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 and CHIP Services 
           
            SMDL # 12-003 
            ACA # 21 
 
            RE:  Essential Health Benefits in the Medicaid  
                    Program 
           
November 20, 2012 
 
Dear State Medicaid Director: 
 
The purpose of this letter is to provide guidance to states on Medicaid benchmark benefit 
coverage options (hereafter referred to as Alternative Benefit Plans) under section 1937 of the 
Social Security Act.  Under the Affordable Care Act, states will rely on the benefit options 
available under section 1937 as they expand eligibility to low-income adults beginning  
January 1, 2014.  This letter provides guidance on the use of Alternative Benefit Plans for the 
new eligibility group for low-income adults; the relationship between Alternative Benefit Plans 
and Essential Health Benefits (EHBs); and the relationship of section 1937 with other Title XIX 
provisions. 
 
General Background 
Enacted as part of the Deficit Reduction Act of 2005, section 1937 of the Social Security Act 
(hereafter referred to as the Act) provides states with significant flexibility to design Medicaid 
benefit packages under the State plan.  There are many options in selecting an Alternative 
Benefit Plan, including the option to offer the Medicaid state plan adult benefit package, and 
states may offer different Alternative Benefit Plans to targeted populations to appropriately meet 
their needs. 
 
Through section 1937 Alternative Benefit Plans, State Medicaid programs have the option to 
provide certain groups of Medicaid enrollees with benchmark or benchmark-equivalent 
coverage based on one of three commercial insurance products, or a fourth, Secretary-
approved coverage option. Benchmark means that the benefits are at least equal to one the 
statutorily specified benchmark plans, and benchmark-equivalent means that the benefits 
include certain specified services, and the overall benefits are at least actuarially equivalent to 
one of the statutorily specified benchmark coverage packages.  The four benchmarks are:  
 
(1) The Standard Blue Cross/Blue Shield Preferred Provider Option offered through the Federal       
  Employees Health Benefit program (hereafter referred to as FEHBP); 
 
(2) State employee coverage that is offered and generally available to state employees (hereafter 
  referred to as State Employee Coverage); 
 
(3) The commercial HMO with the largest insured commercial, non-Medicaid enrollment in the 
  state (hereafter referred to as Commercial HMO) and   Page 2  State Medicaid Director 
 
(4) Secretary-approved coverage, which, as noted above, can include the Medicaid state plan 
  -benefit package offered in that state.   
 
These section 1937 benchmark options are minimum standards and states can augment coverage 
with additional benefits as described below.  In addition, for children under age 21, states must 
ensure Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) services are included 
either as part of the benefit package itself or through a combination of the benefit package and 
additional services.  Services provided to individuals age 21 or older will be deemed to meet 
Medicaid amount, duration and scope requirements when provided in accordance with the 
parameters of the commercial market product selected by the state, as reflected in items (1)-(3) 
above. 
 
Certain populations such as people who are blind and disabled are exempt from mandatory 
enrollment in an Alternative Benefit Plan, as identified at section 1937(a)(2)(B) of the Act and 
42 CFR 440.315.  States are, however, permitted to offer voluntary enrollment in an Alternative 
Benefit Plan to those exempt groups.  42 CFR 440.320 outlines the procedures that apply when 
such voluntary enrollment is offered.   
 
The Affordable Care Act made a number of changes related to section 1937 that are effective on 
January 1, 2014.  These changes include: 
 
  Any Alternative Benefit Plan must cover EHBs as described in section 1302(b) of the 
Affordable Care Act and applicable regulations;  
  EHBs include the following ten benefit categories, recognizing that some of the 
o
benefit categories include more than one type of benefit: (1) ambulatory patient 
services, (2) emergency services, (3) hospitalization, (4) maternity and newborn 
care, (5) mental health and substance use disorder services, including behavioral 
health treatment, (6) prescription drugs, (7) rehabilitative and habilitative services 
and devices, (8) laboratory services, (9) preventive and wellness services and 
chronic disease management, and (10) pediatric services, including oral and 
vision care.  
 
  The Mental Health Parity and Addiction Equity Act (MHPAEA) applies to Alternative 
Benefit.   
 
Alternative Benefit Plans and Essential Health Benefits 
We intend to propose that the definition and coverage provisions for EHBs in section 1302 of the 
Affordable Care Act and as described in the Notice of Proposed Rulemaking, CMS-9980-P, 
generally apply to Medicaid.  However, because of the role of the states in defining Medicaid 
benefits and existing title XIX statutory provisions, we will propose through regulation some 
modifications that will apply when furnishing these services to Medicaid beneficiaries. Section 
1937 coverage options are a starting point for states to establish their Alternative Benefit Plans, 
and the process for ensuring 
coverage of and, as necessary, adding EHBs will mirror steps taken by issuers in the individual 
and small group markets as described below. 
 
 
  Page 3  State Medicaid Director 
 
Coverage of EHBs in Alternative Benefit Plans   
To develop a benefit plan that meets the statutory provisions discussed above, we propose that 
states will first choose a coverage option from the choices set forth in section 1937.  The next 
step is to determine whether the 1937 coverage option selected is one of the options available for 
defining EHBs in the individual and small group market. There is considerable overlap between 
the 1937 coverage options and the base benchmark plan options identified at 45 CFR 156.100. 
We intend to propose, in forthcoming regulations, the following: 
   
  If the 1937 coverage option selected is one of the options available for defining EHBs, 
the state would be deemed to have met the requirement for EHB coverage in an 
Alternative Benefit Plan to the extent that the selected coverage option includes all EHB 
categories.   
  If the state selects a 1937 coverage option that is not one of the options for defining 
EHBs in the individual and small group market, states will select any one of the EHB 
base benchmark options and will then compare the coverage between the 1937 coverage 
option and the selected EHB base benchmark plan and, if needed, supplement the section 
1937 coverage option.    
Under either approach, we intend to propose that the supplementation process proposed at 45 
CFR 156.110(b) to ensure coverage of the ten statutorily-specified EHBs will apply to Medicaid 
as well.  Further, we intend to propose that states may select more than one benchmark plan to 
define EHBs for different segments of the Medicaid population, in keeping with states 
flexibility to design benefit plans appropriate to meet the needs of targeted populations.   
 
Additional Coverage Provisions for EHBs 
 
Certain EHB definitions or options will be adapted to Medicaid as follows: 
 
Habilitative Services:  CMS will propose rules relating to Medicaid to specify that states will 
define the benefit and will request comment on the parameters for this benefit.   
 
Pediatrics:  The EHB proposed regulation provides options for a state to supplement its 
benchmark plan in the individual and small group market if it is lacking with respect to pediatric 
services.  For children enrolled in Medicaid, all medically necessary services in general, 
including pediatric oral and vision services, are covered under the Medicaid EPSDT benefit, 
which applies to every section 1937 Alternative Benefit Plan.  As a result, EHB supplementation 
for pediatric services is not necessary in Medicaid. 
 
Prescription Drugs:  Section 1927 of the Act, which describes the conditions for Medicaid 
coverage of outpatient drugs and the Medicaid drug rebate program, applies to Alternative 
Benefit Plans.  Consistent with this title XIX provision, states have the flexibility to adopt prior 
authorization and other utilization control measures as well as policies that promote use of 
generic drugs.  
 
All other provisions under title XIX of the Act apply, unless, as described in section 1937, the 
state can satisfactorily demonstrate that implementing such other provisions would be directly 
contrary to their ability to implement Alternative Benefit Plans under section 1937.  States can 
use commercial market and/or Medicaid provider qualifications for each benefit.  Free choice of 
qualified providers continues to apply.    Page 4  State Medicaid Director 
 
Updating EHBs and Alternative Benefit Plans 
The Secretary has proposed through regulation that the EHB benchmark plan options for the 
individual and small group markets must be identified based on enrollment data available in the 
first quarter of 2012.  These options will remain effective from January 1, 2014 through 
December 31, 2015, and the process will be evaluated for future years.  We will propose that 
Medicaid adopt this same approach for the initial implementation of the new adult group and all 
other populations that may be provided benefits under Section 1937.  CMS will consult with 
states and reevaluate the process to determine how often states will update their Alternative 
Benefit Plans to reflect benefit changes made to 1937 commercial plans and EHBs in individual 
and small group plans. 
 
Administrative Procedures Pertaining to Alternative Benefit Plans 
Medicaid State Plan Amendments (SPAs) describing section 1937 Alternative Benefit Plans may 
be submitted to CMS beginning in the first calendar quarter of 2013, for individuals in the new 
adult group effective January 1, 2014.  Over the course of 2013, a new automated web-based 
system for submitting section 1937 SPAs will be implemented.  
 
Three major sections must be submitted together as a package and approved by CMS through the 
SPA process:  Section 2.2/2.6 pertaining to Eligibility for the program; Section 3.1-C pertaining 
to Benefits/Services covered by the program; and Section 4.19-B pertaining to fee-for-service 
reimbursement methodology, if applicable.  In addition, a Section 4.18 SPA pertaining to cost-
sharing must be submitted to CMS and approved if the State plan needs to be modified to reflect 
cost-sharing for individuals in the Alternative Benefit Plan.  States implementing Alternative 
Benefit Plans in a managed care delivery system will also need to submit for CMS review any 
contracts with health plans, consistent with current practice.  
 
Regulations at 42 CFR 440.305(d) require that states wishing to establish a new 1937 Alternative 
Benefit Plan or to substantially modify an existing one, need to publish a public notice with  
reasonable opportunity for public comment prior to submitting a SPA to CMS.   
 
We intend to work closely with states as you consider the options for designing appropriate 
benefit packages in the Medicaid program and also will be scheduling webinars to review the 
information and processes described in this guidance.  We expect the proposed regulation will be 
published shortly, which may also include changes related to cost sharing to similarly modernize 
them for the new system that starts in 2014.  If you have any questions regarding section 1937 
Medicaid Alternative Benefit Plan, please contact Ms. Barbara Edwards, Director of the 
Disabled and Elderly Health Programs Group, at 410-786-0325.  
 
            Sincerely, 
 
            /s/ 
 
            Cindy Mann 
            Director 
  Page 5  State Medicaid 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 
 
Joy Wilson 
Director, Health Committee 
National Conference of State Legislatures 
 
Alan R. Weil, J.D., M.P.P. 
Executive Director 
National Academy for State Health Policy 
 
William Garner 
Legislative Director  
National Governors Association 
 
Ron Smith 
Director 
Legislative Affairs 
American Public Human Services Association 
 
Christopher Gould 
Director, Government Relations 
Association of State and Territorial Health Officials 
 
Debra Miller 
Director for Health Policy 
Council of State Governments