Description and Assessment of State Approaches to Diversion Programs and Activities Under Welfare Reform. C. Potential Impact of Lump Sum Diversion Programs on Medicaid Eligibility


To date, 19 states have implemented lump sum payment diversion programs as components of their TANF programs, with several additional states anticipating implementation of lump sum payment programs this year. (See Table I-1 and the discussion in Chapter 2) Thus, the opportunity to affect Medicaid eligibility for a substantial number of persons is significant.

In general, states that have implemented lump sum payment diversion programs do not view these diversion programs as interfering with continued access to Medicaid. In fact, interviews with state officials revealed quite to the contrary. States reported that they were ensuring Medicaid coverage for families who would be eligible under Section 1931 or through one of the other eligibility pathways. All but one of the states use joint TANF/Medicaid application forms.(6) In addition, several states reported that they have retained categorical eligibility for Medicaid. (A state may provide categorical eligibility if a state is able to adopt policies under Section 1931 that match its TANF program.) In these cases, persons who are eligible for TANF are automatically eligible for Medicaid. The states generally reported that persons diverted under lump sum payment programs must have been found eligible for TANF.

Despite assurances from states that Medicaid eligibility has not been impacted adversely by diversion programs, issues associated with lump sum payment diversion programs were uncovered that suggest potential areas where problems may arise. Further analysis also exposed uncertainty and lack of clarity about to use the provisions of Section 1931 to address these potential problems. To explore these issues further this section describes how a lump sum payment diversion program may impact Medicaid in general, reviews federal guidance on Medicaid in light of changes made under the 1996 welfare law, considers one state (Utah) that has addressed Medicaid issues in light of its diversion program, and examines one state (Arizona) that is weighing available options against the impact of a lump sum payment program on Medicaid eligibility before proceeding with the implementation of its diversion program.

The Importance of Rules Affecting the Treatment of Lump Sum Diversion Payments

In designing lump sum payment diversion programs, states may choose to provide families with a cash payment, voucher, or both. In the review of states with lump sum payment programs, 18 of 22 states have opted to provide primarily cash payments directly to families. In these cases, a state must then subject the lump sum diversion income paid to families to the income standards and methodologies authorized under Section 1931 of the 1996 welfare law. While a state must count all earned and unearned income, including a lump sum payment, in determining eligibility for Medicaid vis-à-vis a states July 16, 1996 AFDC income and resource standards (i.e., 1931 Medicaid eligibility), a state has greater flexibility in establishing less restrictive income methodologies. Thus a state may choose to disregard completely a lump sum diversion payment and do so by indicating this income methodology in their state Medicaid plan.

Generally a lump sum payment is counted as income in the month in which it was received. While income standards vary significantly by state, a lump sum diversion payment is likely to exceed the states July 16, 1996 AFDC income standards, thereby making an individual and/or family receiving lump sum diversion payments ineligible for Medicaid under Section 1931. As just noted, to prevent these losses, a state must decide to disregard the lump sum diversion payment as income and show this disregard in its state Medicaid plan. Parents and caretaker relatives, the majority of whom are women, are the most likely to be affected adversely by the states' failure to disregard lump sum diversion payments; they are left without an alternative route to Medicaid. In addition, older adolescents in the household who do not fall within the age limits for the poverty-level pathways could also lose their only basis of Medicaid eligibility.(7) Therefore, the states can assure that individuals who opt to participate in a lump sum payment diversion program do not forego eligibility for Medicaid for themselves or members of their families by using the state plan amend approach.

The Potential Loss of Transitional Medicaid

Possibly of even greater long-term consequence for diversion recipients is the potential loss of transitional Medicaid. For example, assume that an individual accepts a lump sum diversion payment during the first month and finds a job during the second month. The income earned during the second month must be counted toward Section 1931 Medicaid eligibility. This earned income is likely to exceed Section 1931 income standards, thereby rendering the adult (usually a mother) ineligible for Medicaid; the children (except older adolescents) would likely be eligible for Medicaid under one of the poverty-level pathways. Additionally, because the adult/caretaker relative secured employment during the second month and became ineligible for 1931 Medicaid due to excess income, he/she also would not be eligible for transitional Medicaid benefits having failed to be 1931-eligible for at least three of the six preceding months, as required to qualify for transitional Medicaid benefits. As will be discussed below, many states may not be fully aware of their options under Section 1931 to remedy these problems.

Federal Guidance on Structuring State Medicaid Programs

The Health Care Financing Administration (HCFA), the agency with responsibility for administering the Medicaid program, has not issued any guidance to states specifically addressing diversion programs in general or lump sum payment programs in particular. Rather, HCFA has issued guidance to states on the implementation of Section 1931 of the Social Security Act and the continuation of AFDC demonstrations conducted under Section 1115 of the Social Security Act.(8) While not directly related to diversion programs this guidance is instructive.

With regard to determining Medicaid eligibility under Section 1931, HCFA interprets the requirements of this section to mean that states must use the income and resource standards and methodologies, which were in effect on July 16, 1996, unless they choose one of the following three options.(9) States can lower income standards to those in effect on May 1, 1988; states can raise income and resource standards in accordance with increases in the consumer price index

since July 16, 1996; and states can choose more liberal methods to determine the amount of a family's countable income and resources. A fourth option for states is to continue certain provisions of existing welfare reform demonstration 1115 AFDC waivers, provisions that affect deprivation requirements as well as income and resource methodologies. As noted above, however, HCFA recently promulgated a regulation that gives all states the option under Section 1931 to waive the deprivation requirements.(10)

For the small number of states that started their lump sum diversion payments under a welfare reform demonstration waiver, HCFA's policy regarding the continuation of these IV-A waiver terms may be especially important. HCFA issued a letter to states clarifying that states may continue to use IV-A waivers only for three purposes: states may continue waivers of 1) income and resource standards and methodologies, 2) deprivation requirements,(11) and 3) requirements that a child live with a specified relative.(12) States may not, therefore, continue waivers that fall outside one of these three categories. For example, a state may not continue a waiver that deems a person to be an AFDC recipient. According to HCFA's interpretation, the AFDC program has been repealed - except for purposes of determining Medicaid eligibility. Thus, IV-A waivers are allowed to continue only to the extent that they affect eligibility criteria.

HCFA also has stated that the 1996 welfare law does not provide states with the authority to continue Title XIX waivers indefinitely as is the case for IV-A waivers. For example, if a state wishes to continue to provide an additional 12 months of transitional Medicaid benefits to individuals who lose cash assistance because of earnings from employment, or continue to disregard the three-month requirement, the state must contact their HCFA project officer and seek approval for implementing such a continuation. The continuation is effective only until the expiration of the welfare reform/AFDC demonstration and the state would not be required to demonstrate budget neutrality. However, any new Title XIX waivers, post-August 22, 1996, will be subject to the budget neutrality test usually associated with Section 1115 waivers.

State Options to Address Impact of Diversion Programs on Medicaid Eligibility

States can ameliorate the potential losses of Medicaid eligibility by applying less restrictive income methodologies to income received by a family. A state's willingness to utilize such methodologies probably depends on the cost to its Medicaid budget. Addressing the potential losses in Medicaid eligibility - for traditional and extended benefits - has various financial consequences, depending on the number of persons rendered newly eligible for Medicaid as a result of the disregard. To reduce the loss of traditional Medicaid eligibility for persons who accept a lump sum diversion payment, a state may disregard a specific type of income (i.e., lump sum diversion payment). Most states with lump sum payment diversion programs have specified maximum lump sum payment amounts. With the maximum amount of the disregard known, a state could estimate the cost to its Medicaid budget by forecasting the number of persons who would be made newly eligible for Medicaid by the disregard. This disregard may have greater appeal because the scope of the disregard is limited, both by the amount and by the population, i.e., only persons electing a lump sum diversion payment would be eligible for the disregard. Using the income disregards in this manner is perhaps the easiest and simplest way to address the Medicaid eligibility problems associated with lump sum payment diversion programs.

On the other hand, the use of the income disregards to address Medicaid eligibility issues associated with obtaining a job immediately, either before receiving TANF assistance or shortly after receiving a lump sum payment, presents a more complicated solution. States may be more likely to resist addressing the potential losses in transitional Medicaid for employed persons because of the greater financial exposure likely to result from such an action. The challenge here is to ensure that an individual retains Medicaid eligibility for three months in order to qualify for transitional Medicaid. A state wishing to apply a more liberal income methodology for employment-related income must apply it uniformly across all potentially Medicaid-eligible persons. In other words, a state that disregards a certain amount of earned income to alleviate the loss in transitional Medicaid benefits for persons participating in a lump sum diversion payment program, e.g., disregarding entirely the first three months of earned income, must allow all persons to disregard that amount of earned income in determining eligibility for Medicaid under 1931. An alternative approach to income disregards could involve the continuation of the Title XIX waivers changing the three-month requirement to one month.(13) In order to use Title XIX waivers to benefit diverted TANF applicants, the states may need to apply for new Tittle XIX waivers. This approach is discussed in more detail below. Table V-2 provides an outline of state options for preserving Medicaid eligibility within the context of state formal diversion programs.

As the following discussion about the experiences of two states with their lump sum payment diversion programs illustrates, states have a range of choices to make about how to assure continued Medicaid eligibility under formal diversion programs. Table V-2 represents the range of these choices. This discussion also illustrates that HCFA's guidance with respect to how states can structure their Medicaid programs since the implementation of welfare reform may have important implications for lump sum payment diversion programs and recipients' eligibility for Medicaid.

Table V-2:
State Options to Assure Medicaid Eligibility for Traditional and Transitional Medicaid Benefits for Persons Who Are Diverted
  Traditional Medicaid  Transitional Medicaid Traditional Medicaid Transitional Medicaid
1. Modify income and resource standards and methodologies. Disregard lump sum diversion payment in first month   Exclude first three months of earnings  
2. Continue Title IV-A waivers affecting Medicaid eligibility. Modify how to count/disregard lump sum diversion payment   Modify how to count/disregard earned income  
3. Continue Title XIX waivers.

Seek new Title XIX waivers.

  Provide Medicaid eligibility for persons with less than 3 months of eligibility in previous 6 months

Provide additional 12 months of Medicaid eligibility

  Provide Medicaid eligibility for persons with less than 3 months of eligibility in previous 6 months

Provide additional 12 months of Medicaid eligibility

4. Continue existing Section 1115 Medicaid waivers. 

Seek new Section 1115 Medicaid waivers.

Expand Medicaid eligibility to near poor adults   Expand Medicaid eligibility to near poor adults  
5. Expand Medicaid eligibility for pregnant women and children. Modify how to count/disregard lump sum diversion payment   Modify how to count/disregard earned income