Health Care Proposals in President Obama’s Budget

President Obama’s budget includes nearly $1 trillion in new health spending—a $634 billion reserve fund as a “down payment” for expanded coverage, and $330 billion in spending for un-offset increases to physician reimbursements.  The fund would be paid for in part through $318 billion in higher taxes on filers who itemize, “competitive bidding” for Medicare Advantage plans, and more government price controls on drug makers.  Below are a few possible concerns with the proposal.

More Spending Will Not Control Costs

In a week where government actuaries confirmed that health spending will jump from 16.6% to 17.6% of GDP this year alone, President Obama’s plan would propose $1 trillion in new health spending—on top of the more than $150 billion in health spending in the “stimulus” bill.  Members may therefore agree with Senate Budget Committee Chairman Conrad that “It’s very hard for me to understand why the answer is to put more money into the system.”

Creates New Entitlements without Making Current Ones Solvent

On the heels of a $74 billion expansion of children’s health insurance, the Obama Administration now proposes an additional $1 trillion in health care entitlement spending—at a time when Medicare alone faces nearly $86 trillion in unfunded liabilities.  Members may believe that, before creating massive new government programs, Congress should focus instead on reducing costs and improving quality to make health care more affordable, making Medicare solvent for the long term, and reforming a flawed Medicaid system.

Raises Taxes During a Recession

More than half of the proposed savings for the reserve fund would come by raising taxes still further on those individuals making over $250,000—the same people for whom Obama wants to let the Bush tax relief expire.  More than half of all top-income filers are small businesses, and raising taxes on small businesses that create jobs will only prolong our current slowdown.  Members may also note that the President’s proposal would reduce individuals’ ability to deduct charitable donations—which may discourage donations to health-related charitable organizations.

Skyrocketing Government Spending and Taxes

As of February 26, the White House website still claims that “Barack Obama will pay for his $50-65 billion health care effort by rolling back the Bush tax cuts.”  However, the budget proposal includes $1 trillion in new spending, paid for by new tax increases, as a “down payment” for more spending—and more tax increases—to come.

Government Care Means Government Control

Government programs constitute nearly half of all health care spending, and increasing government’s market clout still further may well lead to rationing of procedures as a way to contain costs.  The federal government already imposes price controls on doctors, hospitals, and pharmaceutical companies—leading some Members to wonder when controls on patient procedures will follow.

Question and Answer: “Competitive Bidding” in Medicare Advantage

In light of President Obama’s plan for “competitive bidding” within Medicare Advantage (MA), we have compiled a document providing background on the issue.

Does the President’s proposal create competitive bidding within Medicare?

No.  The proposal requires MA plans to bid against each other—but not traditional Medicare will not be required to be competitive.

Does the President’s proposal create a “level playing field” for MA plans to compete against traditional Medicare?

No.  Current law provides a significant bias in favor of traditional Medicare, including its role as the “default” setting for seniors—patients must affirmatively enroll in an MA plan, while those taking no action will receive government-run insurance through traditional Medicare.  Some Members may question why those purportedly interested in a “level playing field” have not proposed changing the current policy of auto-enrolling beneficiaries in traditional Medicare—particularly when it comes to those MA plans with costs below traditional Medicare spending.  Some Members may also view the double standards set by the Obama budget as further evidence to oppose a nationalized health plan, because Democrats will never create a truly level playing field for MA plans to compete against government-run Medicare.

Do seniors participating in Medicare Advantage plans receive extra benefits?

Yes.  Current law requires most MA plans to provide beneficiaries lower premiums, extra benefits, or reduced cost-sharing.  A May 2008 Government Accountability Office report found that MA beneficiaries saved an average of $804 per year in reduced cost-sharing and premiums by enrolling in Medicare Advantage.  Plans also use their rebates to provide extra benefits not covered by traditional Medicare, such as dental, vision, and hearing coverage.

Is a comparison between MA plan spending and traditional Medicare costs appropriate?

No.  Most Members believe that Medicare does not appropriately price all physician and hospital services—and Democrats’ recent actions demonstrate they do not support Medicare’s current pricing structure.  For instance, the “stimulus” bill placed a moratorium on proposed changes to hospice reimbursement, and legislation last July delayed a scheduled reduction in physician reimbursement levels—while providing for a 21% cut in January 2010.  If Members believe that physicians should not receive a 21% pay cut next January, then they may believe that traditional Medicare’s pricing mechanisms serve as an inappropriate benchmark to judge MA plan spending.

Isn’t traditional Medicare more efficient than Medicare Advantage plans?

No.  While some Democrats claim traditional Medicare’s administrative costs run as low as 3%, these costs exclude building maintenance, staff salaries, and collection of premiums that are borne by other federal agencies.  Traditional Medicare also suffers from fraud and abuse—a January Government Accountability Office report found that estimates of $10.4 billion in improper payments annually could actually understate the level of Medicare fraud—due to a lack of adequate administrative oversight.

Conversely, MA plans provide additional disease management and chronic care initiatives that traditional Medicare does not.  As Ezekiel Emanuel of the National Institutes of Health wrote in November, “Some administrative costs are not only necessary but beneficial.  Following heart attack or cancer patients to see which interventions work best is an administrative costs, but it’s also invaluable if you want to improve care.”

Do low-income seniors and minorities disproportionately benefit from Medicare Advantage?

Yes.  A 2007 study conducted by Ken Thorpe—a former Clinton Administration official—found that more than half of the millions of seniors who would lose MA coverage as a result of proposed cuts would have incomes between $10,000 and $30,000.  The same study included findings that minorities make up 27% of MA enrollment, compared with only 20% in traditional Medicare.  For these reasons, the National Association for the Advancement of Colored People and the League of United Latin American Citizens have previously opposed Democrat-led efforts to cut MA payments.[1]

Do all seniors benefit from the competition Medicare Advantage plans create?

Yes.  According to the Medicare Payment Advisory Commission, MA plans with a prescription drug benefit bid $11 per month less for prescription drug coverage than stand-alone Part D plans.  Because bids from both stand-alone plans and MA plans are averaged together to determine federal spending on the prescription drug benefit, MA plans’ lower bids have helped result in Part D spending much lower than originally projected.

[1] “Minority Groups Oppose Proposed Reduction in Funds for Medicare Advantage Plans,” Kaiser Daily Health Policy Report March 16, 2007 (Washington, DC: Henry J. Kaiser Family Foundation), available online at (accessed February 21, 2009).


Rep. Stearns Op-Ed: Medicaid for Millionaires

“We shouldn’t have to do that, because they should know better.”

So said President Obama in explaining why the Treasury—quite rightly—forced Citigroup to cancel the purchase of a $50 million corporate jet after the banking firm accepted tens of billions in federal bailout dollars. But he could well have been talking about his Democratic colleagues in Congress, who seem perfectly willing to give the former executives of these firms generous federal health benefits—even though they too should know better.

Consider the case of Henry Waxman, a Democrat who has represented Beverly Hills in Congress for over 30 years. Last fall, as Chairman of the Oversight and Government Reform Committee, he led hearings on the financial crisis, and criticized companies for taking “massive risk. When the bottom fell out, senior management walked away with millions of dollars, while shareholders and taxpayers lost billions.”

Fast forward to this year and a new Congress, where Mr. Waxman assumed the Chairmanship of the Energy and Commerce Committee, on which I sit. As Chairman, Waxman wrote major health-related sections of the economic “stimulus” legislation which Congress is currently considering. The proposal Mr. Waxman presented to the Committee spent more than $100 billion on various health spending projects, and created two new federal entitlements—one expanding Medicaid to individuals receiving unemployment compensation, and the second providing subsidies to individuals who choose continuation coverage from their former employers.

But for the new entitlements, there was a massive loophole. Because the bill explicitly prohibited income or asset tests from being applied to people receiving the new health care entitlements, anyone who recently lost their job—including the former CEOs who Mr. Waxman said last fall “walked away with millions”—could receive free or subsidized health care courtesy of federal taxpayers. At a time when all Americans are struggling to make ends meet, I viewed these uncapped subsidies as a poor use of taxpayers’ hard-earned money—and an unnecessary expansion of government to boot.

So when our Committee met to consider the “stimulus” legislation, I offered an amendment to the legislation to make sure that individuals with income over $1 million who elected continuation coverage from their former employers would not receive federal subsidies to pay for that coverage. Chairman Waxman accepted my amendment, and said he would “try to find a way to structure” the subsidies so that wealthy executives wouldn’t be eligible for subsidies they really shouldn’t need.

But several days later, when Democrat leaders introduced the version of the “stimulus” legislation that the House was actually going to vote on, my amendment was stricken from the bill. The omission wasn’t because a cap on the federal health subsidies was unworkable—Congressional tax advisers told a Senate committee an income-based cap was feasible to implement. No one was able to give me a straight answer as to why my amendment wasn’t included in the final bill—Speaker Pelosi actually put out a press release saying my amendment had been accepted as part of the “bipartisan” debate, when in reality my amendment and those of two of my other Republican colleagues had been unceremoniously dumped behind closed doors.

This incident raises a couple of key questions—one procedural, the other political. First, how bipartisan is it to accept an amendment one week, only to remove it without explanation or cause the next? Second, now that they control Congress and the White House, are Democrats so insistent on expanding the federal government’s role in health care that they want to provide subsidized coverage to the same fired executives they have so recently blamed for causing our current economic crisis?

In the end, the final “stimulus” product included an income cap so that taxpayers’ funds won’t be to subsidize the health insurance of Bernie Madoff and other similar characters. But it begs the same point President Obama raised when talking about Citigroup’s desire for a new corporate jet: We shouldn’t have to tell Democrats not to give federal health benefits to millionaires—because they should know better.

This post was originally published at RedState.

Weekly Newsletter: February 23, 2009

Orszag, Liberal Groups Support Health Care Rationing

Today President Obama will host a “fiscal responsibility summit” at the White House, followed later this week by a submission to Congress of his outline for the federal budget in Fiscal Year 2010 and beyond.  Press reports indicate that health issues will predominate both events, as entitlement spending in Medicare and Medicaid will serve as a focus of the fiscal summit, and health initiatives will be given a prominent place in the President’s budget proposals.

However, some Members may take a skeptical view of comments by Office of Management and Budget Director Peter Orszag and others that health care can be reformed—and the entitlement crisis resolved—primarily through government rationing of health care goods and services.  While head of the Congressional Budget Office, Orszag prepared a report on comparative effectiveness research that advocated rationing’s beneficial effects—while alluding to its potential downsides for patients.  The December 2007 report asserted that such research “could …yield lower health care spending without having adverse effects on health.”  However, the report also admits that “patients who might benefit from more-expensive treatments might be made worse off” as a result of changes in reimbursement patterns.

Orszag’s view of health reform is shared by the left-leaning Commonwealth Fund, which last week released its own report outlining ways to generate savings within the health sector.  The largest chunk of proposed savings—$634 billion over ten years—would come from comparative effectiveness research and subsequent rationing of care.  The report asserts that “merely making information available” about the relative merits of treatments “is unlikely to produce” outcomes yielding sufficient savings—and therefore recommends that the new comparative effectiveness center help “to create financial incentives for patients and physicians to avoid high-cost treatments.”  The Fund proposes that the comparative effectiveness center—similar to the Council established in economic “stimulus” legislation signed into law last week—“make benefit and pricing recommendations to public insurance plans, including Medicare.”

While supporting the need to slow the growth of health spending, and entitlement spending in particular, some Members may be concerned by the implications of these recommendations, which would place government bureaucrats between doctors and patients, leading to denials of critical care.  Some Members may instead support alternatives that would slow the growth of health care costs through additional competition (both inside and outside Medicare), while preserving and enhancing a culture where patients and doctors—not insurance companies or government bureaucrats—determine the appropriate course of medical care.  Some Members may also support means testing for the Medicare Part D benefit—requiring Warren Buffett and George Soros to pay more for their prescription drugs—as an additional way to bring our entitlement obligations in line with projected future revenues.

The Outlook Ahead

The President’s address to Congress Tuesday night, coupled with his submission of a budget outline on Thursday, will commence a six-week period leading up to Congress’ Easter recess where health issues will remain prominent.  As indicated above, the budget may include additional provisions regarding comparative effectiveness research and rationing of health care, as well as proposed cuts to Medicare Advantage plans that have proved popular with seniors—particularly those with low incomes—in recent years.  At this time it remains unclear whether the President will use the budget submission to fulfill his statutory obligation to present Congress with Medicare funding reform legislation, as required by the “trigger” provisions inserted into the Medicare Modernization Act at the behest of House Republicans.

Hearings and other legislative activity are also likely to continue regarding comprehensive health reform; Sen. Ron Wyden (D-OR) introduced his comprehensive bill on February 5, and Senate Finance Chairman Baucus—who pledged to introduce legislation early in the 111th Congress—may follow suit in short order.  The House may also consider legislation related to food and drug safety, as well as a bill (H.R. 1108 in the 110th Congress) giving the Food and Drug Administration (FDA) the authority to regulate tobacco products, funded by “user fees” on tobacco companies.  Particularly as many Democrats have harshly criticized the FDA for lax enforcement related to food safety matters, some Members may believe now is precisely the wrong time to distract the FDA from its current mission in order to have the agency regulate the tobacco industry—and the wrong time to burden working families with the second tobacco tax increase this year, on the heels of the 62 cent tax increase used to fund the State Children’s Health Insurance Program (SCHIP) expansion.

Legislative Bulletin: Senate Amendments to H.R. 2, Children’s Health Insurance Program Reauthorization Act

Order of Business: On February 14, 2009, the Senate amendments to H.R. 2 are expected to be considered on the floor under a closed rule, requiring a majority vote for passage.  The rule is expected to waive all points of order against the bill, except those arising under clauses 10 of rule XXI (PAYGO), and provide for one hour of debate, equally divided between the Majority and the Minority.

This legislation was introduced by Representative Frank Pallone (D-NJ) on January 13, 2009, and originally passed by the House by a vote of 289-139 on January 14, 2009.  The Senate passed its version of the bill by a vote of 66-32 on January 29, 2009.

Summary of Senate Changes Made: During consideration of H.R. 2 in the Senate, several changes were made to the legislation; those changes will be voted on by the House.  Among the more important changes, the Senate bill:

  • Accelerates the phase-out of childless adults from September 30, 2010 to December 31, 2009;
  • Removes a requirement that parents provide a signature on documents allowing their children to be enrolled by “Express Lane” agencies, as outlined below.  Some Members may be concerned that removing the signature requirement would further increase the risk of fraud associated with the new “Express Lane” procedures;
  • Expands States’ ability to cover legal aliens in Medicaid and SCHIP, permitting coverage for all children under age 21, instead of permitting coverage for all children under age 19 as in the original House bill;
  • Permits States to establish dental-only supplemental “wrap-around” SCHIP coverage for children enrolled in group health insurance coverage;
  • Establishes a new Medicaid Payment and Access Commission (MACPAC), similar to the Medicare Payment Advisory Commission (MedPAC).  Some Members may be concerned that this provision first would establish a new federal bureaucracy, and second that both its membership—which will include consumer and advocacy groups—and its stated purpose—which focuses on maintaining access—will result in a primary focus on expanding the scope and reach of federal Medicaid spending, rather than restoring the program’s fiscal integrity and improving its quality of care;
  • Removes restrictions on physician-owned specialty hospitals originally contained in the House legislation; and
  • Raises the amount of the tobacco tax increase from 61 cents to 62 cents per pack (which would increase total federal tobacco taxes from 39 cents to $1.01).  Some Members may be concerned that this further increase would place additional tax burdens on working families during an economic downturn.

Summary: The State Children’s Health Insurance Program (SCHIP), established under the Balanced Budget Act (BBA) of 1997, is a state-federal partnership originally designed to provide low-income children with health insurance—specifically, those children under age 19 from families with incomes under 200 percent of the federal poverty level (FPL), or $42,400 for a family of four in 2008.  Funds are provided to states on the basis of capped allotments, and states receive an “enhanced” federal match greater than the federal Medicaid matching rate in order to enroll covered children.  SCHIP received nearly $40 billion in funding over ten years as part of BBA, and legislation passed by Congress in December 2007 (P.L. 110-173) extended the program through March 2009, while providing additional SCHIP funds for states.

H.R. 2 would reauthorize and expand the State Children’s Health Insurance Program (SCHIP), as follows:

Funding and Allotments: The bill would maintain the current capped allotment method of SCHIP financing but would increase the allotments over the four and a half year period of the reauthorization (through September 30, 2013).  Including funding for the first half of the current fiscal year (i.e. through March 30, 2009) already provided under P.L. 110-173, the bill would include total SCHIP funding of nearly $69 billion—an increase of almost $44 billion in SCHIP outlays when compared to the statutory baseline.

The bill increases funding levels for the five fiscal years covered in the program—a total of $10.6 billion in FY09, $12.5 billion in FY10, $13.5 billion in FY11, and nearly $15 billion in FY12.  For Fiscal Year 2013, the bill includes a total of $17.4 billion in funding.  However, this funding would be delivered in two installments—one appropriation of $14.55 billion in October 2012, and a second six-month appropriation of $2.85 billion in March 2013.  Some Members may be concerned that this funding “cliff”—which presumes a 66% reduction in SCHIP expenses, from $17.4 billion in FY13 to $5.7 billion in FY14—is a budgetary gimmick designed primarily to mask the true costs of an SCHIP expansion.

The bill shortens from three years to two years the amount of time states have to utilize their allotment funding and provides that unused state allotments would be redirected to states projected to have allotment shortfalls after that period.  The bill rebases state allotments every two years to reflect actual state expenditures and provides that state allotments will increase annually to reflect increases in health care expenditures and the growth of child populations within each state.  The bill language would permit states to obtain increases in their allotments to reflect planned future expansions of SCHIP coverage and would allow certain states to receive the enhanced SCHIP federal matching rate (if funds are available from the state’s allotment) for Medicaid coverage of children in families with incomes above 133% FPL ($28,196 for a family of four in 2008).

Child Enrollment Contingency Fund: The bill would establish a new contingency fund within the U.S. Treasury for states that exceed their allotments, while also increasing enrollment at a rate that exceeds the states’ child population growth by at least 1%.  The money within the contingency fund would be carved out from the SCHIP allotments described above and could not exceed 20% of overall SCHIP funding.  Some Members may be concerned that the fund—which does not include provisions making additional payments contingent on enrolling the low-income children­ for which the program was designed—will therefore help to subsidize wealthier children in states which have expanded their programs to higher-income populations, diverting SCHIP funds from the program’s original purpose.

Performance Bonus Payments: The bill creates a new performance bonus payment mechanism to offset state costs associated with enrollment outreach and retention activities.  States which increase coverage of eligible low-income children in Medicaid by at least 2% will be eligible for bonuses of up to 15% of each beneficiary’s projected costs, and states which exceed their targets for enrolling eligible children by at least 10% will become eligible for additional bonus payments of up to 62.5%.

Funding for the performance bonus system under the bill totals at least $3.3 billion, which would be increased by any allotments not obligated to the states or any state allotments not expended or redistributed to other states.  State eligibility for the performance bonuses would remain contingent on states’ use of several practices designed to increase ease of enrollment, including continuous eligibility for at least 12 months, eliminating or liberalizing asset tests associated with enrollment applications, automatic administrative renewal, presumptive eligibility for children, and participation in the “Express Lane” process outlined below.

As there are no provisions linking payment of performance bonuses to the enrollment of low-income children, some Members may be concerned that these performance bonuses may provide an inducement to instead enroll children from wealthier families, diverting the program from its original intent.  Some Members may also be concerned that the provision linking performance bonuses to the adoption of at least four so-called best practices for enrollment—including the “Express Lane” process—will provide a strong financial incentive for states not to scrutinize the eligibility of certain applicants.

Coverage of Pregnant Women: The bill adds new language permitting states to utilize SCHIP funding to cover low-income, pregnant women.  The bill imposes several requirements on states seeking to use SCHIP funds to cover pregnant women, including a minimum eligibility threshold of at least 185% FPL (and not below the Medicaid eligibility threshold) for pregnant women only after covering all children under and 200% FPL without a waiting list or other enrollment cap to limit children’s participation in the program.  The provision provides that children born to certain low-income pregnant women participating in SCHIP will automatically be enrolled in the program for the child’s first year.

Coverage of Childless Adults: The bill prohibits the Centers for Medicare and Medicaid Services (CMS) from approving further waivers to cover childless adults under the SCHIP program and phases out SCHIP coverage of childless adults effective December 31, 2009.  The bill also allows states to apply for a Medicaid waiver to continue to cover childless adults but at the lower Medicaid matching rate instead of the enhanced SCHIP rate.  Some Members may be concerned that the bill would permit the continued coverage of childless adults within SCHIP for nearly a year—and for indefinite periods beyond that using the lower Medicaid match rate—diverting its focus from the targeted low-income children for whom it was created.

Coverage of Low-Income Parents: The bill also prohibits the issuance of new SCHIP waivers permitting the coverage of low-income parents and phases out parent coverage.  States may request an automatic two-year extension to cover low-income parents, and may continue coverage of low-income parents through the length of the authorization legislation (i.e. until October 2013), provided the state does not increase its income eligibility thresholds for parent coverage.  Some Members may be concerned that the bill would permit the continued coverage of low-income adults within SCHIP for at least five years, diverting its focus from the targeted low-income children for whom it was created.

Coverage of Higher-Income Children: The bill places certain restrictions on states’ matching rate for coverage of children in families with “effective family income” higher than 300% FPL—$63,600 for a family of four in 2008—to the lower Medicaid match rate, rather than the enhanced SCHIP federal match.  Specifically, the bill would prohibit states from using a “general exclusion of a block of income that is not determined by type of expense or type of income.”  This provision is designed to address an issue related by New Jersey’s SCHIP program, which disregards all income between 200-350% FPL for purposes of eligibility—thus making children in families with incomes up to $74,200 eligible for federal health benefits.

However, the bill expressly retains states’ ability to disregard unlimited amounts of income by type of income (i.e. salary, capital gains) or type of expense (i.e. disregard all housing-related expenses)—thus permitting states to continue to use “income disregards” effectively to ignore some or all of a family’s income for purposes of determining whether the family income falls below the 300% FPL threshold.  And the bill grandfathers in states (i.e. New Jersey) that already have programs in place using blanket income disregards.

Some Members may be concerned first that this provision does not prohibit states from expanding their Medicaid programs to families with incomes above $64,000, and second that the provisions allowing continued use of “income disregards” will only encourage states to use such mechanisms to expand their SCHIP programs to wealthier families—rather than covering poor children first.

Crowd-Out Provisions: The bill does not contain provisions to reduce “crowd-out”—that is, individuals leaving private coverage in order to join a government program—included in both versions of SCHIP legislation (H.R. 976, H.R. 3963) in 2007.  Those provisions included several studies about the extent to which crowd-out occurs within SCHIP, best practices on how to reduce crowd-out, and authority for the Secretary to reduce payments to states enrolling too many children above 300% FPL.  Some Members may be concerned that removal of these provisions will remove the last disincentive for states to enroll large numbers of children in families with incomes above $64,000—and possibly well above that threshold.

According to the Congressional Budget Office, the bill would result in 2.4 million individuals dropping private health insurance coverage to enroll in government programs—a higher level of crowd-out in both number and percentage terms than the first SCHIP bill (H.R. 976) presented to President Bush in 2007.

Outreach and Enrollment Provisions: The bill includes $100 million in new mandatory funding for grants to various entities—including states, localities, elementary and secondary schools, and other non-profit or faith-based organizations—to conduct outreach and enrollment activities, including 10% for a national enrollment campaign and an additional 10% set-aside for the Indian Health Service.  The bill also provides a minimum 75% Medicaid and SCHIP match for translation or interpretation services under the two programs.

“Express Lane” Enrollment Option: The bill permits states to use eligibility determinations from “Express Lane” agencies as a means to facilitate enrollment in Medicaid and SCHIP, including renewals and re-determinations of coverage.  Agencies—including but not limited to those which determine eligibility for Temporary Assistance to Needy Families (TANF), food stamps, federal school lunch programs, Head Start, and federal housing assistance—may not deem children ineligible for coverage based solely on an initial adverse determination with respect to income eligibility.

Under the program, states may establish an income threshold 30 percentage points above the Medicaid or SCHIP eligibility limit (i.e. if the SCHIP eligibility limit is 300% FPL, the state may establish a threshold of 330% FPL for purposes of Express Lane determinations).  States may also temporarily enroll children in SCHIP if the child in question “appears eligible” (criteria undefined) based on the Express Lane agency’s income determination, subject to a “prompt follow up” (time limit undefined) by the State as to whether or not the child actually qualifies.  The bill also allows states to “initiate and determine eligibility” for Medicaid or SCHIP “without a program application from, or on behalf of” children based on data from other sources, and only requires parental consent through “affirmation in writing, by telephone, orally, through electronic signature, or through any other means” the Secretary may provide.  Some Members may be concerned that removal of the written signature requirement in the original House bill will increase the risk of fraudulent enrollments in Medicaid and SCHIP.

The bill provides for a annual sample audit of Express Lane cases to establish whether or not the eligibility determinations made comport with eligibility determinations made using the full Medicaid review process and provides for state remedial actions (and eventually payment reductions) if the error rate for such audits exceeds 3%.  The bill sunsets the Express Lane option at the end of the authorization and includes $5 million for a report on its effectiveness.

Some Members may be concerned first that the streamlined verification processes outlined above will facilitate individuals who would not otherwise qualify for Medicaid or SCHIP, due either to their income or citizenship, to obtain federally-paid health benefits.

Citizenship Verification: Current law applies citizenship verification requirements differently to state SCHIP programs, depending upon the nature of the program.  The BBA permitted states to establish separate SCHIP programs, utilize Medicaid expansions to cover eligible populations, or some combination of the two.  The eight states and the District of Columbia that chose Medicaid expansions, along with Medicaid beneficiaries of the 24 states that chose combination programs, must comply with citizenship verification provisions enacted as part of the Deficit Reduction Act (DRA, P.L. 109-171) in 2006.  These procedures—which include verification of citizenship and nationality by presenting any of a variety of documents (e.g. birth certificate, passport, etc.)—were prompted in part by a July 2005 Inspector General report, which found that 47 states (including the District of Columbia) often relied on an applicant’s self-attestation of citizenship to determine Medicaid eligibility and that 27 of these states undertook no effort to determine whether the self-attestation was accurate.  Beneficiaries in the 18 states with separate SCHIP programs are not subject to the DRA verification requirements with respect to either citizenship or nationality.

The bill provides an alternative to the Medicaid citizenship verification process enacted in DRA—and extends this process to beneficiaries in stand-alone SCHIP programs—for children up to age 21 by allowing states to verify applicants’ citizenship through a name and Social Security number match.  If the Social Security Administration finds an invalid match, the state must make “a reasonable effort to identify and address the causes of such invalid match;” in the event the state cannot resolve the discrepancy, it must dis-enroll the individual within 120 days, during which time the individual in question has 90 days to respond and present satisfactory evidence to resolve the mis-match.

States will be required to submit data for each applicant to determine the states’ invalid match rates, but errors will only include cases where the individual has been dis-enrolled by the state after having received SCHIP benefits.  The bill provides that states with error rates above 3% will be required to pay back funds used to pay for ineligible individuals in excess of the 3% threshold—except that the Secretary may waive such a return requirement “if the state is unable to reach the allowable error rate despite a good faith effort.”

Some Members may echo the concerns of Social Security Commissioner Michael Astrue, who in a September 2007 letter stated that the verification process proposed in the bill would not keep ineligible individuals from receiving federal benefits—since many applicants would instead submit another person’s name and Social Security number to qualify.  Some Members may believe the bill, by laying out a policy of “enroll and chase,” will permit ineligible individuals, including illegal aliens, to obtain federally-paid health coverage for at least four months during the course of the verification process.  Finally, some Members may be concerned that the bill, by not taking remedial action against states for enrolling illegal aliens—which can be waived entirely at the Secretary’s discretion—until states’ error rate exceeds 3%, effectively allows states to provide benefits to illegal aliens.

Coverage of Legal Aliens: The bill would permit states to cover pregnant women and children under 21 who are legal aliens within Medicaid and SCHIP without imposing the five-year waiting period for most legal aliens to receive federal welfare benefits established as part of the welfare reform law (P.L. 104-196) signed by President Clinton in 1996.  For decades, Medicare has maintained a five-year residency requirement for legal aliens to obtain access to benefits; this waiting period was upheld by the Supreme Court in 1976, when Justice John Paul Stevens, writing for a unanimous Court in the case of Mathews v. Diaz, held that “it is obvious that Congress has no constitutional duty to provide all aliens with the welfare benefits provided to citizens.”

Some Members may be concerned that permitting states to cover legal aliens without imposing waiting periods will override the language of bipartisan welfare reform legislation passed by a Republican Congress and signed by a Democrat President, conflict with decades-long practices in other federally-sponsored entitlement health programs (i.e. Medicare), and encourage migrants to travel to the United States for the sole or primary purpose of receiving health benefits paid for by federal taxpayers.

Premium Assistance: The bill permits states to establish premium assistance programs—which provide state and federal funds to finance employer-sponsored health insurance.  The bill provides that employers must pay at least 40% of premium costs in order for the policy to qualify for premium assistance but prohibits high-deductible policies associated with Health Savings Accounts (HSAs) from qualifying under any circumstances.

The bill changes the current premium assistance criteria within SCHIP, such that rather than requiring the cost of covering the entire family through the employer policy be less than the costs to enroll a child in government-run coverage, states should instead use an “apples-to-apples” comparison of the marginal costs of covering the applicable child (or children) when compared to enrolling the child in SCHIP. The bill also permits states to “wrap-around” coverage to supplement the employer policy if the latter does not meet appropriate SCHIP benchmark standards, and to establish a purchasing pool for small employers (i.e. those with fewer than 250 employees) with low-income workers to provide workers options to utilize premium assistance to enroll their families.

The bill requires states that have created premium assistance programs to inform SCHIP applicants of the program and includes provisions regarding coordination with employer coverage and outreach to workers to inform them of premium assistance.  However, the bill does not require states to establish premium assistance programs.  Some Members may therefore be concerned that the bill does not ensure that all children with access to employer-sponsored coverage will be able to maintain their current coverage.

Quality Measures: The bill requires CMS to develop an initial set of child health quality measures for state Medicaid and SCHIP programs, including those administered by managed care organizations, and establish programs allowing states to report such measures and disseminate information to the states on best practices.  The bill includes further requirements for the Department to create a second pediatric quality measures program “to improve and strengthen the initial core child health care quality measures” and authorizes grants and contracts to develop and disseminate evidence-based quality care measures for children’s health.

The bill requires states to report annually on state-specific health quality measures adopted by their Medicaid and/or SCHIP plans and authorizes up to 10 grants for demonstration projects related to improved children’s health care and the promotion of health information technology.  The bill also authorizes (subject to appropriation) $25 million for a demonstration project to reduce childhood obesity by awarding grants to eligible local governments, educational or public health institutions, or community-based organizations.

The bill establishes a program to develop a model electronic health record for Medicaid and SCHIP beneficiaries and authorizes a study on pediatric health quality measures.  These and the other quality programs addressed above would be funded through mandatory appropriations totaling $45 million per fiscal year.

Lastly, the bill applies certain quality provisions to the managed care organizations with whom states contract to provide SCHIP benefits—including marketing restrictions, required disclosures to beneficiaries, and access and quality standards both for the managed care organizations and the state agencies overseeing them.  The bill also requires a Government Accountability Office (GAO) study on whether the rates paid to SCHIP managed care plans are actuarially sound.

Enhanced Benefits: The bill requires state SCHIP plans to have access to dental benefits, and mandates that those dental plans resemble a) coverage provided to children under the Federal Employee Health Benefit Program (FEHBP), b) “a dental benefits plan that is offered and generally available to state employees,” or c) the largest commercially-available dental plan in the state based on the number of covered lives.  States would also be permitted to offer “wrap-around” SCHIP dental benefits packages to supplement children’s employer-sponsored coverage.

The bill includes language requiring mental health parity in state SCHIP benefits, specifically that “financial requirements and treatment limitations applicable to such…benefits” are no more restrictive than those applied to medical and surgical benefits covered by the plan and establishes a prospective payment system for federally qualified health centers receiving Medicaid reimbursements.  The bill also requires that states impose a grace period of at least 30 days on beneficiaries for non-payment of any applicable premiums due before terminating the beneficiaries’ coverage; under current law, such premiums generally only apply to individuals with family incomes above 150% FPL.

Other Provisions: The bill includes language stating that “nothing in this Act allows federal payment for individuals who are not legal residents.”  However, as noted above, the bill provisions allow states to verify SCHIP eligibility without document verification and provide no financial penalties to states enrolling illegal aliens until those errors (which in the case of “Express Lane” applications will be derived from sample audits, not scrutiny of each application) exceed 3%—and these penalties may be waived in the Secretary’s sole discretion.

The bill establishes a new Medicaid Payment and Access Commission (MACPAC), similar to the Medicare Payment Advisory Commission (MedPAC), and requires the new Commission to submit two annual reports to Congress.  The bill requires the Commission to examine both payment policies for the two programs as well as the program’s impact on “access to covered items and services,” including creation of an “early warning system” designed to draw attention to any “problems that threaten access to care” for beneficiaries.  Some Members may be concerned that this provision first would establish a new federal bureaucracy, and second that both its membership—which will include consumer and related advocacy groups—and its stated purpose on maintaining access will result in a primary focus on expanding the scope and reach of federal Medicaid spending, rather than restoring the program’s fiscal integrity and improving its quality of care.

The bill includes language prohibiting the Department of Health and Human Services from approving any new state Health Opportunity Account demonstrations under the program established in DRA.  Some Members may be concerned that the prohibition on this innovative—and entirely voluntary—program for beneficiaries may hinder beneficiaries’ ability to choose the health plan that best meets their needs.

The bill would disregard any “significantly disproportionate employer pension or insurance fund contribution” when calculating a state’s per capita income for purposes of establishing the federal Medicaid matching percentage for that state.  According to CMS, only one state would benefit from this provision—Michigan.  The bill would also increase Disproportionate Share Hospital (DSH) allotments for Tennessee and Hawaii and would clarify the treatment of a regional medical center in such a manner that the Congressional Budget Office, in its score of the bill, identified the provision as specifically benefiting the Memphis Regional Medical Center.  Some Members therefore may view these provisions as constituting authorizing earmarks.

Tobacco Tax Increase; Pay-Fors: The bill would increase by 62 cents—from 39 cents to $1.01—the federal per-pack tobacco tax and place similar increases on cigars, cigarette papers and tubes, and smokeless and pipe tobacco products.  Some Members may be concerned that an increase in the tobacco tax, which is highly regressive, would place an undue and unnecessary burden on working families during an economic downturn and could encourage the production of counterfeit cigarettes by criminal organizations and other entities.

Lastly, the bill increases the percentage of payment of certain corporate estimated taxes in the last fiscal quarter of 2013 by 0.5%, and reduces the next applicable estimated tax payment in the first fiscal quarter of 2014 by a similar amount.

Cost: A final CBO score of the Senate amendments was not available at press time.  However, according to the Congressional Budget Office, the original House-passed bill would increase direct spending by a total of $39.4 billion between Fiscal Year 2009 and Fiscal Year 2014, and $73.3 billion over the FY09-FY19 period.  Most of the spending in the first five years of the budget window ($34.3 billion) would be derived from the SCHIP expansion; and Medicaid spending in the latter five years would rise, as the score notes that children enrolled in SCHIP would be shifted to the Medicaid program upon SCHIP’s expiration.  However, both the Medicaid and SCHIP scores are contingent upon provisions in the bill cutting SCHIP spending from $17.4 billion in Fiscal Year 2013 to $5.7 billion in Fiscal Year 2014.  To the extent that Members believe this 66% reduction in SCHIP expenses will not take place, they may be concerned that the funding “cliff” is a budgetary gimmick designed to mask the true costs of the bill’s expansion of health care benefits.

The Joint Committee on Taxation estimates that the increase in tobacco taxes would generate $38.8 billion through Fiscal Year 2014, and $72 billion from Fiscal Years 2009-2018.  The bill also increases revenues by $1.6 billion through Fiscal Year 2018 as a result of individuals dropping private health insurance in order to enroll in the SCHIP program, as employees with group health insurance would have less of their income sheltered from payroll and income taxes.

The JCT score on the tobacco tax notes that the tax provisions would generate $7.2 billion in FY10 (the first full year the tax increase would take effect), but only $6.4 billion in Fiscal Year 2019—a decrease of more than 10%.  Some Members may be concerned that expansions of the SCHIP program would rely on a declining source of revenue.

Question and Answer: Government Rationing of Health Care

In light of the inclusion of $1.1 billion in the Democrat “stimulus” legislation for comparative effectiveness research, the below provides background on the issue and its larger implications about the federal government’s role in rationing health care.

“We won’t be able to make a significant dent in health-care spending without getting into the nitty-gritty of which treatments are the most clinically valuable and cost-effective….The federal government could exert tremendous leverage with its decisions…In choosing what it will cover and how much it will pay, it could steer providers to the services that are the most clinically valuable and cost-effective, and dissuade them from wasting time and money on those that are neither.”

— Former Sen. Tom Daschle, writing in Critical: What We Can Do about the Health Care Crisis[1]

What is comparative effectiveness research?

Broadly speaking, comparative effectiveness research evaluates the relative merits of various medical treatments, in the hopes of arriving at a set of best practices for treatment of a condition.  Of critical importance is the distinction between clinical effectiveness—i.e., which treatments work best irrespective of cost—and cost effectiveness—where the most effective treatments could be deemed inappropriate because their costs outweigh the perceived benefits in the government’s eyes.

Could the funding in the “stimulus” lead to government rationing of health care?

Yes.  The bill drops bipartisan Senate language requiring a focus on clinical measures—allowing for costs to be taken into account.  Democrat press releases trumpeting the “stimulus” note that CBO believes comparative effectiveness could generate $6 billion in budgetary savings.  Some Members may also note that a draft House Appropriations Committee report promised health care rationing:

Those items, procedures, and interventions that are most effective to prevent, control, and treat health conditions will be utilized, while those that are found to be less effective and in some cases, more expensive, will no longer be prescribed.

Former Health and Human Services Secretary-designee Tom Daschle also laid out the argument for the federal government to end coverage of treatments not deemed cost-effective, admitting that “doctors and patients might resent any encroachment on their ability to choose certain treatments.”[2]

What are other potential implications of using comparative effectiveness research to determine health coverage?

If comparative effectiveness research is used to determine coverage of particular therapies within government health programs (i.e. Medicare, Medicaid, etc.), two questions follow: Will individuals be permitted to pay for the treatments using their own funds?  Some Members may be concerned by the implications of such a policy to deny coverage for certain treatments, regardless of whether or not “top-up” payments are permitted.  If patients may supplement their Medicare or other government coverage with private funds, Members may be concerned that this “two-tier” health system would have a disproportionate impact on poorer individuals, who will not have the resources to purchase supplemental care.  Conversely, if “top-up” payments are prohibited, Members may strongly oppose an effective ban on patients using their own money to obtain care.  Therefore, some Members may oppose the federal efforts to take the unprecedented step of denying care based on cost grounds.

Why is this funding in the “stimulus” legislation?

Some Members may question this need for this provision’s inclusion, and believe that this significant expansion of funding for research that could lead to government-rationed health care should be debated through the usual appropriations process, rather than in a rushed setting, particularly as this government spending will have little effect in hastening economic recovery.

Will the $1.1 billion in the “stimulus” for comparative effectiveness research be well spent?

No.  A December 2007 CBO analysis notes that “it is not at all clear that such sums could be spent in an effective way in the near term.”[3]  Given that entire budget of the Agency For Healthcare Research and Quality (AHRQ) in recent years has hovered around $300 million, with only $15 million per year of that sum devoted to clinical effectiveness (not cost effectiveness) research, some Members may question whether AHRQ could spend an additional $300 million in “stimulus” funding—a doubling of its entire budget—effectively.[4]

Will comparative effectiveness research generate significant budgetary savings?

Former CBO Director Peter Orszag admitted that “the big kick” in savings associated with comparative effectiveness research would stem from insurers—and likely the federal government—implementing “changes in financial incentives tied to the research.”[5]  However, the CBO report admits that such decisions “could be difficult and controversial,” and further concedes studies suggesting that “patients who might benefit from more-expensive treatments might be made worse off” as a result of changes in reimbursement patterns.[6]

For further information on this issue see:

[1] Tom Daschle, Scott Greenberger, and Jeanne Lambrew, Critical: What We Can Do About the Health Care Crisis (St. Martin’s Press, 2008), pp. 171-72, 158.

[2] Ibid., p. 199.

[3] CBO, Comparative Effectiveness, p. 28.

[4] Ibid., pp. 10-11.

[5] Quoted in Fawn Johnson, “Bills Pushed to Gauge Effectiveness of Medical Treatments,” CongressDaily 17 March 2008, available online at (accessed March 18, 2008).

[6] CBO, Comparative Effectiveness, pp. 30, 15.

“Medicaid for Millionaires” in the Democrat “Stimulus”

Among many other spending items in the House-passed Democrat “stimulus” bill (H.R. 1) are provisions that could result in unemployed millionaires receiving federal subsidies to purchase continuation coverage from their former employers—or free health insurance coverage through Medicaid:

  • H.R. 1 creates a new entitlement to Medicaid coverage—fully paid for by the federal government without any state share—to individuals (and their families) currently receiving unemployment compensation, or those individuals who exhausted their unemployment benefits after July 1, 2008.
  • However, H.R. 1 explicitly states that “no income or resources test shall be applied” to Medicaid beneficiaries who qualify based on their receipt of unemployment benefits—meaning that individuals with millions of dollars in assets or other income could receive free health insurance courtesy of federal taxpayers.
  • Similarly, the House “stimulus” bill creates a new 65% federal subsidy for individuals utilizing COBRA continuation health insurance coverage from their former employer—but contains no cap on eligibility for individuals with millions of dollars of income.
  • When H.R. 1 was considered by the House Energy and Commerce Committee, Rep. Cliff Stearns (R-FL) offered an amendment to limit the federal COBRA subsidy to individuals with incomes under $1 million.  While Chairman Waxman accepted this amendment during the markup—and Speaker Pelosi trumpeted its acceptance as a sign of House Democrats’ bipartisan outreach on the “stimulus”—it was one of three Republican amendments that were accepted during in Committee, but dumped from the legislation that came to the House floor for a vote without debate or explanation.
  • Similarly, Rep. Nathan Deal (R-GA) offered an amendment to limit the scope of the new Medicaid entitlement to those individuals making under $1 million—but Chairman Waxman rejected these overtures, stating that limiting the program to people with under $1 million in income would present an “unnecessary barrier” to enrollment and that “it is highly unlikely that you’re going to find millionaires who would like to go on Medicaid.”  He did not explain why wealthy individuals would not want to enroll in Medicaid—or why, if Chairman Waxman believes Medicaid is so unattractive for wealthy people, it is an acceptable form of health insurance for poorer Americans.

Some Members may believe that, particularly given our $52.7 trillion in current entitlement obligations, taxpayers should not be asked to pay for a new entitlement to health benefits for individuals with ample means to pay for their own insurance plans.  Moreover, some Members may question Democrats’ reluctance to modify these provisions in H.R. 1, and why Democrats are so insistent on expanding government-run health insurance to new populations that they would make available free benefits to some of the same fired executives they so recently blamed for causing our current economic crisis.

Medicaid Matching Formulae and the Democrat “Stimulus”


Debate in the Senate this week on economic “stimulus” legislation may focus on the differences between the House and Senate plan to spend a proposed $90 billion increase in Medicaid matching funds to the States.  While this week’s debate may focus on providing an appropriate level of additional assistance to the States in greatest economic need, some Members may note that the underlying Medicaid matching formula itself has resulted in wealthier states spending more on their Medicaid programs than poorer ones.  Some Members may therefore support more enduring reforms to the Medicaid matching formula that would remedy this underlying inequity as a way to pay for the “temporary” increases in Medicaid spending being proposed and as a down payment on comprehensive entitlement reform.

The federal share of spending on States’ Medicaid programs is determined through the Federal Medical Assistance Percentage (FMAP).  Based on a formula that compares a State’s per capita income to per capita income nationwide—a mechanism designed to gauge a State’s relative wealth—the FMAP can range from a low of 50% to a maximum of 83%.  The federal match rate averages 57% of total Medicaid spending, which the Congressional Budget Office estimated to be $184 billion in 2008 (exclusive of State payments).  For Fiscal Year 2009, 13 States have a match rate of 50% (the statutory minimum), while eight States have match rates at or above 70% under the current funding formula.[1]


The Senate version of “stimulus” legislation under consideration this week, like the House-passed legislation (H.R. 1), would spend nearly $90 billion to increase federal Medicaid payments to the States—but would do so using different formulae.  The House would provide an across-the-board increase in the Federal Medical Assistance Percentage (FMAP) of 4.9% for a total of nine calendar quarters—from October 1, 2008 through December 31, 2010.  Both the scope and the length of the FMAP increase exceed the 2.95% increase in the federal match rate for five fiscal quarters passed to help States during the last economic downturn as part of tax and budget reconciliation legislation (P.L. 108-27).

The House bill includes further increases in the FMAP percentage for “high unemployment States,” which are defined by using a 3-month average unemployment rate.  If, when compared to any prior 3-month period after January 1, 2006, unemployment in a State has increased 1.5%, the FMAP will be increased by 6%; if unemployment has increased 2.5%, the FMAP will be increased by 12%; and if unemployment has increased 3.5%, the FMAP will be increased by 14%.  Once qualifying as having high unemployment, a State’s FMAP increases outlined above will remain until at least July 1, 2010, even if unemployment in that State falls prior to that date.

On the other hand, the Senate bill, while providing the same net increase in federal Medicaid funding over the same nine calendar quarters, dedicates more of the increased FMAP funding to all States, rather than those with high unemployment.  As passed by the Senate Finance Committee, the “stimulus” legislation would provide an across-the-board FMAP increase of 7.6%, as opposed to the House bill’s 4.9% blanket rise.  As a result, the increases for States with high unemployment would be reduced—States with unemployment rises over 1.5% would see an additional 2.5% increase (compared to 6% in the House bill), States with unemployment increases over 2.5% would see an additional 4.5% increase (compared to 12% in the House bill), and States with unemployment increases of 3.5% would see an additional 6.5% increase (compared to 14% in the House bill).


Both the House and Senate bills include language providing that no State’s FMAP percentage (exclusive of any across-the-board or unemployment-based increase) shall decline during the nine calendar quarter period.  Finally, both bills include “maintenance of effort” provisions such that States wishing to receive the FMAP increases may not impose more restrictive eligibility standards than those in effect on July 1, 2008 (unless the States retroactively remove such restrictions) and may not deposit any amounts “directly or indirectly” into a State’s rainy day fund or reserve account.


Health policy experts have for some time raised questions about two distortions caused by the FMAP formula.  First, the matching formula inherently encourages States to spend money on their Medicaid programs, because the federal government is guaranteed to pay at least half of the costs.  A State receiving the minimum 50% match would need to cut $2 million from its Medicaid budget to generate $1 million in State budgetary savings, while a State receiving a 70% match would need to reduce Medicaid expenses by $3,333,333 in order to yield a net savings of $1 million to the State.  Thus the FMAP formula, by ensuring that federal expenditures will always meet or exceed State outlays, encourages States to increase their Medicaid entitlement spending during strong economic times and discourages States from enacting Medicaid reductions during times of fiscal austerity.

The end result has been a Medicaid program that in many States has increased in both good economic times and bad.  One study—titled “What Goes Up May Not Go Down”—found that during the economic expansion of the 1990s, Medicaid expenditures for the period 1994-2000 increased at a rate faster than both the general economy and State revenues—even while poverty rates were falling.  Some Members therefore may not be surprised that these significant expansions of spending necessitated $10 billion by Congress in 2003—and may question the structural deficiencies in the current Medicaid formula that encourage such fiscal behavior.

Second, the statutory 50% minimum matching percentage encourages wealthier States greatly to expand their Medicaid programs—because the State share of such increased spending is less than otherwise would have occurred absent the minimum threshold.  An independent analysis compared State Medicaid expenditure data provided by the Centers for Medicare and Medicaid Services (CMS) to State poverty counts issued by the Census Bureau, and found an inverse relationship between a State’s number of poor citizens and Medicaid spending.  For example, the study found that in Fiscal Year 2006, Vermont spent more than $8,032 per poor citizen on its Medicaid program—highest in the nation—despite having a poverty rate of just over 10.2%—the ninth lowest overall, and well below the federal average of 13.3%.[2]  In other words, the behavioral effects of the current FMAP formula mean that wealthier States spend more on Medicaid than poorer ones—exactly the opposite of FMAP’s intended goal.


While the current Senate debate regarding the “stimulus” provisions surrounds what portion of a “temporary” FMAP increase should be targeted to States currently experiencing high unemployment, some Members may believe that the distortionary effects created by the FMAP as explained above warrant a review of the Medicaid matching mechanism itself.  The Congressional Budget Office in its December 2008 Budget Options report noted that “the floor of 50% provides a number of States with FMAP rates well above the rates they would be assigned in the absence of such a floor;” in one case, a State’s FMAP level would be 15% absent the statutory minimum percentage.

The same Budget Options paper noted that reducing the statutory minimum FMAP percentage from 50% to 45% would yield $53 billion in savings, while removing the statutory minimum percentage entirely would, if phased in over three years, yield a total of $88 billion in savings—virtually the entire cost of the “temporary” FMAP increase included in both the House and Senate bills.  If the current debate in the Senate is designed to achieve a “fair” solution that provides the most federal assistance to the neediest States, lowering or removing the statutory floor on the FMAP percentage would enable all federal Medicaid dollars—including dollars currently being spent—to go to those States in greatest economic need, rather than to wealthier States most able to expand their Medicaid programs to middle-income populations.

Therefore, some Members may agree with the need for a thorough examination of the current financing arrangements for the Medicaid program.  The open-ended nature of the Medicaid match, particularly when coupled with the 50% minimum federal contribution rate, encourages States to shift their spending priorities towards receipt of the federal match.  The end result has often been a perpetual “tug of war” between States and the federal government, whereby States use various accounting mechanisms to shift additional costs (whether directly health related or not) on to the federal government’s books.[3]

The Government Accountability Office (GAO) has examined the inequities of the current FMAP formula for more than a quarter-century, first proposing a reduction in the minimum FMAP percentage from 50% to 40% in a 1983 report.[4]  Other policy-makers have advocated for a system of capped allotments—similar to that which fund the State Children’s Health Insurance Program (SCHIP)—as a way to provide fairer and predictable payments to States while controlling the growth of federal Medicaid costs.[5]  Because the “stimulus” provisions as currently drafted would not eliminate these perverse incentives—indeed, by increasing the FMAP match rate, would likely expand them—some Members may agree with the experts who have called for a new approach.


Over and above the concern that an increase in the federal Medicaid match by definition provides no “stimulus,” instead substituting federal expenditures for State spending, some Members may believe that both the House and Senate provisions as drafted would not achieve their intended goal of providing greater federal aid to States with the largest economic need.  By contrast, altering the minimum FMAP formula would provide funds to offset this “temporary” Medicaid expansion in the short term—and in the longer term would ensure that wealthy States neither consume a disproportionate share of federal matching dollars nor expand their Medicaid programs to middle-income populations for whom the program was never intended.  Some Members may therefore believe that fundamental FMAP reform, rather than adding more federal spending to an already flawed funding formula, would be consistent with President Obama’s call for the federal government to re-examine and reform its current entitlement programs.


For further information on this issue see:

[1] Fiscal Year 2009 FMAP Table, available at (accessed January 31, 2009).  Note that the data cited above exclude the FMAP percentages for the District of Columbia and federal territories, which are set by statute and do not vary from year to year.

[2] Testimony of Robert Helms, House Energy and Commerce Subcommittee on Health hearing on “State Fiscal Relief: Protecting Coverage in an Economic Downturn,” July 22, 2008, available at (accessed January 31, 2009); U.S. Census Bureau Small Area Income and Poverty Estimates, available at  (accessed January 31, 2009).

[3] The phrase frames the title of an August 2006 white paper issued by the National Academy for State Health Policy regarding ways to improve the fiscal integrity of the Medicaid program.  See Sonya Schwartz, et al., “Moving beyond the Tug of War,” available online at (accessed February 2, 2009).

[4] Government Accountability Office, “Changing Medicaid Formula Can Improve Distribution of Funds to States,” Report GAO/GGD-83-27, March 9, 1983; available online at (accessed February 2, 2009).

[5] Robert Helms, “The Medicaid Commission Report: A Dissent,” American Enterprise Institute Health Policy Outlook #2, January 2007, available online at (accessed February 2, 2009).


SCHIP Reauthorization Principles

In anticipation of a potential vote to reauthorize and expand the State Children’s Health Insurance Program (SCHIP), the Republican Conference has prepared a series of principles, based on those articulated by House Republicans in the 110th Congress when considering similar legislation, that Members may want to consider in weighing a vote on legislation—along with an analysis of how the Democrat bill comports with those principles.

SCHIP Must Serve Poor Children First


  • SCHIP was passed by a Republican Congress, and signed into law by a Democrat President, as a program to provide health insurance to low-income children. Republicans believe that SCHIP should maintain its focus on low-income populations—that states should cover poor children first.

Some Members may be concerned that the bill falls short of this principle:

  • The bill restricts states from benefiting from the higher SCHIP matching rate for children in families making more than three times federal poverty rates—but the bill places no substantive restrictions on states’ ability to circumvent this restriction by disregarding (i.e. ignoring) some or all of beneficiaries’ income, making the notion of an income “cap” on SCHIP participation more fact than fiction.
  • The bill’s “cap” exceeds by 50% the threshold for targeted low-income children established by the first SCHIP bill in 1997—a significant expansion of the program’s intended parameters allowing children in families making $65,000 (or more if states “disregard” certain income sources, as they are permitted to do) to enroll in government-funded health insurance.

SCHIP Should Not Force Children Out of Private Health Insurance


  • Republicans believe that SCHIP should serve as a backstop for low-income children without other access to health insurance—and should not encourage families to drop their private insurance coverage in order to enroll in a government program.

Some Members may be concerned that the bill falls short of this principle:

  • According to the Congressional Budget Office, the bill would result in 2.4 million individuals dropping private health insurance coverage to enroll in government programs—a phenomenon known as “crowd-out”.
  • The bill does not require states to establish premium assistance programs that would allow workers with access to employer-sponsored coverage to use State funds to subsidize their existing coverage—which could result in families dropping private health insurance in order to join a government-run SCHIP program.

SCHIP Should Serve Low-Income American Children


  • Republicans believe that SCHIP should contain reasonable verification standards that ensure that only eligible recipients receive access to health benefits funded by federal taxpayers.

Some Members may be concerned that the bill falls short of this principle:

  • The bill permits States to avoid verifying applicants’ citizenship through a birth certificate or other documentation (as under current law), relying instead on a match of applicants’ names and Social Security numbers—which the Social Security Commissioner has said would simply result in illegal aliens using false Social Security numbers to obtain federal benefits.
  • The bill would impose no penalties on States for enrolling illegal aliens in the SCHIP program unless and until error rates exceed a specified percentage—and permits the Secretary of Health and Human Services to waive any state penalties that may apply.
  • The bill rolls back the current five-year waiting period—passed by a Republican Congress, and signed into law by a Democrat President—for legal aliens to apply for Medicaid and SCHIP, potentially encouraging individuals to migrate to the United States for the sole or primary purpose of obtaining federal health benefits.

SCHIP Funding Should Be Stable and Should Not Require Tax Increases


  • Republicans believe that American working families should not be subjected to a tax increase amounting to tens of billions of dollars to finance expansions of government health programs. Republicans also believe that SCHIP’s funding should not rely on budgetary gimmicks that could result in massive tax increases in future years.

Some Members may be concerned that the bill falls short of this principle:


  • The bill relies on a 62-cent increase in tobacco taxes—a regressive tax, which disproportionately falls on poorer American families and a declining source of revenue.
  • The bill contains a funding “cliff”—a 66% reduction in funding in the authorization’s final year that no one believes will actually occur, but was included in the bill to avoid a PAYGO point of order in the House.

SCHIP Should Provide Families with Choices


  • Republicans believe that SCHIP should provide all eligible families with premium assistance programs or similar options that will allow families to choose the high quality plans that meet their needs.


Some Members may be concerned that the bill falls short of this principle:

  • The bill does not require States to establish premium assistance programs as part of SCHIP, and thus does not ensure that all children with access to employer-sponsored coverage will be able to maintain their current coverage.
  • The bill prohibits the Centers for Medicare and Medicaid Services (CMS) from approving any new Health Opportunity Account demonstration projects, denying beneficiaries the chance to participate in this purely voluntary and innovative program established by a Republican Congress as part of the Deficit Reduction Act.