OLR Research Report

February 2, 2009




By: Robin K. Cohen, Principal Analyst

You asked several questions about community Medicaid spend-down policies both in Connecticut and other states. Specifically, you wanted to know:

1. the number of states that use central or specialized units to deal exclusively with spend-down clients as well as the costs associated with this;

2. the length of spend-down periods (budget periods) in other states (Connecticut uses a six-month period);

3. the number or percentage of clients in Connecticut and elsewhere who actually reach their spend-down within the budget period;

4. the number of states that use the “pay in” option and whether this affects the number of clients who meet their spend-down;

5. the types of notice that the Department of Social Services (DSS) provides clients about the types of expenses that count towards their spend-down along with the process for documenting these expenses;

6. whether state-funded services for mental health, case management, or “other medical needs” are counted in other states; and

7. if Connecticut would need legislation to implement changes in its spend-down program.

We initially submitted these questions to the federal Medicaid agency, the Centers for Medicare and Medicaid Services (CMS), which presumably has direct access to all state's Medicaid programs. It was able to provide only limited information. We also contacted a number of national experts. It appears that no one entity has this information, and a survey of the states that have spend-down programs would be the only way to get it. We would be happy to undertake such a survey during the interim.

We were unable to learn anything about your first question. But one Medicaid expert with whom we spoke does not believe that any state does this. We have attached copies of DSS spend-down notices in response to your fifth question.


According to the National Academy for State Health Policy, 33 states and the District of Columbia had medically needy spend-down programs as of December 2007. In general, these programs allow people whose income may be too high to qualify for Medicaid but who have high medical expenses that, when deducted (i.e., spending-down), would bring their income below an alternative qualifying level (called Medically Needy Income Limit (MNIL)).

States typically employ one of three spend-down or “budget” periods: one month, three months, or six months (the longest period Medicaid allows). This is the period during which someone must spend down the excess money in order for Medicaid to start paying for his or her medical care. We were unable to determine the budget periods for all the states, but we learned that states are using all three periods.

Kevin Loveland of the DSS believes that perhaps slightly more than 30% of spend-down clients actually reach their spend-down amount during the budget period. A national Medicaid expert, Tom McCormack, offers a more pessimistic assessment: he points to a study commissioned by Congress in the 1970s that concluded that virtually no one in a spend-down who was living in the community successfully reached his or her spend-down amount, while nursing home residents almost always did.

Since 1990, Congress has allowed states to offer spend-down clients the option of “paying-in” the amount by which their income exceeds their MNIL, typically on the first day of the budget period. This enables them to qualify almost immediately for benefits. Apparently, only six states offer this option to their spend-down clients. A Medicaid official in Utah,

which has offered pay-in the longest, believes that many spend-down clients have been successfully able to spend down to their MNILs as a result of the pay-in. But these programs can create administrative burdens, such as the need for computer-related adjustments.

Another strategy to help spend-down clients reach their spend-down amount sooner is a provision in federal law that requires states to deduct medical expenses paid by a state-funded public program (other than Medicaid). McCormack, who presently consults for Title II Community AIDS National Network, suggests that CMS has limited some states' ability to employ this provision. Despite this, Connecticut counts state-funded Connecticut Pharmaceutical Assistance Contract to the Elderly and Disabled (ConnPACE) expenses towards the spend-down. Other states also count these types of programs.

State law gives DSS general authority to run the Medicaid program. It also establishes some (but not all) of the program's eligibility criteria. For example, it establishes the MNIL. State regulations expand on the MNIL, describing the types of expenses that count and the order in which eligibility workers deduct them, as well as set the six-month budget period, largely following federal requirements. One could argue that DSS could change the budget period or institute a pay-in without legislation. But since the intent of these changes would be to enable spend-down clients to qualify for Medicaid coverage sooner, which would affect the state budget, they would be seen as a program expansion that the legislature probably would need to enact.


Federal law gives states the option of providing Medicaid to groups of individuals who do not qualify for benefits because they do not fit into a particular category (e.g., cash assistance recipient). One such group is the “medically needy,” which comprises people who do not qualify for cash assistance but meet categorical eligibility standards (such as disability). Applicants' income is limited to 133 1/3% of the state's Aid to Families with Dependent Children (AFDC) benefit in 1996. People whose income exceeds this “medically needy income limit” or MNIL, can spend

down their excess income on certain medical or remedial services for which they, a family member, or certain third parties pay or incur and qualify for Medicaid coverage (42 USC 1396a (10), 42 CFR 435.301, et. seq., 42 CFR 435.1007).


Federal law requires states to set the periods during which a spend-down client will be expected to meet the spend-down amount (the amount that brings income down to the MNIL). States can set this “budget period” at up to six months and can use more than one period (42 CFR 435.831(a)). If the client is seeking retroactive eligibility for Medicaid (up to three months before application), the spend-down must take into account expenses incurred during that retroactive period (42 CFR 436.831).

For example, if a state has a six-month budget period, a $500 per month MNIL, and the client's monthly income (after certain allowable non-spend-down deductions are taken) is $550, the client would have to incur medical expenses of $300 over the next six months in order for Medicaid to start paying (6 X $50 excess = $300).

Jeff Crowley of Georgetown University's Institute for Health Care Research and Policy suggests that there are pros and cons associated with short and longer budget periods. For some, a short budget period makes it easier to qualify for Medicaid because clients only need to meet the spend-down requirement one month at a time. But others, especially those having recurring high cost health conditions, prefer a long budget period. They may prefer to meet their spend-down and have a longer period to wait before they have to begin spending down again (Jeff Crowley, Medicaid Medically Needy Program: An Important Source of Medicaid Coverage, Kaiser Commission on Medicaid and the Uninsured, January 2003).

Table 1 shows some of the states that have medically needy programs and their spend-down budget periods.

Table 1: Spend-Down Budget Periods in Select States


Budget Period


1 month


6 months

District of Columbia

6 months


1 month


6 months


3 months

Rhode Island

6 months


3 months


1 month


6 months


Since 1990, federal law has permitted states to give individuals the option to spend down to the MNIL through lump-sum or installment payments to the state as an alternative to using the incurred expense method. If a state chooses this option, it must provide it for both Medicaid applicants and recipients and advise them to consider the benefits of using it based on anticipated Medicaid covered expenses during the upcoming budget period. States with budget periods longer than a month can allow clients to pay the pay-in amounts for the full budget period or in monthly installments.

If a client has already incurred expenses before electing the pay-in option, the amount of the incurred expense must be deducted from the spend down amount to determine the pay in amount (State Medicaid Manual, 3645).

CMS reports that five states currently use the pay in option: Illinois, Minnesota, Montana, New York, and Utah. Utah has used it for many years according to that state's Medicaid officials. We also learned that Ohio and Missouri use the option.

An example will help illustrate how this strategy can help clients qualify for coverage sooner. A client has $50 excess income. In Utah, which has a one-month budget period, the client would have to spend the excess down within the month in order to qualify for Medicaid, and then a new budget period would start. On the first day of the budget period, the client goes to his or her Medicaid eligibility office and writes a check for $50. The state Medicaid agency then issues a Medicaid card which can be used for the rest of the month for any Medicaid-eligible expense.

In Connecticut, which has a six-month budget period, the client would have a $300 spend-down using the scenario above. This is because the state takes the monthly overage amount ($50) and multiplies it by six. Once that $300 is spent or incurred, Medicaid coverage would start. If the state adopted a pay-in and a client could come up with the money (which is considerably higher because of the six months, unless the state allowed installment payments) at the outset or soon into the budget period, he or she could start receiving Medicaid.

Illinois Study

At the direction of the state legislature, Illinois' Medicaid agency conducted a study in 2002 law to determine the feasibility of starting a pay-in program in that state. The agency looked at the states that were already running pay-in programs for guidance. It found that four of the five at that time had a favorable opinion of the option, particularly as it benefitted participants. But staff from two of the states reported that the program was administratively burdensome. The Illinois researchers also learned that Minnesota operated its program centrally, while three states used a manual process that operated completely at the local level.

Missouri reported receiving pay-in payments from 1,805 spend-down clients in the program's first month. This represented 38% of the people who met their spend-down amount in that month.

The researchers ultimately concluded that the option would be likely to benefit participants with small spend-down amounts who met their spend-down on a regular basis. These individuals would be able to attain and keep their medical coverage with no break in benefits and with no contact with their local Medicaid caseworker. This would simplify the program for both the client and the caseworker.

But they also expressed concern about the administrative burden that implementing pay-in would create in Minnesota, largely due to federal rules. It pointed to the need for extensive modifications to two state agencies' computer systems, as well as to hire additional staff to interact with participants, coordinate with local staff, and process refund requests (when pay-in was too high). It estimated the costs to implement in the first year of $876,000 and $177,000 per year after that.

Staff recommended that the state proceed to implement pay-in, which it did in 2004.


In your letter, you indicated that you believed that only 30% of spend-down clients actually reached their spend-down during the six-month budget period. We asked DSS' Kevin Loveland if he could confirm this. He thought 30% was a reasonable estimate, but believed that it might be higher. He has requested an ad hoc report from the Medicaid eligibility management system to confirm this.

We spoke with Bev Graham of Utah Medicaid about her state's pay-in program, which has been operational for many years. She said that she believes that many clients have benefited from having the pay-in option, in combination with the one-month budget period, especially those clients whose minimal excess income enables them to qualify at the start of each budget period.


In 1987, Congress authorized states to deduct from income certain medical and remedial care expenses incurred either by the individual, family, or financially responsible relative that were not subject to

payment by a third party. But if the third party was a public program of a state or political subdivision, they had to be counted (42 CFR 435.831(d)).

Your letter gave the example of a client with mental illness who received services, but was either not required to pay for them or payed a nominal fee, from an agency that receives a grant payment from the Department of Mental Health and Addiction Services (DMHAS). We asked DSS' Loveland whether this would be an allowable deduction,

In this instance, DSS would allow the expense to count only if the client could show that the service was funded exclusively with state funds and there was a clear charge (e.g., a bill) for the specific services. If the agency was receiving federal funds (either within the DMHAS grant or separately), and these were co-mingled with state funds, it would not be an allowable spend-down deduction.

AIDS Drug Assistance Programs

The national AIDS network for which Tom McCormack presently consults addressed this issue 10 years ago when it was attempting to get state AIDS drug assistance programs (ADAP) expenditures to count towards their clients' spend-downs. At that time, the predecessor agency to CMS (HCFA) had ruled that these expenditures could not be counted as they were primarily federally funded. In response, the network argued that the 1987 federal law was unambiguous and had been misconstrued. The network did a thorough legislative history to bolster its position. But HCFA was unmoved, and the network ultimately dropped its efforts. (However, we learned that some states count ADAP program expenditures; Connecticut does not.)

One relevant part of the legislative history (attached) that the network presented should be mentioned. The U.S. House of Representatives report on the 1987 legislation contained prefatory language in which state programs were described as “wholly” state-funded. This is the only place in which that word is used, and the network argued that it was not Congress' intention to so narrowly construe the provision as to preclude so many mixed-funding programs that states at the time were counting (e.g., maternal and child health block grant) from being countable expenditures for spend-down clients.

Theoretical Conflict in Medicaid Law

McCormack asserts that a theoretical conflict exists in the Medicaid law. The spend-down program, as originally conceived, assumes that clients will have real medical expenses that they are responsible for paying. Yet the later provision that allows state-funded expenses to count would seem to contradict that by allowing someone who is receiving free

care from a state-funded program to count these expenses. For example, state funds pay for ConnPACE recipients' (those individuals who are not eligible for Medicare) drugs and DSS counts these state payments towards the spend-down client's spend-down amount.

States Using this Provision

We asked McCormack and other national Medicaid experts if they knew which states use this third party pay provision. With the exception of McCormack, the experts did not know and we did not have time to survey the states. McCormack stated that a number of states are generating bills in the names of nonprofit agencies that are providing services free of charge, with some state Medicaid agencies aware of these agreements and others not.

North Carolina. North Carolina's Medicaid Manual includes a separate section on medical expenses paid by a state, county, or city. It directs Medicaid eligibility workers to apply a medical expense to the deductible (spend-down) if it is “totally funded” by state, county (including county general assistance), or city government monies. An attachment to the manual lists examples of these programs, including cancer control, epilepsy medication, home health services, and a Clozaril payment program available through local mental health clinics.

Kansas. Kansas also allows spend-down clients to count third-party expenses paid by a state-funded public program. But only the portion of the expenses funded by the public program is allowable unless the client will continue to be obligated for the remaining portion of the bill, for example, vocational rehabilitation. Interestingly, the state also allows programs that receive federal Title V (Maternal and Child Health) funds, but it prohibits counting services provided for or paid through federal Hill-Burton and Ryan White funds.