Opportunities under the Affordable Care Act for Human Services Programs to Modernize Eligibility Systems and Expedite Eligibility Determination. Some basic ground rules of the cost-allocation exception


The cost-allocation exception has raised the proportion of eligibility system investment costs paid by Medicaid to approximately 88 percent,10 greatly increasing the feasibility of modernizing eligibility IT. The August 2011 letter from HHS and USDA contained language broadly supportive of integration efforts, explaining that the exception “allows States the opportunity to thoughtfully consider the benefits of integrating the eligibility determination functions across health and human services programs... Integrated systems can realize efficiencies for States and better customer service for families.”11 This language reflected OMB’s support for efficiency gains that can result from such integration across the boundaries of multiple programs.

The letter also explained that the cost allocation exception “allows human services programs … to utilize systems designed specifically for determining a person’s eligibility for certain health coverage programs (Medicaid, CHIP, and premium tax credits and cost sharing benefits through the Exchange) without sharing in the common system development costs, so long as those costs would have been incurred anyway to develop systems for the Exchanges, Medicaid, and CHIP.” (Emphasis added.) Even if an expenditure incidentally benefits a health coverage program, it cannot qualify for the cost-allocation exception unless it “would have been incurred anyway” for purposes of the health coverage program.

The letter further noted the “short timeframe” available “to accomplish the eligibility system changes needed to implement Affordable Care Act health insurance changes...” A follow-up, 2012 letter from HHS and USDA emphasized that favorable federal funding is limited to goods and services that are furnished by December 31, 2015. If a state contracts with and pays an IT vendor before that date but some goods and services have not yet been provided, the goods and services that remain to be furnished cannot benefit from either 90 percent federal funding or the cost allocation exception. The letter explained:

“States would need to incur costs for goods and services furnished no later than December 31, 2015 to make use of this exception. This would mean that if an amount has been obligated by December 31, 2015, but the good or service has not yet been furnished by that date, then such expenditure must be cost allocated as currently required under OMB Circular A-87.”12

The letter went on to explain that if a state will be requesting funding for only Medicaid and CHIP IT, it should go through the Advance Planning Document (APD) process with CMS. The APD process involves a state submitting its plan for IT modernization and obtaining federal approval. If funds are also being sought from other federal programs, the state’s APD should be sent to the corresponding federal program offices. In addition, the state could send its proposal “if necessary, to [the Administration of Children and Families’] Office on Administration,” which “acts as the clearinghouse for all HHS-related APDs that include two or more HHS entitlement programs and coordinates review with [the USDA’s Food and Nutrition Service, or FNS].” Further, as a prudential matter, a state would likely be well-advised to keep all affected federal offices informed of IT development efforts that may affect non-Medicaid programs, even if Medicaid is the sole provider of federal funds under the cost-allocation exception.

Given the many other issues facing state Medicaid agencies, it may be important for human services officials to carefully track the APD and work behind the scenes to ensure that it moves forward expeditiously. Nevertheless, CMS will require the state Medicaid agency to take the lead in submitting a Medicaid-specific APD, responding to CMS questions, and serving as the state entity formally responsible for the APD.

According to other CMS materials, a Medicaid/CHIP APD that seeks a cost allocation exception should add the following information to the standard contents of a Medicaid APD:

  • A narrative detailing the human services programs that will eventually be included;
  • A narrative explaining how the state will “identify, capture, and implement the foundational needs” of the applicable human services programs; and
  • The identity of human services agencies and staff working on the project’s design and implementation.13

CMS guidance further explains that “any expansion of these services or increase in capacity beyond that required for health programs must be cost allocated to the benefitting program, consistent with current practice under OMB Circular A-87;” and that the exception applies only to the development of automated eligibility systems, not to their operation and maintenance, which remain subject to standard cost allocation rules. To qualify for the exception, IT investments must satisfy all conditions and standards for enhanced funding under Medicaid rules, which require a consumer-friendly interface supported by a 21st-century IT infrastructure.14

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