Medicaid Section 1906

Premium assistance was first authorized in Medicaid by the Omnibus Budget Reconciliation Act (OBRA) of 1990 as a mechanism to reduce Medicaid spending. As originally enacted, section 1906 of the Social Security Act required states to identify cases in which enrollment in a group health plan would be cost effective for Medicaid-eligible individuals and also required such enrollment as a condition of Medicaid eligibility. It was believed that Medicaid spending would be reduced under this arrangement as some Medicaid costs would be offset by the employer contribution. However, a variety of administrative barriers, as well as the low number of eligible individuals with coverage available through an employer, prevented most states from utilizing this mechanism on a broad scale. As a result, the requirement was changed to a state option in the Balanced Budget Act (BBA) of 1997.

Medicaid-eligible individuals enrolled in premium assistance (HIPP) must receive the same benefit package and cost-sharing protections as any other Medicaid beneficiary. This is accomplished by providing “wrap-around” coverage that supplements the employer health plan benefits and cost sharing. The coverage offered through HIPP must be cost effective—that is, the Medicaid program’s contribution toward employer coverage, including any wrap-around costs, must be no greater than what the state would have otherwise spent through the direct coverage program. States may also enroll family members who are not eligible for Medicaid in employer coverage when that enrollment is necessary to achieve coverage of Medicaid-eligible family members.⁵ For example, Medicaid can pay premiums for a noneligible parent to enroll in an employer health plan so that a Medicaid-eligible child can be enrolled in that plan. However, noneligible family members do not receive any wrap-around benefits.

In most states, HIPP has been used primarily to target Medicaid-eligible individuals with high medical expenses, such as individuals with HIV/AIDS. However, the four states that operate the largest premium assistance programs under the HIPP authority—Iowa, Pennsylvania, Rhode Island and Texas—do not limit their programs to high-cost eligibles. In fact, the majority of enrollees in these states are families and children, which may be a major contributor to the programs’ relative success. Several other states’ PA programs began as HIPP programs but have since used the section 1115 waiver authority to utilize the increased flexibility and expand program enrollment.

Premium Assistance and SCHIP

The enactment of the bipartisan legislation authorizing the SCHIP program in the BBA of 1997 included provisions designed to encourage increased public-private interaction. The legislation permits states to provide coverage to children and families eligible for SCHIP by subsidizing group health plan premiums. The rules on premium assistance for separate (non-Medicaid) child health programs under SCHIP require that eligible children receive one of the benchmark benefit packages, an actuarially-equivalent benefit package, or a “secretary-approved” benefit package as identified in federal statute.⁶ States also have the option to supplement, or wrap around, the benefits offered by the group health plans when those plans do not meet the SCHIP benchmark requirements. Cost sharing must be “nominal” as defined in the SCHIP regulations for children with family incomes at or below 150 percent of the federal poverty level (FPL), and charges may not exceed 5 percent of the family’s income for children of all income levels.

Like Medicaid, SCHIP premium assistance programs must be determined to be cost effective, meaning the cost of covering the children through ESI must not exceed the amount it would cost to cover eligible children through the state’s direct-coverage SCHIP program. However, in a significant departure from Medicaid, states with separate SCHIP programs must apply for a special waiver when noneligible family members are to be covered and meet a stricter cost-effectiveness test. Under this “family coverage waiver,” the cost of covering both eligible and noneligible family members must not exceed the cost of covering only the SCHIP-eligible children. This test has proven to be virtually impossible to meet because of high premium costs in the private market. The theory that the employer contribution would be sufficient to reduce the family premium below the cost of covering the children alone has not proven to be valid.

The SCHIP regulations also require that PA programs have procedures in place that are designed to prevent SCHIP from substituting for private coverage, commonly known as “crowd out.” Children must not have had coverage under a group health plan during the six months prior to enrollment; this six-month waiting period is intended to discourage parents from dropping existing coverage in favor of SCHIP.⁷ However, reasonable exceptions are permitted, including cases of economic hardship.

Programs operating under SCHIP authority have been extremely limited. Maryland and Virginia are the only two states that have operated PA programs under an approved SCHIP state plan.⁸ Maryland’s legislature terminated the program as of July 1, 2003, because of low enrollment and high administrative costs. Virginia’s program operated for a number of years with very low enrollment. In 2005, Virginia made changes to its program under a HIFA waiver and, although enrollment has grown, SCHIP children continue to make up only 14 percent of the total population receiving premium assistance in the state.⁹ Covering only children (as opposed to whole families) within a narrow band of eligibility appears to be a contributing factor to low enrollment for both states.

Premium Assistance Through Section 1115 Waivers

States have more successfully used the flexibility available through section 1115 demonstration projects, including HIFA waivers, to implement PA programs.¹⁰ Premium assistance programs that operate under section 1115 authority are not required to meet some of the Medicaid and SCHIP requirements that have impeded enrollment. Waiver authority is also desirable because section 1115 allows states to provide coverage to people (such as parents or childless adults) who are not otherwise permitted to be covered under the Medicaid and SCHIP statutes.¹¹

Beginning in the mid-1990s, a few states sought the flexibility available through section 1115 demonstration projects to implement PA programs.¹² These states generally wanted to expand coverage to whole families rather than only those individuals who met the Medicaid eligibility criteria and also wanted to include the newly eligible SCHIP children in their expanded Medicaid populations. The Health Care Financing Administration (HCFA, now CMS) required the premium assistance components of these Medicaid demonstrations to follow the SCHIP statute and related guidance, which provided somewhat more flexibility than Medicaid in terms of benefit package and permissible cost sharing for children in the expansion groups. The demonstrations also followed SCHIP guidance for crowd out prevention procedures. Despite these small increases in flexibility, program growth has remained slow and states have struggled to balance the need and desire to pursue this source of potential savings with the programmatic and administrative challenges created by the governing statute, regulations, and policy.

Under the HIFA initiative, CMS goes one step further by requiring states to include premium assistance as part of their project proposals. HIFA offers greater flexibility in implementing PA programs than had been approved in previous demonstrations. States are no longer required to comply with all of the benefits, cost-sharing, and cost-effectiveness requirements that had previously deterred some states from pursuing PA programs. For example, in the Illinois HIFA waiver program, group health plans do not have to meet the specific benefit or cost-sharing requirements for either Medicaid or SCHIP, and the state is not required to provide wrap-around benefits.¹³ Enrollees receive the benefits covered by the employer plan and pay the applicable cost sharing. However, CMS required as part of the demonstration approval that families have a choice of whether to enroll in their employer’s group health plan or the state’s public program. Similarly, Massachusetts and New Jersey have modified some features of their existing section 1115 demonstration projects in order to utilize the increased flexibility under HIFA. In fact, Massachusetts will use the coverage expansion included in its Medicaid section 1115 waiver as a building block for its recently enacted universal coverage plan. The expansion will help low-income individuals meet the individual mandate, which requires all Massachusetts residents to obtain health insurance coverage. For those with higher incomes, the plan includes several insurance market reforms and broad-based state subsidies designed to make it easier for individuals to afford private coverage.

HIFA offers greater flexibility in implementing premium assistance programs than had been approved in previous demonstrations.

In the early years of the HIFA initiative, despite CMS’s keen interest in premium assistance, only four states—Illinois, Oregon, New Mexico, and Utah—included premium assistance components as a central part of the demonstration design. Oregon and Illinois refinanced and expanded existing state-funded PA programs. Oregon has had the most success with its program, where enrollment has recently grown to almost 16,000 people. New Mexico delayed implementation of its program until 2005, largely due to a change of administrations in the state. Utah has implemented its PA program, but it has enrolled only 61 individuals thus far.

In order to meet the PA component requirement, several other states negotiated plans to conduct feasibility studies rather than actually pursuing PA programs. Interestingly, the results of the feasibility studies in Arizona, Colorado, and California indicated several implementation barriers, including limited availability of ESI for low-wage workers, rapidly rising premium and cost-sharing requirements, along with a variety of administrative challenges for the states.¹⁴ Consequently, those three states have not yet moved forward in implementing PA programs.

More recently, several states have expressed interest in pursuing PA programs under HIFA and have voluntarily included implementation plans as part of their waiver proposals. Oklahoma’s recently implemented PA program, O-EPIC, helps small business owners with 25 or fewer employees purchase health insurance in the private market for employees who earn less than 185 percent of the FPL. Thus far, 369 businesses and over 700 people have been enrolled. Arkansas has received approval for a demonstration centered around a public-private partnership that relies heavily on the ESI market. Eligible employers (those with 2 to 500 employees) will voluntarily participate in the program but will be required to provide coverage to 100 percent of their employees, regardless of income. In order to reduce the effect of crowd out, the program will be limited to employers who have not offered health insurance coverage to their employees as a group benefit for the 12 months prior to their decision to participate in the program. The state is also exploring the feasibility of extending eligibility to individuals who are not affiliated with participating employers for phase II of the demonstration. The state estimates potential coverage of up to 80,000 enrollees through the demonstration.¹⁵

But Does It Save Money?

Limited information is available to show conclusively that premium assistance saves state and federal dollars. Any estimates of cost effectiveness must be viewed with caution because each state calculates cost effectiveness differently, particularly with regard to the amount of administrative costs included. However, there is evidence to suggest that PA programs produce cost savings in at least some states. Iowa estimates that its HIPP costs are roughly 30 percent below the standard Medicaid program, and Rhode Island estimates savings of approximately $1 million annually for each 1,000 people enrolled for a full year.¹⁶ Pennsylvania—one of the largest PA programs with over 23,000 enrollees—estimates that savings for fiscal year 2003 reached $76.3 million.¹⁷ A recent study of five states (Illinois, New Jersey, Oregon, Rhode Island, and Utah) found that Rhode Island and New Jersey appear to be saving money on a per-enrollee basis; however, sufficient data were not available for the other states.¹⁸ Further, some analysts speculate that any savings are merely a cost shift to the employer and, ultimately, to low-income workers who pay for premium increases in the form of lower wages. However, no research is available that has examined the impact of PA programs on the wages of low-income workers.

Effective Strategies

Several programmatic features appear to contribute to PA programs’ success.

• Programs with larger enrollment tend to have wider bands of eligibility and target whole families rather than just children. States’ efforts to streamline and expand eligibility categories—for example, by covering all children under age 19 with incomes up to 200 percent of the FPL and by tying eligibility for adults and children exclusively to income instead of to eligibility for welfare programs or disability status—have made the Medicaid and SCHIP programs less complicated administratively and have helped increase the pool of potential premium assistance eligibles. Streamlining eligibility categories can help prevent “fragmentation” of families, where some members are eligible for premium assistance while others are not. Making whole families eligible makes the cost-effectiveness test easier to meet.
  For example, both Massachusetts and Rhode Island cover parents and children in their Medicaid programs and make premium assistance available to mandatory Medicaid populations, as well as to expansion populations under their section 1115 demonstrations. Massachusetts has enrolled over 33,000 people in its PA program, and Rhode Island has enrolled more than 5,000. Rhode Island has reported that premium assistance is found to be cost effective much more frequently for families with incomes below 185 percent of the FPL, where both parents and children are eligible, than for families with incomes above 185 percent of the FPL, where only children are eligible.²⁰ Conversely, Maryland’s program, which covered only children between 200 and 300 percent of the FPL, enrolled slightly less than 200 children. Similarly, Virginia’s program limits eligibility to children with family incomes between 100 and 200 percent of the FPL and has enrolled 229 children in premium assistance to date.
• Mandatory enrollment appears to make a difference. Not surprisingly, states find that participation in PA programs improves when eligible individuals are required to enroll in available group health coverage as a condition of Medicaid or SCHIP eligibility. However, there may be important trade-offs to mandatory enrollment. Illinois, for example, operated a PA program with mandatory enrollment for a number of years with state-only funds. When the state later obtained approval to receive federal matching payments under a section 1115 waiver, CMS required Illinois to allow families to choose between ESI and SCHIP. Premium assistance enrollment decreased as a result. At the same time, premiums in the private market were rising, so the value of the state subsidy ($75 per eligible family member) eroded over time. Families reported that group health insurance was either too expensive, even with a subsidy, or did not include certain benefits (for example, prescription drug coverage) that were needed by the family. Therefore, states must consider the economic and health factors that may lead families to choose enrollment in Medicaid or SCHIP rather than group health coverage, even when ESI enrollment may be more advantageous for the state in terms of cost.

  Participation in PA programs improves when eligible individuals are required to enroll in available group health coverage.

• Employer relationships and communication efforts are critical. States that devote significant resources to employer education, recruitment, and relationship building have had more success with PA programs over time. As employers become more familiar and comfortable working with states, their cooperation and participation increases. Pennsylvania, for example, has staff located in regional offices throughout the state. Cases are assigned to these staff on an employer-by-employer basis so that one state staff member routinely works with the same company representative. This helps eliminate duplicate phone calls and minimizes the burden on employers. As employers have come to understand the program, they have become more cooperative, and some voluntarily contact the state on a quarterly basis to submit a list of new employees.²¹
• States with better enrollment have committed significant resources to program development and operation. These states devote staffing to the program and often contract with outside resources to perform major functions such as tracking down information about available coverage and determining cost effectiveness. Several states have redesigned their eligibility systems to capture information about employment and to link with other systems within the state. These systems help identify eligible individuals who have coverage available on the job and verify continuing enrollment in that coverage. States have established data banks or libraries containing information about employers and group health plans so that information can be more readily available when determining eligibility for new applicants.
  Enrollment is important to the success of PA programs, but not only because more people are insured. The admittedly high administrative costs associated with operating PA programs are mitigated as enrollment increases; the costs are spread across more individuals, thereby increasing the likelihood that the program will achieve savings for both states and the federal government.

Operational Challenges

Several common barriers to the success of PA programs have emerged over the years.

• Many low-income workers do not have coverage available on the job. Sixty-five percent of uninsured workers have family incomes of less than 200 percent of the FPL,²² and these workers are significantly less likely to have health insurance coverage available as an employment benefit. One study found that only about 41 percent of workers below 100 percent of the FPL and 61 percent of workers with incomes between 100 and 199 percent of the FPL were offered health insurance through their employers.²³ Low-income workers also tend to lose or change jobs more frequently than higher-income workers, and such changes in employment often result in loss of, or interruptions in, coverage. These individuals are among the target populations for Medicaid and SCHIP programs, so establishing PA programs can be especially difficult if the employer is not already offering coverage.
• The cost of coverage may be prohibitive for low-income workers, even when a state subsidy is provided. Private insurance premiums have been rising rapidly over the last few years, and employers have shifted more costs, in the form of higher deductibles and other out-of-pocket expenses, to employees in an attempt to reduce premium increases. While a high proportion (85 percent) of workers overall who are offered coverage take it, the take-up rate is lower for low-income workers (71 percent for workers with incomes below the poverty level). Among people who do not enroll in coverage offered by their employer, cost has been found to be the primary factor.²⁴ For example, Utah provides a fixed subsidy of $50 to uninsured adults with incomes up to 150 percent of the FPL in their program called Covered at Work. The program’s low enrollment (61 people) is attributed to the low subsidy amount. As private market costs rise, PA programs must provide ever-larger subsidies so that coverage remains affordable.
• Federal rules and complex administration create barriers to growth for PA programs. Federal rules limit the number of health plans that can qualify for the federal subsidy. For Medicaid, coverage must meet the cost-effectiveness requirement, which includes both the cost of the employer group health insurance and the cost of any wrap-around benefits that the state must provide to meet the Medicaid benefit and cost-sharing standards. Group health plans that do not meet the cost-effectiveness test cannot qualify for subsidy. The cost-effectiveness requirement becomes more difficult to meet as group health insurance premiums and workers’ out-of-pocket costs (deductibles, coinsurance, and co-payments) continue to rise.
  States with separate SCHIP programs must also evaluate cost effectiveness, as well as whether group health plans meet or are actuarially equivalent to one of the benchmark benefit package options. Group health plans that do not meet SCHIP benefit package requirements cannot be subsidized. Alternatively, separate SCHIP programs may establish a mechanism to provide wrap-around coverage, but doing so increases the costs of the program.
  SCHIP requirements for crowd-out prevention in premium assistance also limit the number of people who qualify. Children must be uninsured and may not have been covered by group health insurance within the past six months.²⁵ The federal government also initially required that states could only subsidize plans in which employers contributed a minimum of 60 percent toward premium costs as another way to prevent crowd out. However, because employer recruitment proved difficult at that level, CMS gradually modified its position regarding employer participation. As a result, the final regulations do not mandate a minimum employer contribution level. But it is important to note that employer contribution levels generally have to be substantial in order for the plan to meet the cost-effectiveness test.

Despite some additional flexibility that the federal government has allowed for PA programs, the evaluation of benefit packages, calculation of cost effectiveness, and provision of wrap-around coverage require states to set up complex procedures to administer PA programs. Even in many programs set up under section 1115 waivers, states must still, at a minimum, determine whether eligible individuals have coverage available on the job and the amount of premiums for which workers are responsible. The procedures needed to do so can involve costly changes to computer systems and require additional staff resources. State administrative efforts in these areas are further complicated by federal rules under ERISA (the Employee Retirement Income and Security Act of 1974).

Information Exchange

ERISA precludes states from requiring employers to share health plan information with the Medicaid or SCHIP agency. Employers are often reluctant to become involved with government programs, fearing administrative hassles and increased costs. States usually must rely on voluntary employer participation or request that workers obtain the health plan information from their employers, with varying degrees of success. For example, Maryland found that over 40 percent of employers contacted by the state either did not respond to requests for information or did not provide adequate information. This poses significant problems because, in order to determine whether a health plan qualifies for a premium assistance subsidy, states must collect detailed information from employers about what group health plans are available to workers, whether workers and their dependents are eligible to participate, what benefits are covered, the amount of premiums and other cost-sharing required by those plans, and the frequency of premium payments. This information is needed to assure that federal rules on benefits, cost sharing and cost effectiveness are met, as well as to make accurate and timely premium subsidy payments to either employers or workers, depending on the program design. The information must be updated periodically as plan benefits and costs change.

While ERISA precludes states from requiring employers to provide this information, states may require the insurers with whom employers contract to provide it. For example, Rhode Island and Massachusetts have enacted state laws requiring commercial insurers to share information with Medicaid about members who are enrolled in group health insurance. Although these laws are helpful, even insurers may not have all the information needed by states. For example, insurers often do not know the amount contributed by employers because they receive only the total premium payment. Further, these state laws do not apply to self-insured employers. Some analysts have posited that new authority enacted in the Deficit Reduction Act (DRA) of 2005, mandating states to enact laws that require all health insurers (including self-insured plans) to provide information to Medicaid about coverage for third-party liability purposes, could be used to obtain this information without triggering an ERISA preemption challenge. However, the authority for PA programs to use this approach is not clear-cut. As a result, states devote significant administrative resources to tracking down the necessary information.

Open Enrollment Periods

Typical benefits rules only permit employees to enroll in group health plans or change their election (for example, to add dependents or select a different plan) during an annual open enrollment period or when there is a “qualifying event” such as a birth, adoption, marriage, or divorce. Consequently, workers and/or their family members may be eligible for premium assistance but unable to join the group health plan until the next open enrollment period. Some states with PA programs have enacted laws that make eligibility for Medicaid or SCHIP a qualifying event so eligible workers and their dependents can enroll outside the annual open enrollment period.

However, this strategy does not resolve issues with open enrollment periods when self-insured employers subject to ERISA are involved. Under ERISA, self-insured employers cannot be required to comply with state qualifying event laws. Although some self-insured employers cooperate by permitting special enrollment, in other cases workers may have to wait until the next open enrollment period. Workers may also have difficulty disenrolling from their employer’s plan should they become ineligible for the premium assistance subsidy during the year.