DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland 21244-1850 
 
Center for Medicaid, CHIP and Survey & Certification 
SHO # 11-002
ACA # 15 
April 4, 2011 
 
 
 
Re: CHIP Coverage of Children of Public Employees  
 
 
Dear State Health Official: 
 
This letter is one of a series intended to provide guidance on the implementation of the 
Affordable Care Act.  This letter provides initial guidance to States regarding the new option, as 
amended by the Medicare and Medicaid Extenders Act of 2010 (Public Law 111-309), to receive 
Federal matching funds for coverage of children of State employees through the Childrens 
Health Insurance Program (CHIP).   
 
The purpose of this letter is to provide guidance to States regarding the flexibility available 
through this new option.  States may receive Federal funding to extend CHIP eligibility to 
otherwise eligible children of State employees in cases where the State has maintained its 
contribution levels for health coverage for employees with dependent coverage, or can 
demonstrate that the State employees health benefits plans out-of-pocket costs pose a financial 
hardship for families.  This new coverage option was effective upon enactment of the Affordable 
Care Act on March 23, 2010.   
 
Background 
 
Prior to passage of the Affordable Care Act, section 2110(b) of the Social Security Act (the Act) 
excluded from eligibility CHIP children who were eligible for health benefits coverage under a 
State health benefits program on the basis of a family members employment with a public 
agency in the State (children of State employees).  However, over time, it has become clear that 
in some States children of State employees do not, in fact, have access to comprehensive 
coverage options that are affordable to their families.  Many of these children without 
meaningful access to affordable coverage are within the income eligibility level of their States 
CHIP program.   
 
The Affordable Care Act  
 
In response to States repeated requests for Federal support in this area, Congress added the new 
option for States in the Affordable Care Act.   Specifically, section 10203(b)(2)(D) of the 
Affordable Care Act amends the definition of a targeted low-income child in section 
2110(b)(2)(B) of the Act by permitting States to extend CHIP eligibility to children of State   
employees who are otherwise eligible under the State child health plan to the extent that one of  
 
   
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two conditions is met.  These conditions are described in a new section 2110(b)(6) (added by the 
Affordable Care Act and amended by Public Law 111-309) of the Act and will be referred to as 
the maintenance of agency contribution condition and the hardship condition. States now have 
the opportunity to receive Federal funding to provide CHIP coverage to children of State 
employees when either of these conditions is met.  
 
Maintenance of Agency Contribution 
 
The first approach for offering coverage to children of public employees is in cases where States 
can demonstrate that they have been consistently contributing to the cost of employee coverage, 
with increases for inflation, since 1997.  This condition is met when the public agency 
expenditures for health coverage for employees that have dependent coverage is not less than the 
amount of such expenditures in the 1997 State fiscal year, increased by the percentage increase 
of the medical care expenditure category of the Consumer Price Index (CPI-M) for All-Urban 
Consumers (all items: U.S. City Average).   
 
To meet this condition, States may aggregate employee contributions by the public agency rather 
than have to consider the expenditures for a particular employee or class of employees of the 
public agency.  Only the expenditures for health coverage for employees who elect dependent 
coverage need be considered.   Each public agency would determine the State fiscal year 1997 
baseline contribution levels for its employees, and compare the most recent State fiscal year to 
those levels. The attached set of Questions & Answers provides further information for States 
interested in this option. 
 
Hardship 
 
Another approach available to States is for a State to demonstrate that the coverage currently 
available through the public employee system poses a financial hardship for families. States 
seeking to offer coverage based on this condition would make a hardship determination to assess 
whether the annual aggregate premiums and cost-sharing imposed by the State health benefits 
plan would exceed 5 percent of a familys income during the year the child would be enrolled in 
CHIP.  The attached set of Questions & Answers provides further information on this approach. 
 
State Plan Option  
 
States wishing to elect this coverage may submit a CHIP State plan amendment at any time. To 
continue to meet either condition, the State will need to monitor, on an annual basis, agency 
expenditures or the cost-sharing rules applicable to the coverage offered through the State health 
benefits plan to ensure that it continues to meet one of the conditions. The Centers for Medicare 
& Medicaid Services (CMS) is happy to provide technical assistance to States considering the 
option to cover the children of State employees, including review of other proposed 
methodologies to meet the maintenance of agency contribution or hardship conditions. 
   
CMS is developing a Notice of Proposed Rulemaking outlining proposed regulations for this 
new option.   
 
   
Page 3 State Health Official 
 
If you have questions regarding the information provided in the letter, please contact Ms. 
Victoria Wachino, Director, Family and Childrens Health Program Group, 410-786-5647. 
 
Sincerely, 
 
/s/ 
 
Cindy Mann 
Director 
 
Enclosure 
cc:  
CMS Regional Administrators  
 
CMS Associate Regional Administrators  
Division of Medicaid and Childrens Health  
 
Richard Fenton 
Acting Director 
Health Services Division 
American Public Human Services Association 
 
Matt Salo 
Executive Director 
National Association of Medicaid Directors 
 
Joy Wilson 
Director, Health Committee 
National Conference of State Legislatures 
 
Director of Health Legislation 
National Governors Association 
 
Debra Miller 
Director for Health Policy 
Council of State Governments 
 
Christine Evans, M.P.H 
Director, Government Relations  
Association of State and Territorial Health Officials 
 
Alan R. Weil, J.D., M.P.P. 
Executive Director 
National Academy for State Health Policy 
   
Enclosure 
 
Questions and Answers for Coverage of State Employees Children under CHIP 
 
Q:    For coverage of children of State employees, do both the maintenance of agency 
contribution condition and the hardship condition have to be met? 
 
A:   No, a State is only required to meet one of these conditions in order to provide coverage 
to these children. 
 
Q:    How would a State demonstrate that it meets the maintenance of agency 
contribution condition? 
 
A:    A State must demonstrate that the amount of expenditures for a public agency made on 
behalf of employees with dependent coverage for the most recent State fiscal year is not 
less than the amount of such expenditures made in 1997, adjusted for inflation. (1997 was 
the year CHIP was enacted into law.)  This does not require a case-by-case determination 
but can be calculated on an average basis for each public agency (and, where multiple 
public agencies have the same contribution rate structures, can be done in the aggregate 
for all such agencies). 
 
To do this, a State would first determine the amount of expenditures made by the public 
agency toward dependent coverage for State fiscal year (SFY) 1997.   Next, a State 
would use the SFY 1997 expenditures and adjust it on an annual basis using the 
Consumer Price Index for medical expenses (CPI-M) in order to calculate what the 
expenditures would have been for the most recent prior fiscal year. You can find the  
CPI-M on the Bureau of Labor Statistics website: 
http://www.bls.gov/cpi/home.htm#tables.  
 
Finally, the State would then compare this adjusted 1997 expenditure amount to the 
current expenditure amount (calculated in the same manner as for 1997).  If the State 
demonstrates that the public agency contributed an amount in the most recent prior fiscal 
year that is at least equivalent to the amount spent in SFY 1997, trended forward, then the 
maintenance of agency contribution condition will be met.  The State will then be able to 
make dependents of employees of the public agency eligible for CHIP to the extent that 
other eligibility standards are met for those dependents.   
 
If different public agencies, such as State agencies, public universities or local education 
agencies all offer coverage under a State health benefits program, but provide different 
contribution levels for dependent care coverage, then a separate calculation and 
comparison between 1997 and current expenditures must be made for each public agency 
that has a different contribution level.   
 
A State would need to amend section 4.4.1 of its CHIP State plan and provide a 
methodology for how it would calculate the public agency expenditures on an annual 
basis in subsequent years.  A State would need to provide an assurance that it would 
make these calculations on an annual basis. 
   
Q:    How would a State demonstrate the hardship condition under this new option? 
A:    States can demonstrate that families meet the hardship condition by analyzing data on the 
annual family premiums, co-pays, deductibles,  and other cost sharing under the State 
employees benefit plan (including separate dental/vision plans).  A States calculation 
should be based on cost sharing requirements and a reasonable estimate of prospective 
cost sharing obligations that would be experienced by participating State employees and 
their families.  CMS will work with States in reviewing these estimates to determine 
reasonableness.  If this total out-of-pocket expense for premiums, deductibles, and other 
cost sharing exceeds 5 percent of a familys income then the hardship condition is met. 
A State would need to amend section 4.4.1 of its CHIP State plan and provide a 
methodology for how it would calculate the hardship condition on an annual basis in 
subsequent years.  A State would need to provide an assurance that it would make these 
calculations on an annual basis. 
Q:    Can States make prospective determinations in order to meet the hardship 
condition? 
A:    Yes.  A State can estimate annual cost sharing for the coming year for families and 
compare it with the 5 percent cap based on family income to make a prospective 
determination about meeting this hardship condition. A State could make these 
projections for all families that fall within certain income bands or Federal poverty level 
(FPL) categories.   If different public agencies, such as State agencies, public universities 
or local education agencies offer different State health benefits, such as providing 
different contribution levels for dependent care coverage, then a separate calculation 
could be completed for each agency. 
Q:   Would a State need to extend this State employee coverage option to all income 
levels covered under its CHIP State plan?    
A:   No.  A State could extend this option to a subset of its CHIP-eligible population by 
defining the eligible population accordingly.  CHIP eligibility rules in 42 CFR 457 
Subpart C permit States to identify eligibility groups based on access to other coverage, 
and this could include providing for separate treatment of children with access to a State 
health benefit program.  The State could also determine that the conditions for coverage 
of children of State employees are not met for all otherwise eligible children of State 
employees.  For example, if a State has a CHIP income threshold of 300 percent of the 
FPL, but can only substantiate that those with family incomes under 200 percent of the 
FPL meet the 5 percent hardship option, it may determine that, only those with family 
incomes under 200 percent of the FPL will automatically be eligible, while those above 
200 percent may present additional documentation to establish hardship.  In such an 
instance, the State plan amendment submission should reflect the income coverage level 
that the State intends to cover and criteria to determine if higher income families also 
meet a hardship condition.  The statutory provision in CHIP prohibiting States from 
covering children with a higher family income without covering children with a lower 
family income within any defined group of covered targeted low-income children still 
applies. 
Q:   Would a State need to extend this State employee coverage option to all State 
employees?      
A:   No, this is an option and States have flexibility to define eligible groups as outlined in 42 
CFR 457 Subpart C.  A State could extend this option to all or a subset of its State 
employees.  For example, if a State offers different coverage options for University 
employees, that agency may not meet the maintenance of agency contribution condition 
or those families may not meet the hardship condition.  Or the State may find it can only 
afford to offer coverage to employees at a certain income level as explained in the 
previous question. CMS will work with States and their unique circumstances. 
Q:   How is this coverage option affected by crowd out?    
A:   States have discretion as to how they limit and monitor crowd out.  States are not 
required to have a waiting period, but for those States with a waiting period, some have 
an affordability exception to the waiting period. The State may want to consider adding 
an exception specific to State employees who meet the affordability condition.  States 
must continue to monitor for crowd out because children must be uninsured as described 
in section 2110(b)(1)(C) of the Act.   
Q:   Can a child of a State employee be eligible for CHIP and use premium assistance for 
a State employee health benefits plan?    
A:   Yes and all rules related to the premium assistance options continue to apply.  For 
example, if a State chose to provide premium assistance under section 2105(c)(10) of the 
Act,  like any other employer, whether the State is covering children of State employees 
using the hardship or maintenance of agency contribution approach, the State agency 
would need to maintain its 40 percent contribution. 
Q:   Can States that offer coverage to pregnant women include those who are State 
employees? Can States that offer supplemental dental coverage enroll children of 
State employees into that program?    
A:   Yes.  A State can choose to include or exclude targeted low-income pregnant women who 
are State employees and children of State employees in supplemental dental coverage, 
consistent with the rules applicable to children.