The federal government on Thursday cleared the way for Kentucky and other states to begin using a work requirement as a condition to qualify for Medicaid. It marks the first time in the history of the federal health insurance program for low-income Americans that states will be allowed to require some recipients to be employed, volunteer or participate in job training in order to receive coverage.

Gov. Matt Bevin’s administration was among the first wave of state governments to ask for the requirement.

The federal government “will support state efforts to test incentives that make participation in work or other community engagement a requirement for continued Medicaid eligibility or coverage for certain adult Medicaid beneficiaries,” the letter from the Centers for Medicare and Medicaid Services reads.

The requirement — which the administration calls “community engagement” and could include working, volunteering or going to school or job training for able-bodied adults — has been the most controversial part of Bevin’s effort to overhaul Medicaid in Kentucky. And the impact of Thursday’s decision by the Trump administration will likely be felt quickly in the commonwealth, which could have its Medicaid changes approved as soon as Friday.

Former governor Steve Beshear originally expanded Kentucky’s Medicaid program under the Affordable Care Act. The expansion included individuals earning up to 138 percent of the poverty limit – that’s almost $17,000 for one person. The expansion was funded in large part by the ACA.

While he was campaigning for governor in 2015, Bevin said he would dismantle the Medicaid expansion. And during the summer of 2016, his administration submitted proposed changes to the federal government outlining a truncated version of both the Medicaid and Medicaid expansion programs.

Here are three ways today’s decision will play out in Kentucky:

Work Requirements

The federal government says it’s OK to have some sort of “community engagement” requirement, which will include work in Kentucky. One of the justifications the Centers for Medicare and Medicaid makes is research that shows unemployment is generally harmful to health.

But there’s a catch. The federal government also says states will have to prove they are providing assistance to get work hours, GED hours or volunteer hours. CMS, however, will not pay a state to provide this support for Medicaid enrollees.

“Nothing in this letter changes the types of services eligible for federal match,” the letter reads.

Those eligible services are what the feds already pay for: doctor’s visits, hospital stays, prescription drugs. That means Kentucky has to pay its own way to help beneficiaries get connected with work and GED classes to keep coverage.

Dustin Pugel with the Kentucky Center for Economic Policy, a left-leaning think tank, said this might mean the services the state offers will be skimpy, given its current budget woes.

“So even in the most rosy scenario in which work requirements help people to be better off, [CMS is] still not willing to put up the money to make sure that happens,” Pugel said. “I think it’s entirely likely that what we’re going to see instead is people unable to meet the requirements and kicked off coverage.”

Saving Money

Another federal requirement to have the Kentucky waiver approved is that the state prove the Medicaid changes will save money. Jeff Myers, president and CEO of Medicaid Health Plans of America, said this is a wrinkle for the Kentucky plan.

“Your waiver cannot spend more money than the federal government would have spent already. There have to be savings accrued,” Myers said.

In the Kentucky waiver, the state estimated 99,000 people would lose coverage. That could be because they couldn’t keep up with the new requirements or because the requirements were successful and participants gained commercial insurance.

The state estimated the move would save $16.8 million just in the first year of implementation. The federal government, meanwhile, would save $121.7 million in that year.

In the letter Thursday, CMS throws a wrench in that reasoning: The cost savings will have to come from somewhere other than people coming off Medicaid rolls.

Those cost savings are called “budget neutrality” in government lingo, according to Patricia Boozang, a health care consultant with Manatt Health.

“We had heard that one of the delays was the discussion and work with CMS on budget neutrality,” Boozang said. “So I’d not be surprised if the budget neutrality looks somewhat different than what the state submitted.”

Legal Challenge

“Work requirements for Medicaid are completely unprecedented. It’s never happened before, and it’s never been approved before,” Pugel said.

That’s partly because CMS has to justify legally why work requirements are part of the original law that created Medicaid. That law is the Social Security Act, to which Congress added Medicaid in 1965.

CMS pulled this from that law as justification:

“For the purpose of enabling each State…to furnish…rehabilitation and other services to help such families and individuals attain or retain capability for independence or self-care,” the law states.

Boozang with Manatt Health said this part of the law has never been interpreted to mean economic independence before. But that’s what CMS is doing now.

“I can tell you the interpretation to date has been about providing health care benefits that help families with people who have disabilities maintain independence and live in a community setting,” Boozang said. “So it’s bootstrapping that language for a different purpose than we’ve seen in Medicaid before.”

That difference in interpretation will likely mean court challenges once Kentucky’s waiver is approved.

“One of the reasons for this detailed and elaborate explanation for the work requirements is perhaps CMS anticipating that there will be legal challenge and this will end up in the courts, whether it’s CMS directly or states that implement,” Boozang said. “And I think we can expect to see both.”

Lisa Gillespie is WFPL's Health and Innovation Reporter.