Medicaid Substitution Rules: Mandatory vs Optional by State

What Are Medicaid Substitution Rules?

Medicaid substitution rules exist to stop public health programs like Medicaid and CHIP from taking the place of private health insurance that families could reasonably afford. These rules were created under the Balanced Budget Act of 1997 and later updated by the Affordable Care Act in 2010. The goal isn’t to deny help-it’s to make sure public funds go to people who truly don’t have other options. If a child has access to affordable coverage through a parent’s job, Medicaid shouldn’t automatically step in. That way, employers keep offering insurance, and taxpayer money isn’t used to replace coverage that already exists.

Under federal law, states must have systems in place to prevent this kind of substitution. But how they do it? That’s where things get messy. Some states use strict waiting periods. Others track private insurance databases. A few even combine both. And now, thanks to a new rule from the Centers for Medicare & Medicaid Services (CMS) that took effect in April 2024, states are being pushed to make transitions smoother between Medicaid and CHIP-without letting families fall through the cracks.

Mandatory Rules: What All States Must Do

Every state, plus Washington, D.C., is required by federal law to block Medicaid or CHIP from replacing private insurance. This isn’t optional. It’s written into 42 CFR 457.805(a) and rooted in Section 2102(b)(3)(C) of the Social Security Act. States can’t just ignore it. They must design processes that identify when a child has access to affordable employer-sponsored coverage.

One key requirement is handling waiting periods. If a parent loses a job and their child loses coverage, states can’t immediately enroll the child in CHIP. They can impose a waiting period-but it can’t be longer than 90 days. And even then, they must allow exemptions. For example, if a family’s income drops suddenly, or if the employer’s plan is unaffordable (premiums over 9.12% of household income in 2024), the waiting period must be skipped.

States also have to make sure kids don’t lose coverage during transitions. If a child moves from Medicaid to CHIP-or vice versa-there should be no gap. The 2024 CMS rule now forces states to build automatic enrollment pathways so families aren’t stuck in limbo while paperwork gets processed. This is a big shift. Before, many families lost coverage for weeks or even months because systems didn’t talk to each other.

Optional Rules: How States Diverge

While the core rule is the same everywhere, how states apply it varies wildly. That’s where the real differences show up.

Thirty-four states use a 90-day waiting period as their main tool to prevent substitution. That means if a parent says their child lost private insurance, the state can delay CHIP enrollment for up to three months-unless an exemption applies. But 16 states don’t use waiting periods at all. Instead, they rely on real-time data checks. They connect to insurance databases to see if the child is still covered under a parent’s plan. If the database says yes, they deny CHIP. If it says no, they enroll them immediately.

Some states go even further. Fifteen states, including Florida, Illinois, and Pennsylvania, have added their own exemptions beyond the federal minimum. For example, if a parent works seasonal jobs in agriculture or tourism, or if they’re laid off during a layoff season, those states skip the waiting period entirely. They know these families don’t have steady income or consistent coverage.

Then there’s the issue of system integration. Thirty-two states have merged their Medicaid and CHIP eligibility systems into one platform. That makes it easier to detect when someone qualifies for one program but not the other. These states see 22% fewer coverage gaps than those still running separate systems. In states with disconnected systems, families often have to reapply multiple times, fill out different forms, and wait longer-sometimes ending up uninsured.

Real-World Impact: Who Gets Hurt?

The rules sound logical on paper. But in practice, they often hurt the very families they’re meant to protect.

Take Ohio. A Medicaid worker there described a common scenario: a parent loses their job on a Friday. Their child’s insurance ends that day. They apply for CHIP on Monday. But because of the 90-day waiting period, the child can’t get enrolled until three months later. That’s 12 weeks without coverage. During that time, the child might miss doctor visits, dental checkups, or even emergency care. Many parents end up paying out of pocket-or just don’t get care at all.

On the flip side, Texas administrators say without waiting periods, they’d see a flood of families dropping employer coverage just to get free CHIP. That’s called “churning.” Employers might not even know their workers are doing it. And the state ends up paying for coverage that was already available.

But here’s the problem: the system doesn’t always catch the truth. In a 2023 survey of 47 state Medicaid offices, 68% said verifying private insurance was their biggest headache. It takes an average of 14.2 days just to confirm if a family has coverage. Meanwhile, kids go without care. One parent in Minnesota told a reporter she waited six weeks just to get a simple form signed. Her child had asthma. She couldn’t get a refill on the inhaler until the state finally confirmed her husband’s employer plan was still active.

And then there’s the data gap. Even with all the rules, 21% of children still experience coverage gaps when switching between Medicaid and CHIP. That’s over 700,000 kids every year. States like Louisiana saw their uninsured child rate jump by nearly 5 percentage points after tightening substitution rules in 2021. The rule was supposed to save money. Instead, it pushed more kids off coverage entirely.

Success Stories: What Works

Not all states struggle. Some have cracked the code.

Minnesota’s “Bridge Program” is a standout. It connects private insurance databases directly to the state’s Medicaid system. When a parent’s job ends, the system sees the coverage drop in real time-and automatically enrolls the child in CHIP. No forms. No waiting. No gaps. Since launching in 2020, Minnesota cut substitution-related coverage gaps by 63%.

Massachusetts and Oregon use similar tech. They don’t just check insurance status-they also track income changes. If a parent’s pay drops below a certain level, the system flags them for Medicaid eligibility without requiring a new application. That’s proactive, not reactive.

These states also train their frontline workers better. Instead of relying on paperwork, they use dashboards that show real-time eligibility status. They don’t have to call employers. They don’t have to wait for faxed documents. The system tells them what’s happening.

And it’s working. In these top-performing states, coverage gaps are under 8%. That’s less than half the national average.

The New Rule: What Changed in 2024

The big update came in March 2024. The CMS finalized a new eligibility and enrollment rule that forces states to fix the biggest flaws in the system.

First, states must now accept eligibility decisions from other insurance programs. If someone qualifies for a marketplace plan through the ACA, that counts as proof of coverage. No more double-checking.

Second, states must build automatic transitions between Medicaid and CHIP. No more manual reapplications. If a child’s income changes and they now qualify for CHIP instead of Medicaid, the system switches them over-no paperwork needed.

Third, states have to start reporting quarterly data on substitution gaps, waiting period use, and enrollment delays. Starting January 1, 2025, every state must publish this data. That means transparency. If a state’s gap rate is 18%, everyone will know. And pressure will build to fix it.

States have until October 1, 2025, to upgrade their systems. Those with separate Medicaid and CHIP systems will need 12 to 18 months to make the changes. Those with integrated systems? They’ll likely be ready by mid-2025.

What’s Next? The Future of Substitution Rules

Experts agree: the current system is outdated. The 90-day waiting period was designed in the late 1990s, when jobs were more stable and insurance was easier to track. Today, people switch jobs every 18 months. Gig work is common. Short-term insurance plans are booming. The rules haven’t kept up.

By 2027, industry analysts predict all states will use automated data matching. That means manual verification will drop by 65%. Families won’t wait weeks for a form to be signed. Systems will just know.

CMS says it will review the new rule’s impact in late 2026. If data shows gaps are still too high, they might remove the 90-day waiting period entirely-or replace it with income-based triggers. Some lawmakers are already pushing for that.

The real question isn’t whether substitution rules should exist. It’s whether they should be based on time-or on actual need.

Bottom Line: It’s Not About Denying Help

Medicaid substitution rules aren’t about saying “no” to kids who need care. They’re about making sure public money goes to those who have no other choice. But right now, the system is too slow, too rigid, and too confusing.

States that use technology to see real-time changes in coverage are succeeding. States that still rely on paper forms and 90-day waits are failing families.

The 2024 rule is a step forward. But it’s not enough. The next step? Let the system adapt to how people live today-not how they lived 25 years ago.