One of the more mystical sounding acronyms receiving a
lot of attention in the Affordable Care Act (ACA) is MAGI or Modified Adjusted
Gross Income. MAGI is a way of defining income rooted in tax law and, along
with the size of the tax filing unit (to determine household size), will be
used to evaluate eligibility for advance premium tax credits and cost-sharing
reductions. But, it also will be
used to evaluate eligibility for CHIP and most Medicaid eligibility
categories.
The good news is that the use of MAGI will establish a simplified and consistent basis for
determining financial assistance for all health coverage options under the ACA.
However, there is a lot more involved in the conversion to MAGI than simply
relying on IRS rules to determine income and family composition. States are also required to establish
income eligibility levels that are not less than the “effective income
eligibility” in place on the date of the ACA’s enactment. This is especially
important for children whose eligibility is protected through the ACA’s
stability provisions (aka MOE) until 2019. But what does it really mean?
Currently most states disregard certain income or allow
certain expenses to be deducted from gross income to arrive at the net income
used for eligibility purposes. In effect, states will be required to convert
their current system of evaluating Medicaid eligibility based on a net income
test using disregards and deductions into a new higher gross income test based
on MAGI. The gross income test needs to be set at a higher level than current
Medicaid and CHIP net income thresholds to replace the loss of disregards and
deductions. Otherwise, fewer kids
would be eligible for Medicaid and CHIP than under current law. Confused as
Crabbe and Goyle in Professor Flitwick’s Charms class?
Let’s take a simplistic example – consider the Weasley
family of three, which includes Molly and her children, Ron and Ginny, who is
in full-time childcare. The Weasleys live in Hogsmead, a state where Medicaid
covers children up to 235% FPL ($43,545 for a family of three). Hogsmead allows a $90 monthly income
disregard ($1,080 a year) for each working parent and a $175 monthly deduction
for childcare expenses ($2,100 a year). This means that Molly, who works as a
potions teacher, can get Medicaid coverage for Ron and Ginny if her Hogwarts
salary is $46,725 a year or below.
That’s because Hogsmead will “disregard” (i.e., subtract) $3,180 from
Ms. Weasley’s income when evaluating whether she meets the state’s net income
threshold of $43,545 a year for a family of three. (Here’s a link to Harry Potter terminology for you Muggles who may be feeling a bit lost by now.)
Still feel a bit like I cast a “Confundus” spell on you?
Maybe this will help put it in perspective – in essence, the $3,180 in income
disregards and expense deductions are equal to 17.2% FPL for a family of three.
Based on this example, the state’s “effective eligibility level” using MAGI
would need to be at 252% of the FPL (235% + 17% FPL) to account for the loss of
disregards and deductions. This
way the Weasley kids still will be eligible for Medicaid when Molly’s MAGI is
considered. It gets a lot more complicated than this but this example gives you
a sense of what the ACA is trying to achieve.
What’s really important to remember is that this change
to MAGI is designed to eventually get us to a better place, where eligibility
rules are aligned between coverage options, eligibility is determined
consistently and there is a source of trusted income data to verify eligibility
electronically. Sound like a fantasy? Well, it’s true that the older tax data
(based on the latest return for the prior year income) may not always reflect a
family’s current circumstances and we’ll have untangle what future regulations
say about that. But in the meantime, we do need more than a magic wand to
address the initial challenges posed by the conversion to MAGI.
Clearly, it will not simplify and streamline the process
to take the “sorting hat” approach and look at every person individually to
determine if they would be eligible under the old method compared to the new
MAGI standard. This complication, coupled with the challenge of distinguishing who is newly
eligible vs. previously eligible so states get paid the right federal matching
rates, has Medicaid and CHIP agencies somewhat mystified. Together, these
issues are as challenging as finding a “horcrux” and are the source of the
untenable notion that states would need to run “shadow eligibility systems.”
(HHS squashed this concept in their IT 2.0 guidance.)
Thankfully, CMS has a “marauder’s map” (AKA a solicitation
issued on June 28, 2011) to find some really smart organization (perhaps Hermione Granger has been hired as a consultant) to help the agency and states figure out how this
is going to work. I don’t have a “pensieve” or crystal ball to predict the
results but CMS seems determined to find a fair and balanced way to deal with
these issues in a straightforward manner. If you’re interested in reading about
a couple of their ideas, check out Appendix 2 of the solicitation. In the
meantime, it’s good to know that children who are currently eligible won’t be
gobbled up by “death eaters” on their way to MAGI.