February 13, 1998  
Dear State Health Official:  
The Children's Health Insurance Program (CHIP) was created, with 
bipartisan support, to provide health insurance to uninsured children. The 
new law contains provisions explicitly designed to ensure that funds are 
targeted only to uninsured, and not already insured, children. Some of these 
provisions relate to Medicaid, while others are intended to prevent CHIP 
from substituting for private coverage. We are writing to provide guidance 
on the standards that the Department of Health and Human Services (DHHS) 
will use to evaluate State strategies to prevent this type of substitution of 
coverage. These strategies are necessary to maximize the use of Federal 
dollars and to provide more coverage to children who currently lack health 
insurance.  
The Potential for Substitution 
The potential for substitution of CHIP coverage for private group health 
coverage exists because CHIP provides reduced-price coverage that some 
individuals and employers currently purchase with their own funds. 
Specifically, employers with lower-wage employees could potentially save 
money if they stop offering dependent coverage (or if they reduce or 
eliminate their contributions for such coverage) and encourage their 
employees to enroll their children in the CHIP plan. At the same time, 
families that currently are making significant contributions towards 
dependent coverage (either through their employer plan or through an 
individual plan) could have an incentive to drop their current coverage and 
enroll their children in the CHIP plan as long as the benefits would be 
comparable and their out-of-pocket costs would be reduced. There also may 
be an incentive for States to substitute CHIP for Medicaid coverage, since 
CHIP has an enhanced matching rate.  
Medicaid Substitution Provisions  Title XXI contains three provisions aimed at preventing CHIP from 
substituting for current Medicaid coverage. First, the State plan must include 
assurances that the State will coordinate its CHIP program with other public 
and private programs, including Medicaid. Second, there are "maintenance 
of effort provisions for Medicaid eligibility. In a State that chooses to create 
a non-Medicaid CHIP program, the State cannot adopt income and resource 
methodologies for Medicaid children that are more restrictive than those in 
effect on June 1, 1997. In a State that chooses to create a Medicaid CHIP 
program, children are not eligible for enhanced matching under CHIP if they 
would be eligible for Medicaid in their State under the standards in effect on 
March 31, 1997. Third, any child who applies for CHIP must be screened for 
Medicaid eligibility and, if found eligible, enrolled in Medicaid.  
HHS Review of Strategies to Protect Against Substitution of Private 
Coverage 
The Balanced Budget Act of 1997 requires that States submitting 
applications to operate a State program with Federal funding through the 
Children's Health Insurance Program (CHIP) include a description of the 
procedures to ensure that coverage provided under CHIP does not substitute 
for coverage under either Medicaid or private group health plans. DHHS 
will review State CHIP plans to determine if the State has included 
procedures designed to address any potential substitution concerns. We 
believe that there are two distinct cases that need to be addressed: (1) 
insurance coverage provided directly through CHIP or Medicaid; and (2) 
using CHIP funds to subsidize coverage provided through employer-
sponsored group health plans.  
We will apply particular scrutiny to States whose State CHIP programs 
furnish coverage through employer-sponsored group health plans because 
we believe there is a greater potential for substitution of public for existing 
private spending on health insurance in these types of arrangements. First, 
we believe that this approach may increase the likelihood that families 
currently covered by employer-sponsored plans will seek the publicly 
subsidized coverage since these families could get premium assistance while 
still remaining in their existing group coverage plan. Many families may be 
reluctant to split up their family's health insurance to cover their children  through CHIP, but could be more likely to choose CHIP if they would not 
have to disenroll their children from their current plans. Second, employers 
with low-wage workers may have incentives to reduce or eliminate their 
premium contributions for dependent coverage if the CHIP assistance 
replaced that contribution. The Department will review State CHIP plan 
submissions as follows:  
  Insurance Coverage Provided Directly through CHIP or Medicaid  
 
   
  States that provide insurance coverage through a children's only 
and/or a State plan (as opposed to subsidizing employer-sponsored 
coverage) or expand through Medicaid will be required to describe 
procedures in their State CHIP plans that reduce the potential for 
substitution. The crowd out concerns increase at higher levels of poverty, 
and the Department will be applying greater scrutiny in these cases. After a 
reasonable period of time, the Department will review States' procedures to 
limit substitution. If this review shows that they have not adequately 
addressed substitution, the Department may require States to alter their 
plans.  
Subsidizing Employer-Sponsored Group Health Plans 
    
 
States that use CHIP funds to subsidize employer-sponsored group health 
plans should incorporate provisions in their State CHIP plan that are 
substantially equivalent to each of the following five provisions. We will 
work with States that have other methods to prevent crowd out to ensure that 
they are substantially equivalent to these requirements.  
1.   To ensure that coverage is targeted to children in families that 
previously were unable to afford dependent coverage, children in a 
family will not be eligible for subsidies through an employer-
sponsored group health plan if the family had employer-sponsored 
group coverage for these children within the previous six months. 
States will have the option to require a longer period of uninsurance, 
but that period could not exceed 12 months. Exceptions would be 
allowed if the prior coverage was involuntarily terminated (by other 
than a current employer). Newborns who are not covered by 
dependent coverage would not be subject to any such waiting period.  
  2.   To discourage employers from lowering their existing 
contributions for dependent coverage, States only will be permitted to 
make subsidies available for the purchase of dependent coverage 
through employer-sponsored group health plans in cases where the 
employer contributes at least 60 percent of the cost of family 
coverage, which is the median employer contribution nationwide. We 
can consider a somewhat lower level if States have additional 
provisions to limit employers ability to lower contribution levels. For 
ease of administration, the State may establish a minimum dollar 
employer contribution or some other method that is equivalent to the 
60 percent requirement to assure that employers continue to pay a 
meaningful share of the costs in these programs.  
 
3.   To ensure that the provision of child health assistance through 
employer-sponsored group health plans is cost effective and that the 
State is not inappropriately subsidizing coverage for the adults in a 
family, a State's payment for a child enrolled in an employer-
sponsored group health plan can be no greater than the payment that 
the State would make for the child if they were enrolled in a separate 
CHIP plan offered by the State (or in Medicaid if appropriate). If the 
State subsidizes children's coverage only, there is no need for a State 
to seek a family coverage waiver under Section 2105(c)(3). If the 
State intends to cover any adults, however, the State must seek a 
waiver under this section.  
 
4.   To promote cost effectiveness, families electing to receive child 
health assistance through an employer-sponsored group health plan 
will be required to apply for the full premium contribution available 
from the employer. This contribution will reduce the CHIP 
contribution toward the premium.  
 
5.   To demonstrate cost effectiveness, the State will be required to 
collect information and conduct an evaluation that examines the 
amount of substitution (if any) that has occurred under the program 
and the effect of these provisions on access to the program. States 
must assess the prior insurance coverage of enrolled children. 
Information on prior coverage can be obtained through the enrollment 
process, separate studies of CHIP enrollees, or other means that 
reliably gather information about prior health insurance status. To 
determine the level of substitution, States are encouraged to analyze  the number of families who choose to enroll in CHIP who might have 
retained or bought private insurance had they not received CHIP 
funding for employer-sponsored insurance. States will conduct this 
evaluation within a specified time period. Based on the State 
evaluations, the Department will reevaluate its position on these 
requirements for States that subsidize employer-sponsored group 
health plans.  
 
States that choose to subsidize children's coverage through employer-
sponsored group health plans would report in their State Child Health 
Plan their compliance with these guidelines. Including this 
information in the Plan will be deemed as meeting the requirement in 
the law that insurance provided under the State child health plan does 
not substitute for coverage under group health plans.  
Summary  
This guidance is intended to contribute to our national goal that CHIP 
provides coverage to uninsured  
children rather than children who are already covered.  
 
Sincerely,  
 
Sally K. Richardson  
Director  
Center for Medicaid and State Operations  
Health Care Financing Administration  
 
Claude Earl Fox, M.D., M.P.H.  
Acting Administrator  
Health Resources and Services Administration  
 
All HCFA Regional Offices  
All PHS Regional Offices   HHS Regional Directors  
 
Ms. Lee Partridge - American Public Welfare 
Association  
Ms. Jennifer Baxendell - National Governor's 
Association  
Ms. Joy Wilson - National Conference of State 
Legislatures  
Brent Ewig - Association of State and Territorial 
Health Officials  
Mary Beth Senkewicz - National Association of 
Insurance Commissioners