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HCFA Issues Proposed Rule On "Income Disregards" For State Medicaid Programs

For Immediate Release, November 2, 2000
Contact: Chris Marshall

On October 31, the Health Care Financing Administration published a proposed regulation expressly allowing states to offer additional income (and asset) eligibility "disregards" in their Medicaid programs. The rules also cover the medically needy, spend down and home and community-based waiver eligibility groups. These changes, which would allow states greater flexibility in determining Medicaid eligibility, are intended to assist people with disabilities and families with disabled children to obtain Medicaid coverage while living at home.

The proposed change addresses problems created by inflexible eligibility rules that often prevent individuals with disabilities, such as severe mental illnesses, who live with (or receive support from) family members, from qualifying for Medicaid. It is aimed at assisting those whose income is slightly above traditional Medicaid income limits, but who are strapped with overwhelming medical bills.

Under current "medically needy" rules, a state can offer Medicaid coverage to such persons once they have spent so much of their income on medical bills that what is left over meets the state's medically needy income standard. In 22 states, however, that standard is significantly below the poverty level. Under the proposed rule, a state would be allowed to disregard portions of a person's income, such as the income necessary to pay for food, clothing or housing.

The proposed rule is of special significance for families who care for an adult with a severe mental illness in their home. Under current rules, people in institutions (e.g., state psychiatric hospitals and nursing homes) can qualify for Medicaid coverage at much higher income levels than if they lived in the community. This "institutional bias" has had the perverse effect of jeopardizing Medicaid eligibility for people with severe mental illnesses in the community. This is especially the case with in-kind support and maintenance (food and shelter) provided by family members. The proposed change would allow states the flexibility to change their own rules so that individuals with severe disabilities would not necessarily have to lose their Medicaid eligibility when they receive such in-kind support in the community from family members.

Likewise, states would also be allowed to use this new rule to disregard additional amounts of income under its medically needy program - effectively reducing (or even eliminating) large "spenddown" liabilities. This "spenddown" is the process by which individuals in nearly half the states just above the medically needy level must spend down a certain amount of "excess" income to qualify for Medicaid. In addition, states would also be allowed to expand income disregards to exclude so-called "deemed" income from a spouse.

The proposed change could also be used by states to further the goal of the 1999 Ticket To Work and Work Incentives Improvement Act (TWWIIA) to end the severe penalties associated with employment for people living on SSI and Medicaid. By allowing states to disregard certain earnings or other sources of income, and still retain vital health coverage under Medicaid, beneficiaries would be able to work more without the risk of losing Medicaid eligibility. Likewise, a state might disregard income from a savings account used by a worker to save funds for the purchase of a home, automobile, or similar items that promote independence.

The proposed regulations are based on Section 1902(r)(2) of the Social Security Act, which has for a number of years allowed states to have these extra income and asset disregards. This is the first time that HCFA has definitively explained this section of the law in regulations, clarifying that states are permitted to set an upper eligibility limit above 300% of the SSI level. New federal spending under the proposed regulation (that will result from expanded Medicaid eligibility) is estimated at $960 million over five years. States would also spend a similar additional amount over that period.

It is important to note that enactment of these new income and asset disregard rules are entirely up to the states, i.e. governors, state legislatures and state Medicaid directors must affirmatively act in order to increase current restrictions on Medicaid eligibility. In the coming weeks, NAMI will update its current state legislative proposal on work incentives - contained in the NAMI Omnibus Mental Illness Recovery Act (OMIRA) - to encourage use of higher income disregards that foster an environment in which individuals can work without losing Medicaid eligibility.

The full text of HCFA's proposed rule can viewed at: