Following In Lieu of Services Requirements for State Managed Care Programs

States that have clearly documented ILOS in an approved MCO contract have until the contract rating period effective January 1, 2024, to conform with new guidance.

On January 4, 2023, the Centers for Medicare & Medicaid Services (CMS) issued enhanced requirements regarding states’ use of “in lieu of services” (ILOS) in their managed care programs. States allow contracted managed care organizations (MCOs) to use ILOS as one strategy to reduce health disparities and address unmet health-related social needs (HRSNs).

States that have clearly documented ILOS in an approved MCO contract have until the contract rating period effective January 1, 2024, to conform with this guidance. Any new ILOS added to an MCO contract after this issuance must be compliant with these requirements to be approved.


Definition and Examples of ILOS

Since April 2016, CMS has allowed state Medicaid MCOs to use ILOS, defined as medically necessary and cost-effective alternatives to traditional Medicaid covered services. ILOS may improve quality of life, allow beneficiaries to remain in the least restrictive setting, be more readily accessible, and decrease healthcare costs.

Examples of ILOS include remediating asthma in the home, providing healthy meals, and providing environmental support to beneficiaries with special needs or disabilities, such as installing grab bars and wheelchair ramps. ILOS can be provided by community organizations. They are optional for beneficiaries’ and for MCOs, but their cost is incorporated into MCO plan rates.


Alignment with CMS Strategic Plan and Priorities

CMS is accelerating efforts to promote policies that address unmet HRSNs. In November 2022, CMS issued its Framework for Health Equity 2022-2032, which outlines its vision for achieving health equity over the next 10 years.

CMS lists five priorities in its Framework for Health Equity 2022-2032:

  1. Expand the collection, reporting, and analysis of standardized data

  2. Assess causes of disparities within CMS programs, and address inequities in policies and operations to close gaps

  3. Build capacity of healthcare organizations and the workforce to reduce health and healthcare disparities

  4. Advance language access, health literacy, and the provision of culturally tailored services

  5. Increase all forms of accessibility to healthcare services and coverage

The use of ILOS is in line with several of these priorities. SMD#: 23-001 guidance is related to Priority 1, which is to expand the collection, reporting, and analysis of standardized data.

The rationale for the increased requirements governing ILOS is to assure consistency and structure to:

  • Account for ILOS, financially and programmatically, so that they can be administered nationally in a standardized manner
  • Standardize definitions and documentation for auditing, fraud monitoring, evaluation of effectiveness, budgeting, financial forecasting, and processing appeals
  • Set requirements and definitions for MCOs through managed care contracts
  • Make definitions and measurements uniform so that the most effective practices can be identified and shared to foster improvement and program adoption


Current and New ILOS Requirements

Prior to the issuance of this new set of requirements, CMS required that:

  • ILOS must be a medically appropriate and cost-effective substitute for Medicaid covered services or settings.
  • Enrollees cannot be required to use an ILOS instead of a covered Medicaid service.
  • Approved ILOSs must be authorized and identified in the MCO contract and offered to the enrollee at the discretion of the MCO.
  • The utilization and cost of ILOSs must be considered in capitation rate development.

There are six principals CMS outlines for states’ use of ILOS in its State Medicaid Director guidance that expand upon the previous requirements: 

Must Advance the Objectives of the Medicaid Program
Generally, this means ILOS services must be approvable through a state plan amendment or a waiver under Section 1915(c) of the Social Security Act. These cannot violate any applicable federal requirements (42 CFR § 438.3(e)(2)), prohibitions on payment for room and board costs under Title XIX of the Social Security Act, the Americans with Disabilities Act, Section 504 of the Rehabilitation Act, and the Emergency Medical Treatment and Labor Act.

Must Be Cost-Effective
ILOS must be cost-effective, and states must demonstrate to CMS they are cost-effective. An annual actuarial certification regarding ILOS Cost Percentage is required. CMS defines this percentage as the total managed care capitation payment attributable to all ILOS by a state managed care program divided by the total costs for the managed care program, inclusive of all capitation payments, state pass-through, and directed payments. The actuarial report should include a summary of the actual MCO costs for delivering ILOS based on claims and encounter data provided by the MCO to states. The guidance lays out specific requirements related to the calculation of the ILOS Cost Percentage. Cost percentages are by distinct managed care programs (e.g., Medicaid, Children's Health Insurance Program, long-term services and supports).

Any Cost Percentage that is at or greater than 5% may result in CMS’s disapproval. Those below 1.5% have fewer documentation requirements and those above have more.
States must provide CMS a description of how ILOS (both material and non-material impact) were different than other program categories of service and how their costs were considered in budgeting and rate development.

Must Be Medically Appropriate
States must demonstrate, according to specific CMS requirements, how ILOS are medically appropriate. CMS reserves the authority to deny approval of any ILOS service that it determines is not a medically appropriate substitute.

States must provide CMS the name and definition of each ILOS, the covered Medicaid state plan services or settings which they substitute, and the coding to be used on claims/encounter data. States must also provide the clinically oriented definitions for the target population(s) for which the state has determined each ILOS to be a medically appropriate and cost-effective substitute.

MCO contracts must require MCOs use a consistent process for determining ILOS medical necessity by target population and this must be documented in the member plan of care. If a state has an ILOS Cost Percentage for a program greater than 1.5%, the state must provide a description of processes used to determine each ILOS is medically appropriate for that target population (e.g., use of peer-reviewed research, randomized control trial). As mentioned earlier, if the projected ILOS Cost Percentage is greater than 5%, the ILOS may not be approvable by CMS.

Must Be Provided in a Manner That Preserves Enrollee Rights and Protections
ILOSs must be provided in a manner that preserves enrollee rights and protections under federal law. As with current requirements, MCOs are prohibited from requiring enrollees to utilize ILOS or mandating replacement of a state plan covered service and an enrollee may choose not to use an ILOS. MCOs cannot stand in the way of enrollee access to covered state plan service. MCO enrollee handbooks must contain information on enrollee rights and responsibilities and the state must ensure that each plan’s enrollee handbook clearly explains the rights and protections under federal law. The state MCO contract must, pursuant to 42 CFR § 438.228, require every MCO have an established and compliant grievance and appeal system. Appeal and grievance rights for enrollees regarding ILOS should be the same as regular services.

Must Be Subject to Monitoring and Oversight Requirements
States must conduct ongoing and robust monitoring using audited data to continuously monitor ILOS activity in compliance with 42 CFR §§ 438.66(b)-(c), 438.66(e), 438.242(d), and 438.818. Audited data will be used to evaluate the medical appropriateness and cost-effectiveness of each ILOS. States must use quantitative and qualitative measures to annually evaluate to ensure MCOs submit “timely, complete, accurate, and validated encounter data.” Data must include sex (including sexual orientation and gender identity), race, ethnicity, disability status, and spoken language, and each ILOS must have a HCPCS or CPT code.

States using ILOS must provide CMS with an attestation stating it will continuously audit encounter, grievance, appeal, and state fair-hearing data to ensure accuracy, completeness, and timeliness.

For any ILOS deemed no longer a medically appropriate alternative or that is not compliant with federal requirements, the state must provide a written notification within 30 days of that determination, develop a transition or corrective action plan, and amend MCO contracts and cost percentage rates.

As described earlier under cost-effectiveness, States must annually submit actuarially certified ILOS Cost Percentage calculations. If any program is over 1.5% of capitation, additional documentation is required.

Must Be Subject to Retrospective Evaluation, When Applicable
States are encouraged to conduct a retrospective evaluation but when ILOS Cost Percentages are greater than 1.5%, CMS requires states are to submit a retrospective evaluation for each managed care program, determine its overall impact on furthering the purposes of the Medicaid program, and demonstrate that each ILOS is a medically appropriate and cost-effective substitute for identified state plan-covered services and settings. CMS outlines more specificity in the guidance.

If the review shows ILOS are not medically necessary and do not follow program and regulatory requirements, CMS may terminate the program or put the state into corrective action and require the state do another evaluation in future years.


How Guidehouse Can Help States with ILOS

Guidehouse can assist states in the assessment of their ILOS and identification of compliance issues and our actuaries can help states calculate the ILOS Cost Percentage.


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