HHS Sheds Light on How Family Income Will be Calculated Under New MAGI Method for Medicaid and CHIP

By Jocelyn Guyer

Over the holidays, while we were all relaxing with family and friends (or sneaking off for fiscal cliff updates), HHS issued an important “Dear State Medicaid Director” letter that will help to determine the income levels for children’s coverage under Medicaid and CHIP for at least the next six years.  Not quite as heady stuff as the last-minute fiscal cliff deal, but from a children’s coverage perspective, a very important development. So, the new letter is worth slogging through despite its nearly impenetrable header: “RE: Conversion of Net Income Standards to MAGI Equivalent Income Standards.”

As most readers of Say Ahhh! already know, the Affordable Care Act (ACA) requires major changes in how income is calculated when children, pregnant women, parents and most other adults are being evaluated for Medicaid eligibility.  We are moving to the use of a new measure of income, known as “Modified Adjusted Gross Income,” based on IRS rules for counting income. Unlike current Medicaid rules, the new measure doesn’t allow for disregards and deductions, such as for childcare and work-related expenses.  As a result, the Affordable Care Act could have resulted in many children missing out on Medicaid and CHIP coverage when their families failed to receive disregards and deductions.  To prevent this from happening, the ACA requires states to increase their income thresholds to compensate for the loss of those disregards and deductions (i.e., to create “MAGI equivalent income standards”).  The December 28th letter provides details on how states should proceed. For kids, the new income thresholds are a particularly big deal because states are required to maintain their Medicaid and CHIP coverage for children through October 1, 2019.

Here are some highlights from the letter, including a notable change in how the new thresholds will be calculated that reflects input from the children’s advocacy community:

1.  Two Options for Calculating MAGI Equivalent Income Standards.  States will have two major options for calculating the MAGI-equivalent income standards:

  • HHS-standardized methodology.  Under this option, states will consider the average value of disregards to families whose net income (i.e., income after disregards and deductions are taken into account) falls within 25 percentage points of a state’s eligibility threshold.  For example, in a state with an income threshold in Medicaid of 133% of the FPL for children under age six, the methodology will consider the value of disregards and deductions for families with net income between 108 percent and 133 percent of the FPL.  If they are worth an amount on average equal to, say, 8 percent of the FPL, the new MAGI-equivalent Medicaid threshold for kids under six would be 141 percent of the FPL in that state.  States can have HHS perform these calculations for them using national data or do it themselves using state administrative data.
  • State Proposal Option.  If a state wants to come up with its own methodology, it may work with HHS to do so.  States may pursue such an option if they feel that the HHS-standardized methodology doesn’t fit their unique circumstances.  But, as HHS makes clear, any state proposal will need to ensure that the new MAGI-based income eligibility standard doesn’t systematically decrease or increase the number of people who qualify for coverage.

2)    Change in Strategy for Calculating New MAGI-Equivalent Thresholds.  As called for by children’s advocates, the new standardized HHS methodology uses a more accurate mechanism for calculating the value of disregards and deductions to families.  In their initial proposal, HHS was going to take the average value of disregards and deductions for EVERYONE in an eligibility category.  The problem with this approach was that it caught in its net many families who didn’t use disregards and deductions, potentially causing calculations of the average value of disregards and deductions to be artificially low (e.g., a family at 80 percent of the FPL doesn’t need a child care deduction to enroll a 2-year old in Medicaid coverage that is available up to 133 percent of the FPL and so perhaps never reports child care expenses). Now, HHS plans to consider the value of disregards and deductions only for people whose eligibility is potentially affected by their availability.  HHS has estimated these are individuals with family income within 25 percentage points of a state’s net income threshold.  The change can be expected to result in somewhat higher MAGI-equivalent income thresholds, more fairly reflecting the value of the loss of disregards and deductions.

3)    Greater clarity on the applicability of MAGI-equivalent income thresholds.  The new letter makes it clear that states will be using the new thresholds for a number of purposes, including to 1) maintaining Medicaid and CHIP coverage for children through October 1, 2019, as well as establishing minimum eligibility thresholds for parents, pregnant women and other adults (e.g., minimum thresholds in states that fail to cover adults in Medicaid up to 133 percent of the FPL as a result of the Supreme Court decision), 2) determining which families can be subject to premium payments; and 3) calculating the availability of enhanced FMAP for newly-eligible adults (another complex topic for another day).

States will have the next several months to work with HHS to adopt their new MAGI-equivalent thresholds, with final results expected in June of 2013.  Children’s advocates may want to keep an eye on the process in their states since the final outcome will determine the eligibility thresholds for children in Medicaid and CHIP through at least October 1, 2019.