CMS Final Rule Prohibits Federal Medicaid, CHIP Funding for Child "Sex-Rejecting" Procedures
Highlights
- The Centers for Medicare & Medicaid Services (CMS) released a Final Rule that prohibits state Medicaid and Children's Health Insurance Programs (CHIP) from using federal funding to pay for certain "sex-rejecting" pharmaceutical and surgical interventions designed for the treatment of gender dysphoria.
- The rule, which becomes effective October 13, 2026, applies to beneficiaries up to age 18 for Medicaid and age 19 for CHIP.
- In a departure from the Proposed Rule, the Final Rule allows federal funds to continue to reimburse these treatments during a ramp-down period of up to six months following the effective date to allow beneficiaries to taper off certain interventions. After that time, states may elect to continue coverage and payment for these services, but using only state or nonfederal funds.
The Centers for Medicare & Medicaid Services (CMS) on August 11, 2026, released a Final Rule titled "Medicaid Program; Prohibition on Federal Medicaid and Children's Health Insurance Program Funding for Sex-Rejecting Procedures Furnished to Children." The Final Rule prohibits state Medicaid and Children's Health Insurance Programs (CHIP) from using federal funding to pay for certain pharmaceutical and surgical interventions used for the treatment of gender dysphoria. The prohibition applies to beneficiaries up to age 18 for Medicaid and age 19 for CHIP. The Final Rule takes effect on October 13, 2026.
In a departure from the Proposed Rule, the Final Rule allows federal funds to continue to reimburse these treatments during a ramp-down period of up to six months following the effective date to allow beneficiaries to taper off certain interventions. The Final Rule does not prohibit states from utilizing nonfederal funding sources to continue payment on an ongoing basis for impacted services, such as state-only funding, self-payment or private insurance. The Final Rule places significant emphasis on mental health treatments and psychotherapy as an alternative treatment and continues to permit federal funding for these treatments, although the Final Rule does not endorse any particular treatment modality.
CMS states that the prohibition is necessary to realign federal payment for services with U.S. Department of Health and Human Services (HHS) findings related to medical necessity, arguing HHS' review of domestic and international standards, research and guidelines from clinician organizations found a lack of sufficient, current evidence to substantiate the efficacy or demonstrate meaningful benefit for children receiving the interventions over the long term.
Background and Rationale
CMS acknowledges ongoing litigation related to Executive Orders (EO) 14187 and 14168 and the declaration issued by HHS Secretary Robert F. Kennedy Jr. December 18, 2025, (the Kennedy Declaration), yet argues the Final Rule does not run afoul of court-imposed injunctions that prevent implementation of funding restrictions imposed by the EOs and policy initiatives set forth in the Kennedy Declaration as litigation continues. CMS indicates that the basis for the Final Rule stems from the findings of HHS' review of existing literature and guidelines from both domestic and international entities and does not rely on the authority of either EO or the Kennedy Declaration.
CMS writes that the HHS review found "growing international concern" regarding the use of hormonal and surgical interventions and highlighted HHS' belief that existing recommendations from certain professional organizations and international guidelines are "low quality" and should not serve as the basis for providing the treatments. CMS also argues that adverse outcomes associated with treatments have been found to occur, including infertility/sterility disorders, sexual dysfunction, impaired bone density accrual, diverse cognitive disorders, cardiovascular disease, metabolic disorders and psychiatric disorders, necessitating action to protect beneficiaries from these potential outcomes.
Another consistent rationale cited throughout the Final Rule is the need for federal financial payments to align with services that are "consistent with quality of care" and provided "in a manner consistent with the best interests of beneficiaries."
States Required to Update SPAs, Waivers as Applicable to Align with Prohibition on Use of Federal Funding
The Final Rule prohibits state Medicaid and CHIP programs from using federal funds to pay for "sex-rejecting procedures," which CMS defines as "any pharmaceutical or surgical intervention that attempts to align a child's physical appearance or body with an asserted identity that differs from the child's sex." The prohibition applies to the use of federal funding to pay for such sex-rejecting procedures for Medicaid and CHIP beneficiaries under the ages of 18 and age 19, respectively.
The Final Rule requires state Medicaid and CHIP programs to update state plan amendments (SPAs) and any related waivers where applicable to align with the prohibition. CMS will develop and distribute a revised SPA template document that will include a reiteration of the prohibition on the use of federal funds for this purpose. CMS anticipates requiring all states and territories to submit the revised template with updated information for approval as part of the state plan.
The Final Rule does not prohibit state Medicaid and CHIP programs from paying for the services using nonfederal funding. States may use state-only or other nonfederal funding to pay for the full cost of providing these services. States will likely seek to implement changes to coverage policies for these services, with the potential for the addition of prior authorization and other utilization management mechanisms. Federal payment for treatments to individuals diagnosed with gender dysphoria such as psychotherapy will remain available and continue to be covered under the mandatory Early and Periodic Screening, Diagnostic and Treatment requirements within the Medicaid program.
In a departure from the Proposed Rule, CMS establishes a six-month "taper" period to provide enrolled Medicaid and CHIP beneficiaries and providers a "reasonable opportunity" to phase off medications and allow for "clinical discretion" regarding future treatment plans or shift use of federal funding for the services entirely to state-only or nonfederal funding sources. The timeline is not intended as a clinical recommendation, with CMS noting providers may elect to change prescribing practices or dosing for beneficiaries more quickly when appropriate.
The taper period does not apply to those beneficiaries who initiate treatment after the effective date of the Final Rule, nor does the taper period extend to surgical procedures or use of puberty blockers as payment for those treatments will end on the effective date.
Although CMS states throughout the Final Rule that it does not view the prohibition as infringing on the practice of medicine, endorsing a single treatment modality or providing a clinical guideline, the rule noticeably states that the prohibition on use of federal funding to cover the services will apply "even when a provider determines that a sex-rejecting procedure is medically necessary for treatment of gender dysphoria."1 CMS states that the rule is not intended to "restrict providers' clinical judgement in the practice of medicine."2
Impacts on Providers
In the Final Rule, CMS presumes that "the vast majority of providers who have offered sex-rejecting procedures have done so in good faith reliance on existing clinical guidelines."3 To address potential financial losses as a result of the prohibition, CMS notes that providers will have "other avenues" to receive compensation for providing medical intervention and continue providing services using nonfederal funding sources, such as private insurance or self-payment options.
CMS writes that the agency "remain[s] committed to monitoring these effects and will consider them in any future rulemaking"4 and will also "continue to monitor developments in the clinical evidence base and will consider whether future adjustments to this policy are warranted as that evidence evolves."5 However, do not anticipate that CMS will implement changes to the policy in the near term given the significant emphasis by the administration on promoting noncoverage of these services.
There are likely to be substantial impacts on access to care for patients and likely cost shifting to other parts of the healthcare system as a result of potential changes in healthcare utilization related to mental health, prescribing practices and other areas. CMS acknowledges there may be beneficiary access issues as a result of the policy, writing that "the changes in this [F]inal [R]ule may prevent or delay individuals from receiving these healthcare services."6
Impacts on States
Recognizing the need for additional clarity regarding coverage and payment for pharmaceutical interventions with intended conditions for use outside of treatment for gender dysphoria, CMS confirms that pursuant to Section 1927 of the Social Security Act, drugs for a covered indication other than a sex-rejecting procedure remain eligible for Medicaid coverage and the use of federal funds for payment.
States that wish to cover these services – to the extent they remain covered by the state plan – for their Medicaid population will likely implement prior authorization and other utilization management mechanisms to ensure federal funds are not utilized. States are not required to exclude pharmaceutical interventions that have other indicated uses from their Medicaid formularies (such as gonadotropin-releasing hormone agonists) when pharmaceutical products are used for alternative indications or conditions or surgical interventions that are intended to address a medically verifiable disorder of sexual development. The Final Rule reiterates states must ensure federal funds do not reimburse claims for use in treatment of gender dysphoria.
CMS estimates total Medicaid and CHIP spending will be reduced by $235 million over 10 years. Federal spending will be reduced by $138 million, and state spending will be reduced by $97 million. Federal Medicaid spending will be reduced by about $175 million from fiscal year (FY) 2027 to FY 2036. Because CMS found that the impact on revenue to pharmacies and healthcare providers in the aggregate would be less than 1 percent of total revenue within healthcare industry segments, CMS contends the Final Rule does not meet the threshold for significant economic impact under the Regulatory Flexibility Act. However, CMS states the impact on individual providers who specialize in providing care to this patient population could be "more significant."7
CMS recognizes that "the same drug or procedure may serve different purposes for different patients and that the purpose-based nature of this prohibition requires careful implementation" and says that CMS will work with states to "develop practical approaches that minimize burden on providers and patients while ensuring compliance"8 with the Final Rule.
Legal and Statutory Basis for Final Rule
CMS lays out a legal framework in support of the Proposed Rule in anticipation of litigation that will be likely forthcoming – reiterating that the Final Rule is not based upon EOs or the Kennedy Declaration and laying out a legal argument intended to preempt potential constitutional challenges to the Final Rule under the First, Fifth, Eighth, Tenth or Fourteenth Amendments.9 CMS cites recent U.S. Supreme Court decisions as establishing precedent for setting restrictions on access to and payment for procedures, noting the Final Rule – like laws passed at the state level that have been subject to litigation – are grounded in restrictions based on age and funding rather than a specific group or beneficiary category or an aspect of a particular beneficiary. The agency believes it remains within its statutory authority to restrict how federal funding may be used and contends the Final Rule is "far less restrictive" than other proposals from various states nationwide.10
CMS also lays out the legal basis for the Final Rule applying to "children under 19" even though a person is considered a legal adult who can make their own decisions at age 18. CMS explained that the funding prohibition relating to CHIP beneficiaries under age 19 references the statutory definition of "targeted low-income child" (Social Security Act Section 2110(c)(1)), which defines such a child as a person under 19 years of age.11
CMS states there is precedent for setting age-based limits on the use of federal funding, using sterilization for individuals under age 21 as a key example (42 C.F.R. 441.253) while acknowledging that the sterilization rule is grounded in a different statutory context. CMS does not address the distinction that this prohibition has exceptions for situations where the beneficiary demonstrates medical competence and provides informed consent. CMS does acknowledge that the reference to sterilization as precedent is a new argument and that the agency has "not previously relied on these provisions to establish a purpose-based restriction on FFP for a specific category of services in this manner,"12 referring to Federal Financial Participation.
Definitions and Creation of New Subpart "N"
The Final Rule creates a new "subpart N" in 42 C.F.R. Part 441, which requires state Medicaid agencies to stipulate that the Medicaid agency will not make payment under the plan for sex-rejecting procedures provided to children under 18 using federal funding. The Final Rule does not prevent or prohibit states from using state or other nonfederal funds to cover procedures.
Though the Final Rule prohibits payment for pharmaceutical or surgical intervention for gender dysphoria, it does not prohibit funding for their use if the beneficiary is a child with a medically verifiable disorder of sexual development for purposes other than attempting to align a child's physical appearance or body with an asserted identity that differs from the child's sex or treat complications, including any infection, injury, disease or disorder, that has been caused by or exacerbated by the performance of sex-rejecting procedure(s).
The Final Rule utilizes definitions for "female" and "male," defining "female" as "a person of the sex characterized by a reproductive system with the biological function of (at maturity, absent disruption or congenital anomaly) producing eggs (ova), and defining "male" as a person of the sex characterized by a reproductive system with the biological function of (at maturity, absent disruption or congenital anomaly) producing sperm.
CMS' rationale for not using the term "gender-affirming care" to define the treatments is its contention that gender-affirming care has a "positive connotation," whereas "sex-rejection procedure" better reflects CMS policy framing the restrictions on a "purpose driven" treatment. CMS retains the definition of "sex-rejecting procedure" offered in the Proposed Rule to replace the term "child" with "individual" to provide a more "appropriate degree of precision."
Part of CMS' estimation on cost to states, providers and others incorporates potential costs associated with the need for some states to amend existing policy or manual documents where terms may be inconsistent with provisions in Final Rule. However, CMS does not believe the Final Rule will impact active claims or billing forms/instructions.
Future Rulemaking and Next Steps
A consistent discussion throughout the rule is the pending proposed rule to establish a Medicare Condition of Participation (CoP) for hospitals, which (if finalized as proposed) could make hospitals continuing to provide certain treatments ineligible to continue participation in the Medicare program. CMS does not provide insight into the status or timing of the CoP proposed rule outside of the comments being under review but notes that "each rule is subject to its own comment and review process."13
The Final Rule is expected to be the subject of significant attention from stakeholders such as children's hospitals and other impacted providers and is likely to face legal challenges. Stakeholders who operate entities or facilities or business that currently offer these services should prepare for significant enforcement and compliance activity, reassess financial ability to absorb potential losses in funding, speak with state legislators to assess whether state-only funding will be made available to reimburse for these services and identify alternative avenues to support continuity of care for beneficiaries.
For additional questions, please reach out to the authors.
Notes
1 Final Rule at 52419.
2 Final Rule at 52428.
3 Final Rule at 52424.
4 Final Rule at 52429.
5 Final Rule at 52431.
6 Final Rule at 52466.
7 Final Rule at 52430.
8 Final Rule at 52432.
9 Final Rule at 52407, 52435-52436.
10 Final Rule at 52436.
11 Final Rule at 52448.
12 Final Rule at 52444.
13 Final Rule at 52429.
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