Legislative Bulletin: Summary of Revised Graham-Cassidy Legislation

A PDF version of this document is available on the Texas Public Policy Foundation website.

Summary of CBO Score

On Monday evening, the Congressional Budget Office (CBO) released a preliminary estimate of the Graham-Cassidy bill. CBO concluded that the bill would comply with reconciliation parameters—namely, that it would reduce the deficit by at least as much as the underlying reconciliation vehicle (the House-passed American Health Care Act), reduce the deficit by at least $1 billion in each of its two titles in its first ten years, and not increase the deficit overall in any of the four following decades.

Although it did not include any specific coverage or premium numbers, CBO did conclude that the bill would likely decrease coverage by millions compared to the current policy baseline. The report estimated that the bill’s block grant would spend about $230 billion less than current law—a 10 percent reduction overall (an average 30 percent reduction for Medicaid expansion states, but an average 30 percent increase for non-expansion states). Moreover, CBO believes at least $150 billion in block grant funding would not be spent by the end of the ten-year budget window.

CBO believes that “most states would eventually make changes in the regulations for their non-group market in order to stabilize it and would use some funds from the block grants to facilitate those changes.” Essentially, current insurance regulations mean that markets would become unstable without current law subsidies, such that states would use a combination of subsidies and changes in regulations to preserve market stability.

CBO believes that most Medicaid expansion states would attempt to use block grant funding to create Medicaid-like programs for their low-income residents. However, the analysis concludes that by 2026, those states’ block grants would roughly equal the projected cost of their current Medicaid expansion—forcing them to choose between “provid[ing] similar benefits to people in a [Medicaid] alternative program and extend[ing] support to others” further up the income scale. In those cases, CBO believes “most of those states would then choose to provide little support to people in the non-group market because doing so effectively would be the more difficult task.”

Overall, CBO believes that the bill would reduce insurance coverage, because of its repeal of the subsidies, Medicaid expansion, and the individual mandate. The budget office believes that states with high levels of coverage under Obamacare would not receive enough funds under the revised block grant to match their current coverage levels, while states with lower levels of coverage would spend the money slowly, in part because they lack the infrastructure (i.e., technology, etc.) to distribute subsidies easily. CBO also believes that employment-based coverage would increase under the bill, because some employers would respond to changes in the individual market by offering coverage to their workers.

With respect to the Medicaid reforms in the bill, CBO concludes that most “states would not have substantial additional flexibility” under the per capita caps. Some states with declining populations might choose the block grant option, but the grant “would not be attractive in most states experiencing population growth, as the fixed block grant would not be adjusted for such growth.” States could reduce their spending by reducing provider payment rates; optional benefit categories; limiting eligibility; improving care delivery; or some combination of the approaches.

For the individual market, CBO expresses skepticism about the timelines in the bill. Specifically, its analysis found that states’ initial options would “be limited,” because implementing new health programs by 2020 would be “difficult:”

To establish its own system of subsidies for coverage in the nongroup market related to people’s income, a state would have to enact legislation and create a new administrative infrastructure. A state would not be able to rely on any existing system for verifying eligibility or making payments. It would need to establish a new system for enrolling people in nongroup insurance, verify eligibility for tax credits or other subsidies, certify insurance as eligible for subsidies, and ultimately ensure that the payments were correct. Those steps would be challenging, particularly if the state chose to simultaneously change insurance market regulations.

While CBO believes that states that expanded Medicaid would be likely to create programs for populations currently eligible for subsidies (i.e., those households with incomes between one and four times poverty), it notes that such states “would be facing large reductions in funding compared with the amounts under current law and thus would have trouble paying for a new program or subsidies for those people.”

CBO believes that without subsidies, and with current insurance regulations in place, a “death spiral” would occur, whereby premiums would gradually increase and insurers would drop out of markets. (However, “if a state required individuals to have insurance, some healthier people would enroll, and premiums would be lower.”) To avoid this scenario, CBO believes that “most states would eventually modify various rules to help stabilize the non-group market,” thereby increasing coverage take-up when compared to not doing so. However, “coverage for people with pre-existing conditions would be much more expensive in some of those states than under current law.”

While widening age bands would “somewhat increase insurance coverage, on net,” CBO notes that “insurance covering certain services not included in the scope of benefits to become more expensive—in some cases, extremely expensive.” Moreover, some medically underwritten individuals (i.e., subject to premium changes based on health status) would become uninsured, while others would instead obtain employer coverage.

Finally, CBO estimated that the non-coverage provisions of the bill would increase the deficit by $22 billion over ten years. Specific estimates for those provisions are integrated into the summary below.

Summary of Changes Made

On Sunday evening, the bill’s sponsors released revised text of their bill. Compared to the original draft, the revised bill:

  • Strikes language repealing sections of Obamacare related to eligibility determinations (likely to comply with the Senate’s “Byrd rule” regarding budget reconciliation);
  • Changes the short-term “stability fund” to set aside 5 percent of funds for “low-density states,” which some conservatives may view as a carve-out for certain states similar to that included in July’s Better Care Reconciliation Act;
  • Re-writes waiver authority, but maintains (and arguably strengthens) language requiring states to “maintain access to adequate and affordable health insurance coverage for individuals with pre-existing conditions,” which some conservatives may view as imposing limiting conditions on states that wish to reform their insurance markets;
  • Requires states to certify that they will “ensure compliance” with sections of the Public Health Service Act relating to: 1) the under-26 mandate; 2) hospital stays following births; 3) mental health parity; 4) re-constructive surgery following mastectomies; and 5) genetic non-discrimination;
  • Strikes authority given to the Health and Human Services Secretary in several sections, and replaces it with authority given to the Centers for Medicare and Medicaid Services (CMS) Administrator;
  • Includes a new requirement that at least half of funds provided under the Obamacare replacement block grant must be used “to provide assistance” to households with family income between 50 and 300 percent of the poverty level;
  • Requires CMS Administrator to adjust block grant spending upward for a “low-density state” with per capita health care spending 20 percent higher than the national average, increasing allocation levels to match the higher health costs—a provision some conservatives may consider an earmark for specific states;
  • Imposes new requirement on CMS Administrator to notify states of their 2020 block grant allocations by November 1, 2019—a timeline that some may argue will give states far too little time to prepare and plan for major changes to their health systems;
  • Slows the transition to the new Obamacare replacement block grant formula outlined in the law, which now would not fully take effect until after 2026—even though the bill does not appropriate block grant funds for years after 2026;
  • Gives the Administrator the power not to make an annual adjustment for risk in the block grant;
  • Strikes the block grant’s annual adjustment factor for coverage value;
  • Delays the block grant’s state population adjustment factor from 2020 until 2022—but retains language giving the CMS Administrator to re-write the entire funding allocation based on this factor, which some conservatives may view as an unprecedented power grab by federal bureaucrats;
  • Re-writes rules re-allocating unspent block grant allocation funds;
  • Prohibits states from receiving more than a 25 percent year-on-year increase in their block grant allocations;
  • Makes other technical changes to the block grant formula;
  • Changes the formula for the $11 billion contingency fund provided to low-density and non-expansion states—25 percent ($2.75 billion) for low-density states, 50 percent ($5.5 billion) for non-Medicaid expansion states, and 25 percent ($2.75 billion) for Medicaid expansion states;
  • Includes a $750 million fund for “late-expanding” Medicaid states (those that did not expand Medicaid under Obamacare prior to December 31, 2016), which some conservatives may consider an earmark, and one that encourages states to embrace Obamacare’s Medicaid expansion to the able-bodied;
  • Includes $500 million to allow pass-through funding under Section 1332 Obamacare waivers to continue for years 2019 through 2023 under the Obamacare replacement block grant;
  • Strikes language allowing for direct primary care to be purchased through Health Savings Accounts, and as a medical expense under the Internal Revenue Code;
  • Strikes language reducing American territories’ Medicaid match from 55 percent to 50 percent;
  • Restores language originally in BCRA allowing for “late-expanding Medicaid states” to select a shorter period for their per capita caps—a provision that some conservatives may view as an undue incentive for certain states that expanded Medicaid under Obamacare;
  • Restores language originally in BCRA regarding reporting of data related to Medicaid per capita caps;
  • Strikes language delaying Medicaid per capita caps for certain “low-density states;”
  • Includes new language perpetually increasing Medicaid match rates on the two highest states with separate poverty guidelines issued for them in 2017—a provision that by definition includes only Alaska and Hawaii, which some conservatives may view as an inappropriate earmark;
  • Strikes language allowing all individuals to purchase Obamacare catastrophic coverage beginning in 2019;
  • Strikes language clarifying enforcement provisions, particularly regarding abortion;
  • Allows states to waive certain provisions related to insurance regulations, including 1) essential health benefits; 2) cost-sharing requirements; 3) actuarial value; 4) community rating; 5) preventive health services; and 6) single risk pool;
  • Requires states to describe its new insurance rules to the federal government, “except that in no case may an issuer vary premium rates on the basis of sex or on the basis of genetic information,” a provision that some conservatives may view as less likely to subject the rules to legal challenges than the prior language; and
  • Retains language requiring each waiver participant to receive “a direct benefit” from federal funds, language that some conservatives may view as logistically problematic.

Full Summary of Bill (as Revised)

Last week, Senators Lindsey Graham (R-SC) and Bill Cassidy (R-LA) introduced a new health care bill. The legislation contains some components of the earlier Better Care Reconciliation Act (BCRA), considered by the Senate in July, with some key differences on funding streams. A full summary of the bill follows below, along with possible conservative concerns where applicable. Cost estimates are included below come from prior Congressional Budget Office (CBO) scores of similar or identical provisions in BCRA.

Of particular note: It is unclear whether this legislative language has been fully vetted with the Senate Parliamentarian. When the Senate considers budget reconciliation legislation—as it would do should the Graham-Cassidy measure receive floor consideration—the Parliamentarian advises whether provisions are budgetary in nature and can be included in the bill (which can pass with a 51-vote simple majority), and which provisions are not budgetary in nature and must be considered separately (i.e., require 60 votes to pass).

As the bill was released prior to issuance of a CBO score, it is entirely possible the Parliamentarian has not fully vetted this draft—which means provisions could change substantially, or even get stricken from the bill, due to procedural concerns as the process moves forward.

Title I

Revisions to Obamacare Subsidies:             Beginning in 2018, changes the definition of a qualified health plan, to prohibit plans from covering abortion other than in cases of rape, incest, or to save the life of the mother. Some conservatives may be concerned that this provision may eventually be eliminated under the provisions of the Senate’s “Byrd rule.” (For more information, see these two articles.)

Eliminates provisions that limit repayment of subsidies for years after 2017. Subsidy eligibility is based upon estimated income, with recipients required to reconcile their subsidies received with actual income during the year-end tax filing process. Current law limits the amount of excess subsidies households with incomes under 400 percent of the federal poverty level (FPL, $98,400 for a family of four in 2017) must pay. This provision would eliminate that limitation on repayments, which may result in fewer individuals taking up subsidies in the first place. Saves $11.7 billion over ten years—$8.5 billion in spending, and $3.2 billion in revenue.

Repeals the subsidy regime entirely after December 31, 2019.

Small Business Tax Credit:             Repeals Obamacare’s small business tax credit, effective in 2020. Disallows the small business tax credit beginning in 2018 for any plan that offers coverage of abortion, except in the case of rape, incest, or to protect the life of the mother—which, as noted above, some conservatives may believe will be stricken during the Senate’s “Byrd rule” review. Saves $6 billion over ten years.

Individual and Employer Mandates:             Sets the individual and employer mandate penalties to zero, for all years after December 31, 2015. The individual mandate provision cuts taxes by $38 billion, and the employer mandate provision cuts taxes by $171 billion, both over ten years.

Stability Fund:          Creates two state-based funds intended to stabilize insurance markets—the first giving funds directly to insurers, and the second giving funds to states. The first would appropriate $10 billion each for 2018 and 2019, and $15 billion for 2020, ($35 billion total) to the Centers for Medicare and Medicaid Services (CMS) to “fund arrangements with health insurance issuers to address coverage and access disruption and respond to urgent health care needs within States.” Instructs the CMS Administrator to “determine an appropriate procedure for providing and distributing funds.” Does not require a state match for receipt of stability funds. Some conservatives may be concerned this provision provides excessive authority to unelected bureaucrats to distribute $35 billion in federal funds as they see fit.

Includes new language setting aside 5 percent of stability fund dollars for “low-density states”—a provision which some conservatives may oppose as an earmark for Alaska and other similar states.

Market-Based Health Care Grant Program:       Creates a longer-term stability fund for states with a total of $1.176 trillion in federal funding from 2020 through 2026—$146 billion in 2020 and 2021, $157 billion in 2022, $168 billion in 2023, $179 billion in 2024, and $190 billion in 2025 and 2026. Eliminates BCRA provisions requiring a state match. States could keep their allotments for two years, but unspent funds after that point could be re-allocated to other states. However, all funds would have to be spent by December 31, 2026.

Expands BCRA criteria for appropriate use of funds by states, to include assistance for purchasing individual insurance, and “provid[ing] health insurance coverage for individuals who are eligible for” Medicaid, as well as the prior eligible uses under BCRA: to provide financial assistance to high-risk individuals, including by reducing premium costs, “help stabilize premiums and promote state health insurance market participation and choice,” provide payments to health care providers, or reduce cost-sharing.

However, states may spend no more than 15 percent of their resources on the Medicaid population (or up to 20 percent if the state applies for a waiver, and the Department of Health and Human Services concludes that the state is using its funds “to supplement, and not supplant,” the state Medicaid match). In addition, states must spend at least half of their funds on “provid[ing] assistance” to families with incomes between 50 and 300 percent of the federal poverty level. Some conservatives may believe these restrictions belie the bill’s purported goal of giving states freedom and flexibility to spend the funds as they see fit.

Some conservatives may be concerned that, by doling out nearly $1.2 trillion in spending, the bill does not repeal Obamacare, so much as it redistributes Obamacare funds from “blue states” to “red states,” per the formulae described below. Some conservatives may also be concerned that the bill creates a funding cliff—with spending dropping from $190 billion in 2026 to $0 in 2027—that will leave an impetus for future Congresses to spend massive new amounts of money in the future.

Grant Formula:         Sets a complex formula for determining state grant allocations, tied to the overall funding a state received for Medicaid expansion, the basic health program under Obamacare, and premium and cost-sharing subsidies provided to individuals in insurance Exchanges. Permits states to select any four consecutive fiscal quarters between September 30, 2013 and January 1, 2018 to establish the base period. (The bill sponsors have additional information regarding the formula calculations here.)

Intends to equalize grant amounts, with a phase-in of the new methodology for years 2021 through 2026. Ideally, the bill would set funding to a state’s number of low-income individuals when compared to the number of low-income individuals nationwide. Defines the term “low-income individuals” to include those with incomes between 50 and 138 percent of the federal poverty level (45-133% FPL, plus a 5 percent income disregard created by Obamacare). In 2017, those numbers total $12,300-$33,948 for a family of four.

Adjusts state allocations (as determined above) according to additional factors:

  1. Risk Adjustment:      The bill would phase in risk adjustment over four years (between 2023 and 2026), and limit the risk adjustment modification to no more than 10 percent of the overall allotment. Risk adjustment would be based on clinical risk factors for low-income individuals (as defined above). The Centers for Medicare and Medicaid Services (CMS) Administrator could cancel the risk adjustment factor in the absence of sufficient data.
  2. Population Adjustment:              Permits (but does not require) the Administrator to adjust allocations for years after 2022 according to a population adjustment factor. Requires CMS to “develop a state specific population adjustment factor that accounts for legitimate factors that impact the health care expenditures in a state”—such as demographics, wage rates, income levels, etc.—but as noted above, does not require CMS to adjust allocations based upon those factors.

Notwithstanding the above, states could not receive a year-on-year increase in funding of more than 25 percent.

Requires the Administrator to adjust block grant spending upward for a “low-density state” with per capita health care spending 20 percent higher than the national average, increasing allocation levels to match the higher health costs—a provision some conservatives may consider an inappropriate earmark for Alaska. Imposes new requirement on the Administrator to notify states of their 2020 block grant allocations by November 1, 2019—a timeline that some may argue will give states far too little time to prepare and plan for major changes to their health systems.

Some conservatives may be concerned that, despite the admirable intent to equalize funding between high-spending and low-spending states, the bill gives excessive discretion to unelected bureaucrats in Washington to determine the funding formulae. Some conservatives may instead support repealing all of Obamacare, and allowing states to decide for themselves what they wish to put in its place, rather than doling out federal funds from Washington. Finally, some may question why the bill’s formula criteria focus so heavily on individuals with incomes between 50-138 percent FPL, to the potential exclusion of individuals and households with slightly higher or lower incomes.

Provides $750 million for “late-expanding” Medicaid states—those that did not expand Medicaid under Obamacare prior to December 31, 2015—which some conservatives may consider an earmark, one that encourages states that have embraced Obamacare’s Medicaid expansion to the able-bodied. Also includes $500 million to allow pass-through funding under Section 1332 Obamacare waivers to continue for years 2019 through 2023.

Grant Application:  Requires states applying for grant funds to outline the intended uses of same. Specifically, the state must describe how it “shall maintain access to adequate and affordable health insurance coverage for individuals with pre-existing conditions,” along with “such other information as necessary for the Administrator to carry out this subsection”—language that could be used by a future Democratic Administration, or federal courts, to undermine the waiver program’s intent.

Explicitly requires states to “ensure compliance” with several federal insurance mandates:

  1. Coverage of “dependents” under age 26;
  2. Hospital stays following deliveries;
  3. Mental health parity;
  4. Reconstructive surgery following mastectomies; and
  5. Genetic non-discrimination.

Some conservatives may note that these retained federal mandates belie the notion of state flexibility promised by the legislation.

Contingency Fund:               Appropriates a total of $11 billion—$6 billion for calendar year 2020, and $5 billion for calendar 2021—for a contingency fund for certain states. Half of the funding ($5.5 billion total) would go towards states that had not expanded Medicaid as of September 1, 2017, with the remaining one-quarter ($2.75 billion) going towards “low-density states”—those with a population density of fewer than 15 individuals per square mile—and another one-quarter ($2.75 billion) going towards states that did expand Medicaid.

Implementation Fund:        Provides $2 billion to implement programs under the bill. Costs $2 billion over ten years.

Repeal of Some Obamacare Taxes:             Repeals some Obamacare taxes:

  • Restrictions on use of Health Savings Accounts and Flexible Spending Arrangements to pay for over-the-counter medications, effective January 1, 2017, lowering revenues by $5.6 billion;
  • Increased penalties on non-health care uses of Health Savings Account dollars, effective January 1, 2017, lowering revenues by $100 million;
  • Medical device tax, effective January 1, 2018, lowering revenues by $19.6 billion; and
  • Elimination of deduction for employers who receive a subsidy from Medicare for offering retiree prescription drug coverage, effective January 1, 2017, lowering revenues by $1.8 billion.

Some conservatives may be concerned that the bill barely attempts to reduce revenues, repealing only the smallest taxes in Obamacare—and the ones that corporate lobbyists care most about (e.g., medical device tax and retiree prescription drug coverage provision).

Health Savings Accounts:  Increases contribution limits to HSAs, raising them from the current $3,400 for individuals and $6,750 for families in 2017 to the out-of-pocket maximum amounts (currently $6,550 for an individual and $13,100 for a family), effective January 2018. Allows both spouses to make catch-up contributions to the same Health Savings Account. Permits individuals who take up to 60 days to establish an HSA upon enrolling in HSA-eligible coverage to be reimbursed from their account for medical expenses. Lowers revenues by a total of $19.2 billion over ten years.

Allows for Health Savings Account funds to be used for the purchase of high-deductible health plans, but only to the extent that such insurance was not purchased on a tax-preferred basis (i.e., through the exclusion for employer-provided health insurance, or through Obamacare insurance subsidies).

Allows HSA dollars to be used to reimburse expenses for “dependents” under age 27, effectively extending the “under-26” provisions of Obamacare to Health Savings Accounts. Prohibits HSA-qualified high deductible health plans from covering abortions, other than in cases of rape, incest, or to save the life of the mother—an effective prohibition on the use of HSA funds to purchase plans that cover abortion, but one that the Senate Parliamentarian may advise does not comport with procedural restrictions on budget reconciliation bills. No separate cost estimate provided for the revenue reduction associated with allowing HSA dollars to be used to pay for insurance premiums.

Federal Payments to States:             Imposes a one-year ban on federal funds flowing to certain entities. This provision would have the effect of preventing Medicaid funding of certain medical providers, including Planned Parenthood, so long as Planned Parenthood provides for abortions (except in cases of rape, incest, or to save the life of the mother). CBO believes this provision would save a total of $225 million in Medicaid spending, while increasing spending by $79 million over a decade, because 15 percent of Planned Parenthood clients would lose access to services, increasing the number of births in the Medicaid program by several thousand. Saves $146 million over ten years.

Medicaid Expansion:           Phases out Obamacare’s Medicaid expansion to the able-bodied, effective January 1, 2020. After such date, only members of Indian tribes who reside in states that had expanded Medicaid—and who were eligible on December 31, 2019—would qualify for Obamacare’s Medicaid expansion. Indians could remain on the Medicaid expansion, but only if they do not have a break in eligibility (i.e., the program would be frozen to new enrollees on January 1, 2020).

Repeals the enhanced federal match (currently 95 percent, declining slightly to 90 percent) associated with Medicaid expansion, effective in 2020. Also repeals provisions regarding the Community First Choice Option, eliminating a six percent increase in the Medicaid match rate for some home and community-based services. Saves $19.3 billion over ten years.

Retroactive Eligibility:       Effective October 2017, restricts retroactive eligibility in Medicaid from three months to two months. These changes would NOT apply to aged, blind, or disabled populations, who would still qualify for three months of retroactive eligibility. Saves $800 million over ten years.

Eligibility Re-Determinations:             Permits—but unlike the House bill, does not require—states, beginning October 1, 2017, to re-determine eligibility for individuals qualifying for Medicaid on the basis of income every six months, or at shorter intervals. Provides a five percentage point increase in the federal match rate for states that elect this option. No separate budgetary impact noted; included in larger estimate of coverage provisions.

Work Requirements:           Permits (but does not require) states to, beginning October 1, 2017, impose work requirements on “non-disabled, non-elderly, non-pregnant” beneficiaries. States can determine the length of time for such work requirements. Provides a five percentage point increase in the federal match for state expenses attributable to activities implementing the work requirements.

States may not impose requirements on pregnant women (through 60 days after birth); children under age 19; the sole parent of a child under age 6, or sole parent or caretaker of a child with disabilities; or a married individual or head of household under age 20 who “maintains satisfactory attendance at secondary school or equivalent,” or participates in vocational education. Adds to existing exemptions (drafted in BCRA) provisions exempting those in inpatient or intensive outpatient substance abuse treatment and full-time students from Medicaid work requirements. No separate budgetary impact noted; included in larger estimate of coverage provisions.

Provider Taxes:        Reduces permissible Medicaid provider taxes from 6 percent under current law to 5.6 percent in fiscal year 2021, 5.2 percent in fiscal year 2022, 4.8 percent in fiscal year 2023, 4.4 percent in fiscal year 2024, and 4 percent in fiscal year 2025 and future fiscal years—a change from BCRA, which reduced provider taxes to 5 percent in 2025 (0.2 percent reduction per year, as opposed to 0.4 percent under the Graham-Cassidy bill). Some conservatives may view provider taxes as essentially “money laundering”—a game in which states engage in shell transactions solely designed to increase the federal share of Medicaid funding and reduce states’ share. More information can be found here. CBO believes states would probably reduce their spending in response to the loss of provider tax revenue, resulting in lower spending by the federal government. Saves $13 billion over ten years.

Medicaid Per Capita Caps:              Creates a system of per capita spending caps for federal spending on Medicaid, beginning in fiscal year 2020. States that exceed their caps would have their federal match reduced in the following fiscal year.

The cap would include all spending on medical care provided through the Medicaid program, with the exception of DSH payments and Medicare cost-sharing paid for dual eligibles (individuals eligible for both Medicaid and Medicare).

While the cap would take effect in fiscal year 2020, states could choose their “base period” based on any eight consecutive quarters of expenditures between October 1, 2013 and June 30, 2017. The CMS Administrator would have authority to make adjustments to relevant data if she believes a state attempted to “game” the look-back period. Late-expanding Medicaid states could choose a shorter period (but not fewer than four) quarters as their “base period” for determining per capita caps—a provision that some conservatives may view as improperly incentivizing states that decided to expand Medicaid to the able-bodied.

Creates four classes of beneficiaries for whom the caps would apply: 1) elderly individuals over age 65; 2) blind and disabled beneficiaries; 3) children under age 19; and 4) all other non-disabled, non-elderly, non-expansion adults (e.g., pregnant women, parents, etc.). Excludes State Children’s Health Insurance Plan enrollees, Indian Health Service participants, breast and cervical cancer services eligible individuals, and certain other partial benefit enrollees from the per capita caps. Exempts declared public health emergencies from the Medicaid per capita caps—based on an increase in beneficiaries’ average expenses due to such emergency—but such exemption may not exceed $5 billion.

For years before fiscal year 2025, indexes the caps to medical inflation for children and all other non-expansion enrollees, with the caps rising by medical inflation plus one percentage point for aged, blind, and disabled beneficiaries. Beginning in fiscal year 2025, indexes the caps to overall inflation for children and non-expansion enrollees, with the caps rising by medical inflation for aged, blind, and disabled beneficiaries—a change from BCRA, which set the caps at overall inflation for all enrollees beginning in 2025.

Eliminates provisions in the House bill regarding “required expenditures by certain political subdivisions,” which some had derided as a parochial New York-related provision.

Provides a provision—not included in the House bill—for effectively re-basing the per capita caps. Allows the Secretary of Health and Human Services to increase the caps by between 0.5% and 3% (a change from BCRA, which set a 2% maximum increase) for low-spending states (defined as having per capita expenditures 25% below the national median), and lower the caps by between 0.5% and 2% (unchanged from BCRA) for high-spending states (with per capita expenditures 25% above the national median). The Secretary may only implement this provision in a budget-neutral manner, i.e., one that does not increase the deficit. However, this re-basing provision shall NOT apply to any state with a population density of under 15 individuals per square mile.

Requires the Department of Health and Human Services (HHS) to reduce states’ annual growth rate by one percent for any year in which that state “fails to satisfactorily submit data” regarding its Medicaid program. Permits HHS to adjust cap amounts to reflect data errors, based on an appeal by the state, increasing cap levels by no more than two percent. Requires new state reporting on inpatient psychiatric hospital services and children with complex medical conditions. Requires the HHS Inspector General to audit each state’s spending at least every three years.

For the period including calendar quarters beginning on October 1, 2017 through October 1, 2019, increases the federal Medicaid match for certain state expenditures to improve data recording, including a 100 percent match in some instances.

Home and Community-Based Services:             Creates a four-year, $8 billion demonstration project from 2020 through 2023 to expand home- and community-based service payment adjustments in Medicaid, with such payment adjustments eligible for a 100 percent federal match. The 15 states with the lowest population density would be given priority for funds.

Medicaid Block Grants:      Creates a Medicaid block grant, called the “Medicaid Flexibility Program,” beginning in Fiscal Year 2020. Requires interested states to submit an application providing a proposed packet of services, a commitment to submit relevant data (including health quality measures and clinical data), and a statement of program goals. Requires public notice-and-comment periods at both the state and federal levels.

The amount of the block grant would total the regular federal match rate, multiplied by the target per capita spending amounts (as calculated above), multiplied by the number of expected enrollees (adjusted forward based on the estimated increase in population for the state, per Census Bureau estimates). In future years, the block grant would be increased by general inflation.

Prohibits states from increasing their base year block grant population beyond 2016 levels, adjusted for population growth, plus an additional three percentage points. This provision is likely designed to prevent states from “packing” their Medicaid programs full of beneficiaries immediately prior to a block grant’s implementation, solely to achieve higher federal payments.

In a change from BCRA, the bill removes language permitting states to roll over block grant payments from year to year—a move that some conservatives may view as antithetical to the flexibility intended by a block grant, and biasing states away from this model. Reduces federal payments for the following year in the case of states that fail to meet their maintenance of effort spending requirements, and permits the HHS Secretary to make reductions in the case of a state’s non-compliance. Requires the Secretary to publish block grant amounts for every state every year, regardless of whether or not the state elects the block grant option.

Permits block grants for a program period of five fiscal years, subject to renewal; plans with “no significant changes” would not have to re-submit an application for their block grants. Permits a state to terminate the block grant, but only if the state “has in place an appropriate transition plan approved by the Secretary.”

Imposes a series of conditions on Medicaid block grants, requiring coverage for all mandatory populations identified in the Medicaid statute, and use of the Modified Adjusted Gross Income (MAGI) standard for determining eligibility. Includes 14 separate categories of services that states must cover for mandatory populations under the block grant. Requires benefits to have an actuarial value (coverage of average health expenses) of at least 95 percent of the benchmark coverage options in place prior to Obamacare. Permits states to determine the amount, duration, and scope of benefits within the parameters listed above.

Applies mental health parity provisions to the Medicaid block grant, and extends the Medicaid rebate program to any outpatient drugs covered under same. Permits states to impose premiums, deductibles, or other cost-sharing, provided such efforts do not exceed 5 percent of a family’s income in any given year.

Requires participating states to have simplified enrollment processes, coordinate with insurance Exchanges, and “establish a fair process” for individuals to appeal adverse eligibility determinations. Allows for modification of the Medicaid block grant during declared public health emergencies—based on an increase in beneficiaries’ average expenses due to such emergency.

Exempts states from per capita caps, waivers, state plan amendments, and other provisions of Title XIX of the Social Security Act while participating in Medicaid block grants.

Performance Bonus Payments:             Provides an $8 billion pool for bonus payments to state Medicaid and SCHIP programs for Fiscal Years 2023 through 2026. Allows the Secretary to increase federal matching rates for states that 1) have lower than expected expenses under the per capita caps and 2) report applicable quality measures, and have a plan to use the additional funds on quality improvement. While noting the goal of reducing health costs through quality improvement, and incentives for same, some conservatives may be concerned that this provision—as with others in the bill—gives near-blanket authority to the HHS Secretary to control the program’s parameters, power that conservatives believe properly resides outside Washington—and power that a future Democratic Administration could use to contravene conservative objectives. CBO believes that only some states will meet the performance criteria, leading some of the money not to be spent between now and 2026. Costs $3 billion over ten years.

Inpatient Psychiatric Services:             Provides for optional state Medicaid coverage of inpatient psychiatric services for individuals over 21 and under 65 years of age. (Current law permits coverage of such services for individuals under age 21.) Such coverage would not exceed 30 days in any month or 90 days in any calendar year. In order to receive such assistance, the state must maintain its number of licensed psychiatric beds as of the date of enactment, and maintain current levels of funding for inpatient services and outpatient psychiatric services. Provides a lower (i.e., 50 percent) match for such services, furnished on or after October 1, 2018; however, in a change from BCRA, allows for higher federal match rates for certain services and individuals to continue if they were in effect prior to September 30, 2018. No separate budgetary impact noted; included in larger estimate of coverage provisions.

Medicaid and Indian Health Service:             Makes a state’s expenses on behalf of Indians eligible for a 100 percent match, irrespective of the source of those services. Current law provides for a 100 percent match only for services provided at an Indian Health Service center. Costs $3.5 billion over ten years.

Disproportionate Share Hospital (DSH) Payments:     Adjusts reductions in DSH payments to reflect shortfalls in funding for the state grant program described above. For fiscal years 2021 through 2025, states receiving grant allocations that do not keep up with medical inflation will have their DSH reductions reduced or eliminated; in fiscal year 2026, states with grant shortfalls will have their DSH payments increased. Costs $17.9 billion over ten years.

High-Poverty States:            Provides for a permanent increase in the federal Medicaid match for two states, based on poverty guidelines established for 2017. Specifically, provides for a 25 percent increase to the state with the “highest separate poverty guideline for 2017,” and a 15 percent increase to the state with the “second highest separate poverty guideline for 2017”—provisions that by definition would apply only to Alaska and Hawaii, respectively. Some conservatives may be concerned first that these provisions represent inappropriate earmarks, and further that they would change federal spending in perpetuity based on poverty determinations made for a single year. Costs $7.2 billion over ten years.

Title II

Prevention and Public Health Fund:             Eliminates funding for the Obamacare prevention “slush fund,” and rescinds all unobligated balances, beginning in Fiscal Year 2019. Saves $7.9 billion over ten years.

Community Health Centers:             Increases funding for community health centers by $422 million for Fiscal Year 2018—money intended to offset reductions in spending on Planned Parenthood affiliates (see “Federal Payments to States” above). Spends $422 million over ten years.

Cost-Sharing Subsidies:      Repeals Obamacare’s cost-sharing subsidies, effective December 31, 2019, and does not appropriate funds for cost-sharing subsidy claims for plan years through 2019. The House of Representatives filed suit against the Obama Administration (House v. Burwell) alleging the Administration acted unconstitutionally in spending funds on the cost-sharing subsidies without an explicit appropriation from Congress. The case is currently on hold pending settlement discussions between the Trump Administration and the House.

Grant Conditions:    Sets additional conditions for the grant program established in Title I of the bill. States may submit applications waiving certain provisions currently in federal statute:

  1. Essential health benefits;
  2. Cost-sharing requirements;
  3. Actuarial value requirements, including plan metal tiers (e.g., bronze, silver, gold, and platinum);
  4. Community rating—although states may not be able to vary premiums based on health status, due to contradictory language in this section;
  5. Preventive health services; and
  6. Single risk pool.

Requires states to submit their revised rules to the federal government, “except that in no case may an issuer vary premium rates on the basis of sex or on the basis of genetic information.” Some conservatives may view this language as less likely to spark new legal challenges than the prior wording, which prohibited insurance changes based on “membership in a protected class.” However, some conservatives may also find that the mutually contradictory provisions over whether and how states can vary insurance rates may spark other legal challenges.

The waivers only apply to an insurer receiving funding under the state program, and “to an individual who is receiving a direct benefit” from the grant—which does not include reinsurance. In other words, each individual must receive some direct subsidy, rather than just general benefits derived from the broader insurance pool. Some conservatives may be concerned that, by tying waiver of regulations so closely to receipt of federal grant funds, this provision would essentially provide limited regulatory relief. Furthermore, such limited relief would require states to accept federal funding largely adjudicated and doled out by unelected bureaucrats.

Some conservatives may be concerned that, while well-intentioned, these provisions do not represent a true attempt at federalism—one which would repeal all of Obamacare’s regulations and devolve health insurance oversight back to the states. It remains unclear whether any states would actually waive Obamacare regulations under the bill; if a state chooses not to do so, all of the law’s costly mandates will remain in place there, leaving Obamacare as the default option.

Some conservatives may view provisions requiring anyone to whom a waiver applies to receive federal grant funding as the epitome of moral hazard—ensuring that individuals who go through health underwriting will receive federal subsidies, no matter their level of wealth or personal circumstances. By requiring states to subsidize bad actors—for instance, an individual making $250,000 who knowingly went without health coverage for years—with federal taxpayer dollars, the bill could actually raise health insurance premiums, not lower them. Moreover, some conservatives may be concerned that—because the grant program funding ends in 2027, and because all individuals subject to waivers must receive grant funding—the waiver program will effectively end in 2027, absent a new infusion of taxpayer dollars.

Gov. Jindal Op-Ed: Supreme Court Decision Is Not the End of the Debate

As a matter of law, the Court’s decision upholding subsidies for states participating in the federally run insurance exchange, healthcare.gov, violates the plain text of Obamacare. The statute expressly restricted insurance subsidies to those individuals purchasing coverage through an “Exchange established by the state.” But just as Chief Justice Roberts three years ago decreed that the individual mandate functioned as a tax, even though both Congress and President Barack Obama stated that it wasn’t, the Court decided that “Exchange established by the state” meant any type of Exchange, whether established by states or by Washington.

It’s a sad outcome for the rule of law — and the English language. But when it comes to the political debate surrounding Obamacare, the Court’s ruling ultimately decides little. Of course, Obama, who took an entirely predictable victory lap yesterday, would have you believe otherwise. But we’ve seen his triumphalism before — and have seen it come crashing back to reality.

Three years ago, Obama stated he wouldn’t “refight old battles,” mere hours after seven Supreme Court justices — including his own former solicitor general — struck down the law’s mandatory Medicaid expansion as unconstitutional “economic dragooning” of the states. On election night 2012, the president promised to “move forward” — months before at least 4.7 million Americans received insurance cancellation notices thanks to Obamacare. And this April, the president arrogantly declared that “the repeal debate is and should be over” — mere weeks before his native state of Hawaii shut its failed insurance exchange, an effort the federal government spent more than $200 million funding.

So, much as the President would like the debate on Obamacare to be over, it isn’t. The debate persists in large part because the law has singularly failed in its prime objective: Containing health care costs. Consider why this Supreme Court case mattered so much to the administration in the first place. The law spends over $1.7 trillion on subsidized coverage to make insurance more “affordable,” largely to offset the new mandates and regulations that have raised the price of insurance.

And with myriad insurers proposing double-digit premium increases for next year — some as high as 50% — candidate Obama’s 2008 promise to lower insurance premiums by $2,500 per family is further away then ever. No wonder the law remains singularly unpopular. When it comes to winning the debate on Obamacare, there is still all to play for.

But in order to win, we conservatives first have to play. That means outlining our alternative vision for health care: How we would restore freedom and choice to a health care sector currently lacking for both — and most importantly, how we would slow, and hopefully reverse, the trend of skyrocketing health care costs.

As I write this, I stand as the sole major declared presidential candidate (with the possible exception of Bernie Sanders) to put forward my vision on health care, and an alternative to Obamacare. As proud as I am of my plan, that is a boast I wish I were not able to make. Because Republicans, from the top down, must outline a clear and coherent vision for health care to win the trust of the American people to repeal this President’s health law.

While we should be shouting our vision from the rooftops, many of my fellow candidates have managed barely a whisper about how exactly they would repeal Obamacare, or what they would do to tackle the main issue plaguing our health care system: rising costs. Sen. Mike Lee recently stated that lack of an Obamacare replacement plan should be a disqualifier for any conservative presidential candidate. He’s absolutely right. We owe it to the American people to release our plans well before November 2016, and to have a robust debate within our party about what should come after Obamacare.

Because, contrary to this President’s self-proclaimed edicts, yesterday’s Supreme Court decision is not the end of the debate on Obamacare.

Now that the Supreme Court has ruled, the debate shifts back to the elected branches of government — the ones that caused our health care mess in the first place. It is there that conservatives can complete our work to repeal Obamacare.

This post was originally published at Time.

In California’s Health Exchange Cuts, A Preview of Other States’ Woes?

The Supreme Court is expected to rule soon on the legality of insurance subsidies in 37 states that use the federal HealthCare.gov site. Some states have discussed creating their own exchanges in the wake of the court’s decision, but those may not be fiscally sustainable.

The Los Angeles Times reported last week that Covered California, the Golden State’s exchange, “is preparing to go on a diet,” cutting its budget 15% for the fiscal year beginning July 1 because of lower-than-expected enrollment. Earlier this month, Hawaii’s state exchange prepared plans to shut down this fall amid funding shortfalls. Hawaii’s exchange had technical problems that have impeded signups since its launch, but Covered California has had relatively few computer glitches. During the HealthCare.gov rollout problems in 2013, columnist Paul Krugman held up California as a model of efficiency:

What would happen if we unveiled a program that looked like Obamacare, in a place that looked like America, but with competent project management that produced a working website? Well, your wish is granted. Ladies and gentlemen, I give you California.

Mr. Krugman called California “an especially useful test case,” saying that “it’s huge: if a system can work for 38 million people, it can work for America as a whole.”

But that model has run into financial distress. After slashing its spending, Covered California achieved a balanced budget for next year by utilizing $100 million in federally provided start-up funds. The Department of Health and Human Services’ inspector general and at least two U.S. senators have questioned whether exchanges are using start-up funds to plug holes in their budgets—a practice prohibited by law and one the senators called a “short term fix” in a letter to the Centers for Medicare and Medicaid Services. Using federal funds may help Covered California next year—but it will leave a multi-million-dollar hole in its budget the following year, leading to another round of belt-tightening.

The spending cuts—particularly a 33% reduction to marketing and outreach next year—will have an impact. As one report noted, “With enrollment growing more slowly than expected, a big cut in marketing might result in continued difficulties reaching target markets.” In other words, a spending cut next year could result in lower-than-expected enrollment—and budget crunches—in future years. Covered California could raise the $13.95 per policy monthly fee to generate more revenue—but that would also raise premiums, potentially driving away customers.

Before the exchanges opened, some worried about a disproportionate number of sick patients driving up premiums–and driving out healthy enrollees. A related phenomenon could be happening in state-run exchanges: in which few sign-ups result in a combination of cuts to outreach programs and/or higher monthly fees, discouraging enrollment and starting another round of the spiral. It’s possible that California’s experience could be a useful test case of that proposition—and a cautionary tale for those states contemplating their own exchanges.

This post was originally published at the Wall Street Journal Think Tank blog.

Weekly Newsletter: October 20, 2008

Hawaii Program “Crowded Out” by Rising Costs

Late last week, state officials in Hawaii announced a rapid end to a child universal health care program that had only been established earlier this year. The program, dubbed Keiki Care, was intended to provide coverage to children from families above the Medicaid eligibility threshold—which in Hawaii stands at 300% of the federal poverty level, or more than $73,000 for a family of four.

Despite a six-month waiting period incorporated into the program at the Governor’s insistence, state officials found that families were dropping private coverage in order to obtain health insurance through the government program, which featured co-pay levels—$7 per physician visit—lower than many private plans. As one official noted, “People who were already able to afford health care began to stop paying for it so they could get it for free.”

Some conservatives may not be surprised by this development, and note that Hawaii’s experience should give policy-makers looking to expand public programs significant pause. Not only does expanding access to public programs for families making over $75,000 increase government spending, but below-market co-payment levels will only encourage individuals to over-consume health care, exacerbating the acceleration of health care costs plaguing the current system. At a time when the federal government faces Medicare obligations alone of nearly $86 trillion, conservatives may believe that the failed Hawaii experiment should remind lawmakers why the Democrat leadership’s call expand the SCHIP program to families making more than $80,000 per year will be neither cheap nor sustainable.

Read the Associated Press story here.

Medicaid Fraud Will Not Be Addressed by Bailout

Last month, the New York Times highlighted the case of Staten Island University Hospital, an institution with a history of questionable billing practices—and now one of the largest fraud settlements against a single hospital. This week the hospital agreed to return nearly $90 million to respond to claims of overbilling government programs as a result of two whistle-blower lawsuits and actions by federal prosecutors. The lawsuits and charges alleged among other things that the hospital deliberately inflated bed and patient counts in order to obtain reimbursements from Medicare and Medicaid, and come after the hospital had reached two previous settlements—one in 1999 resulting in $45 million in Medicaid
repayments, and another in 2005 resulting in $76.5 returned to Medicaid—with state authorities regarding fraudulent billing activity.

Many conservatives may not be surprised by these repeated instances of fraud and graft within the program, given that a former New York state Medicaid investigator estimated that 40% of all Medicaid payments were fraudulent or questionable in nature. However, this episode may only strengthen conservative concerns that a proposed “temporary” increase in federal Medicaid matching funds (HR 5268) would do nothing to combat this fraud and abuse before spending additional federal dollars. Indeed, given that a single hospital has settled more than $200 million in fraud claims, some conservatives may wonder whether, if the Medicaid program had appropriate anti-fraud efforts in place, an additional $10-15 billion “bailout” for states would even be needed at all.

Also on Medicaid, last week the Centers for Medicare and Medicaid Services released the first annual Medicaid actuarial report, which included long-term projections for Medicaid spending. According to the report, Medicaid spending is scheduled to double in the next nine years, reaching nearly $674 billion in both state and federal spending by 2017 and consuming a rising share of both national GDP and the federal budget. Many conservatives may view these figures as further evidence of the need for comprehensive entitlement reform to slow the skyrocketing growth in health costs, and believe that a temporary bailout would be counter-productive to the program’s long-term stability.

Read the article here. The CMS 2008 Actuarial Report on Medicaid is available here.

The RSC has prepared a one-pager highlighting the need for comprehensive Medicaid reform based on examples from several states; the document can be found here.

Medicare Forces People to Accept Costly Benefits

Earlier this month, several individuals filed a ground-breaking lawsuit against the Department of Health and Human Services and the Social Security Administration. The suit would force both agencies to develop a process to allow individuals to renounce their eligibility for Medicare Part A, which governs hospital care. Under current regulations, while Part B (outpatient and physician care) and Part D (prescription drug coverage) are optional programs, individuals cannot waive participation in Medicare Part A once they apply for Social Security benefits. The plaintiffs’ proposed remedy echoes legislation (H.R. 7148) recently introduced by RSC Member Sam Johnson, which would grant individuals an explicit right to opt-out of Medicare should they choose to provide for their health care without relying on public funding.

Many conservatives may question the absurdity of the government’s position—spending taxpayer dollars to defend itself against individuals who want to forfeit their right to Medicare benefits, which would only save taxpayers money. At a time when Medicare faces unfunded obligations totaling $86 trillion, many conservatives may believe that the government’s time and money would be much better spent finding solutions to America’s entitlement obligations, rather than forcing individuals to accept benefits they don’t want—and costing taxpayers billions in the process.

Weekly Newsletter: February 15, 2008

  • Medicare Trigger Legislation Submitted

    This week the President formally submitted to Congress legislation to reform Medicare, as required by Title VIII of the Medicare Modernization Act (MMA). The so-called trigger provisions of Title VIII—inserted into MMA five years ago at the behest of RSC members—requires the President to submit legislative remedies when the Medicare trustees certify that Medicare expenditures are consuming a growing portion of general budget revenues, and provides a mechanism for both Houses of Congress to demand an up-or-down vote on a solution to Medicare’s funding woes.

    The President’s proposal to Congress includes three planks: value-based purchasing (also known as “pay-for-performance”), medical liability reform, and a means-tested premium for Medicare Part D, similar to the means-tested Part B premium incorporated into MMA. These proposals follow on the heels of the President’s Fiscal Year 2009 budget submission to Congress, which proposed $178 billion in savings over the next five years, largely through adjustments to provider reimbursement rates (see below).

    Although some conservatives may have concerns over the significant intrusion into doctor-patient relationships that pay-for-performance could create, it is worth noting that the President has put forward two distinct proposals for Medicare reform in as many weeks. While some conservatives will look to more comprehensive measures—re-structuring of Medicare cost-sharing, and Medicare’s eventual conversion into a health care system similar to that provided to Members of Congress—many view the measures advanced by the Administration, and supported by the Republican leadership in Congress, as a positive first step in the cause of comprehensive entitlement reform.

    When it comes to entitlement reform, the cost of inaction is great: the Government Accountability Office estimates that each year Congress does not act to reform Social Security and Medicare, their unfunded liability to the federal government grows by $2 trillion. Congress needs to act—and act now—on comprehensive reforms to Medicare.

    To learn more about the trigger, read the RSC policy briefs on this issue.

    Analysis of Fiscal Year 2009 Budget Proposals

    Last week the Administration put forward its Fiscal Year 2009 budget, which contained several key health-related proposals. The President’s budget suggested generating $178 billion in savings from Medicare over the next five years, slowing its projected rate of growth from 7.2% to 5.0% and saving beneficiaries $6.2 billion in Part B premiums over five years. The budget also proposed $14 billion in savings from Medicaid, but more than offset these savings by proposing a $19 billion expansion of the State Children’s Health Insurance Program (SCHIP).

    The RSC prepared a policy brief highlighting the President’s health care proposals.

    Articles of Note

    Two articles in the past week dissected the ongoing debate between Democrat Presidential contenders over a mandate for individual coverage, while providing all the proof needed that such a mandate would likely prove ineffective. While Politico noted Sen. Hillary Clinton’s “winner-take-all” approach to universal coverage and an individual mandate, the Wall Street Journal provided insights as to why most conservatives view mandates as both unnecessary and unworkable:

    Census Department data indicate that more than one-third of the uninsured—over 17.7 million Americans—come from families with annual incomes over $50,000, raising questions as to how many of the uninsured cannot afford to buy insurance and how many do not wish to purchase insurance, because costly state regulations have inflated premiums.

  • Massachusetts has already exempted 20% of its uninsured population from its “universal” individual mandate—a number which is likely to climb in future years, as the cost of overregulated health insurance products in the state skyrockets.
  • Hawaii has incorporated a “pay-or-play” mandate—requiring most employers to subsidize their workers’ health insurance—for more than three decades, yet Hawaii still has more than 100,000 uninsured individuals—even though employers cannot easily relocate their businesses to other states in order to avoid paying the higher health costs associated with the mandate.

    As the Journal points out, enforcing a mandate will require both harsh government penalties—Sen. Clinton has suggested garnishing workers’ wages—and a new federal bureaucracy to enforce them.

    Read the articles here: Politico: “Mandate vs. Incentive

The Wall Street Journal: “The Wages of HillaryCare” (subscription required)

Question and Answer: SCHIP Legislation

The House will soon be faced with a vote to override the President’s veto on H.R. 3963, the Children’s Health Insurance Program Reauthorization Act of 2007, legislation which would reauthorize and expand the State Children’s Health Insurance Program (SCHIP), with several tax increases designed to partially offset the bill’s costs.

Does H.R. 3963 increase the scope of the SCHIP program?

Yes.  Under current law, states can cover families earning up to 200% of the Federal Poverty Level (FPL) or $41,300 for a family of four in 2007 or those at 50% above Medicaid eligibility.  As of 2010, H.R. 3963 increases the eligibility limit to 300% of FPL or $61,950 for a family of four while continuing the current authority for states to define and disregard (i.e. ignore) income.  As a result, H.R. 3963 places no practical limit on SCHIP eligibility since states can always manipulate the definition of income to expand coverage.  In addition, Section 116(g) of the bill overturns CMS’s current policy of requiring states to ensure that 95% of the eligible children in their state below 250% of FPL are enrolled before expanding coverage to higher incomes.

Does H.R. 3963’s increased spending violate the spirit of PAYGO?

Yes.  H.R. 3963 provides $35.4 billion over five years and $71.5 billion over ten years in new mandatory spending.  This new spending is only partially offset by tax increases on cigarettes of 61 cents to $1 per pack, and a cigar tax up to $3 per cigar, supposedly (see below) generating $35.5 billion over five years and $71.7 billion over ten years.  However, this CBO score overlooks a major gimmick which the bill employs to lower its costs.  The bill dramatically lowers the SCHIP funding in the fifth year by 80%, from $13.75 billion in the first six months to $1.75 billion.  In all likelihood, such a reduction will never take effect, which would make this an effort to generate unrealistic savings in order to artificially comply with PAYGO rules.

Does H.R. 3963 raise taxes?

Yes.  H.R. 3963 increases the cigarette tax by 61 cents to $1 per pack, and the cigar tax up to $3 per cigar.  Some conservatives may be concerned that the bill increases taxes on low-income individuals in order to pay for the expansion of SCHIP, which is designed to assist low-income families.  In addition, this revenue source is constantly declining as fewer and fewer individuals begin to smoke, since placing a tax on cigarettes will likely deter sales, leading some to question the efficacy of the offset.  According a study by the Heritage Foundation, “To produce the revenues that Congress needs to fund SCHIP expansion through such a tax would require 22.4 million new smokers by 2017.”

Will H.R. 3963 decrease private insurance participation in the market?

Yes.  Expanding SCHIP will generate a substantial shift away from the private health insurance market, by encouraging more and more children to obtain health care coverage from the federal government.  According to CBO, under H.R. 3963, two million children will shift from receiving private health insurance to government health insurance.  This means that they may get worse health care service and become increasingly dependent on the federal government.  In addition, as H.R. 3963 begins to reduce SCHIP funding in 2012, some note that states may shift these children who would be newly eligible for a government program into Medicaid.

Would H.R. 3963 bar illegal immigrants from receiving benefits?

No.  While H.R. 3963 states that “nothing in this Act allows Federal payment for individuals who are not legal residents,” the bill actually weakens existing law by removing the documentation requests under the Deficit Reduction Act (DRA), specifically the burden that citizens and nationals provide documentation proving their citizenship in order to be covered under Medicaid and SCHIP.  Instead, the bill would require that a name and Social Security number be provided as documentation of legal status to acquire coverage and that those names and Social Security numbers be submitted to the Secretary to be checked for validity.    It is unclear what substantive changes were made to the original bill the President vetoed (HR 976) beyond the cosmetic with regard to citizenship certification.  Some conservatives may remain concerned that a Social Security number and name are not sufficient for proof of citizenship.  For instance, according to a recent letter from Social Security Administration Commissioner Michael Astrue, a Social Security number would not keep someone from fraudulently receiving coverage under Medicaid or SCHIP (if they claimed they were someone they were not).

Does H.R. 3963 contain earmarks?

Yes.  H.R. 3963 contains at least three authorizing earmarks.  First, the bill disregards “extraordinary employer pensions” as income.  According to CMS, only one state would fall into this category—Michigan, due to the presence of many auto manufacturers.  In addition, the bill sets the disproportionate share hospital (DSH) allotments for Tennessee at $30 million a year beginning in FY 2008, and sets the DSH allotment increases for Hawaii beginning in FY 2009 and thereafter as the allotments for low DSH states.

Would H.R. 3963 encourage additional SCHIP spending?

Yes.  H.R. 3963 shortens from three to two years the amount of time a state has to spend its annual SCHIP allotment.  Under current law, states are given three years to spend each year’s original allotment, and at the end of the three-year period, any unused funds are redistributed to states that have exhausted their allotment or created a “shortfall,” i.e. commitments beyond the funding available.  In addition, the bill establishes a process through which any unspent funds would be redistributed to any states with a shortfall.  Some conservatives may be concerned that this process provides incentives both for states to spend their allotment quickly and to extend their programs beyond their regular allotments into shortfall, so as to be relieved by the unspent funds of other states.

Do conservatives support the SCHIP program?

Most conservatives support enrollment and funding of the SCHIP program for the populations for whom the SCHIP program was created.  That is why in December the House passed, by a 411—3 vote, legislation reauthorizing and extending the SCHIP program through March 2009.  That legislation included an additional $800 million in funding for states to ensure that all currently eligible children will continue to have access to state-based SCHIP coverage.

Legislative Bulletin: H.R. 3963, Children’s Health Insurnace Program Reauthorization Act

Order of Business:  Today the House will consider the President’s second veto of SCHIP legislation, H.R. 3963.  This bill passed the House by a vote of 265-142 on October 25, 2007, and was vetoed by President Bush on December 12, 2007.  On December 12, 2007, the House by a 211-180 vote postponed consideration of the President’s veto until today.

An earlier version of SCHIP legislation, H.R. 976, was vetoed by President Bush on October 3, 2007.  This bill was originally passed in the House by a vote of 265-159 on September 25, 2007.  On October 18, 2007, the House sustained the President’s veto of H.R. 976 by a vote of 273–156 (needing 2/3 to override a veto).

On December 19, 2007, the House passed by a 411—3 margin S. 2499, which was signed into law by President Bush on December 29, 2007.  This legislation reauthorized the SCHIP program through March 2009, and included $800 million in additional funding to ensure that all states would have sufficient funds to cover existing populations through the 18 months of the authorization.

Summary:  H.R. 3963 reauthorizes and significantly expands the State Children’s Health Insurance Program (SCHIP), while increasing cigarette taxes to supposedly offset the bill’s costs.  The legislation follows closely the recently-vetoed version of SCHIP reauthorization.  Highlights of the revised legislation are as follows:

Cost:  H.R. 3963 provides $35.4 billion over five years and $71.5 billion over ten years in new mandatory spending—this spending is on top of the $25 billion over five years that would result from a straight extension of the program.

The new spending is partially offset by increasing taxes on tobacco products (see below).  However, this CBO score overlooks a major gimmick which the bill employs to lower its costs.  The bill dramatically lowers the SCHIP funding in the fifth year by 84%, from $13.75 billion in the first six months to $1.15 billion.  In all likelihood, such a reduction would not actually take effect, which would make this a gimmick to generate unrealistic savings in order to comply with PAYGO rules.  To that end, H.R. 976 is technically compliant with PAYGO.

Block Grant:  Under current law, a federal block grant is awarded to states, and from the total annual appropriation, every state is allotted a portion for the year according to a statutory formula.  The bill extends the SCHIP block grants from FY 2008-12.  In addition, the bill also creates a new Child Enrollment Contingency Fund capped at 20% of the total annual appropriation, for states that exhaust their allotment by expanding coverage, and Performance Bonus Payments comprised of a $3 million lump sum in FY 2008 plus unspent SCHIP funds in future years.

Expansion to Higher Incomes:  Under current law, states can cover families earning up to 200% of the Federal Poverty Level (FPL) or $41,300 for a family of four in 2007 or those at 50% above Medicaid eligibility.  However, states have been able to “disregard” income with regard to eligibility for the program, meaning they can purposefully ignore various types of income in an effort to expand eligibility.  For instance, New Jersey covers up to 350% of FPL by disregarding any income from 200-350%, allowing them to cover beyond 200% with the enhanced federal matching funds that SCHIP provides.

H.R. 3963 increases the eligibility limit to 300% of FPL or $61,950 for a family of four but also continues the current authority for states to define and disregard income.  States which extend coverage beyond 300% of FPL would receive the lower Medicaid match rate.  The bill limits states from expanding their programs above 300% of FPL through an income disregard whereby they block “income that is not determined by type or expense or type of income.”  However, a state could get around this restriction in a host of ways by disregarding specific types of income, such as income paid for rent or transportation or food.  Practically speaking, H.R. 3963 still places no limit on SCHIP eligibility since states can still manipulate the definition of income to expand coverage, and CMS is limited in its ability to reject such determinations. [New Jersey would be grandfathered from this limitation until 2010, but they would then have to ensure that they are in the top ten of states with the highest coverage rate for low-income children.]

Furthermore, Section 116 overturns CMS’ current policy of requiring states to ensure that 95% of the eligible children in their state below 250% of FPL are enrolled before expanding coverage to higher incomes.  As a result, some conservatives may be concerned that this does not adequately ensure that SCHIP funding targets truly low-income children.

Unlike past legislation, the bill would not grandfather New York’s proposed plan (seeking to cover 400% of FPL or $82,600 for a family of four).  However, New York could merely use specific income disregards to effectively cover up to 400% of FPL.  Some conservatives may be concerned that a family with an income of $82,600 will still potentially be eligible for SCHIP funding after this bill is enacted.

Childless Adults:  The earlier bill phased adults off of the program within two years.  H.R. 3963 would remove childless adults from the program (all would be off by 2009), while allowing parents of eligible SCHIP kids to continue receiving healthcare under SCHIP.  According to CBO estimates, there will still be approximately 700,000 (roughly 10% of total SCHIP enrollees) adults (parents of eligible kids and pregnant women) enrolled in SCHIP by 2012.

H.R. 3963 states that no new waivers for non-pregnant childless adults will be granted to states, and any currently existing waivers will be extended through FY 2008 (terminating such waivers at the end of FY 2008).  H.R. 3963 states that any current state waiver for non-pregnant childless adults which expires before January 1, 2009 may be extended until December 31, 2008 to retain all currently covered non-pregnant childless adults on the program until the end of FY 2008.  The bill extends enhanced FMAP to apply to such waivers through December 31, 2008.

H.R. 3963 grants states the opportunity to apply for a Medicaid waiver for non-pregnant childless adults by September 30, 2008, for those whose SCHIP coverage will end December 31, 2008, and requires that the Secretary approve such waivers within 90 days or the application is automatically deemed approved.

Parents:  The bill provides a two year transition period and automatic extension at the state’s discretion through FY 2009 for the currently covered parents of SCHIP eligible/covered kids, and states that no new waivers be granted or renewed to states to cover the parents of SCHIP kids if such waivers do not currently exist.  Similar to what would be done with non-pregnant childless adults, H.R. 3963 states that any current state waiver for parents of SCHIP kids which expires before October 1, 2009 may be extended until September 30, 2009 to retain all currently covered parents on the program until the end of FY 2009.  The bill states that the enhanced FMAP shall apply to these expenditures under an existing waiver for parents of eligible SCHIP kids during FY 2008 and 2009.

H.R. 3963 requires that any state which provides coverage under a currently existing waiver for a parent of an SCHIP child may continue to provide such coverage through FY 2010, 2011, or 2012, but such coverage must be paid for by a block grant funded from the state allotment.  If the state makes the decision to continue the coverage of parents through 2012, the Secretary may set aside for the state for each fiscal year an amount equivalent to the federal share of 110% of the state’s projected expenditures under currently existing waivers.  The Secretary will then pay out such funds quarterly to the state.  States that enhanced FMAP only applies in fiscal year 2010 for states with “significant child outreach or that achieve child coverage benchmarks.”

In addition, H.R. 3963 retains the statement from H.R. 976 that states there shall be no increase in income eligibility level for covered parents (i.e. no expenditures for providing child health assistance or health benefits coverage to a parent of a “targeted low-income child” whose family income exceeds the income eligibility level applied under the applicable existing waiver).

Private Insurance Crowd-Out:  According to CBO, under H.R. 3963, 2 million children will still shift from receiving private health insurance to government health insurance.  This means that they may get worse health care service and become increasingly dependent on the federal government.  In addition, as H.R. 3963 begins to reduce SCHIP funding in 2012 (if such a reduction is actually intended, see above), some have noted that states may shift these children made newly eligible for a government program into Medicaid.  This phenomenon takes place despite a provision in H.R. 3963 to offer a premium assistance subsidy under SCHIP for employer-sponsored coverage.  A qualifying employer-sponsored plan would have to contribute at least 40 percent of the cost of any premium toward coverage.  The bill includes new language requiring the Secretary, in consultation with the states, to measure crowd-out and to develop best practices designed to limit it.  States would then be required to limit SCHIP crowd-out and incorporate those best practices.  However, many conservatives are likely to be concerned that this language is not enough of protection when CBO maintains that two million will lose their health insurance under this bill.

Legal Immigrants and Citizenship Certification:  H.R. 3963 states that “nothing in this Act allows Federal payment for individuals who are not legal residents.”  However, the bill weakens existing law by removing the documentation requests under the Deficit Reduction Act (DRA), specifically the burden that citizens and nationals provide documentation proving their citizenship in order to be covered under Medicaid and SCHIP.  Instead, the bill would require that a name and Social Security number be provided as documentation of legal status to acquire coverage and that those names and Social Security numbers be submitted to the Secretary to be checked for validity.  If a state is notified that a name and Social Security number do not match, the state must contact the individual and request that within 90 days the individual present satisfactory documentation to prove legal status.  During this time, coverage for the individual continues.  If the individual does not provide documentation within 90 days, he is “disenrolled” from the program but maintains coverage for another 30 days (after the 90 days given to come up with proper documentation), giving the individual up to four months of coverage on a false identity.

It is unclear what substantive changes were made to the vetoed bill beyond the cosmetic, with regard to citizenship certification.  Some conservatives may be concerned that a Social Security number and name are not enough for a proof of citizenship and that more documents should be required to determine eligibility.  For instance, according to a recent letter from Social Security Administration Commissioner Michael Astrue, a Social Security number would not keep someone from fraudulently receiving coverage under Medicaid or SCHIP (if they claimed they were someone they were not).  Thus, this bill may allow illegal aliens the opportunity to enroll falsely in Medicaid or SCHIP and retain coverage for an undetermined amount of time before they are disenrolled for lack of proper identification.

Tax Increase:  H.R. 3963 increases the cigarette tax by 61 cents to $1 per pack, and the cigar tax up to $3 per cigar, supposedly generating $35.5 billion over five years and $71.1 billion over ten years.  It is important to note that this is a substantial tax increase on low-income individuals in order to pay for an expansion of SCHIP to higher income levels, which it was not initially designed for.  In addition, this revenue source is constantly declining as fewer and fewer individuals smoke, and since placing a tax on cigarettes will likely deter sales, some have questioned the efficacy of the offset.  According to a study by the Heritage Foundation, “To produce the revenues that Congress needs to fund SCHIP expansion through such a tax would require 22.4 million new smokers by 2017.”  The bill also changes the timing for some corporate estimate tax payments.

Encourages Spending:  H.R. 3963 shortens from three to two years the amount of time a state has to spend its annual SCHIP allotment.  Under current law, states are given three years to spend each year’s original allotment, and at the end of the three-year period, any unused funds are redistributed to states that have exhausted their allotment or created a “shortfall,” i.e. making commitments beyond the funding it has available.  In addition, the bill establishes a process through which any unspent funds would be redistributed to any states with a shortfall.  Some conservatives may be concerned that this process provides incentives both for states to spend their allotment quickly and to extend their programs beyond their regular allotments into shortfall, so as to be relieved by the unspent funds of other states or the new Contingency Fund.

Other Provisions:

  • Disregarding of Pension Contributions as Income.  The bill disregards “extraordinary employer pensions” as income.  According to CMS, only one state would fall into this category—Michigan, due to the auto manufacturers.  Some conservatives may view this as an authorizing earmark.
  •  Name Change.  H.R. 3963 renames the program the “Children’s Health Insurance Program.”
     
  • Medicaid Disproportionate Share Hospital (DSH) Allotment for TN and HI.  The bill sets the DSH allotments for Tennessee at $30 million a year beginning in FY 2008, and sets the DSH allotment increases for Hawaii, beginning in FY 2009 and thereafter, as the allotments for low DSH states.  Some conservatives may view these provisions as authorizing earmarks.
  • Premium Assistance and Health Savings Accounts.  The bill streamlines procedures for states to provide premium assistance subsidies for children eligible to enroll in employer-sponsored coverage, rather than placing such children in a state-sponsored SCHIP program.  However, all high-deductible health insurance plans and Health Savings Accounts (HSAs) would be ineligible for premium assistance, even if employers and/or states chose to make cash contributions to the HSA up to the full amount of the plan’s high deductible.  Some conservatives may be concerned that these restrictions would undermine the recent growth of HSAs and consumer-driven health care plans.

Does the Bill Expand the Size and Scope of the Federal Government?:  Yes, the bill would expand the SCHIP program by $35 billion over five years and loosen the program’s eligibility requirements.

Does the Bill Contain Any New State-Government, Local-Government, or Private-Sector Mandates?:  A detailed CBO cost estimate with such information is not available.