July 31, 2000  
Dear State Health Official:  
This letter provides guidance on our considerations in reviewing proposed demonstration 
projects under the authority of section 1115 of the Social Security Act (the Act) in the State 
Children's Health Insurance Program (SCHIP). SCHIP was created in 1997, with bipartisan 
support, to provide health care coverage to uninsured low-income children. While States have 
broad flexibility under title XXI of the Act to design their SCHIP coverage, section 1115 
demonstration projects may provide States additional opportunities to develop innovative 
methods for expanding children's coverage, promoting participation in SCHIP and Medicaid, and 
improving the scope and quality of the services available to children. The Department of Health 
and Human Services (the Department) will consider demonstration proposals that will expand 
coverage and improve enrollment, health care outcomes, and access to health care services for 
children.  
We are issuing this guidance to help States understand the types of demonstrations that will be 
considered and to inform States of the information they will need to present to the Health Care 
Financing Administration for consideration and approval of these projects. The enclosed set of 
Questions and Answers on SCHIP demonstration policy explains the factors we will consider 
when exercising our authority under section 1115 of the Act to review and approve 
demonstration projects. We will continue to provide guidance to States in this question and 
answer format as further issues arise.  
SCHIP Demonstration Project Considerations  
As previously announced, we will consider section 1115 demonstrations once a State has had at 
least one year of experience providing child health assistance under SCHIP and has submitted all 
required evaluations and enrollment reports. Experience with SCHIP will give States and the 
Department insight into what, if any, new initiatives might help States meet coverage goals and 
whether such initiatives could be accomplished without a waiver. The evaluations and 
enrollment reports are an important source of information that allows States, the Department, the 
Congress and the public to assess a State's progress in covering uninsured children. The first 
evaluations were due March 31, 2000, and we are pleased to report that almost all States have 
submitted them.  
As with all section 1115 demonstration projects, the purpose of SCHIP 1115 demonstrations is to 
allow States to illustrate how State-initiated innovations, not otherwise permitted under the law, 
will help them accomplish the goals of the program. Thus, all demonstration requests must 
identify demonstration objective(s) and include an evaluation component. In addition, before we  will approve demonstration projects, a State will need to provide assurances that it has met the 
primary purpose of SCHIP by expanding eligibility to low-income children (defined as those in 
families with incomes up to 200 percent of the Federal poverty level) and demonstrate that it is 
successfully reaching and enrolling eligible children. SCHIP funds are limited, and we have an 
obligation to ensure that the target group of low-income children receives coverage before 
SCHIP funds are used for other purposes.  
We encourage States that have addressed these issues to submit demonstration proposals that 
would expand coverage to children, incorporate innovative outreach strategies to find and enroll 
eligible children, and provide services that improve the quality of their care. For example, a State 
might seek demonstration authority to establish a public health initiative designed to address 
targeted health needs of children, or obtain coverage for SCHIP enrollees and other low-income 
children for supplemental health care-related services not otherwise available through Medicaid 
and SCHIP. In keeping with the purposes of SCHIP and the strong Congressional intent to assure 
minimum coverage standards and cost-sharing protections, we will not consider proposals that 
would reduce benefits for children below the minimum requirements of the law or that would 
require cost sharing above the limits allowed by law. States already have broad flexibility to 
design benefit packages and establish cost-sharing rules.  
We also recognize that some States have expressed interest in extending coverage through 
demonstrations to low-income parents of the children they are enrolling in Medicaid and 
SCHIP. To the extent that States have met the conditions described above, we support 
demonstration initiatives to extend coverage to low-income parents, within the constraints of 
the SCHIP law and available funds. SCHIP funding, however, was not designed to be sufficient 
to cover other populations. This is why the Administration continues to support the FamilyCare 
initiative that adds funding to SCHIP to help States extend health insurance coverage to low-
income parents.  
The enclosed set of Questions and Answers more specifically describes our policy for section 
1115 demonstration projects in SCHIP. This guidance is not intended to provide details on 
every type of demonstration that States may propose or to limit innovative proposals that States 
may want to develop. We anticipate that we will learn more about possible approaches that 
could promote coverage for low-income children as States come forward with their ideas and 
questions, and we will provide further guidance over time.  
Please contact Cynthia Shirk, SCHIP Technical Director, at (410) 786-6614 if you have 
questions about this guidance. We look forward to working together to develop proposals for  section 1115 demonstration projects in SCHIP that further our mutual goal providing health care 
to children and their families.  
Sincerely,  
/s/  
Timothy M. Westmoreland 
Director  
Enclosure  
Cc: All HHS Regional Directors All HCFA Regional Administrators All HCFA Associate 
Regional Administrators for Medicaid and State Operations Lee Partridge, American Public 
Human Services Association Brett Ewig, Association of State and Territorial Health Officials 
Joy Wilson, National Conference of State Legislatures Matt Salo, National Governors' 
Association  
Enclosure  
 
STATE CHILDREN'S HEALTH INSURANCE PROGRAM (SCHIP) SECTION 
1115 DEMONSTRATION POLICY  
<<< Questions and Answers >>>  
Question #1: What is the Department's policy on section 1115 demonstration projects for 
SCHIP?   Answer: The State Children's Health Insurance Program (SCHIP) was established to provide 
health insurance coverage to uninsured children in families with incomes too high to qualify for 
Medicaid but too low to afford private health insurance. The SCHIP statute accords States broad 
flexibility to design initiatives to provide coverage to low-income uninsured children, and the 
section 1115 demonstration authority gives States the ability to expand that coverage to other, 
related populations or undertake other health care-related initiatives for children. We encourage 
innovative demonstrations designed to evaluate new approaches to providing health care to 
children and will consider State requests to cover populations other than uninsured children. The 
Department, however, will consider certain factors in evaluating demonstration requests to 
ensure that SCHIP funds are used for coverage related to the purpose of SCHIP and are not 
diverted to other uses until SCHIP's primary purpose of insuring low-income children has been 
met. We are interested in working with States to pursue demonstration proposals that are 
consistent with the goals of promoting health care coverage for all low-income children and 
improving health care outcomes and access to services.  
Question #2: What factors will affect the Department's consideration of SCHIP 
section 1115 demonstration projects?  
Answer: As discussed in the "Dear State Health Official Letter," the State must have at least 
one year of experience providing child health assistance under SCHIP. In addition, the State 
must have submitted any evaluations required by Federal law, as well as all required SCHIP 
enrollment reports back to the implementation of its SCHIP program. Like all section 1115 
demonstrations, the purpose of SCHIP 1115 demonstrations is to allow States to demonstrate 
how State-initiated innovations, not otherwise permitted under the law, will help a State 
accomplish the goals of the program. Thus, all demonstration requests must identify 
demonstration objective(s) and include an evaluation component.  
In addition, as noted above, a State will need to provide assurances that it is effectively covering 
the core population of low-income children intended to be served by SCHIP.  
  The State must be covering children up to age 19 with family incomes up to at least 200 
percent of the Federal poverty level (FPL), the target income range under the SCHIP law. At all 
times during the course of the demonstration, the State's SCHIP program must be enrolling 
children on a Statewide basis and cannot have a waiting list or otherwise close enrollment of 
eligible children.  
    A State must demonstrate that its application and redetermination process for 
SCHIP and Medicaid promotes enrollment and retention of eligible children. For those 
demonstrations that do not focus on ways to find and enroll uninsured children, or that seek to  cover populations other than targeted low-income children, the State must show that it has 
adopted at least three of the following policies and procedures in its child health programs 
(SCHIP and Medicaid):  
  Use of a joint mail-in application and a common application procedure (e.g., the same 
verification and interview requirements) for SCHIP and Medicaid;  
  Elimination of assets tests;  
  12-month continuous eligibility;  
  Procedures that simplify the redetermination/coverage renewal process by allowing 
families to establish their child's continuing eligibility by mail and, in States with separate 
SCHIP programs, by establishing effective procedures that allow children to be transferred 
between Medicaid and the separate program without a new application or a gap in coverage 
when a child's eligibility status changes.  
  Presumptive eligibility for children.  
  States that seek enhanced SCHIP matching funds to cover populations other than targeted 
low-income children (such as, parents or pregnant women) through a SCHIP demonstration 
project must cover the lower income individuals in the group targeted by the waiver before 
covering the higher income individuals in that group. In addition, SCHIP 1115 demonstrations 
will not be available to expand coverage to populations other than targeted low-income children 
at higher income levels than the income levels applicable to children in that State.  
 
Question #3: Will the Department consider demonstrations for States to use SCHIP 
funds to provide additional benefits or services to low-income children?  
Answer: Yes. The Department will consider proposals to provide health-related services to low-
income children as long as these services are provided to an identifiable group of children and 
represent an expansion in the services available to children (i.e., the SCHIP funds do not simply 
supplant other State and Federal funds). There are two ways that States might receive enhanced 
matching funds to provide additional benefits for low-income children under a SCHIP 
demonstration. They can provide a health care-related benefit for SCHIP enrollees and other 
low-income children that is not otherwise coverable under Medicaid or SCHIP, or design public 
health initiatives that address the health care needs of some or all low-income children in the 
State.  
Supplemental Benefits: Additional benefits could be made available by establishing a health 
care-related benefit that supplements the benefit package provided under Medicaid or a State's 
separate child health program. For example, we would consider demonstration proposals to 
receive enhanced Federal matching payments for providing respite services to Medicaid or 
SCHIP eligible children with special health care needs. Since the benefits that are covered under 
Medicaid and SCHIP are quite expansive, States will need to clearly define the benefit(s) to be 
made available under the demonstration that are not otherwise coverable under Medicaid or 
SCHIP.   Public Health Initiatives: Some States might consider title XXI waivers to develop public 
health initiatives that target all or some low-income children in the State. These public health 
initiatives could be broad-based to address the significant health care needs of low-income 
children or focused on specific target populations. For example, a State could design a public 
health initiative to coordinate community mental health and substance abuse services for 
children, to address the special needs of children with chronic physical or mental health 
conditions. Additionally, a State could provide health care services to a targeted group of 
underserved low-income children, such as children who lack access to dental services. 
However, the State must ensure that such a demonstration does not replace existing State 
public health services.  
Question #4: Will the Department consider demonstration requests to use SCHIP funds to 
provide coverage to populations other than children?  
Answer: Yes, with limitations and subject to the criteria identified in Question #2. We will 
consider demonstration projects for States to cover other populations, as long as the initiative 
is related to the purposes of the SCHIP law and is designed to improve enrollment of 
uninsured children. The primary purpose of the law is to provide health care coverage to low-
income children; however, the law also anticipated coverage of adult family members through 
the provision of family coverage waivers. Thus, States may submit demonstrations to cover 
parents, but to ensure that the purpose of the SCHIP law is met, we will consider the factors 
discussed in Question #2 to ensure that children are covered before SCHIP funds are spent on 
parent coverage.  
We also will consider SCHIP demonstration requests to cover pregnant women with incomes 
above 185 percent of the Federal poverty level (for States that have already covered pregnant 
women up to 185 percent of the FPL through Medicaid at the regular matching rate), but we will 
not consider demonstration proposals to use SCHIP funds to cover other adults without children.  
Question #5: Will the Department approve demonstration projects to cover parents of 
SCHIP-funded children as well as parents of children covered under traditional 
Medicaid?  
Answer: Yes, if the factors discussed in Question #2 are addressed. We will consider 
demonstrations from States that implement an expansion of coverage to uninsured parents 
after March 31, 2000 (the date on which States were required to submit their first SCHIP  evaluations) regardless of whether the children of these parents are eligible for regular 
Medicaid, a SCHIP-funded Medicaid expansion, or a separate child health program. This is 
consistent with the criteria discussed earlier, that lower income parents must be covered 
before higher income parents and that such demonstrations will increase enrollment of 
children.  
Question #6: Some States have already expanded coverage for parents either through 
Medicaid options or through title XIX section 1115 demonstrations. Can States receive 
SCHIP enhanced matching payments for these parent expansions?  
Answer: A primary goal of SCHIP and of SCHIP demonstrations is not to supplant dollars being 
spent on existing coverage. However, States that meet the applicable criteria and show how the 
demonstration will improve or expand coverage may have access to SCHIP funds for parent 
expansions that were implemented on or before March 31, 2000. These demonstrations will be 
limited to coverage of those parents whose income exceeds 100 percent of the FPL. The 
demonstration proposal must address each of the considerations outlined in Question #2 and 
illustrate how it will enhance coverage or bolster enrollment. This policy offers the potential of 
SCHIP enhanced matching payments to States that have adopted significant coverage expansions 
for parents, while limiting the extent to which SCHIP funds are used for parents who are already 
eligible for coverage.  
As with all section 1115 demonstration projects, States will need to identify their demonstration 
objective(s) and evaluation plan, and these demonstrations will be effective only on a 
prospective basis. States should address in their proposals how expanded coverage will be 
improved or promoted through the use of demonstration authority.  
Question #7: What are the rules relating to budget neutrality? Will States have to 
show that activities under a title demonstration would not cost the Federal 
government any additional Federal dollars?  
Answer: As we believe Congress intended States to have full access to their SCHIP allotments 
to improve children's health care coverage, the Department has adopted an allotment neutrality 
policy for SCHIP demonstrations that allows States to spend title XXI Federal funds up to their 
individual SCHIP allotments. This permits States to access more of their Federal SCHIP funds 
and at the same time, limits Federal spending exposure to the capped allotment levels. 
Reallocated funds will not be considered with respect to this policy, since such funds are not 
available to a State on an ongoing basis.   States that seek a title XIX (Medicaid) demonstration in conjunction with a title XXI 
demonstration will need to meet all title XIX budget neutrality rules; this policy does not change 
title XIX budget neutrality rules.  
Question #8: What happens if a State with a SCHIP demonstration exceeds its 
allotment? Does coverage under the demonstration end?  
Answer: The answer to this question depends on how a State has set up its coverage and 
designed its demonstration project. A State could design a title XXI demonstration that operates 
through its Medicaid program or that is administered through its separate child health program. If 
the title XXI demonstration operates through a separate program, no further Federal matching 
funds will be available once the SCHIP allotment has been used.  
If the demonstration is in Medicaid, regular Medicaid matching funds can be available, either 
through a title XIX State plan amendment or through a title XIX demonstration, when the title 
XXI allotment is exhausted. As noted in Question #7, if the coverage continues through a title 
XIX demonstration, title XIX budget neutrality rules will apply. In the course of establishing the 
terms and conditions for a combination title XIX/title XXI demonstration, budget neutrality 
would be negotiated at the onset of the demonstration to establish the parameters under which 
Federal funds would continue to flow through the Medicaid program at the regular Federal 
matching rate in the event that the State's SCHIP allotment is exhausted.  
Question #9: Are there other types of demonstrations the Department will consider?  
Answer: Yes. While it is not possible to envision every type of demonstration that States might 
propose, particularly in light of the flexibility that States already have under the SCHIP law, 
States have identified some of the following initiatives that the Department would consider:  
  Extensions of coverage for children who age out of SCHIP in the midst of treatment for a 
specific condition; and  
  Proposals to promote enrollment of children, who are eligible for benefits under other 
income-based benefit programs, such as free and reduced school lunch program.  
 
While we are offering guidance on types of demonstrations in which we have particular interest 
and the factors we will consider in evaluating demonstration proposals, each proposal will be 
considered on a case-by-case basis.   Question #10: Are certain types of demonstrations not likely to be approved?  
Answer: Yes. We will not consider demonstrations that are inconsistent with key 
principles of the SCHIP law, including proposals that would:  
  Reduce benefits below benchmark levels;  
  Permit cost sharing above levels specified in title XXI;  
  Cover groups where there is a high risk that Federal funds will be substituted for State or 
private funds, such as children of public employees eligible for a State health benefit plan, 
children in institutions for mental diseases, and children who already have comprehensive 
private coverage;  
  Permit children who are eligible for regular Medicaid to enroll in a separate child health 
program; and  
  Waive the 10 percent cap for administrative expenditures.  
 
Question #11: What process will the Department follow in considering section 1115 
demonstration proposals from States?  
Answer: In general, the Department will follow the section 1115 demonstration procedures 
discussed in the Federal Register notice published on September 27, 1994. That notice outlined 
the requirements for public notice that a State should complete prior to submitting a section 
1115 demonstration proposal. We strongly encourage States to solicit and consider public input 
as they develop their proposals. As with traditional Medicaid section 1115 demonstrations, we 
also expect States to incorporate processes for consultation with Tribes where American 
Indian/Alaska Native populations are involved.  
In addition, we reaffirm the Administration's commitment to reviewing proposals in an 
expeditious manner. The Department plans to provide a proposal guide in the near future that 
will specify the information that States should submit for SCHIP demonstration proposals. We 
will continue discussions with States regarding how the process can be designed to accomplish 
our mutual goal of expanding and improving health insurance coverage for low-income children 
and their families.