CMS’s Final Rule Bans Federal Medicaid Funding for Youth Gender-Affirming Care

Overview: Final Rule Bans Medicaid/CHIP Funding for Gender-Affirming Care, Allows States to Take Action

On August 13, 2026, the Centers for Medicare and Medicaid Services (CMS) published its final rule banning the use of federal funds — through Medicaid and the Children’s Health Insurance Program (CHIP) — to pay for gender-affirming care for children and youth. The final rule takes effect October 13, 2026 (“Prohibition on Federal Medicaid and Children's Health Insurance Program Funding for Sex-Rejecting Procedures Furnished to Children”). While CMS finalized several key elements of its late-2025 proposed rule (Client Alert December 24, 2025), the proposed Medicare hospital Condition of Participation rule remains in proposed form.

On August 14, 2026, just one day after the final rule published, CMS was dealt a blow in litigation over a provision that excluded gender-affirming care from essential health benefits (EHBs) under the Affordable Care Act for health plans sold through the ACA marketplace. The U.S. District Court for the District of Massachusetts, in State of California v. Kennedy (Civil Action No. 25-12019-NMG), found that the HHS acted in contravention of the ACA and vacated the provision. Notably, CMS had referenced this rule in the preamble to its August 15, 2026 final rule and, at the time, affirmed the June 20, 2025, rule was in effect.

The final rule could have a disproportionate impact on low-income and disabled children seeking gender-affirming care. About 36 million children, or nearly half of all children in the U.S., receive health care through Medicaid and CHIP, according to CMS. The rule also could raise questions about allowable procedures performed on intersex children and infants when chromosomes are not XX or XY.

In both the proposed and final rules, CMS uses the term "sex-rejecting procedures" (SRP) — a category that encompasses puberty-blocking medications; cross-sex hormone therapy; surgeries affecting the breast, chest, and genitals; as well as other pharmaceutical or surgical interventions. CMS is deviating from the term "sex-trait modification procedure,” which was used by the Trump Administration in guidance and rules issued last year. CMS asserts that the new term is “purpose-based, meaning that the same pharmaceutical or surgical intervention may or may not constitute a sex-rejecting procedure depending on the purpose for which it is provided.”

In its preamble, CMS appears to be trying to get ahead of potential legal challenges to the final rule, which are anticipated but not filed. CMS specifically lays out its defenses and the permissibility of its actions under numerous frameworks, including the U.S. Constitution, APA, and federalism grounds. It also asserts that it has statutory authority to promulgate the final rule under the requirements in the Social Security Act (SSA) for state plans to provide care and services in a manner consistent with the best interest of recipients. The preamble cites successful arguments made by states in State of Oregon v. Kennedy (Case No. 6:25-cv-02409). In December 2025, 19 states and the District of Columbia filed a lawsuit challenging the Kennedy Declaration, which was released at the same time as CMS’s proposed rule. The Kennedy Declaration threatened providers with exclusion from Medicare or Medicaid for providing gender-affirming care. In April 2026, the directive was found to be unlawful by the U.S. District Court for the District of Oregon and the federal government was enjoined from relying on it on the grounds that the federal government lacked the authority to establish standards of care that supersede professionally recognized standards for gender-affirming care.

What the Final Rule Addresses

The final rule prohibits the use of federal Medicaid funding for SRPs for children under age 18 in state Medicaid programs and prohibits federal CHIP funding for SRPs for individuals under age 19. For children currently receiving hormone therapy, the rule provides a tapering-off period of up to six months from the effective date during which federal funding remains available. This provision is limited only to cross-sex hormones and does not apply to other treatments. This transition mechanism was not included in the proposed rule. Children who have not yet begun treatment will lose access to federal Medicaid and CHIP funding beginning October 13, 2026.

Mental health coverage is expressly preserved under the final rule. Medicaid’s Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) provisions continue to ensure comprehensive coverage of mental health services for eligible children, and CHIP continues to require coverage of necessary mental health services in accordance with federal law.

The final rule allows states or private insurers to cover SRPs without federal funds, similar to CMS’s 2025 final rule regarding health coverage sold through ACA marketplaces. Since January, that rule has excluded certain gender-transition and “sex-trait modification procedures” for all ages from being treated as EHBs in health plans sold through the marketplaces, although that requirement has now been declared vacated as previously discussed. The marketplace rule similarly allowed states to designate separate funds for the coverage of gender-affirming care. However, only a limited number of states issued guidance and created separate funds. While state Medicaid agencies may be more inclined to create separate funds with the Medicaid rule, many states likely will not allocate separate funds, due to either political/doctrinal, financial, or administrative constraints.

The final rule will impact states differently based on their existing policies and where they fall on the political spectrum. According to CMS, 17 state Medicaid programs currently cover one or more forms of SRPs for children, while 27 states and one territory have enacted laws restricting SRPs. Fourteen states and the District of Columbia have enacted shield laws covering some or all SRPs, and three states have Executive Orders extending coverage of these procedures. The final rule will most directly impact Medicaid and CHIP coverage in the 17 states that currently cover SRPs for children, and specifically the set of states that decide not to allocate separate funding. California, Maine, and Massachusetts have already released guidance confirming their intent to continue covering gender-affirming care services.

What the Final Rule Does NOT Address

Two changes included in December’s package of proposed rules did not make it into the final rule. The proposed rule had called for prohibiting Medicare- and Medicaid-participating hospitals from performing SRPs on minors and subjecting noncompliant hospitals to decertification. That Condition of Participation proposal is not included in the final rule and remains in proposed form.

Additionally, a provision included in the December 19, 2025, proposed rule — clarifying that gender dysphoria unrelated to a physical impairment would not constitute a "disability" under Section 504 of the Rehabilitation Act of 1973 — has not been finalized.

CMS's Rationale for the Final Rule

According to CMS, the final rule follows a review of national and international research that identified significant evidence gaps, documented serious safety concerns, and concluded the evidence supporting SRPs for children remains insufficient to justify federal taxpayer funding. The agency also contends that it is unable to guarantee quality assurance for certain treatments. In the preamble, CMS repeatedly references HHS’s Treatment for Pediatric Gender Dysphoria: Review of Evidence and Best Practices. That report, which was published on May 1, 2025, and revised the following November, asserts that medical professionals improperly failed to reconsider evidence challenging gender-affirming care protocols. CMS specifically asserts that the findings were “not manufactured for political purposes” and “reflect genuine and growing scientific concern about these interventions.”

Notably, CMS appears to concede there is "limited evidence regarding the harms" of gender-affirming care, anchoring the rule instead on what it characterizes as "very uncertain" evidence of benefits. The final rule rejects studies supportive of gender-affirming care that report on benefits — including the Utah Review, a 1,000-page 2025 report from the Utah State Legislature, and a 2023 study on the effects of hormones on transgender youth, published in the New England Journal of Medicine.

Final Rule Could Put Pressure on States and Hospitals

On the same day that the final rule was published in the Federal Register, HHS issued a report highlighting alleged fraudulent insurance billing practices related to sex-reassignment procedures performed on minors. The report — based on CMS guidance, DOJ investigations, insurance claims data, whistleblower testimony, and patient interviews — identifies 225 hospitals that offer pediatric gender programs and flags approximately $50 million in insurance claims for puberty blockers billed under an unspecified endocrine-disorder code. The report further states that nearly $11 million in claims were submitted for patients -aged 1317 and billed under a "precocious puberty diagnosis," which HHS characterizes as potentially improper.

Implications for Stakeholders

The final rule represents a significant federal funding restriction with near-term operational implications for state Medicaid agencies, CHIP programs, Medicaid managed care companies, and hospital systems. Key areas of focus for affected parties include:

• State Medicaid and CHIP agencies will need to assess existing coverage policies and determine whether state-only funding mechanisms are legally and financially viable.
• Medicaid and CHIP managed care plans will need to review coverage policies for their plans. Where gender-affirming care services are currently covered for minors, the plans will need to keep an eye out for impending guidance from the state agencies in advance of the October effective date of the final rule. Where no guidance has been provided and coverage is mandated by state law, plans may want to reach out to their state agencies directly for guidance.
• Hospitals and providers with active pediatric gender programs should evaluate billing and compliance practices in light of the new regulation and HHS report, given potentially heightened enforcement risk.
• Families of patients currently receiving gender-affirming care services through Medicaid and CHIP plans will, in many cases, lose coverage for those services, depending on state action. Patients receiving hormone therapy have a limited window — up to six months from October 13, 2026 — during which federal funding remains available to facilitate care transitions.