Description and Assessment of State Approaches to Diversion Programs and Activities Under Welfare Reform. B. Medicaid Changes under PRWORA


Prior to the passage of PRWORA, persons who were eligible for cash assistance under the former Aid to Families with Dependent Children (AFDC) program were enrolled automatically in Medicaid. However, under PRWORA individuals and families become eligible for Medicaid independent of their eligibility for cash assistance under a state's TANF program. In other words, receipt of TANF no longer entitles persons to Medicaid coverage and ineligibility for TANF benefits does not necessarily make persons ineligible for Medicaid.


The Creation of Section 1931 of the Social Security Act

While the 1996 welfare law de-linked eligibility for Medicaid from TANF, the law also created a new mandatory Medicaid eligibility group of low-income families with children by adding Section 1931 to the Social Security Act. Section 1931 requires that all persons who meet the basic requirements of the states' AFDC programs in effect on July 16, 1996 (with certain options described below) be considered eligible for Medicaid. Thus, persons who meet the AFDC family composition rules (i.e., deprivation requirements) and the income and resource standards using the methodologies in place in a state as of July 16, 1996 should be eligible for Medicaid. Section 1931 was created to ensure that persons who would have been eligible for benefits prior to the passage of PRWORA would continue to be eligible for Medicaid, especially if states adopted more restrictive eligibility standards for TANF than had been in place for their AFDC programs.

Continued Reliance on AFDC Income and Resource Standards and Methodologies

While the 1996 welfare law repealed AFDC, replacing it with TANF, certain references to the AFDC program remain intact with respect to determining eligibility for Medicaid. In particular, the 1996 welfare law retained AFDC income and resource standards and methodologies for purposes of determining Medicaid eligibility.

Section 1931 requires states to establish income and resource standards for Medicaid eligibility at the levels in effect as of July 16, 1996, with certain options. The state may lower its standards to May 1, 1988 levels, an option available to states since passage of the Family Support Act of 1988 (PL 100-485). The law also permits states to increase standards by a percentage no greater than the percentage increase in the consumer price index for all urban consumers. These income and resource standards are used to determine whether a family would have received an AFDC payment as of July 16, 1996.

Section 1931 also permits the state to use less restrictive AFDC income and resource methodologies than the methodologies used under the State plan in effect as of July 16, 1996. Income and resource methodologies are the methods (e.g., disregards, exclusions, allocations) used to establish the amount of a family's countable income and resources. The Health Care Financing Administration (HCFA) has defined a methodology as less restrictive if additional individuals are made eligible for Medicaid and no individuals who are otherwise eligible are made ineligible.(1) Thus, although Section 1931 requires states to use the AFDC income and resource standards in effect on July 16, 1996, this section also gives the states considerable flexibility in defining Medicaid much more liberal eligibility criteria due to the states' unfettered ability to use less restrictive income and resource methodologies. For example, states could choose to disregard 50 percent of all earned income or to disregard the total value of one car when determining Medicaid eligibility.(2)

Authority to Continue Certain IV-A Waiver Provisions

Under Section 1931(d), states also have the option to continue indefinitely certain provisions of IV-A waivers, which had been previously approved as part of the states' Section 1115 welfare reform demonstration projects, that affect Medicaid eligibility. These IV-A waivers must have been submitted prior to August 22, 1996 and approved by July 1, 1997. As interpreted by HCFA in a February 1997 letter to the states, the allowable waivers provisions to be continued are income and resources standards and methodologies, deprivation requirements (e.g., the 100-hour rule), and caretaker requirements. While states can also change the income and resources standards and methodologies through the state Medicaid plan amendments, the only mechanism for changing the deprivation and caretaker requirements is by continuing these provisions of existing IV-A waivers.

Transitional Medicaid Linked to Section 1931 Eligibility

Since 1990 states have been required to provide transitional Medicaid benefits of up to one year to persons who lost AFDC eligibility as a result of increased hours of, or increased income from, employment. To be eligible for transitional Medicaid benefits, a person must have received AFDC in at least three of the preceding six months. With passage of the 1996 welfare law de-linking Medicaid eligibility from TANF, the trigger for transitional Medicaid benefits became the receipt and loss of 1931 Medicaid eligibility due to an increase in hours or earnings rather than the receipt and loss of eligibility for cash benefits under TANF; eligibility now depends upon receipt of Medicaid under Section 1931 in at least three of the preceding six months. Prior to the enactment of PRWORA, many states had used the IV-A waiver process associated with the welfare reform demonstrations to extend the availability of transitional Medicaid benefits to 24 months and to change the eligibility requirement of three months to one month. These waivers are known as Title XIX waivers. Unlike the IV-A waivers, Section 1931 does not give states the authority to continue their Title XIX waivers. States may, however, seek new Title XIX waivers in order to continue expanded transitional Medicaid benefits and the relaxed eligibility standard for recipients of cash assistance.

Medicaid Eligibility Outside of Section 1931

In addition to Section 1931 there are other eligibility routes to Medicaid for low-income families, the most significant of which are the so-called poverty-level pathways. The 1996 welfare law did not alter these pathways. The poverty-level pathways provide Medicaid coverage to pregnant women and children based solely on their income, and in a few states, resources; there are no family composition requirements. Federal Medicaid law specifies certain minimum income standards for these populations although states may exceed the federal requirements at their option. At a minimum, states must provide Medicaid to pregnant women and children up to age six with incomes up to 133 percent of the federal poverty level. Children between six and 19 born after September 30, 1983 with incomes up to 100 percent of the federal poverty level also qualify for Medicaid on a mandatory basis. Additionally, states have the option to provide Medicaid coverage to pregnant women and infants up to age one with incomes at or below 185 percent of the federal poverty level. In general, these additional pathways provide considerable access to Medicaid for poor children,(3) but with the exception of pregnant women, provide no expanded access for adults.

Seventeen states have implemented "comprehensive health care reform demonstrations" by using the Section 1115 waiver process to gain HCFA approval for reorganizing their state Medicaid programs into mandatory managed care programs for most Medicaid beneficiaries. As part of this waiver process, six states have expanded Medicaid eligibility to include a portion of low-income adults up to the federal poverty level in both single parent and intact families.(4) The approach to expanding Medicaid eligibility through 1115 waivers, however, involves a very challenging and demanding process for states as well as substantial financial considerations and it is not likely that many states will use the 1115 waivers as a mechanism to expand Medicaid eligibility. Thus, Medicaid eligibility for adults as parents and caretaker relatives will continue to be tied primarily to the requirements set forth under Section 1931.

The provisions of Section 1931 are intended to ensure that, at a minimum, families who would have been eligible for Medicaid prior to the implementation of PRWORA will continue to be eligible for Medicaid post-PRWORA. Section 1931 also grants to the states considerable flexibility to modify their income and resources methodologies - states are free to use this new flexibility to expand access to Medicaid by, in effect, liberalizing the eligibility criteria. (Table V-1 provides an outline of the states' post-PRWORA options for affecting Medicaid eligibility.) With respect to formal diversion programs, states must consider two questions: 1) how do their formal diversion programs affect Medicaid eligibility for families, and 2) what changes in states' Medicaid policies might be necessary to counteract the negative effects of diversion programs. Our preliminary analysis of state efforts to divert families from the welfare system indicates that the implementation of diversion programs is likely to make numerous families, primarily the adult members, ineligible for Medicaid unless the states decide to take advantage of their flexibility under Section 1931 to expand resource and income disregards.(5)

Table V-1: State Options to Affect Medicaid Eligibility Post-PRWORA
1. Modify income and resource standards and methodologies. Section 1931(b) of the PRWORA

Nominal HCFA Approval of State Medicaid Plan Amendment

Must apply uniformly to all populations with type of income or resource May target certain income/resources for disregards (e.g., lump sum diversion payment; first three months of earned income)  Indefinite
2. Continue Title IV-A waivers terms affecting Medicaid eligibility. Section 1931(d) of the PRWORA 

Nominal HCFA Approval

Waiver submitted prior to 8/22/96 and approved on/before 7/1/97 

Limited to waivers of: income and resource standards and methodologies; deprivation requirements; and caretaker relative requirements 

Individuals subject to IV-A waivers in some states retain Medicaid eligibility if they would have been eligible in the absence of the demonstration - in this case state must continue welfare reform demonstration on exactly same terms  Indefinite - even though welfare reform demonstration may expire or be terminated by state, IV-A waiver terms affecting Medicaid eligibility can continue indefinitely 
3. Continue Title XIX waivers.  

Seek new Title XIX waivers.

Section 1115 of the Social Security Act 

HCFA Approval for both continuation and new 

Existing waiver is not required to meet budget neutrality test 

New waiver approved after 8/22/96 must comply with budget neutrality requirements


Expire at end of IV-A demonstration
4. Continue existing Section  
1115 Medicaid waivers.  

Seek new Section 1115 Medicaid waivers.

Section 1115 of the Social Security Act 
HCFA approval
Waiver must comply with budget neutrality requirements May expand eligibility to near poor Waivers usually limited to 5 years
5. Expand eligibility for  pregnant women and children Section 1902r(2) of the Social Security Act   May apply more liberal income and resource methodologies for pregnant women and children  Indefinite