One of the more mystical sounding acronyms receiving a lot of attention in the Affordable Care Act (ACA) is MAGI or Modified Adjusted Gross Income. MAGI is a way of defining income rooted in tax law and, along with the size of the tax filing unit (to determine household size), will be used to evaluate eligibility for advance premium tax credits and cost-sharing reductions.  But, it also will be used to evaluate eligibility for CHIP and most Medicaid eligibility categories. 

The good news is that the use of MAGI  will establish a simplified and consistent basis for determining financial assistance for all health coverage options under the ACA. However, there is a lot more involved in the conversion to MAGI than simply relying on IRS rules to determine income and family composition.  States are also required to establish income eligibility levels that are not less than the “effective income eligibility” in place on the date of the ACA’s enactment. This is especially important for children whose eligibility is protected through the ACA’s stability provisions (aka MOE) until 2019. But what does it really mean?

Currently most states disregard certain income or allow certain expenses to be deducted from gross income to arrive at the net income used for eligibility purposes. In effect, states will be required to convert their current system of evaluating Medicaid eligibility based on a net income test using disregards and deductions into a new higher gross income test based on MAGI. The gross income test needs to be set at a higher level than current Medicaid and CHIP net income thresholds to replace the loss of disregards and deductions.  Otherwise, fewer kids would be eligible for Medicaid and CHIP than under current law. Confused as Crabbe and Goyle in Professor Flitwick’s Charms class?

Let’s take a simplistic example – consider the Weasley family of three, which includes Molly and her children, Ron and Ginny, who is in full-time childcare. The Weasleys live in Hogsmead, a state where Medicaid covers children up to 235% FPL ($43,545 for a family of three).  Hogsmead allows a $90 monthly income disregard ($1,080 a year) for each working parent and a $175 monthly deduction for childcare expenses ($2,100 a year). This means that Molly, who works as a potions teacher, can get Medicaid coverage for Ron and Ginny if her Hogwarts salary is $46,725 a year or below.  That’s because Hogsmead will “disregard” (i.e., subtract) $3,180 from Ms. Weasley’s income when evaluating whether she meets the state’s net income threshold of $43,545 a year for a family of three. (Here’s a link to Harry Potter terminology for you Muggles who may be feeling a bit lost by now.)

Still feel a bit like I cast a “Confundus” spell on you? Maybe this will help put it in perspective – in essence, the $3,180 in income disregards and expense deductions are equal to 17.2% FPL for a family of three. Based on this example, the state’s “effective eligibility level” using MAGI would need to be at 252% of the FPL (235% + 17% FPL) to account for the loss of disregards and deductions.  This way the Weasley kids still will be eligible for Medicaid when Molly’s MAGI is considered. It gets a lot more complicated than this but this example gives you a sense of what the ACA is trying to achieve.

What’s really important to remember is that this change to MAGI is designed to eventually get us to a better place, where eligibility rules are aligned between coverage options, eligibility is determined consistently and there is a source of trusted income data to verify eligibility electronically. Sound like a fantasy? Well, it’s true that the older tax data (based on the latest return for the prior year income) may not always reflect a family’s current circumstances and we’ll have untangle what future regulations say about that. But in the meantime, we do need more than a magic wand to address the initial challenges posed by the conversion to MAGI.

Clearly, it will not simplify and streamline the process to take the “sorting hat” approach and look at every person individually to determine if they would be eligible under the old method compared to the new MAGI standard. This complication, coupled with the challenge of distinguishing who is newly eligible vs. previously eligible so states get paid the right federal matching rates, has Medicaid and CHIP agencies somewhat mystified. Together, these issues are as challenging as finding a “horcrux” and are the source of the untenable notion that states would need to run “shadow eligibility systems.” (HHS squashed this concept in their IT 2.0 guidance.)

Thankfully, CMS has a “marauder’s map“ (AKA a solicitation issued on June 28, 2011) to find some really smart organization (perhaps Hermione Granger has been hired as a consultant) to help the agency and states figure out how this is going to work. I don’t have a “pensieve” or crystal ball to predict the results but CMS seems determined to find a fair and balanced way to deal with these issues in a straightforward manner. If you’re interested in reading about a couple of their ideas, check out Appendix 2 of the solicitation. In the meantime, it’s good to know that children who are currently eligible won’t be gobbled up by “death eaters” on their way to MAGI.