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

Volunteer in yellow vest loads groceries into a car

Volunteers load free groceries into the cars of people experiencing food insecurity because of the coronavirus pandemic, Dec. 1, 2020, in Los Angeles. Lack of access to nutritious food can lead to poor health outcomes. Photo: Robyn Beck/AFP via Getty Images

Volunteers load free groceries into the cars of people experiencing food insecurity because of the coronavirus pandemic, Dec. 1, 2020, in Los Angeles. Lack of access to nutritious food can lead to poor health outcomes. Photo: Robyn Beck/AFP via Getty Images

  • Social drivers of good health — from a safe and healthy living environment to nutritious food — lie outside of traditional medical care but contribute to health outcomes

  • Giving parents a dehumidifier for a child with asthma is just one example of the “in lieu of” services that California wants to provide to residents enrolled in Medicaid managed care

Today, it is too common for low-income children with severe asthma to end up in emergency rooms when their condition could have been controlled by mold removal or ventilation improvements at home. Nor is it unusual for someone living in a “food desert” to have uncontrolled diabetes, partly because he or she cannot afford or do not have access to nutritious food. The COVID-19 pandemic has helped to highlight the fact that these situations are disproportionately experienced by people of color. Providing these services — dehumidifier or healthy meals, for instance — can improve health, lower health care costs, and also advance health equity.

Recognizing these opportunities, states have increasingly sought to use Medicaid to address social drivers of health (DoH) — that is, factors like healthy living environments or nutritious food that are outside of traditional health care but are among the largest contributors to health outcomes. Federal guidance has encouraged these efforts, but Medicaid’s tools have been limited. 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, the Centers for Medicare and Medicaid Services (CMS) approved a proposal by California that will allow the state — and potentially others — a new path to support Medicaid beneficiaries by integrating health-related services into the ongoing delivery and financing of Medicaid services. Last December, CMS approved California’s use of “in lieu of” services (ILOS) to offer a robust menu of health-related services through managed care. ILOS allows health plans to pay for nonmedical services instead of standard Medicaid benefits when it is medically appropriate and cost effective to do so. Because ILOS is authorized under federal Medicaid managed care regulations, no waiver is required. Until recently, however, CMS has had a narrower view of this authority.

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 care conditions, as well as supporting people who want to continue living in their community rather than in a nursing home; for instance, through providing housing deposits. Eligible individuals enrolled in Medicaid managed care can access these supports from community providers, mirroring the delivery and financing of medical services. The services are optional for managed care plans, but if 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.

ILOS authority has limitations, and the services approvable under this authority will not fill all the gaps in the social safety net. Specifically, as defined in federal regulations issued in 2016, ILOS must be medically appropriate and cost-effective substitutes for Medicaid services; there has been no further guidance from CMS on how those terms apply. Prompted by the California request, CMS agreed that the regulation did not require ILOS to be an immediate substitute for Medicaid services; it could be a preventive service. For instance, a child with severe asthma may receive a dehumidifier before the next time she needs emergency care. Additionally, CMS clarified that cost effectiveness need not be measured on an individual basis but in the aggregate. If the provision of the new service was cost effective (by avoiding more costly medical care) across the group that received the service, it would meet the regulatory requirement. States would monitor the data on an ongoing basis and CMS would review when the state submits data along with its proposed managed care rates.

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 (from a former pilot program or existing literature, for instance) that the services are likely to be cost effective. Once approved, states will need to monitor cost effectiveness and implement a process to document that the service is medically appropriate for the individual. The regulation also provides that beneficiaries may not be required to accept an ILOS instead of a traditional Medicaid service and may appeal a denial of an ILOS.

CMS approved 12 different services in California under ILOS authority. In addition to asthma remediation, nutritious meals, and supports to allow people to remain or return to their communities, including housing deposits, the approval allows funding for sobering centers, housing navigation and tenancy support services, day habilitation, caregiver respite, home modifications, and personal care and homemaker services. Two other services proposed by California (recuperative care, often referred to as medical respite, and short-term posthospitalization housing) were not approved under ILOS authority because of federal exclusions on Medicaid payment for room and board, but were funded under the state’s section 1115 waiver and will have identical rules, implementation, and health plan financing.

As CMS leadership explained in a recent webinar, federal guidance on the ILOS regulation that follows the framework of the California approval is forthcoming. In the meantime, that approval provides a roadmap for other states to work with CMS as they construct their own menu of medically appropriate, cost-effective health-related services. State policy can evolve, and services can be added, dropped, or modified over time through managed care contract amendments that are subject to CMS approval.

CMS’s new ILOS policy represents a paradigm shift for Medicaid. It does not offer a financing vehicle for addressing all health-related care needs but does open the door to a more holistic approach to care for people with complex health and social needs. Community-based organizations and nontraditional service providers with experience providing social services become part of the managed care network, ideally working side-by-side with traditional health care providers. Funding is sustainable because costs are accounted for in managed care payment rates. Like any paradigm shift, this will take time to implement effectively on the ground, but the new policy holds great promise for improving health and promoting health equity.

Publication Details



Cindy Mann, Partner, Manatt Health

[email protected]


Cindy Mann and Dori G. Reyneri, “New Policy Opens the Door for States to Address Drivers of Health in Medicaid,” To the Point (blog), Commonwealth Fund, Apr. 19, 2022.