, CMS points states to DSM-5, ICD-10 and the federal ISMICC definitions rather than setting its own.

How a state decides, and where your records come in

The rule tells states to establish exemptions from data they already hold before asking the enrollee for anything. For medical frailty, that includes claims and encounter data from the preceding 12 months. In a KFF survey of state Medicaid agencies fielded early this year, 32 states said they plan to use Medicaid claims to identify medically frail enrollees, and 10 of them had identified or planned to identify both ICD-10 diagnosis codes and CPT service codes for the purpose. Twenty-five planned to use behavioral health managed care enrollment.

So the first reviewer of your client’s exemption is a query against your billing history. If a client’s claims carry a vague or outdated diagnosis, or the services billed don’t reflect the intensity of care, the data match fails and the client is asked to prove frailty some other way. The rule does say a state cannot treat the complete absence of claims as grounds for finding someone ineligible, but that protects people with no record, not people with a thin or inaccurate one.

When the data falls short, states may accept documentation from a practitioner. The National Council’s summary of the rule lists the acceptable sources: physicians, nurse practitioners, physician assistants, psychologists, counselors and therapists, clinical social workers, and other practitioners the state credentials if the determination falls within their scope of practice. Twenty-nine states told KFF they would seek provider confirmation when data was unavailable.

The American Medical Association told CMS that this design “transforms the clinical encounter into an eligibility gatekeeping process.” Whatever one thinks of that, the effect for a behavioral health organization is concrete: your clinicians will be asked to write statements about functional impairment, and those statements will decide whether clients keep coverage.

Self-attestation narrows on a fixed schedule

For now, states have some room to take an enrollee’s word. When reliable data isn’t available, an enrollee can attest to medical frailty under penalty of perjury. As KFF Health News summarized it, states may accept that statement twice in 2027 and only once in 2028. From January 1, 2028, a self-attestation can be used only once per enrollment period, and documentation is required whenever it is reasonably available.

Several states are skipping the grace period. Arkansas, Idaho, Indiana, New Hampshire, North Carolina and Ohio have laws or policies that bar self-attestation for the medical frailty exemption starting next year, according to AP reporting in late September. Verification frequency varies too: most states plan to check compliance every six months at renewal, while Indiana and New Hampshire will check quarterly. For organizations in those states, clinician documentation is the main path from the first month.

The timeline did not move

Twenty-five states, joined by the governors of Kentucky and Pennsylvania, sued HHS and CMS on June 29 in federal court in Massachusetts, arguing that the impairment standard goes beyond what Congress wrote and asks state agencies to act as occupational medicine experts. On July 29, Judge Richard Stearns denied their request for a preliminary injunction. He called the issues difficult but noted that Congress, not CMS, set the January 1 deadline. The case continues; the deadline stands.

Some states are already live. Nebraska began enforcement on May 1, 2026, and Arkansas started a soft launch on July 1 with penalties beginning in January. The HHS Secretary can grant a state a good-faith effort exemption that delays implementation, but only case by case and no later than December 31, 2028. If you operate in more than one state, confirm each state’s status directly rather than assuming one national date.

What to do before January 1

Most of this work falls on clinical and revenue-cycle staff, not policy teams. In rough order of payoff:

1. Audit diagnosis coding for active Medicaid clients. Make sure claims carry the current, specific diagnosis and that billed services reflect the level of care. This is the cheapest exemption your clients will get, because nobody has to fill out a form. Once your state publishes its code list, compare it against your active caseload.
2. Write impairment into the clinical record. A note that records a diagnosis but not how it limits work, attendance or follow-through will not satisfy a two-part test. Clinicians who already document functional status well will have an easier time writing exemption statements that hold up.
3. Standardize the clinician statement. Decide who signs, which template they use, how fast requests are turned around, and where the statement lives in the record. Expect volume to spike around renewals, which most states run every six months.
4. Check who on your staff can sign. The acceptable-source list names licensed professions, and state scope-of-practice rules decide the rest. In many organizations a large share of direct care is delivered by associate-level clinicians, and whether they can sign a frailty determination depends on your state. If they can’t, the load falls on a smaller group of licensed staff.
5. Route treatment-program clients to the simpler exclusion. Clients actively in SUD treatment may qualify under the treatment-participation exclusion without the impairment test. Find out which of your programs your state counts.
6. Fix Part 2 consent before the data requests arrive.

Our free H.R.1 Employer Readiness Checklist covers these steps alongside revenue-cycle and funding items, with an owner and a date for each. The National Council’s H.R.1 Resource Hub has a decision tree for identifying affected clients, an editable client FAQ template, and its full summary of the rule.

Why this is a workforce problem

The medically frail exemption turns two things behavioral health employers already manage into coverage questions for their clients: how many licensed clinicians they have, and how well those clinicians document. An organization whose caseload is carried mostly by associates waiting on their licensing exam has fewer people who can sign a frailty statement, and the ones who can will spend more of their week on paperwork. An organization whose notes record diagnoses but not function will see more clients pushed from the data match to the paperwork route.

Both have known fixes. Getting associates through the ASWB, NCE/NCMHCE, MFT or EPPP exams grows the pool of licensed staff who can bill independently and, in most states, sign. Documentation is a standard continuing education topic, and we covered what a defensible clinical record looks like in our piece on clinical documentation lessons. If H.R.1 is also pressuring your budget, CCBHC cost-based rates and several grant programs treat this kind of training as an allowable cost; we mapped those funding sources here.