September 19, 1996


Although the Medicaid block grant was dropped from the welfare bill before final passage, the new welfare law has a significant impact on the Medicaid program. This paper reviews the Medicaid changes that directly result from the repeal of the AFDC program1.

The rules governing AFDC and Medicaid have always been closely intertwined, and, therefore, the repeal of all federal rules governing eligibility for AFDC ought to have a substantial effect on Medicaid coverage and eligibility rules. However, the new welfare law includes provisions designed to assure that children, pregnant women and low-income families do not lose Medicaid coverage as a result of the welfare changes. Even so, the new law could significantly alter the way that poor families qualify for Medicaid since eligibility for Medicaid will no longer be linked automatically to eligibility for welfare.

The AFDC-related Medicaid provisions in the welfare law address the following issues:

States must adjust their Medicaid program rules to comply with these requirements as of the date they submit their state plan under the welfare block grant (i.e., any time after enactment of the law but no later than July 1, 1997).

These changes and some of the implementation issues that will arise as a result of these changes are described below.

Current Standards for Determining Eligibility for Medicaid Are Retained

While a growing portion of the children and pregnant women who are covered under the Medicaid program are eligible for Medicaid without regard to whether they receive welfare, some 1.3 million children aged 13 and older and more than four million parents currently receive Medicaid based solely on their eligibility for AFDC2. If Medicaid coverage for these children and parents remained linked to eligibility for welfare, these children and parents would be at risk of losing Medicaid coverage as a result of new welfare restrictions. For example, older children and parents would lose Medicaid coverage as well as aid under the welfare block grant when their family reached its welfare time limit.

Similarly, if Medicaid remained linked to receipt of aid under the new block grant, states would be required to extend full Medicaid coverage to all persons who receive any aid under whatever programs the state might fund with block grant dollars. Thus, if a state chose to use a portion of its block grant funds to provide transportation vouchers to low-income parents commuting to work or to provide education stipends to low-income students attending community college, linkage between Medicaid and federal block grant funds would have required the state to provide full Medicaid coverage to these parents and students.

The new law addresses these issues by severing the link between eligibility for aid under the new block grant and Medicaid. Certain AFDC rules and standards are carried over to the Medicaid program so that current eligibility criteria for Medicaid remains intact. Eligibility for welfare would not be a condition of eligibility for Medicaid — low-income children and parents can qualify for Medicaid regardless of whether they apply for or are eligible for aid under the new welfare block grant. This is not simply a "grandfather" provision. The AFDC income and asset standards and family composition rules are carried over to the Medicaid program so that current recipients and future applicants can qualify for Medicaid coverage regardless of the changes a state may adopt in its program funded under the TANF block grant.

Under the new law, states must provide Medicaid to children and parents:

Thus, all children and parents who qualify for Medicaid based on current AFDC rules will be eligible for Medicaid regardless of whether a state expands or restricts eligibility for programs funded with federal block grant funds. If a state imposes a two-year lifetime time limit on the receipt of welfare, that time limit will not apply to Medicaid. If a state uses its block grant funds to provide transportation vouchers to low-income parents commuting to work, it will not be obligated to provide full Medicaid coverage to these parents unless they would otherwise qualify under Medicaid rules.

For example...

Here's an example of how the new coverage rules will work in a state where the AFDC income eligibility standard for a family of three was $350 per month and the asset limit was $1,000 as of July 16, 1996. In this state, families of three who meet the family composition rules — that is, single parent families and some two-parent families — whose monthly countable income is below $350 and who have no more than $1,000 in assets will be eligible for Medicaid.

The family does not have to be eligible for aid under whatever program(s) this state establishes under its block grant in order to qualify for Medicaid. If the state imposes a time limit, creates new nonfinancial eligibility restrictions, or lowers the income eligibility standards in its welfare program, these changes will not affect eligibility for Medicaid.

Current Methods for Counting Income and Assets Are Retained

The Medicaid program has always borrowed its rules for determining financial eligibility from the AFDC and SSI programs. AFDC income and asset rules and methodologies apply in the Medicaid program to all children, pregnant women, and families with children, not just to AFDC recipients5. These rules largely determine whose income and assets are to be considered when an applicant's eligibility for Medicaid is calculated, what income and assets are exempt from consideration, and what deductions from gross income are allowed.

The new law abolishes these federal rules for purposes of welfare and allows states very broad discretion to establish their own rules for calculating eligibility for aid under the block grant. The law, however, maintains current federal standards for determining financial eligibility for Medicaid by retaining these AFDC rules for purposes of the Medicaid program6.

As a result, Medicaid rules for counting income and resources will not be affected by state changes in welfare program rules. If a state decides, for example, to restrict eligibility under its new program funded with block grant dollars by no longer allowing a deduction for child care expenses or by counting noncash benefits such as housing assistance, these changes will not affect the rules for determining eligibility for Medicaid. Thus, if a state changes its welfare rules, it may have one set of income and asset counting rules for its block grant program and one set of rules for Medicaid. The Medicaid rules for determining eligibility, however, will be the same rules the state has used for determining Medicaid eligibility for all children, pregnant women and low-income families who apply for coverage7.

For example...

If a state decides to make major changes in its welfare eligibility rules it will have to separately determine Medicaid eligibility for families applying for aid under the block grant. However, the procedures the state uses to determine eligibility will be virtually the same as those that are now in place for determining Medicaid eligibility for families who do not apply for cash assistance.

Under existing Medicaid program rules, family income is calculated using federal rules to decide what income is counted and what deductions are allowed. Once family income is calculated, the state's Medicaid income eligibility standards are applied to decide which family members are eligible for Medicaid. Virtually all states apply different Medicaid income eligibility standards to different family members. For example, most states, have a higher Medicaid income eligibility standard for children under age six than for children ages six through 12. Medicaid eligibility workers compare family income to these different eligibility standards and determine who within the family is eligible for Medicaid.

Under the new law, this process remains pretty much the same. States will calculate family income using the same rules they now use in Medicaid-only cases. They will compare family income to the state's various Medicaid income standards, with the addition of the July, 1996 AFDC income standards, to decide which family members are eligible for Medicaid . The family composition rules that will have to be applied under the new law to determine eligibility for older children and parents should not change state Medicaid application procedures since family composition is already considered when agency staff evaluates family income and determines whether child support should be pursued.

Transitional Medicaid Assistance

Under changes made to the Medicaid law over the past several years, families who become ineligible for AFDC due to earnings or child support income can continue to receive Medicaid coverage for a limited period of time8. These rules help to assure that the potential loss of Medicaid is not a disincentive for families to seek employment or pursue child support.

Under the new welfare law, if a family that qualifies for Medicaid based on the standards carried over from the state's AFDC program would otherwise lose Medicaid coverage because earnings or child support income puts them over the income standards the family will continue to be eligible for Medicaid under the transitional Medicaid rules. Thus, families with child support income that puts them over the income standards are eligible for Medicaid for an additional four months, while families with earnings that put them over the income standards remain eligible for Medicaid for an additional six to 12 months, depending on whether their income remains below 185 percent of the federal poverty line. Under the new law, families do not have to be receiving aid under the block grant program in order to qualify for transitional Medicaid assistance.

For example...

In the example above, where the state's income eligibility limit is $350 per month, if the parent who is receiving Medicaid for herself and her two children gets a job that brings the family's monthly countable income to $500 per month, Medicaid eligibility continues for all members of the family under transitional Medicaid assistance rules. The family will receive Medicaid for an additional 12 months as long as their income remains below 185 percent of the poverty line.

State Options Under the New Rules

The new law allows states various options, some of which can help states streamline eligibility procedures and enhance cross-program coordination.

Thus, the new law allows states some flexibility in determining how they will administer their Medicaid program and the extent to which Medicaid rules and the rules under the block grant will be the same.

Additional federal funds are available to states to cover administrative expenditures for Medicaid eligibility determinations that states would not otherwise have incurred but for the Medicaid-related changes in the welfare law15. These funds may cover expenses incurred in the first 12 calendar quarters in which a state has implemented its new program(s) under the welfare block grant. The Secretary shall determine the distribution of the funds among states, and payments to all states cannot exceed $500 million over the four-year period beginning in fiscal year 1997.


The delinking of Medicaid and cash assistance will assure that children and parents continue to be eligible for Medicaid regardless of the changes in welfare rules that may be adopted by states over time. The loss of the automatic eligibility link between welfare and Medicaid, however, creates challenges for states to assure that eligible children and parents are enrolled in the Medicaid program. The new law does provide states options that will help them structure simplified Medicaid eligibility systems and achieve some degree of program coordination between welfare and Medicaid rules.


1. The new law (Public Law 104-193) includes other major changes to the Medicaid program. Under the law, most legal immigrants who enter the country after the day of enactment, August 22, 1996, will be ineligible for many federal means-tested programs for at least five years. Emergency Medicaid services would be exempt from these restrictions. It is unclear, however, whether states have the authority to not apply this ban to legal immigrants seeking nonemergency Medicaid coverage. It is clear that states have the discretion to decide whether or not most legal immigrants who are already in the country will be eligible for the full range of Medicaid coverage.

The law also changes SSI program rules by making most legal immigrants, including those currently in the country and already receiving SSI, ineligible for benefits and by significantly tightening the SSI eligibility standards for disabled children. Since people who qualify for SSI are automatically eligible for Medicaid, disabled children and elderly or disabled adults may lose coverage under Medicaid as a result of these SSI changes. It is important to note, however, that Medicaid should continue for those people who have an alternative basis for qualifying for Medicaid. For example, a child who qualifies for Medicaid based on his or her eligibility for SSI and who becomes ineligible for SSI could be eligible for Medicaid under federal rules that require states to cover younger children with family income below the federal poverty line. Similarly, a state can provide Medicaid coverage for legal immigrants losing SSI under a Medicaid program option that permits states to cover low-income elderly and disabled people who are not receiving SSI.

2. Younger children who receive AFDC are eligible for Medicaid under an alternate eligibility category. They are covered under federal Medicaid rules that phase in coverage for poor children each year according to the age of the child. Under these rules, all poor children born after September 30, 1983, are eligible for coverage. Thus, as of October 1, 1996, children under age 13 are eligible for Medicaid if their income is below the federal poverty line. Some states cover older children under these or more generous income standards, at state option.

3. States can lower or raise these standards within limits imposed by the new law. See discussion below on state options. These same standards and limitations are also carried over with respect to the "medically needy" option under the Medicaid program.

4. These rules largely limit coverage to single-parent families with children under age 18. Some two-parent families are covered, however, if one parent is unable to work due to a physical or mental impairment or if the principal wage-earner in the family has a recent work history but currently works less than 100 hours a month. Many states have AFDC waivers eliminating some or all of the restrictions on eligibility for two-parent families; the new law allows states the option to continue to apply these waiver rules to its Medicaid program. See discussion on state options below.

5. Similarly, SSI rules are used by most states to determine Medicaid eligibility for all elderly and disabled Medicaid applicants, not just those who receive SSI. A small number of states operate under special "section 209(b)" rules that allow them to use pre-SSI law rules to determine how income and assets are counted for elderly and disabled Medicaid applicants. The new welfare law does not make any changes in this area.

6. Technically, the new law provides that all references in the Medicaid law to AFDC income and resource "methodologies" and other AFDC rules are to be considered references to those rules as they were in effect on July 16, 1996.

7. The new law provides that states can modify their Medicaid rules as the new Medicaid rules are no more restrictive than the rules in effect as of July 1996. See discussion below on state options.

8. Medicaid coverage for families who lose AFDC eligibility due to child support income is limited to four months while coverage for families who lose AFDC eligibility due to earnings continues for six months and may be extended for an additional six months if the family's gross income (not including child care expenses) is below 185 percent of the federal poverty line.

9. This applies to all waivers submitted prior to the date of enactment of the law (August 22, 1996) if approved before July 1, 1997. Clarification of the rules governing this waiver option will be forthcoming from HHS. For example, it is not clear whether states can rely on their waiver rules for purposes of determining Medicaid eligibility if they are not continuing to follow their AFDC waivers for purposes of their block grant program.

10. The law stipulates that the CPI for all urban consumers for all items shall be used.

11. The impact of this limitation is moderated by the option discussed next that allows states to use less restrictive methodologies for counting income and assets. Moreover, the CPI limitation only applies to the income and resource eligibility standards carried over from the AFDC program; other eligibility standards used in the Medicaid program are not affected by this limitation. For example, many states have expanded income eligibility for children under section 1902(r)(2) of the federal Medicaid law or through waivers granted under section 1115 of the law. These opportunities for states to expand eligibility are not limited by the new law.

12. This is consistent with section 1902(r)(2) of the Medicaid law which allows states to use less restrictive methodologies for determining financial eligibility for pregnant women and for children covered under the poverty-line standards.

13. This apparently means that medical assistance must be restored if an individual who has lost cash aid for refusing to work no longer refuses to work or is no longer required to work under state rules.

14. States that keep welfare and Medicaid rules consistent may be able to minimize their administrative costs. States can claim federal Medicaid administrative matching funds to cover the cost of determining eligibility under Medicaid, whereas under the new block grant, states do not receive additional federal matching funds for administration. If the eligibility process for the two programs remains closely linked, the administrative work done for purposes of Medicaid could significantly simplify and limit the administrative tasks required to determine eligibility for aid under the block grant.

15. States must establish that their administrative expenditures "are attributable to administrative costs of eligibility determinations that (but for the enactment of this section) would not be incurred." Public Law 104-193, section 114(h)(2).