Listen to this post

Social determinants of health (“SDOH”) consider the non-clinical factors that can profoundly impact an individual’s well-being. They are extensive and often overlap, including housing instability, food insecurity, the inability to afford and obtain medications and more. Research has indicated that healthcare systems that connect patients to basic resources have observed improvements in population health metrics, fostered trust with their patient base, and experienced reduced hospitalization costs.

To address social determinants, providers may need to resourcefully rely on non-clinical services or provide medical services in alternative settings, which may present reimbursement difficulties.

In additional guidance to State Medicaid Directors, the Centers for Medicare and Medicaid Services (“CMS”) clarified the nature in which “In Lieu of Service or Setting” (“ILOS”) can be offered in Medicaid managed care programs, encouraging states to seize opportunities to address the unmet health needs of its beneficiaries with the release of a new policy framework.

In Lieu of Services and Settings Background

Though federal healthcare programs generally excluded non-clinical services from reimbursement, the evolution of value-based care prompted managed care plans to provide alternative benefits to enrollees under flexibilities in their risk-based contracts. To add uniformity to this practice, CMS codified this flexibility in the 2016 Medicaid and Children’s Health Insurance Plan (CHIP) managed care final rule by authorizing coverage for “In Lieu of Service or Settings” (ILOS). [i] Under the regulation, Medicaid managed care plans may elect to use an ILOS alternative benefit as a substitute for an immediate or long-term solution to the meet the needs of their enrollees. ILOS permits Medicaid managed care plans to provide food, transportation, housing transition services and many more categories to meet enrollees’ needs. Most commonly, states have relied on the ILOS lever to substitute inpatient mental health or substance use disorder treatments during short term stays.

States have taken advantage of ILOS to support their lower-income consumers in innovative ways:

North Carolina’s Well Care In Lieu of Services

North Carolina has offered intensive outpatient mental health care since July 2021 to bridge the gap for patients requiring more intensive care not arising to the level of inpatient treatment and transitional programs for high risk populations. Through a peer-to-peer network, the agency connects children between the ages of 5 to 17, and families at risk of foster care to community-based resources after leaving hospital settings by making 120 days of crisis response services accessible.

California Medicaid’s CalAIM Community Supports

In January 2022, The “California Advancing and Innovating Medi-Cal” (“CalAIM”) ILOS community supports program was established to provide beneficiaries cost-effective coordinated services for beneficiaries facing a high risk of hospitalization and costly services. CalAIM offers 14 categories of ILOS or “Community Supports” including the provision of medically supportive food, meals, and tailored meals to address food insecurity affecting 20% of Californians. Please refer to our prior blog for more information on CalAIM.

CMS encourages State Medicaid Plans and Medicaid managed care plans to provide meaningful resources that intervene with adverse health events.

A 2023 Refresh to In Lieu of Services and Settings

According to previous guidance, State Medicaid Plans needed to meet four requirements to leverage ILOS:

  1. The state determines that the in lieu of alternative service or setting is a medically appropriate and cost effective substitute for the covered service or setting under the state plan;
  2. The enrollee is not required to use the alternative service or setting;
  3. The approved in lieu of service is authorized and identified in the managed care plan contract and offered to enrollees at the option of the managed care plan; and
  4. The utilization and actual cost of in lieu of services is taken into account in developing the component of the capitation rates that represents the covered state plan services, unless a statute or regulation explicitly requires otherwise.

In the latest letter to State Medicaid Directors, CMS expects State Medicaid agencies to comply with the following six principles to receive ILOS approval. Further, agencies with existing ILOS offerings must comply with the new policy framework by January 2024.

  1. ILOSs must advance the objectives of the Medicaid program. The ILOS must not violate federal prohibitions and must be approvable through state plan amendments.
  2. ILOSs must be cost effective. States may determine whether an ILOS is a cost-effective substitute and CMS will assess whether the ILOS Cost Percentage under each individual managed care program is reasonable. To reduce inequities for beneficiaries, states and Medicaid managed care organizations are allowed to spend up to 5 cents of every premium dollar on alternative services and settings addressing social determinant of health needs.
  3. ILOSs must be medically appropriate. CMS will review clinical definitions for ILOS target populations and its accompanying contractual requirements to ensure medical care is consistently delivered. States retain discretion over setting higher provider qualifications and imposing limitations to ensure ILOS medical appropriateness.
  4. ILOSs must be provided in a manner that preserves enrollees rights and protections. Enrollees must be able to decline ILOS services. Their care cannot depend on whether they have been offered an ILOS, are currently leveraging an ILOS, or have used an ILOS previously. States must have an appeal and grievance system for ILOS and other services that conforms to existing requirements.
  5. ILOSs must be subject to appropriate monitoring and oversight.States must submit actuarial reports certifying cost percentages and 30-day written notice once ILOS are deemed non-compliant.
  6. ILOSs must be subject to retrospective evaluation, when applicable. The evaluation will analyze encounter data against medical effectiveness and cost measures and health equity impact of each ILOS.

Through these reworked parameters, CMS encourages states to address macro-level social needs by using the plan’s resources to provide micro-level solutions such as ensuring access tailored meals for beneficiaries suffering chronic conditions worsened by poor diets and those living in food deserts.


[i] 42 CFR §438.3(e)(2).