CMSDEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland 21244-1850 
 
Center for Medicaid and State Operations 
 
May 7, 2008                  SHO #08-003 
             
 
Dear State Health Official:  
 
In our August 17, 2007 letter to State Health Officials, we discussed our review strategy for 
ensuring compliance with existing requirements under the State Childrens Health Insurance 
Program (SCHIP) established under title XXI of the Social Security Act (Act) for the effective 
and efficient provision of child health assistance coordinated with other sources of health 
benefits coverage.  In working with States to ensure compliance with statutory and regulatory 
requirements in a way that is tailored to the unique circumstances of each State, we have learned 
that some States were unclear about our approach.  This letter addresses some of the key issues 
that have arisen during those discussions. 
 
In the August 17 letter, we discussed the need to minimize the substitution of SCHIP coverage 
for private coverage (crowd-out) at higher income levels in accordance with existing statutory 
and regulatory requirements.  We discussed our review strategy for evaluating State compliance 
with requirements under 2102(b)(3)(C) of the Act and with regulations at 42 C.F.R. 457.805 for 
reasonable crowd-out procedures when States expand eligibility to effective family income 
levels above 250 percent of the Federal poverty level (FPL) to include some strategies developed 
in the course of ten years of SCHIP operation.  We also set forth our concern that expansion to 
higher income levels could interfere with the overall effective and efficient provision of 
coverage, coordinated with other sources of health benefits coverage, to core SCHIP populations.  
We indicated that we would ask States to make assurances related to this concern, based on data 
concerning coverage of lower income children.  
 
In our prior letter, we stated that we would not expect any effect on current enrollees from the 
review strategy announced in the letter.  Nevertheless, a number of States who currently provide 
coverage to children above 250 percent of the FPL and are working to comply with the letter 
have expressed concern about the effect on current enrollees.  We reiterate that any changes 
made to a States crowd-out procedures in response to the August 17 letter need not be applied to 
prior enrollees.  These children can be grandfathered into the States current coverage and cost 
sharing levels, as long as they remain continuously enrolled in the program. 
 
Some affected States have asked whether the crowd-out procedures described in our prior letter  
in particular, the 12-month uninsurance period and cost-sharing within one percentage point of 
family income when compared to the cost of private coverage in the group market or set at the 
five percent family capshould be applied to all enrollees or only those enrollees with effective 
family incomes above 250 percent of the FPL.  Because our heightened concern about increased 
substitution risk applies to higher income levels, such crowd-out procedures need not be applied   Page 2  State Health Official 
 
to enrollees with effective family incomes at or below 250 percent of the FPL.  However, States 
do have the option to apply these crowd-out procedures to enrollees with family incomes at or 
below 250 percent of FPL as part of efforts to ensure that SCHIP coverage does not substitute for 
private coverage.  States do not have to use crowd out procedures when covering children at any 
level of income solely with their own funds. 
 
In our prior letter, we did not address the special circumstance of unborn children.  Because of 
the unique importance of timely prenatal care, we would not expect States to apply crowd-out 
procedures to SCHIP coverage for unborn children. 
 
The 12-month period of uninsurance is the standard by which States will be evaluated.  
However, CMS will review alternative proposals from States, and the justifications for them.  
We will also consider exceptions for categories of individual enrollees (based on particular 
circumstances) if the State furnishes justifications and data demonstrating a low substitution risk.   
 
The assurance that at least 95 percent of children in the State with family incomes below 200 
percent of the FPL have coverage can be supported by data demonstrating Medicaid, SCHIP or 
private coverage.  This is an achievable goal and based on conversations with States, we are 
convinced that a number of States have already reached this goal. We will continue to work 
individually with affected States on different approaches to document this assurance, including 
the use of state-specific survey data or other data sources to refine the underlying Current 
Population Survey (CPS) data.    
 
The purpose of the crowd-out procedures and assurances discussed in the August 17th letter is to 
ensure compliance with existing regulatory requirements by reasonably protecting against 
crowd-out and otherwise ensuring the effective and efficient operation of the SCHIP program in 
serving the most vulnerable low-income populations, when coverage is extended to populations 
with higher income levels.  Because State programs (and 1115 demonstrations) vary widely, we 
will continue to work with affected States and review requests for alternative approaches on a 
case-by-case basis to ensure compliance with these existing requirements of law. 
 
If you have any questions regarding this guidance, please contact Ms. Kathleen Farrell, Acting 
Director, Family and Childrens Health Programs Group, who may be reached at                  
(410) 786-1236. 
 
        Sincerely, 
 
/s/ 
 
        Herb B. Kuhn 
        Deputy Administrator 
        Acting Director, Center for Medicaid and State Operations 
 
   
Page 3  State Health Official 
 
cc: 
 
CMS Regional Administrators 
 
CMS Associate Regional Administrators 
   Division of Medicaid and Childrens Health 
 
Barbara Edwards           
NASMD Interim Director 
American Public Human Services Association 
 
Joy Wilson 
Director, Health Committee 
National Conference of State Legislatures 
 
Matt Salo 
Director of Health Legislation 
National Governors Association 
 
Debra Miller 
Director for Health Policy 
Council of State Governments 
 
Christie Raniszewski Herrera 
Director, Health and Human Services Task Force 
American Legislative Exchange Council 
 
Barbara Levine 
Director of Policy and Programs 
Association of State and Territorial Health Officials