In lieu of services (ILOS): when Medicaid health plans pay for rides the benefit does not list

In lieu of services let a Medicaid health plan pay for something outside the state plan as a stand-in for a service inside it. They matter to a ride company in two places: the trips a plan books to these services, and transportation folded into a substitute service. Both happen inside managed care, so the plan, not the state, is the payer. Managed care organizations covers how plans arrange rides in general, and our guide to plan contracts covers getting into their networks.

The federal rules

Health plans have long used substitutes under risk contracts, and the 2016 managed care rule put the practice into 42 CFR 438.3(e)(2). A plan may cover an ILOS only when:

1. The state has found it a medically appropriate and cost-effective substitute for a covered service or setting.
2. The member is not required to use it and keeps every right to the regular service.
3. It is written into the plan contract, and the plan chooses whether to offer it.
4. Its use and cost are counted when the state sets the plan’s capitation rates.

CMS’s 2023 letter, SMD 23-001, described substitutes as an option for meeting health-related social needs such as housing and nutrition, with medically tailored meals as its example. The 2024 managed care rule, 89 FR 41002, added 42 CFR 438.16. It applies to rating periods starting 60 days or more after July 9, 2024.

Limits that keep substitutes small

The new section puts a ceiling on spending and adds paperwork as substitutes grow:

• The 5 percent cap. ILOS spending may not exceed 5 percent of a program’s total capitation payments, counting state directed and pass-through payments, measured before the year as a projection and after it as a final figure, both certified by an actuary.
• More scrutiny above 1.5 percent. A state projecting more than 1.5 percent must show CMS how it decided each substitute is medically appropriate and cost-effective, and one that ends up above 1.5 percent must send CMS a retrospective evaluation.
• Codes in the encounter data. Plans must report each ILOS under codes the state assigns, so it can be tracked in encounter data.
• Only approvable services. An ILOS has to be something a state could cover through a 1915(c) waiver or a state plan amendment.

Spending on an approved substitute counts as a claim, not overhead, in a plan’s medical loss ratio.

Where rides fit

The first link is the trip to the substitute. North Carolina’s NEMT policy for its health plans, as amended January 1, 2025, says plan NEMT can include rides to and from value-added services and in lieu of services. The policy also defines ILOS as services or settings outside the state plan that are a medically appropriate, cost-effective alternative to a covered one.

The second link is transportation inside the substitute itself. Commenters on the 2024 rule asked whether rides to an ILOS could count as part of it. CMS answered that transportation could be a component only if it is an allowable part of a service the state plan or a 1915(c) waiver could cover. Its own example of an immediate substitute was “transportation to and services provided at a sobering center” in place of an emergency room visit or an inpatient stay. Where a state builds a ride into a substitute that way, the trip belongs to the substitute service rather than the NEMT benefit, so ask the plan which contract and code it falls under. Rides that 1915(c) waivers cover are explained under non-medical transportation.