The MCO Is Not in the Room. It Still Has to Pay the Bill.
The 2025 reconciliation law bars managed care organizations from determining Medicaid work requirement compliance. It does not protect them from its financial consequences. Seven months remain before the federal deadline. Most states are not ready. Neither are most plans.
In this edition
01 The law gave states the compliance authority. The financial risk stayed with MCOs. 02 The risk composition problem is not priced in. Capitation rate lag will be structural. 03 Nebraska is live. Other states start in weeks. The data clock has started. 04 Four things Medicaid plans must build in the next seven months — whether the law requires it or not. 05 Why it matters across finance, compliance, operations, and IT. 06 Questions leaders should ask now. Sources.The Law Gave States the Wheel. The Risk Sits Somewhere Else.
The 2025 federal budget reconciliation law requires 43 states to implement Medicaid work requirements for adults in the ACA expansion group by January 1, 2027. To maintain eligibility, enrollees must document 80 hours per month of work, community service, education, or other qualifying activities — or satisfy a mandatory exemption.
On one point the law is explicit: managed care organizations cannot determine whether an enrollee satisfies the work requirement. That is a state function. States verify. States disenroll. MCOs can assist with outreach and member identification, but the compliance determination sits with the state.
This framing may look like a protection for plans. It is not. It is a description of where authority ends. Financial exposure does not track authority. It tracks enrollment.
“Community engagement requirements will lead to coverage losses and churn of healthier expansion population enrollees; this will result in MCO capitation rates that are not reflective of the acuity of the remaining members.”
People projected to lose Medicaid coverage under work requirement provisions of the 2025 reconciliation law — driven not only by actual ineligibility but by documentation barriers, system errors, and procedural churn at the state level.
requirements over 10 years (CBO)
through managed care
semi-annually at renewal
Sources: Congressional Budget Office; KFF State Health Facts; KFF Medicaid Work Requirements Survey (April 2026)
The Risk Composition Problem Is Not Priced In
Managed care organizations raised this concern in formal recommendations to CMS, and the logic is not disputed: work requirements will selectively remove the healthier segment of the Medicaid expansion population, leaving a sicker, higher-cost cohort whose per-member-per-month cost is higher than the rate that was set before the attrition began.
The lag between enrollment composition change and capitation rate adjustment is not a design flaw. It is the normal operating cadence of state Medicaid actuarial processes. What is abnormal is the rate at which the composition will change — and the policy mandate driving it.
The Medicaid redetermination unwinding of 2023-2024 demonstrated this pattern clearly. Plans that experienced rapid enrollment changes struggled to document actuarial impact within standard rate-setting windows. Some states did modify rates mid-year; most did not. The reconciliation law will replicate that pressure on a compressed timeline, with a federal compliance overlay that the unwinding did not have.
MCOs that do not build enrollment monitoring infrastructure capable of detecting composition change — disaggregated by eligibility group — will not be able to make the case to state partners that rate adjustment is warranted. The actuarial argument requires the data to support it.
> 2025-07-04 Reconciliation law signed. Work requirements effective.
> 2026-05-01 Nebraska [LIVE] First state to begin enforcement.
> 2026-06-01 HHS interim final rule deadline. Implementation parameters finalized.
> 2026-07-01 Montana enforcement begins. Arkansas begins compliance checks.
> 2026-09-01 States required to begin member outreach notifications.
> 2026-12-01 Iowa enforcement begins.
> 2027-01-01 FEDERAL DEADLINE. All 43 states must be enforcing.
> 2027-07-01 State directed payments must shift to capitation rate-setting structure.
> STATUS: 34 states verifying semi-annually. 2 states quarterly.
> WARNING: Most states report system readiness below threshold.
> WARNING: MCOs prohibited from compliance determination.
> KFF Survey (April 30, 2026): States cite delayed federal guidance, staff constraints, eligibility system gaps, data matching complexity with SNAP/labor/education agencies.
Nebraska Is Live. The Data Clock Has Started. There Is No Structured Feedback Loop.
Nebraska became the first state to begin enforcing Medicaid work requirements on May 1, 2026. That means real-world implementation data exists right now: enrollment patterns, documentation failure rates, exemption processing backlogs, member outreach response rates, and the early signals of what happens when a state eligibility system tries to integrate labor, education, and SNAP data on a compliance timeline it was not built for.
That data is not yet flowing in any structured way to the other 42 states that will be required to implement before January 2027, or to the managed care organizations that will absorb whatever enrollment volatility the implementation produces. There is no federal mechanism for real-time learning transfer between early-adopter states and the field. The HHS interim final rule due June 1 establishes parameters, but it does not create a shared evidence base.
The parallel from recent history is instructive. During the 2023-2024 Medicaid unwinding — when states were required to resume eligibility redeterminations after COVID-era continuous enrollment ended — the scale of procedural terminations shocked most observers. The majority of people who lost coverage were not ineligible; they lost coverage because they did not respond to state notices, addresses were outdated, or eligibility systems failed to process renewals correctly. The Government Accountability Office found serious administrative failures across multiple states. The situation improved as states and plans learned from early results — but the learning happened slowly and unevenly.
Work requirements will replicate the structural conditions of the unwinding: tight timeline, high documentation burden placed on enrollees, state systems that were not built for this function, and managed care plans positioned as the first institution enrollees contact when coverage is lost. The KFF survey published April 30, 2026 found that states rate eligibility system modification and cross-agency data matching as their most serious implementation challenges — the same friction points that drove avoidable coverage losses in 2023-2024.
The reconciliation law also compounds this with a second structural change. State directed payments — which currently flow to MCOs as predictable, separate payment terms under managed care contracts — must be restructured through capitation rate-setting adjustments beginning July 2027. That is six months after the work requirement federal deadline, meaning plans will be managing enrollment volatility from work requirements and rate structure change from directed payment reform simultaneously. Neither change was designed with the other in mind.
Plans that wait for states to notify them of rate inadequacy are misreading the timeline. The actuarial evidence for rate adjustment will need to be developed by plans and presented to states — and that requires enrollment monitoring infrastructure that is current, granular, and tied to eligibility group composition, not just total headcount.
“The short implementation timeline means states will need to move quickly with key systems changes and policy decisions before clear federal guidance is available.”
The KFF survey asked Medicaid directors in all 50 states and the District of Columbia about anticipated implementation challenges. The findings document what most compliance professionals had already concluded: the timeline is not achievable at the level of readiness states expected to have.
Major eligibility system modifications, cross-agency data matching, staff capacity constraints, and the absence of finalized federal guidance were cited as the four primary obstacles. States noted that many of the required system changes are deeply integrated with SNAP eligibility infrastructure — meaning changes must be coordinated across two federal programs, two state agencies, and multiple vendor systems simultaneously.
Two states, Indiana and New Hampshire, will verify compliance quarterly. Thirty-four states will verify semi-annually. That difference in frequency is not trivial: it creates different administrative cadences, different churn patterns, and different levels of exposure to procedural coverage loss — all of which MCOs in those states will experience differently.
What the MCO Must Actually Build in Seven Months
The legal prohibition on MCO compliance determination does not translate into operational neutrality. Plans that serve Medicaid expansion populations need to prepare for several simultaneous changes — none of which the law explicitly required, and all of which operational reality demands.
The first is enrollment monitoring infrastructure. MCOs need real-time or near-real-time visibility into enrollment changes disaggregated by eligibility group. The expansion population leaving under work requirements is a distinct cohort from standard terminations. Plans that cannot track composition changes will not be able to document capitation rate inadequacy to their state partners — which makes rate negotiation nearly impossible and rate adjustment arguments legally thin.
The second is state coordination protocol. The law bars MCOs from compliance determination but does not prohibit structured communication with state Medicaid agencies around disenrollment patterns, member outreach, and transition planning. Plans that treat state coordination as a regulatory formality will absorb enrollment shocks without warning. Plans that build formal coordination channels will have earlier visibility into what is actually happening.
The third is contract amendment review. The reconciliation law, the April 3 Medicaid provider tax rule, and the July 2027 state directed payment restructuring collectively change the financial environment for managed care contracts. Plans have a narrow window to identify clauses that need amendment before multiple simultaneous changes are locked into existing terms.
The fourth is member outreach design. While MCOs cannot determine compliance, they can and should engage with members at risk of losing eligibility — helping them understand documentation requirements, connecting them to community supports that qualify, and flagging members who are likely expansion-group enrollees. The 2023-2024 unwinding demonstrated that a significant share of coverage losses were procedural, not substantive. Plans with outreach capability reduced avoidable losses. Plans without it did not.
Until next week, stay briefed.
Why It Matters
Questions Payer Leaders Should Ask Now
Do we have enrollment monitoring infrastructure that can track composition by eligibility group in real time — specifically the ACA expansion cohort — in each of our Medicaid markets?
Which states in our portfolio are implementing before the January 2027 deadline, and what is our state coordination protocol with those Medicaid agencies today?
Have we reviewed our managed care contracts for provisions affected by work requirements, the April 3 Medicaid provider tax rule, and the July 2027 state directed payment restructuring?
What is our actuarial model for capitation rate adequacy after expansion population attrition? Have we formally documented our case for quarterly rate review to state partners?
What did we learn from the 2023-2024 Medicaid unwinding about procedural coverage loss in our markets, and what outreach infrastructure did we build in response? Is it sufficient for this implementation?
Do we know what eligibility data our state partners will and will not share with us during implementation — specifically on disenrollment timing and reason codes?
Have we modeled network adequacy implications of a smaller, higher-acuity remaining population in our current Medicaid markets?
What is our plan for the period between January 2027 (work requirement deadline) and July 2027 (directed payment restructuring) when both changes are simultaneously affecting financial position?
- H.R.1 — 119th Congress. One Big Beautiful Bill Act. Congress.gov.
- KFF. A Closer Look at the Work Requirement Provisions in the 2025 Federal Budget Reconciliation Law.
- KFF. Survey Offers Early Look at States’ Differing Approaches to Implementing Medicaid Work Requirements. April 30, 2026.
- KFF. An Early Look at Policy Decisions as States Get Ready to Implement Work Requirements.
- KFF. Tracking Implementation of the 2025 Reconciliation Law: Medicaid Work Requirements.
- Fierce Healthcare. Managed Care Plans Offer Recommendations to CMS on Rollout of Medicaid Work Requirements.
- Healthcare Dive. How States Are Planning to Implement Medicaid Work Requirements: Survey.
- CMS. Preserving Medicaid Funding for Vulnerable Populations — Closing a Health Care-Related Tax Loophole Final Rule. Effective April 3, 2026.
- KFF. Medicaid Enrollment and Spending Growth: FY 2025 and 2026.
- KFF. Implementing Medicaid Work Requirements: Lessons from Unwinding.