DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland   21244-1850 
 
            SHO # 12-003 
            ACA # 22 
 
December 28, 2012 
  RE: Conversion of Net Income Standards to  
    MAGI Equivalent Income Standards 
Dear State Health Official:  
Dear State Medicaid Director: 
 
This letter is one of a series intended to provide guidance on implementation of the Patient 
Protection and Affordable Care Act of 2010 (Pub. L. No. 111-148), as amended by the Health 
Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152) (collectively referred to as 
the Affordable Care Act).  The purpose of this letter is to inform states about the provisions 
under the Affordable Care Act for converting current net income eligibility thresholds to 
equivalent modified adjusted gross income (MAGI) thresholds (referred to in this guidance as 
"MAGI-equivalent" or "MAGI-based") in the Medicaid program and Children's Health Insurance 
Program (CHIP), the conversion methodology and process, and the timeframes for executing the 
conversions.   
As discussed below, the Centers for Medicare & Medicaid Services (CMS) will provide 
substantial technical assistance to states as they undertake the conversion process, including 
actually calculating the final converted thresholds for states if the state chooses.   
Transition to Modified Adjusted Gross Income (MAGI) 
Currently, states methodologies for determining Medicaid and CHIP income eligibility vary 
widely, primarily due to differences in the application of income disregards.  To determine 
eligibility, the state first determines an individuals (or family's) gross income using a 
combination of state and federal rules on household or family composition, and then deducts, or 
disregards, income amounts that are not considered countable, such as childcare expenses.  These 
income deductions or disregards can vary by state, type of income, and by eligibility group.  The 
resulting net income is then compared to an income eligibility threshold (referred to as the net 
income standard) to determine whether the individual is income eligible for Medicaid or CHIP.     
Effective January 1, 2014, a methodology for determining income based on modified adjusted 
gross income (MAGI) will apply to both Medicaid and CHIP eligibility for most enrollees, 
including children, pregnant women, parents and other caretaker relatives and the new adult 
group (as applicable in a state).  As added by the Affordable Care Act, sections 1902(e)(14)(A) 
and 2102(b)(1)(v) of the Social Security Act (the Act) for the Medicaid program and CHIP, 
respectively, provide that states will use the MAGI-based methodology for determining the 
income of an individual and the individual's household, as applicable, for purposes of eligibility 
for Medicaid or CHIP under the state plan or an 1115 demonstration and for any other purpose  Page 2  State Health Official/State Medicaid Director 
 
applicable under the plan or a demonstration project for which a determination of income is 
required.  To promote coordination and avoid gaps or overlaps in coverage, the new 
methodology is aligned with the one that will be used to determine eligibility for the premium 
tax credits and cost sharing reductions available to certain individuals purchasing coverage on 
the Affordable Insurance Exchanges starting in 2014.  Under the statute, MAGI-based income 
methodologies will not apply to determinations of Medicaid eligibility for elderly and disabled 
populations. 
MAGI and household income are defined in section 36B(d)(2)(A) and (B) of the Internal 
Revenue Code (IRC).  The MAGI-based methodology under the Medicaid statute includes 
certain unique income counting and household composition rules reflected in CMS regulations at 
42 CFR 435.603 and discussed in section III.B. of the preamble to the eligibility final rule 
published in the Federal Register on March 23, 2012, (77 FR 17144, pages 17150-59; available 
at http://www.gpo.gov/fdsys/pkg/FR-2012-03-23/pdf/2012-6560.pdf.) 
 
Under the statute, to complete the transition to the MAGI-based methodology, states will 
develop MAGI-based income eligibility standards for the applicable eligibility groups that are 
not less than the effective income levels that were used to determine Medicaid and CHIP 
income eligibility as of the enactment of the Affordable Care Act.  The conversion of current 
income eligibility standards to equivalent MAGI-based income eligibility standards should 
account for any income disregards now used.  Finally, under section 1902(e)(14)(E) of the Act, 
each state must submit to the Secretary for approval its proposed MAGI-equivalent income 
eligibility standards and the methodologies and procedures that support those proposed 
standards, for each applicable eligibility group.  We refer to this submission as the states 
MAGI Conversion Plan which is discussed in greater detail below.  
State Engagement, Solicitation of Public Input, and Criteria for Testing Methodologies 
In order to test various methodologies and develop this guidance for converting current income 
standards to MAGI-based standards, we consulted with states, solicited public comments through 
a request for information (Solicitation) in June 2012, and worked with ten pilot states to test 
the feasibility of potential conversion methodologies.   
We evaluated potential conversion methodologies bearing in mind the statutory objective to 
establish a MAGI-based income eligibility standard for each eligibility group, on a state specific 
basis, that is not less than the effective income eligibility standard as applied on the date of 
enactment of the Affordable Care Act.  We interpret this to mean a standard that, in the 
aggregate, neither systematically increases nor decreases eligibility overall.  We applied various 
criteria in evaluating each of the potential conversion methodologies and associated data sources 
including: 
  Unbiased: Across all eligibility categories, the method does not systematically increase 
or decrease the number of eligible individuals within a given eligibility group or 
systematically increase or decrease the costs to states.  
  Accuracy: To the extent possible, the method minimizes changes in eligibility status by 
minimizing losses and gains in eligibility for a given category of coverage.  
  Precision: The converted standard must be stable and repeatable. In other words, if the 
methodology to arrive at the converted standard were repeated, it would arrive at the 
 
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same result.  For example, if a sampling methodology is used, the sample size must be 
large enough to ensure that the conversion method, if calculated on another sample, 
would in general yield the same converted standard. 
  Data quality: The data used are representative of the income and disregards of the 
population so as not to bias the converted standard due to poor data quality. 
  Administrative burden: The method minimizes demands on state administrative 
resources and capacity. 
 
Applications of Converted Income Standards  
 
States will use converted income standards for the purposes described below to: 
Establish the Applicable Income Eligibility Standards.  Through the income conversion process, 
a MAGI-based income eligibility standard will be established for each existing eligibility group.  
 
Follow the Minimum Eligibility Requirements.  In addition to current income standards, certain 
minimum income standards will be converted.  For adult groups, a state may lower the income 
standard after the maintenance of effort (MOE) provision for adults (under sections 1902(a)(74) 
and 1902(gg) of the Act) expires on January 1, 2014, subject to the applicable statutory 
minimum standards.  For childrens eligibility in Medicaid and CHIP, the converted state income 
standards will establish the MAGI-based state income eligibility standards until at least  
October 1, 2019, when the MOE provision for children expires. 
 
Identify Premium Payment Income Thresholds.  The income conversion process will also be 
used to establish new income thresholds for premium payments for states that tie premium 
payments to income under section 1916A.  
 
Establish Income Levels for Determining Newly Eligible Adults.  Beginning in January 2014, an 
enhanced federal medical assistance percentage (FMAP) will be available for the expenditures of 
certain individuals in the new adult eligibility group who are considered to be newly eligible, 
as defined in section 1905(y)(2) of the Act.  In general, in accordance with the statutory 
definition, newly eligible refers to an adult who would not be eligible for full benefits, 
benchmark benefits, or benchmark-equivalent benefits  under a states Medicaid program in 
effect on December 1, 2009.  States will need to convert income eligibility standards in effect on 
December 1, 2009, that differ from those in effect when the Affordable Care Act was enacted, to 
MAGI-equivalent standards in order to identify newly eligible individuals in the adult group for 
whom the state can claim the increased FMAP.  More detail on FMAP claiming for newly 
eligible individuals will be forthcoming in an upcoming regulation. 
 
Options for Conversion to MAGI Eligibility Standards 
After evaluating a range of conversion methodologies and the associated process for establishing 
MAGI-equivalent standards, we identified two options states may use for income conversion. 
The first option is the Standardized MAGI Conversion Methodology.  The research data 
underlying the selection of this methodology will be made available, as discussed at the end of 
this letter.  This methodology can be implemented with national survey data or with state data.  
The second option, the State Proposal Option, allows states to propose and implement 
alternative methodologies and processes, with federal approval.   
 
  Page 4  State Health Official/State Medicaid Director 
 
Option 1.   Standardized MAGI Conversion Methodology 
 
The Standardized MAGI Conversion Methodology adjusts the applicable Medicaid net income 
eligibility standard for each eligibility group by: (1) calculating the average size of the disregards 
for people whose net income falls within 25 percentage points of the federal poverty level (FPL) 
below the net income standard; and (2) adding this average disregard amount, expressed as a 
percentage of the FPL, to the net income eligibility standard, also expressed as a percentage of 
the FPL.  The resulting sum is the MAGI eligibility standard for that eligibility group.  The 25 
percentage point band for calculating the average disregard was derived through research and 
data analysis in order to target the population for whom disregards most affects eligibility, 
without limiting the group so narrowly as to affect the stability of results. 
For example, if the net income standard for a given state and eligibility category is 80 percent of 
FPL, the Standardized MAGI Conversion Methodology will estimate the average disregard for 
individuals with net income between 55 percent and 80 percent of FPL.  If the average disregard 
for that group of people is 7 percent of FPL, then the converted standard would be 87 percent of 
FPL.   
The standardized conversion methodology will not make any adjustment for differences between 
current Medicaid financial methodologies and certain aspects of the MAGI rules which address 
household composition and income counting.  Our research determined that, for most 
individuals, there was no difference between MAGI-based income and gross income under 
current Medicaid rules; and, for other individuals, adjustments for MAGI rules which address 
household composition and income counting would be too imprecise. 
This methodology can be implemented in two ways: using national survey data (which CMS will 
perform for all states); or using state data (which states will perform).   
 
National Survey Data.  Under this approach, the average disregard would be quantified for all 
individuals within 25 percentage points of the FPL below the net income standard in each 
applicable eligibility group for each state using data from the Survey of Income and Program 
Participation (SIPP) weighted to represent each state.  The SIPP is a nationally recognized data 
source administered by the United States Census Bureau which contains detailed information on 
cash and non-cash income types, household composition, familial relationships, and other 
variables relevant to MAGI.  To calculate converted income standards, CMS will use the SIPP 
by modeling relevant rules currently used to assess Medicaid eligibility for each applicable group 
in every state.  To ease the implementation burden for states, CMS has identified the income 
eligibility groups and applicable methodologies for each state and has been confirming that data 
with each state.  In addition, CMS will determine the converted MAGI-equivalent standards for 
each applicable eligibility group using the SIPP in all states, whether or not a state elects this 
implementation approach (see further discussion under Contingency Approach).  States that do 
not retain gross and net income information, or do not wish to use their own data, should 
consider the SIPP data option.  A schedule for when these conversions will be performed and 
reviewed by states is provided later in this letter.    
State Data.  States that retain data on gross and net income for individuals in their eligibility 
systems may have the information needed to determine the marginal disregard value of the 
Standardized MAGI Conversion Methodology necessary to establish the MAGI-equivalent 
 
  Page 5  State Health Official/State Medicaid Director 
 
income standards for each eligibility group.  Under this approach, a state would use 
administrative data to determine the average value of income disregards for individuals in each 
applicable eligibility group whose net income falls within 25 percentage points of the FPL below 
the states net income standard.  The average disregard amount from individuals in the marginal 
band would then be added to the net income standard for each applicable eligibility group to 
establish the MAGI-equivalent standard for the eligibility group.  CMS will not perform the 
conversion for states using state data but will provide technical assistance.  
Option 2.  State Proposal Option   
In selecting the Standardized MAGI Conversion Methodology, we based our decision on the best 
national information available as well as our analysis of state data, as provided by collaborating 
pilot states.  In some cases, individual states may have information that could allow them to 
deploy alternative methodologies that meet the criteria identified above.  In addition, some states 
may have unusual disregards or income standards that make an alternative methodology as 
effective in their state.  In those cases, states may propose alternative methods, including 
variations on the Standardized MAGI Conversion Methodology, and/or processes for 
establishing the converted MAGI-based income eligibility standards such as:  
  Adjusting for differences in income counting and household composition rules (if a state 
adjusts for MAGI income and household composition rules, it must do so using all MAGI 
rules for all eligibility groups); 
  Adopting a different marginal band based on its own state specific disregards, data, 
eligibility standards, and population analysis. 
States wishing to propose alternative methods should review the information we will be 
providing shortly (discussed at the end of this letter) on our research and conclusions over the 
last year and take those results into consideration.   
A state seeking to use an alternative conversion methodology must provide the necessary data to 
CMS and demonstrate how that methodology (combined with the proposed data source) meets 
statutory objectives.  We will work with states as they develop their MAGI Conversion Plans and 
undertake the conversion calculations.  States will be responsible for performing the conversion 
calculations under an alternative methodology.  Before approving an alternative methodology, 
CMS will conduct a review of the methodology, data and results.   
Contingency Approach 
CMS will proceed to calculate a states converted standards under the Standardized MAGI 
Conversion Methodology, using SIPP data, for all states.  These converted standards will be used 
if a state chooses this approach or in the case that a state's conversion based on state data or its 
alternative method is either not approved or is not completed by the deadline for MAGI 
Conversion Plans (see timeline below).    
 
 
 
 
  Page 6  State Health Official/State Medicaid Director 
 
Timeline and Process for Submission of MAGI Conversion Plans 
The development of the MAGI Conversion Plans will include five steps:  
  Step 1:  MAGI Conversion Templates 
  Step 2:  Statements of Intent/Selection of Conversion Methodology 
  Step 3:  Data Analysis 
  Step 4:  Submission of MAGI Conversion Plan 
  Step 5:  State Plan Amendments/systems programming 
Step 1:  MAGI Conversion Templates due by January 15, 2013.  Over the last several months, 
CMS has issued to every state a pre-populated template setting forth all of the income 
standards and other rules documented in the Medicaid and CHIP state plans and, as applicable, 
section 1115 demonstration Special Terms and Conditions (STC).  These templates map states 
pre-2014 eligibility groups that will transition into new groups in 2014 and, once finalized, will 
document states income standards and capture other relevant information needed for income 
conversion.  States are asked to review the templates, confirm that the information is accurate, 
and/or notify CMS of any discrepancies between the template and documented state practice by 
January 15, 2013; most states have already completed this review.  CMS will work closely with 
states to resolve any discrepancies between policy and practice that might exist and when 
practice differs from approved plans or STCs will not pursue compliance action against states, 
provided the actual practice can be documented (e.g., through state regulations) and comports 
with federal law.  (In these cases, to conform with current practice, the state plan and/or waiver 
terms and conditions may ultimately need to be modified.)   
CMS will utilize the information from the templates for each state to develop converted income 
eligibility levels for all states using the SIPP data and the Standardized MAGI Conversion 
Methodology (see Step 3).  This information will also be useful in assessing states alternative 
conversion methodology proposals, as described below.  
Step 2:  Statements of Intent/Selection of Conversion Methodology due February 15, 2013. 
States should consider the options presented in this guidance and submit by February 15, 2013 a 
non-binding statement of intent to CMS indicating which MAGI conversion methodology they 
intend to pursue.  These statements should be sent via email to 
IncomeConversion@cms.hhs.gov.  This information will help us to prioritize the SIPP based 
conversions, plan for additional technical assistance, and allow us the opportunity to provide 
early feedback on the states planned direction.    
Step 3:  Data Analysis (on a rolling basis).  CMS will be developing converted MAGI-based 
standards using the Standardized MAGI Conversion Methodology based on SIPP data for all 
states from January through April 2013.  All states will have the opportunity to review the results 
of the CMS data analysis using SIPP data before finalizing the information in the MAGI 
Conversion Plans (see Step 4 below).  We anticipate sharing the results of the SIPP data runs for 
eligibility purposes on a rolling basis; all states will receive their conversions for review no later 
than April 30, 2013.  States will have 15 calendar days to review these recommended converted 
standards and bring any errors to our attention, so that CMS can review the calculations.  For 
 
  Page 7  State Health Official/State Medicaid Director 
 
example, if the state believes that a particular disregard was applied with the wrong frequency, in 
order to review the question and, if necessary, recalculate the recommended income standards, 
the state must bring that issue to our attention within 15 calendar days of receipt of the 
information.   
 
Questions regarding recommended converted income standards should be submitted via email to:  
IncomeConversion@cms.hhs.gov. 
 
Step 4:  Submission of MAGI Conversion Plans.  Section 1902(e)(14)(E) of the Act directs each 
state to submit to the Secretary for approval its proposed MAGI-based income eligibility 
standards, which should be accompanied by a description of the methodologies and procedures 
used in developing such standards; we are referring to this submission as the MAGI Conversion 
Plan.  For a state that elects the Standardized MAGI Conversion, submission will be simple.  The 
MAGI Conversion Plan will consist of the information from the eligibility groups template and a 
confirmation that the state intends to use the CMS-derived MAGI-based standards.  CMS 
approval of the MAGI Conversion Plan will be pro forma when we have performed the 
conversion with SIPP data.  States selecting this option should submit their MAGI conversion 
plans after they have completed their review of the SIPP-based conversion and after CMS has 
made and returned any necessary corrections, as discussed in Step 3, but in no case later than 
May 31, 2013.  States will be notified of their approval or disapproval by June 15, 2013. 
States deciding to utilize their own data, or an alternative methodology, should submit their 
MAGI Conversion Plans as soon as possible, but no later than April 30, 2013.  This earlier 
timeline is necessary for sufficient review of the proposed alternative.  We will provide 
additional details on the submission requirements in future guidance.  Generally, however, the 
review will cover the explanations of the methodology (if different than the Standardized MAGI 
Methodology), details of the data used, and results.  States will be notified of their approval or 
disapproval by June 15, 2013.   
Step 5:  Provision of MAGI-based Eligibility Standards to Eligibility Systems and State Plan 
Amendments by June 2013.  Results of the MAGI income conversion will be programmed into 
the necessary eligibility systems.  States will incorporate MAGI-based income standards into 
Medicaid and CHIP eligibility systems to ensure that the Medicaid agency can program the 
MAGI-based eligibility standards in sufficient time for testing before October 1, 2013.  Under 
current Medicaid/CHIP and Exchange regulations, states have the option to delegate 
Medicaid/CHIP eligibility determinations to the Exchange (using the states Medicaid and CHIP 
rules subject to policies regarding who makes final eligibility determinations), or have the 
Exchange make an assessment of Medicaid/CHIP eligibility (also based on  the states rules) and 
electronically transfer accounts of potentially eligible individuals to the state Medicaid or CHIP 
agency for final determination.  Information in each states MAGI Conversion Plan should be 
shared with the Exchange operating in that state (whether state based or federally facilitated) by 
June 2013, in order to support open enrollment on October 1, 2013.   
Finally, the converted MAGI-based income standards for the MAGI groups will be 
memorialized through amendments to the state Medicaid and CHIP plans and/or section 1115 
demonstrations, if applicable.  We anticipate that states will submit these state plan amendments 
(SPAs) through the new, web-based system for submitting SPAs known as MACPro, which will 
become available in 2013.  CMS will be working closely with states through the State Operations 
 
  Page 8  State Health Official/State Medicaid Director 
 
and Technical Assistance (SOTA) process to discuss the timing of these SPA submissions in 
order to ensure their timely review and approval. 
Technical Assistance Documentation 
CMS will make available technical assistance documents and artifacts on an ongoing basis. In 
particular, we will share the following items with states shortly:  
  Research Results:  Information about methods explored in our research, and the data results 
that led us to select the Standardized MAGI Conversion Methodology, the 25 percent band, 
and the decision not to make further adjustments for MAGI income counting and household 
composition rules.   
  Eligibility Groups- Minimums and Maximums:  Detailed descriptions of the eligibility 
groups that states will need to convert and the minimum and maximum allowable eligibility 
thresholds for each group. 
  SIPP Information:  Information about the SIPP, to support understanding and interpretation 
of SIPP based analysis. 
  Guidance on Applying State Data:  Information for states wishing to explore how to 
implement the Standardized MAGI Conversion Methodology using their own state data. 
 
We hope that this guidance will be helpful to states as they move forward with implementation 
of the streamlined, seamless system of coverage envisioned by the Affordable Care Act.   
We look forward to working closely with states on MAGI income conversion over the coming 
months. We will announce dates soon for webinars to review this information with states and the 
availability and content of technical assistance.  Please contact Stephanie Kaminsky, at           
410-786-4653 or via email at stephanie.kaminsky@cms.hhs.gov with any questions.                    
Sincerely, 
            /s/ 
Cindy Mann         
  Director 
 
cc: 
CMS Regional Administrators 
CMS Associate Regional Administrators  
Division of Medicaid and Childrens Health Operations 
 
Matt Salo 
Executive Director 
National Association of Medicaid Directors  
 
 
 
  Page 9  State Health Official/State Medicaid Director 
 
Alan R. Weil, J.D., M.P.P.  
Executive Director  
National Academy for State Health Policy 
 
Ronald Smith 
Director of Legislative Affairs 
American Public Human Services Association  
 
Joy Wilson  
Director, Health Committee  
National Conference of State Legislatures 
 
William Garner 
Legislative Director 
Committee on Health and Human Services 
National Governors Association 
 
Debra Miller  
Director for Health Policy  
Council of State Governments  
 
Christopher Gould 
Director, Government Relations  
Association of State and Territorial Health Officials