On June 3, CMS issued an Interim Final Rule (IFR) misinterpreting the work reporting requirements enacted last July in H.R. 1. The H.R. 1 provisions were bad enough, but as my colleague Leo Cuello has explained, the IFR imposes policies on states and individuals that the Congress did not enact. Most notably, the IFR makes it far more difficult for states to protect people who are “medically frail” from losing their Medicaid coverage due to red-tape requirements to report work or other types of what it euphemistically referred to as “community engagement.” On June 30, 25 states and the District of Columbia filed a lawsuit in federal district court against CMS seeking to block the implementation of certain IFR provisions, including those relating to “medically frail” individuals. You can follow the progress of this case on the O’Neill Institute’s exceptional Health Care Litigation Tracker, but for now, here’s a brief introduction.
“Medically Frail” Individuals
Section 71119 of H.R. 1 requires states that cover Medicaid expansion adults to condition their eligibility for coverage on compliance with work reporting requirements, effective January 1, 2027. The statute exempts several categories of individuals from compliance with the requirements; one of these is for individuals who are “medically frail or otherwise [have] special medical needs.” This category includes, but is not limited to, individuals who (1) are blind or disabled as defined for purposes of Supplemental Security Income (SSI); (2) have a substance use disorder; (3) have a disabling mental disorder; (4) have a physical, intellectual, or developmental disability that significantly impairs their ability to perform one or more activities of daily living; or (5) have a serious or complex medical condition.
The statute specifies that the Secretary of HHS is to define an individual who is “medically frail or otherwise has special needs.” The IFR at 42 CFR 435.554(c)(5)(i) defines such an individual as an individual who is described in one of the five statutory groups above AND “whose physical, mental, or other behavioral health condition significantly impairs the individual’s ability to comply with the community engagement requirement….” This additional eligibility criterion is not in the statute. It dramatically narrows the “medically frail” exemption from compliance with work reporting requirements, increasing operational challenges for state Medicaid agencies and putting expansion adults, particularly older working-age adults, at risk of losing the Medicaid coverage that supports their ability to work—even if they fall into one or more of the protected statutory groups.
The Lawsuit
The name of the case is Commonwealth of Massachusetts et al. v. Oz et al. The docket number is 1:26-cv-12962. The complaint, along with plaintiffs’ motion for preliminary injunction and supporting declarations, were filed in U.S. District Court for the District of Massachusetts on June 29, 2026. (Massachusetts is in the U.S. Court of Appeal for the First Circuit, also in Boston). The case has been assigned to Judge Richard G. Stearns. As of this writing, no hearing date has been set for plaintiffs’ motion.
The Parties
The IFR’s misinterpretation of H.R. 1’s work reporting requirements applies to the 41 states (including DC) that have taken up Medicaid expansion plus GA, TN, and WI, which cover some Medicaid expansion adults under a section 1115 waiver. Three fifths of these — 25 states plus the District of Columbia — are plaintiffs in the lawsuit: AZ, CA, CO, CT, DE, DC, HI, IL, KY, MA, ME, MD, MI, MN, NJ, NM, NY, NV, NC, OR, PA, RI, VT, VA, WA, and WI.
All but two of the plaintiffs are states with Democratic Governors (or Mayor) or are Governors themselves (Beshear of KY and Shapiro of PA). (The Governors of NV and VT are Republicans). The 17 states to which the IFR applies but are not parties to the lawsuit are: AK, AR, GA, ID, IN, IA, LA, MO, MT, NE, NH, ND, OH, SD, TN, UT, WV. All of these states have Republican Governors.
The defendants are Dr. Mehmet Oz in his official capacity as Administrator of CMS, CMS, Secretary Robert F. Kennedy Jr., in his official capacity, and HHS.
The Theory of the Case
The plaintiff states’ 120-page complaint has a lot of moving parts. What follows is a summary that focuses solely on the provision in the IFR relating to the “medically frail” exemption from compliance with the work reporting requirement. There are a number of other provisions at issue that, in the interest of brevity, are not addressed here.
The plaintiff states argue that the IFR “departs significantly” from the text of H.R. 1 and from the subregulatory guidance CMS issued to state Medicaid officials late in 2025, including a November 19 slide deck (Exhibit 1 on page 76 of this PDF) and a December 8 Informational Bulletin. Among many other things, the plaintiff states contend that the IFR (1) impermissibly limits the “medically frail” exclusion by requiring individuals with a qualifying condition to establish that their condition significantly impairs their ability to comply and (2) lacks “workable” methods for determining or verifying medical frailty and impairment of ability to comply. The result, they argue, is that certain provisions of the IFR, including 42 U.S.C. 435.554(c)(5)(i), violate the Administrative Procedure Act (APA) because they are (1) contrary to law and (2) arbitrary and capricious. (They also argue that because the IFR does not provide “clear notice” to states as to what their obligations are, the IFR violates the Spending Clause of the U.S. Constitution.)
What the Plaintiff States Are Asking the Court to Do
In their complaint, the plaintiff states ask the court, among other things, to vacate and set aside specific provisions of the IFR, including 42 CFR 435.554(c)(5)(i), and to enjoin CMS from enforcing those provisions against them. (If the District Court were to grant this relief, it would not apply to the expansion states that are not plaintiffs, listed above).
The plaintiff states also filed a motion for a preliminary injunction (i.e., emergency relief) accompanied by nearly 600 pages of supporting declarations from Medicaid and other state agency officials in each of the states except Hawaii. (The declarations also include a 24-page letter to Secretary Kennedy and Dr. Oz from the National Health Law Program dated November 19, 2025 relating to implementation of Medicaid work requirements). As in their complaint, the plaintiff states ask the Court to swiftly block CMS from enforcing certain provisions of the IFR, including 42 CFR 435.554(c)(5)(i), against them. The states argue not just that these provisions violate the APA but that the provisions, if not blocked quickly, will require them to revise the compliance plans they developed before the IFR was issued at considerable expense and with almost no lead time:
“Given the changes, for example, to the definition of medical frailty, Plaintiff States must now expend new funds, not previously budgeted for, to engage vendors, develop a system capable of evaluating an individual’s ability to work by January 1, 2027 and communicate to members how to navigate this system by August 31, 2026.”
Prognosis
The first test will be how the Court rules on the motion for a preliminary injunction. The plaintiff states have to persuade the Court that they are likely to succeed on the legal merits (i.e. that the challenged provisions violate the APA); that they are likely to suffer irreparable harm if the Court doesn’t grant the preliminary injunction; that the balance of the equities is in their favor; and that the granting of a preliminary injunction would be in the public interest. The Department of Justice, representing CMS, will likely argue that the plaintiff states meet none of these factors.
While the plaintiff states have a strong argument that the IFR impermissibly narrows the statutory exemption for “medically frail” individuals, all eyes will now be on the Court as it weighs these factors. If the Court issues a preliminary injunction as requested, the plaintiff states would have temporary relief from implementing the challenged provisions. From there, federal officials could seek an emergency stay of the injunction from the District Court or the First Circuit (or potentially the Supreme Court via the “shadow docket”). Or they could follow normal appeals process to the First Circuit. Or CMS could issue a final rule that attempts to cure any defects in the IFR identified by the Court. Even if the Court doesn’t issue the preliminary injunction, the plaintiff states’ litigation would continue, either on appeal or along the lines set forth in their complaint.
In any event, states also have the option under the statute (and the IFR) of requesting a delay in implementation for six months at a time (but not beyond December 31, 2028) by demonstrating a “good faith effort to comply.” Indeed, the motion for a preliminary injunction at footnote 1 indicates that the states have already requested a six-month delay in the January 1, 2027 implementation deadline. If CMS agrees to this delay, the plaintiff states may no longer need a ruling by July 31, 2026. Yet another possibility is a negotiated temporary compromise, as happened last month in Minnesota’s lawsuit against CMS challenging its deferral of $350 million in federal Medicaid matching funds.
Stay tuned.