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 
 
                 
                                                                                                                      SMDL# 10-010 
                   ARRA#  7
June 21, 2010 
 
                RE:  Political Subdivisions 
 
Dear State Medicaid Director: 
 
The purpose of this letter is to provide clarification on the interpretation and application of the 
provision known as the political subdivision requirement in section 5001(g)(2) of the 
American Recovery and Reinvestment Act of 2009 (Recovery Act).  This provision was clarified 
under section 10201(c)(6) of the Patient Protection and Affordable Care Act (Affordable Care 
Act), which was signed into law on March 23, 2010.  The Centers for Medicare & Medicaid 
Services (CMS) provided initial information to States on the political subdivision requirement 
through State Medicaid Director letters in June and August of 2009, and also through a 
Frequently Asked Questions document dated July 7, 2009.  Further, each State attests to their 
compliance with this provision when they access increased FMAP funds provided through their 
quarterly grant award.  However, in light of questions that have arisen since providing this initial 
information, and the clarification in the Affordable Care Act, CMS believes additional guidance 
is needed, along with information on how States may demonstrate compliance.   
 
The Recovery Act provision establishes a prerequisite for accessing increased Federal matching 
funds during the current Recovery Act recession adjustment period (October 1, 2008, through 
December 31, 2010).  This guidance only applies to the Recovery Act and codifies technical 
assistance that has been offered to States on an as needed basis.  A similar provision for 
accessing certain increased Federal matching funds, enacted in the Affordable Care Act, will be 
addressed in future guidance.   
 
Background 
 
According to Section 5000 of the Recovery Act, the purpose of title V of the Recovery Act is to 
provide fiscal relief to States in a period of economic downturn and protect and maintain 
State Medicaid programs during a period of economic downturn, including by helping to avert 
cuts to provider payment rates and benefits or services...  Section 5001 provides a temporary 
increase of the Medicaid Federal medical assistance percentage (FMAP), subject to a series of 
qualifications and requirements.  Particularly, section 5001(g)(2) of the law requires that: 
  Page 2  State Medicaid Director 
 
In the case of a State that requires political subdivisions within the State to 
contribute toward the non-Federal share of expenditures under the State 
Medicaid plan required under section 1902(a)(2) of the Social Security Act (42 
U.S.C. 1396a(a)(2)), the State is not eligible for an increase in its FMAP under 
subsection (b) or (c), or an increase in a cap amount under subsection (d), if it 
requires that such political subdivisions pay for quarters during the recession 
adjustment period a greater percentage of the non-Federal share of such 
expenditures, or a greater percentage of the non-Federal share of payments under 
section 1923, than the respective percentage that would have been required by the 
State under such plan on September 30, 2008, prior to the application of this 
section. 
 
This section seeks to prohibit States from shifting Medicaid costs to political subdivisions and to 
ensure that States share the increased Federal matching dollars generated by the FMAP increase 
with political subdivisions.  In measuring compliance with this provision of the Recovery Act, 
CMS seeks to ensure that political subdivisions are not shouldering a greater percentage of 
funding of the Medicaid program without stifling States ability to manage or modify their 
Medicaid programs. 
 
Section 10201(c)(6) of the Affordable Care Act amended section 1905 of the Social Security Act 
to add section (cc) which establishes a similar prohibition on increasing percentage contributions 
from political subdivisions as a condition of receiving increased Federal funding authorized 
elsewhere under the Affordable Care Act.  In addition, section 1905(cc) contains additional 
language clarifying the treatment of voluntary contributions by political subdivisions.  This 
additional language specifically indicates that it shall apply to the increased Federal funding in 
section 5001 of the Recovery Act.  The additional language states: 
 
...in the case of a State that requires political subdivisions within the State to 
contribute toward the non-Federal share of expenditures required under the State 
plan under section 1902(a)(2), the State shall not be eligible for an increase in its 
Federal medical assistance percentage under such subsections if it requires that 
political subdivisions pay a greater percentage of the non Federal share of such 
expenditures, or a greater percentage of the non-Federal share of payments under 
section 1923, than the respective percentages that would have been required by 
the State under the State plan under this title, State law, or both, as in effect on 
December 31, 2009, and without regard to any such increase. Voluntary 
contributions by a political subdivision to the non-Federal share of expenditures 
under the State plan under this title or to the non-Federal share of payments 
under section 1923, shall not be considered to be required contributions for 
purposes of this subsection.  The treatment of voluntary contributions and the 
treatment of contributions required by a State under the State plan under this title, 
or State law, as provided by this subsection, shall apply to the increases in the 
Federal medical assistance percentage under section 5001 of the American 
Recovery and Reinvestment Act of 2009. 
 
  Page 3  State Medicaid Director 
 
States that have not made any changes to their Medicaid State plan and/or modified the non-
Federal share of their Medicaid funding since October 1, 2008, are unlikely to have funding 
issues which are inconsistent with section 5001(g)(2) of the Recovery Act.  However, States that 
have made changes in their programs and/or modified the non-Federal share of their Medicaid 
funding since October 1, 2008, must determine if such changes impact the funding of their 
Medicaid program under section 5001(g)(2).  States have several options for demonstrating 
compliance as described below.  If a State violates section 5001(g)(2) it is no longer entitled to 
the increased FMAP under the Recovery Act. 
 
Demonstrating Compliance 
 
Voluntary Contributions 
States that wish to utilize new political subdivision financing can demonstrate compliance with 
section 5001(g)(2) by documenting that the financing is voluntary.  In order to show that the 
local contribution is voluntary, States should provide CMS with a letter from the appropriate 
official in charge of the political subdivision providing the contribution certifying that the 
contribution was voluntary and that the State is in no way requiring the subdivision to provide 
the funding, and describing any relevant contribution parameters (i.e. time period, amount).  If 
the State can demonstrate that a local contribution is voluntary with such a letter, that specific 
contribution is considered compliant with section 5001(g)(2) of the Recovery Act.  This 
certification may need to be renewed if it is specific to a particular budget period or political 
subdivision appropriation.  
 
Non-Voluntary Funding 
States with non-voluntary changes in local contributions during the recession adjustment period 
must demonstrate that the percentage of the non-Federal share of payments provided by political 
subdivisions during the recession adjustment period is no greater than the percentage they were 
providing on September 30, 2008.  This can be demonstrated using one of the two methodologies 
described below.  Under either method, States should exclude any new voluntary contributions 
that have been certified by the contributing political subdivision during the recession adjustment 
period (as discussed above). 
 
Option 1: Aggregate Analysis of non-Federal Share Funding  
States may elect to demonstrate compliance by measuring aggregate non-voluntary funding 
contributions.  The goal of this analysis is to consider comparable funding comparisons of the 
State plan as it existed for services and populations for periods both prior to, and subsequent to, 
the baseline date.  The analysis must include total (medical and administrative costs) annual 
program costs for the Medicaid program as it existed under the Medicaid State plan on 
September 30, 2008.  In order to accurately reflect the State and local percentage funding of the 
Medicaid program on September 30, 2008 (the baseline), States must measure the funding of 
administrative costs and medical services provided, based on the State plan approved and in 
place on September 30, 2008.  CMS understands that States operate their Medicaid State plans 
on annual cycles and that not all payments captured in the State plan occur quarterly; and that 
some payments, such as supplemental payments and disproportionate share hospital payments 
funded by localities may occur less than quarterly.  We also understand that these types of 
payments must be included to accurately reflect a States internal funding process.  In order to  Page 4  State Medicaid Director 
 
accurately reflect the impact of those funding arrangements, the States analysis should include 
total annual program costs for the 12 months ending on September 30, 2008, to measure baseline 
financing of the Medicaid program, but can be adjusted to annualize funding changes that were 
in effect on September 30, 2008.   
 
For this baseline period, the State must determine the percentage of the baseline aggregate 
funding that was required to be furnished by political subdivisions.  To determine compliance 
with section 5001(g)(2) of the Recovery Act, the State must then compare that baseline 
percentage to the percentage of current expenditures that are, or are estimated to be, funded by 
political subdivisions. 
 
Option 2: Payment Specific Analysis of non-Federal Share Funding 
Alternatively, States may elect to demonstrate compliance based on a comparison of percentage 
funding obligations by specific payments.  Under this approach, the State would compare the 
percentage of the non-Federal share funded by a political subdivision for each type of 
expenditure in the baseline, with the current or proposed funding obligation for that same type of 
expenditure in the current period (including payments to providers and administrative 
expenditures).  The State would demonstrate compliance if there were no increases in the 
political subdivision funding obligation for any type of expenditure.  Under this approach, 
growth in particular program expenditures, which political subdivisions finance, will not affect 
compliance as long as the percentage contribution for each particular expenditure type does not 
increase.  States that might want to use this methodology are those that require political 
subdivision contributions to finance the non-Federal share of particular expenditures, such as 
inpatient hospital services, that may increase in proportion to the overall program (or fluctuate in 
proportion to the overall program).  This methodology enables States to maintain constant 
financing mechanisms without regard to shifts in utilization or other fluctuations in particular 
program expenditures.   
 
It is important to note that States should include in both methodologies only expenditures and 
funding for services that existed under the State plan as of the baseline date.  New services that 
have been added after the baseline date should not be included in the analysis.  One example 
might be a new or expanded mental health benefit under the rehabilitative services benefit 
category.  These services did not exist at the time of the baseline measurement and would 
therefore distort the comparison.   
 
It is also important to note that States should include in both methodologies new payments for 
services or administrative activities that existed under the State plan during the baseline period.  
An example of a new payment that should be included would be a new targeted supplemental 
payment for services covered under the State plan prior to the baseline date.  
 
If a State performs one of the two demonstrations described above and the demonstration shows 
that the percentage has increased above the baseline percentage on September 30, 2008, that 
State would lose all of its Recovery Act-increased FMAP funding beginning with the date it 
implemented the increased percentage of political subdivision funding.  However, a State could 
correct the problematic funding by adjusting the funding to the political subdivision to reflect the   Page 5  State Medicaid Director 
 
correct percentages as of September 30, 2008, and the Recovery Act-increased FMAP funding 
would be restored for the entire period the State is in compliance with section 5001(g)(2). 
 
We hope you will find this guidance useful.  CMS will continue to provide technical assistance 
to States seeking to demonstrate compliance with section 5001(g)(2) of the Recovery Act.  
Questions regarding this guidance may be directed to Ms. Dianne Heffron, Director, Financial 
Management Group, CMCS at 410-786-3247.  
 
            Sincerely, 
 
                                                                        /s/ 
 
            Cindy Mann 
            Director 
 
cc: 
 
CMS Regional Administrators 
 
CMS Associate Regional Administrators 
Division of Medicaid and Childrens Health 
 
Ann C. Kohler 
NASMD Executive 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 
 
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