Introduction
The budget reconciliation bill enacted in July 2025 (H.R. 1) includes two major changes to federal Medicaid law that will impose large implementation costs on most states. One mandates the states that extend Medicaid coverage to low-income (“expansion”) adults require those adults to report 80 hours of work or community service per month. The other mandates that those states redetermine the eligibility of those expansion adults every 6 months. These changes will require major modifications to Medicaid eligibility and enrollment systems in these states. H.R. 1 provides $200 million in FY 2026 to assist states with the costs of implementation—an amount that comes nowhere close to the expenses states will be forced to incur. The purpose of this issue brief is to explain the other sources of federal funds that affected states can potentially draw upon to mitigate, at least somewhat, the impact of these implementation costs on their budgets.
H.R. 1 Requirements for Reporting Work and Redetermining Eligibility Will Impose Large Administrative Costs on Affected States
Enacted in July 2025, H.R. 1 fundamentally changes the Medicaid programs in the 41 states (including DC) that have expanded coverage to most low-income adults (“expansion adults”). (It also applies to Georgia and Wisconsin.) Expansion adults are non-disabled adults age 19 through 64 with incomes at or below 138 percent of the federal poverty level ($22,025 per year for an individual in 2026) who are not pregnant and not eligible for traditional Medicaid coverage or Medicare. The law mandates that states that cover expansion adults require, as a condition of eligibility, that those who are not exempt report at least 80 hours of work or other “community engagement” activities per month at both initial application and renewal. The law also requires that states conduct renewals of eligibility for these adults every 6 months. According to the Congressional Budget Office, implementation of these two requirements will result in 6 million individuals becoming uninsured altogether by 2034, reducing federal spending by $375 billion over 10 years.
The CBO cost estimate does not break out the additional administrative costs the federal and state governments will incur as a result of the two provisions, which take full effect January 1, 2027. There is, however, little doubt that these costs will be large, both initially and over time. And one way or another, taxpayers will shoulder the cost.
First and foremost, the new requirements will affect millions of people. As of March 2025, a total of 20.1 million expansion adults were covered by the 41 states (including DC but not counting Georgia and Wisconsin). Unless they are exempt, these adults will have to demonstrate compliance with work reporting requirements at initial application and, if they establish eligibility, every 6 months when they have to renew their eligibility.
Secondly, the work reporting requirements are complicated. The initial CMS guidance takes up three single-spaced pages just to summarize the statute. Among the many complexities are seven different pathways in which an individual who is not exempt from the requirement can demonstrate compliance, including having an income of at least $580 per month. States must have the operational capability to determine and verify compliance under each pathway, using an ex parte process where possible to minimize administrative burden on applicants and enrollees.
In addition, there are nine categories of individuals who are exempt from the work reporting requirement altogether, including individuals who are “medically frail or otherwise [have] special medical needs.” (States have the option of adding up to four additional exemptions). State Medicaid agencies must identify exempt individuals, verify that they are exempt, and ensure that they are not required to comply with the reporting requirements. And the agencies must do so both at application and, with respect to those enrolled in the program, every six months at renewal.
Affected states will have to explain all of these new rules and procedures to both their expansion adults and their eligibility workers as well as providers and managed care organizations. In particular, states must provide notice to all expansion adults (by mail and one other means) that they must meet work reporting requirements as a condition of eligibility unless they are exempt; what the bases for exemption are; how to comply if they are not exempt; and the consequences of noncompliance (including an opportunity for a fair hearing to challenge an erroneous denial of eligibility or termination of enrollment).
The eligibility and enrollment systems of every one of the affected states will have to be extensively modified, if not completely overhauled, in order to operationalize these new requirements—i.e., determining who is subject to the requirements and who is not; determining and verifying exemptions; determining whether non-exempt individuals are in compliance and on what basis; and maintaining records documenting these determinations for purposes of CMS payment error rate measurement. In addition, states will likely have to expand eligibility staffing in order to process double the number of renewals each year.
This will be expensive; the only question is how expensive. While there are no reliable national estimates of either the start-up or ongoing costs of implementing the new work reporting requirements, the Government Accountability Office has collected some relevant data. In 2019, GAO examined the costs of implementing and administering work reporting requirements estimated by five states with approved section 1115 demonstrations (AR, IN, KY, NH, and WI); the estimates totaled $408 million, ranging from $6.1 million in New Hampshire to $271.6 million in Kentucky. GAO noted that these estimates did not reflect all implementation costs these states incurred. In 2025 GAO reported specifically on Georgia’s experience in implementing work reporting requirements under a section 1115 waiver. GAO found that in the first four and one half years of the demonstration (which included a two-year delay), the state spent $54 million on administrative costs—two thirds of the total demonstration spending (the federal government paid 88 percent of the costs).
Federal Funding is Available to States for the Start-up and Ongoing Costs of implementation
H.R. 1 makes a one-time appropriation of $200 million available to states to assist with the costs of implementation of work reporting requirements and other eligibility provisions. (An Overview Slide Deck posted by CMS suggests that there are a total of 13 eligibility and enrollment provisions in H.R. 1.). Of these funds, $100 million is to be divided equally among all states and DC (under $2 million per state). The other $100 million is to be distributed among the expansion states in proportion to the number of residents subject to work reporting requirements as of March 31, 2025. The funds are appropriated for FY 2026 but available until expended. As the GAO reports suggest, this amount will come nowhere close to funding the implementation costs of all affected states in FY 2026, much less every year thereafter.
There are, however, other long-standing sources of federal funding for state administrative expenses that are not limited to FY 2026 and are not capped at a fixed dollar amount. Unlike the $200 million, these other sources require state outlays in order to trigger federal matching funds. The federal matching rates vary depending on the type of administrative activity: 90 percent for design, development, installation or enhancement of eligibility and enrollment (E&E) systems; 75 percent for the maintenance and operation of E&E systems; and 50 percent for all other expenditures necessary for the proper administration of the Medicaid program. As of this writing, CMS has issued only summary guidance on how these three funding sources would apply to implementation of work reporting requirements. The following discussion is necessarily based on current regulations and administrative guidance; future CMS guidance, if any, may vary.
90 Percent Federal Match for Design, Development, Installation, or Enhancement of E&E System
The federal government will pay for 90 percent of a state’s expenditures for the design, development, installation or enhancement of an E&E system that meets regulatory requirements. (CMCS uses the initialism DDI as shorthand). The regulations define an E&E system as “one that is used to process applications from Medicaid or CHIP applicants or beneficiaries to determine eligibility for enrollment in the Medicaid or CHIP programs, as well as change in circumstance updates and renewals.” Changes in a state’s E&E system that are necessary to bring the state into compliance with the mandate for work reporting requirements under H.R. 1 will likely receive a 90 percent federal match (as they did in the case of Georgia’s section 1115 waiver).
There are 22 conditions that an E&E system must meet in order for the federal government to pay 90 percent of the design, development, installation, or enhancement costs. These include generic requirements that costs of the system comply with federal cost principles and that the system “produce transaction data, reports, and performance information that would contribute to program evaluation, continuous improvement in business operations, and transparency and accountability.”
Of particular relevance to work reporting requirements is the condition that the E&E system “support accurate and timely processing and adjudications/eligibility determinations and effective communications with providers, beneficiaries, and the public.” In addition, the system must “allow interoperability with ….community organizations providing outreach and enrollment assistance services as applicable.”
The types of activities that would qualify for 90 percent federal matching under current regulations are detailed in Appendix A of this March 31, 2016 State Medicaid Director letter. They include contractor services; procurement and acquisition (solicitation, evaluation, negotiation, contract selection, etc.); and initial leasing/licensing software tool(s) for design, development, installation or enhancement.
75 Percent Federal Match for the Maintenance and Operation of an E&E system
The federal government will match 75 percent of a state’s costs of maintaining and operating (M&O) a CMS-approved E&E system on an ongoing basis if the system meets regulatory requirements, including the 22 conditions referenced above for 90 percent matching. The 75 percent match is not time-limited; it is available for as long as the state operates a compliant E&E system. CMS periodically reviews systems for continuing compliance. Reapproval of the 75 percent match requires, among other things, “operational reporting, metric data, and/or other evidence demonstrating successful system performance….”
The activities that qualify for 75 percent matching are itemized in Appendix B of the March 31 State Medicaid Director letter. They include the salaries and other direct costs for eligibility workers (both line staff and supervisory and support staff) who receive applications, determine eligibility, and process changes of circumstances and renewals; and call center activities related to eligibility determinations and on-going case maintenance.
50 Percent Federal Match for Administrative Costs
The federal government matches, at a 50 percent rate, state spending on “activities that the Secretary finds necessary for the proper and efficient administration of the State [Medicaid] plan.” The types of E&E-related activities that are subject to the 50 percent match are activities that precede or follow eligibility determination. They include beneficiary education and outreach and explanations of eligibility policies; community-based application assistance; eligibility verification unrelated to the operation of electronic systems; program integrity activities associated with Payment Error Rate Measurement (PERM); and processing appeals. See Appendix B of the March 31, 2016 State Medicaid Director letter.
Advance Planning Documents (APDs).
To qualify for either of the higher matching rates, a state’s expenditures for E&E Systems must be detailed in an Advance Planning Document (APD). (APDs are not required for administrative costs matched at 50 percent). The APD must be approved by CMS prior to a state’s expenditure of funds. CMS has specified standardized templates for APDs that states are required to use, including one that can be used for, among other things, updating E&E systems (at 90 percent match). There is also a template for operational costs (OAPD) that is required to receive 75 percent match. As explained in an August 2025 letter to State Health Officials, the purpose of these standardized templates is to “ensure CMS spends appropriately on systems that … meet [the] Medicaid Conditions for Enhanced Funding (CEF) pursuant to 42 CFR 433.112(b).”
Conclusion
As of February 1, 2026, CMS has not issued any guidance specific to the modification of E&E systems necessary to bring affected states into compliance with the mandates for work reporting requirements and 6-month redeterminations. CMS has posted a Fact Sheet describing pledges from technology vendors to provide “discounts” to state Medicaid agencies for E&E system upgrades. It’s possible that CMS will issue such guidance in connection with the issuance of the Interim Final Rule implementing the WRR mandate required by June 1, 2026.