Modified Adjusted Gross Income (MAGI) Income Conversion Methodologies. Introduction


The Affordable Care Act extends Medicaid to low-income adults and provides tax credits for coverage through the new Affordable Insurance Exchanges (Exchanges).1  A key component of these coverage expansions is the use of the tax concept of Modified Adjusted Gross Income (MAGI) to assess financial eligibility for Medicaid and the Children’s Health Insurance Program (CHIP) and for applicants for Advanced Premium Tax Credits and Cost Sharing Subsidies in the Exchanges.2   To make the transition to MAGI-based eligibility for Medicaid, states must convert their existing net income standards to equivalent standards based on MAGI.  States are required to submit MAGI-based Medicaid eligibility standards to the Department of Health and Human Services (Department) for approval by the Centers for Medicare and Medicaid Services (CMS). 

To assist states with this conversion effort, the Department developed the “Standardized MAGI Conversion Methodology” as the recommended option for states to develop their standards.  This recommendation was the product of more than a year’s work within the Department and with states, including 10 pilot states, to test the feasibility of potential conversion methodologies. This paper provides an overview of the recommended method, as well as alternative conversion methods considered.  The paper is intended to provide insight into the complexity of the conversion process and context for individuals, states, and interested groups seeking to understand how the Department developed the recommended method, and illustrate the analytic challenges encountered by the Department while testing these methods.  This paper will also provide additional context for states that are considering proposing alternative conversion methodologies to CMS3 for approval.

The recommended Standardized MAGI Conversion Methodology converts current state net income standards to equivalent MAGI standards by taking the average disregard amount for all individuals within a band consisting of 25 percentage points of FPL below the current net income standard and adding that amount to the current net income standard to produce the MAGI standard. This methodology is also referred to as the “Marginal Disregard Methodology.” However, states may propose and implement other methodologies and processes for MAGI conversion with federal approval.  Guidance from the CMS to state health officials on the conversion of net income standards to MAGI equivalent income standards was published on December 28, 2012 (“CMS Guidance”).4 As noted in that guidance, states have flexibility to develop an alternative method. Because states have unique knowledge of their specific circumstances, the Department will consider for approval alternative methodologies that meet the criteria for evaluation that the Department applied in developing its recommended method, as discussed in more detail below. 

Key terms

To assist with the discussion of Medicaid eligibility standards and the analytic work behind the Department’s “Standardized MAGI Conversion Methodology,” key terms are defined as follows:

  • Gross Income:  Gross income is the total of all types of income included under a state’s Medicaid/CHIP definition of income in place on March 23, 2010.  Gross income is measured before incorporating disregards and includes income types such as earned income, child support income, and other income as applicable under state rules.
  • Disregard: A disregard is a portion of gross income that is not included in net income.5 Within federal statutory and regulatory provisions, each state sets its own rules about what income is disregarded for purposes of Medicaid eligibility. Under pre-Affordable Care Act law, states may choose to disregard a percentage of an individual’s income or certain categories of income, such as child care expenses.
  • Net Income:  Net income is the income remaining after applicable disregards are subtracted from gross income and any state and eligibility category specific income counting and household composition rules are applied. The definition of net income is guided by federal law but varies by state.  Today (that is, before the effective date of the new Medicaid eligibility rules in the Affordable Care Act), Medicaid eligibility is determined by comparing net income to the applicable income eligibility standard.
  • MAGI Income: MAGI is the total of all types of income as defined under Section 36B(d)(2) of the Internal Revenue Code of 1986. MAGI income as defined for Medicaid eligibility in the Notice of Proposed Rulemaking (NPRM) published on August 17, 2011, is largely aligned with although not exactly the same as the tax code definition of MAGI.6 The definition of MAGI does not vary by state. Effective January 1, 2014, Medicaid eligibility for most groups of individuals will be determined by comparing MAGI-based income to the applicable income eligibility standard.  As noted in Footnote 11 below, the Department’s analysis of conversion methodologies focused primarily on the household composition and income counting rules of MAGI.
  • Income Counting:  Under the Medicaid rules in effect prior to January 2014, certain types of income are included, or counted, for purposes of determining eligibility for coverage and benefits.  Examples of types of countable income include earned income, child support, workers’ compensation, and other income sources.
  • Household Composition:  Both current Medicaid rules and new MAGI-based rules use the concept of a household unit to determine whose income within the household must be counted toward the applicant’s or beneficiary’s income. However, the current rules and new rules have different definitions of household.  Current Medicaid rules generally prohibit counting income from anyone other than the person seeking coverage or an individual who is legally responsible for that person (such as a parent or spouse).  Under MAGI, a “household” generally includes the primary tax payer and his or her tax dependents (e.g., children), and “household income” is defined as the sum of the MAGI of the primary taxpayer and of each dependent who is required to file a tax return for income tax purposes. 
  • Net Income Standard:  The net income standard is the income eligibility standard for Medicaid and CHIP eligibility under the eligibility rules in effect prior to MAGI conversion. This varies by state and eligibility group.  As used in this paper, this term has the same meaning as pre-MAGI Medicaid standard or pre-ACA Medicaid standard.
  • Converted Standard:  The converted standard is the new eligibility standard that results from adjusting for the MAGI definition of income mandated by the Affordable Care Act. As used in this paper, this term means the new standard resulting from application of the conversion methodology.
  • SIPP Data: The Survey of Income and Program Participation (SIPP) is administered by the US Census Bureau and provides information on cash and non-cash income types, household composition, familial relationships, and other administrative and enrollment variables relevant to implementation of MAGI conversion.
  • State Data: These data are extracted from the eligibility systems of states and territories.  State data generally include information about applicants or enrollees that is needed to make a Medicaid eligibility determination. State data vary widely because they are based on the unique eligibility rules and system designs of each state.
  • Federal Poverty Level (FPL): This document uses FPL as a shorthand to refer to the federal poverty guidelines issued by the Department.7  For many eligibility groups, states set a net income standard based on a certain FPL.  For example, in Arizona, children under age 1 whose household income does not exceed 140% of FPL are eligible for Medicaid.

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