The Personal Responsibility and Work Opportunity Reconciliation Act was intended to provide states the flexibility to design cash assistance programs that encourage work and end welfare dependence. Although the act greatly affected AFDC and SSI, few changes were made to Medicaid to help ensure continued health care coverage for low-income families and children. Since its inception in 1935, AFDC—a state and federally funded entitlement program administered by HHS’ Administration for Children and Families and the states—guaranteed cash assistance to needy families with children. The new welfare reform law replaced AFDC with a block grant program, Temporary Assistance for Needy Families (TANF), that ended open-ended federal funding and eliminated the entitlement to cash assistance for eligible families. Unlike the former AFDC program, TANF and the Administration for Children and Families have placed few requirements on how states design and administer their programs. But to encourage work and discourage long-term dependency on public assistance, TANF requires that adults begin working within 2 years of receiving benefits and places a 5-year lifetime limit on benefits. The Balanced Budget Act of 1997 modified several provisions of the welfare reform law that affected SSI eligibility criteria for aliens and Medicaid eligibility for disabled children. SSI—a federal income assistance program that provides monthly cash payments to needy aged, blind, or disabled persons—is administered by the Social Security Administration.The welfare reform law eliminated SSI eligibility for most aliens and tightened the eligibility criteria for children to qualify for disability assistance, with projected savings of more than $21 billion over a 6-year period, according to Congressional Budget Office estimates. The Balanced Budget Act, in part, reinstated Medicaid coverage for those aliens and disabled children who were enrolled in SSI when the welfare reform law was enacted on August 22, 1996. While major changes were made to cash assistance programs, relatively few changes were made to Medicaid—a federal-state funded program that the states administer under broad guidance from HCFA. Welfare reform, however, had the potential to directly affect Medicaid eligibles who, prior to the reform, were automatically enrolled in Medicaid based on their eligibility for cash assistance under AFDC. This population accounted for less than 40 percent of the total Medicaid population in 1996. To ensure continued Medicaid coverage for low-income families, the law generally set Medicaid eligibility standards at AFDC levels in effect on July 16, 1996. By setting Medicaid’s eligibility standards at this level, the law ensured that low-income families who would have been eligible for Medicaid before welfare reform continued to qualify for services regardless of the states’ cash assistance reforms. In addition, the Balanced Budget Act established the State Children’s Health Insurance Program and authorized over $20 billion over a 5-year period in federal matching funds to expand health care coverage to uninsured, low-income children who do not qualify for Medicaid. The Balanced Budget Act offers states several options regarding this program. States can use their federally set allotments to (1) expand their existing Medicaid programs to include children who do not qualify under the state’s March 31, 1997, Medicaid rules; (2) create or expand a separate children’s health insurance program; or (3) use a combination of Medicaid and State Children’s Health Insurance Program funds to increase health coverage for children. Although the new welfare reform law provided states with certain choices regarding Medicaid eligibility and administration, the states that we visited chose welfare reform options that sustained Medicaid coverage for their previously eligible populations. Medicaid-related options involve income and resource criteria for determining eligibility, aspects of program administration, sanctions for noncompliance with TANF work requirements, and continued Medicaid coverage for certain aliens residing in the United States at the time of the law’s enactment. Table 1 shows the Medicaid-related choices that the nine states we visited made. In the first year of welfare reform implementation, states generally chose to maintain the linkages formerly in place between their Medicaid and cash assistance programs. In some states, financial eligibility criteria for Medicaid and cash assistance had begun to diverge prior to welfare reform, as a result of state welfare experimentation. This divergence was consistent with the flexibility that the 1996 federal welfare reform law offered states. The Congress included a provision in the welfare reform law to protect Medicaid eligibility for low-income families. This provision—which requires states to use AFDC’s July 16, 1996, standards as the criteria for determining Medicaid eligibility—also provides several exceptions, only one of which allows states to impose more restrictive standards. Specifically, the law permits states to (1) increase their AFDC July 16, 1996, income and resource standards by as much as the year’s consumer price index; (2) use less restrictive methodologies for calculating family income and resources than used on July 16, 1996; or (3) lower their AFDC July 16, 1996, income standards but not below May 1, 1988, levels. At the time of our visits, none of the nine states indicated that they intended to lower their AFDC income standards from July 16, 1996, levels, which could have disqualified some individuals from the Medicaid program. Florida, however, increased its income standard. States desiring to modify their standards or methodologies are required to submit their amended Medicaid state plans to HCFA. However, because of Medicaid’s historic linkage to cash assistance, choices that states must make regarding eligibility for TANF can also affect Medicaid participation rates for low-income families. For example, states must choose who will be eligible for TANF and how much income and resources TANF recipients may have. Less generous standards could discourage people from going to welfare offices where they could receive information on Medicaid eligibility. The welfare reform law gives states the option to continue using their July 16, 1996, AFDC categorical and financial standards for both programs or to develop separate standards for TANF. Four of the nine states we visited reported having separate income or resource standards for Medicaid and TANF. (See table 1.) Officials in these states told us they began using different standards for their Medicaid and cash assistance programs under time-limited welfare demonstration projects that began before the passage of federal welfare reform legislation. State officials indicated that their attempts to identify the proper mix of incentives that would encourage work and discourage welfare dependency frequently led to more generous Medicaid income limits that allowed working families to remain eligible for Medicaid—as was the case in California and New Jersey. (App. II provides more detail on income and resource standards for the nine states.) In addition to experimenting with income and resource standards before welfare reform, states experimented with different methodologies for determining financial eligibility and the amount of cash assistance a family could receive. AFDC regulations allowed states to disregard (not count) certain types of income and resources. For example, states could disregard $265 of a family’s monthly income—$90 for work-related expenses and $175 per child for child care expenses—when determining income eligibility for AFDC and Medicaid. While TANF does not require states to use this or any of the other former AFDC determination methodologies, the welfare reform law requires states to continue using their AFDC July 16, 1996, methodologies for determining Medicaid eligibility. Five of the nine states we visited told us they have different income and resource determination methodologies for their Medicaid and welfare programs. For example, New Jersey officials told us they use more liberal Medicaid income and resource determination methodologies as incentives to encourage cash assistance recipients to begin working. The state disregards 100 percent of the first month’s earnings and 50 percent of subsequent months’ earnings to redetermine continued Medicaid eligibility for welfare families who have begun to work. Also, by disregarding the first $1,000 of personal property, the state has effectively raised its Medicaid resource standard to $2,000—the limit for individuals applying for Work First, New Jersey’s TANF program. In contrast, Wisconsin counts all income in determining whether an applicant is below the 115-percent federal poverty level and eligible for the state’s TANF program—Wisconsin Works, or W-2—but adheres to its July 16, 1996, AFDC rules to determine Medicaid eligibility. Prior to welfare reform, federal law provided that a single state agency be responsible for making both AFDC and Medicaid eligibility determinations. As a result, local public assistance caseworkers were generally responsible for accepting applications and determining eligibility for both AFDC and Medicaid. Welfare reform gave states the option to continue using a single agency to determine eligibility for Medicaid and TANF or to assign those duties to separate agencies. Additionally, the law gave states the option of using a single application for both programs or separate forms. All but one of the states we visited planned, at least in the near term, to maintain the administrative and application linkages between the two programs. All nine states use a common application for the programs, and only Wisconsin has separate agencies for determining applicant eligibility. State officials, including those in Wisconsin, believe that common applications are less burdensome for families seeking assistance and simplify the interview process for caseworkers. Florida officials, for example, told us that the state has used a common application for its assistance programs since 1992. Following the passage of federal welfare reform, Florida further streamlined the application process by converting its state unemployment offices into one-stop public assistance centers. At these centers, Florida residents can complete a single application to apply for Medicaid, job search assistance, child care, housing, and emergency assistance. There are 65 such centers located throughout the state. Wisconsin officials told us that although a single state agency will no longer determine applicant eligibility for Medicaid and TANF, the state will continue to use a single application for both programs. Wisconsin’s Department of Workforce Development determines eligibility for W-2 and the Department of Health and Family Services determines Medicaid eligibility. Wisconsin officials explained that both agencies use the same electronic application and have access to information in the state’s client database.