SCHIP Proposals in Fiscal Year 2009 Budget

Summary:  In submitting his Fiscal Year 2009 Budget request to Congress, President Bush proposed a number of changes to the State Children’s Health Insurance Program (SCHIP).  As part of this package, the Administration requested a $19.7 billion increase in federal funding for SCHIP over the next five years.

Background:  The State Children’s Health Insurance Program, 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 approximately $40,000 for a family of four.  States may implement SCHIP by expanding Medicaid and/or creating a new state SCHIP program.  SCHIP received nearly $40 billion in funding over ten years as part of BBA, and legislation recently passed by Congress in December (P.L. 110-173) extended the program through March 2009 while providing additional SCHIP funds for states.

Budget Funding Proposal:  The budget proposes an additional $2.2 billion in SCHIP spending for Fiscal Year 2009, and $19.7 billion over the five year period.  The budget includes outreach grants of $50 million in 2009, and $100 million annually for the four succeeding years, for state and local governments as well as community-based organizations to engage in activities designed to increase enrollment of eligible children.

These funding levels significantly exceed the approximately $5 billion in increased funding proposed by the President in his Fiscal Year 2008 budget last year.  The proposal also exceeds the $1.8 billion in proposed Medicaid savings in Fiscal Year 2009 and $17.4 billion over the next five years achieved by realigning and simplifying the federal matching percentage for various administrative and family planning services, among other proposed changes.

Proposed SCHIP Enrollment Levels:  The Department of Health and Human Services’ (HHS) Fiscal Year 2009 Budget in Brief document notes that CMS exceeded its 2005 goal of enrolling five million children in the SCHIP program by more than a million children.  During FY2006, 4.0 million children on average were enrolled in SCHIP during any given month, and 6.6 million children were enrolled at any time during the year.

In arriving at a top-line budget number for its SCHIP proposal, the budget document also sets assumptions for future year enrollment levels.  The proposal notes the fact that the $19 billion increase in funding proposed by the Administration would fund an average of 5.6 million children in SCHIP per month, and nearly nine million children at some point over the course of a year—both of which constitute increases of nearly a third over 2006 levels.  Much of the additional enrollment and spending would stem from the outreach efforts as a result of the $450 million in grants proposed as part of the Cover the Kids initiative.

The significant increases in enrollment proposed that would result from the Administration’s higher budget request seem to be inconsistent with another document commissioned by HHS to study the number of uninsured children.  In that report, two researchers from the Urban Institute found that in 2003-2004, only 689,000 uninsured children in families with incomes under 200% FPL were eligible for, but not enrolled in, SCHIP coverage.  During the debate over SCHIP’s reauthorization last year, Administration officials utilized these data to reject calls from Congressional Democrats for $35-50 billion in increased SCHIP funding as unnecessary to fund health insurance for all targeted populations.

Focus on Originally Targeted Populations.  The budget notes a guidance letter issued by the Centers for Medicare and Medicaid Services (CMS) on August 17, 2007 designed to prevent children from dropping private insurance coverage in order to join the government-funded SCHIP—a phenomenon commonly referred to as “crowd-out.”  The letter provided several criteria for states seeking to cover children in families with incomes above 250% FPL, including a one-year waiting period of uninsurance for individuals seeking coverage and assurance that the state has enrolled 95% of children below 200% of FPL who are eligible for coverage through Medicaid or SCHIP.  The letter, which is consistent with the Administration’s stated policy of targeting federal assistance to the low-income children for whom SCHIP was originally created, advised that CMS could pursue corrective action against states that have not worked to implement the guidance within 12 months (i.e. by August 2008).  The budget proposes legislation to extend this standard to any state wishing to expand coverage beyond 200% of FPL—the level below which states were supposed to target their SCHIP coverage, according to the original BBA provisions.

In addition, the budget would tighten SCHIP eligibility by clarifying the definition of income.  This proposal would eliminate the general “income disregard” system that has caused concern for many conservatives by enabling some states to extend government-financed SCHIP coverage to children in families making above 250-300% FPL ($50,000-$60,000 for a family of four).  However, states may still create “income disregards” around specific items (e.g. food, housing, etc.).

Coverage for Adults.  While the Administration’s budget proposes to transition adults out of SCHIP, it also proposes to transition adults into Medicaid coverage.  Although the federal matching percentage is slightly lower for Medicaid than for SCHIP, some conservatives may remain concerned that the budget’s proposed transition out of a program intended for low-income children belies the fact that these adults will remain dependent on public health insurance coverage.  Moreover, this proposal echoes language in the Senate SCHIP “compromise,” which the Administration twice vetoed (H.R. 976, H.R. 3963) last year.

Conclusion:  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.

While the Administration’s Fiscal Year 2009 budget includes several reasonable proposals to ensure that SCHIP funds are targeted toward low-income children, the significant increases in proposed funding levels may give some conservatives pause.  A study funded by the Department of Health and Human Services itself confirms the impossibility of enrolling more than 1.5 million new children to enroll in SCHIP, given current eligibility guidelines.  Therefore, it is an open question whether the nearly fourfold proposed increase in SCHIP funding—coupled with $450 million in outreach grants to states, localities, and community organizations—will only serve to encourage states to expand government-funded health insurance under the aegis of covering uninsured children.

Health Care Proposals in Fiscal Year 2009 Budget

Summary:  In submitting his Fiscal Year 2009 Budget request to Congress, President Bush proposed a number of health-related changes that would achieve budgetary savings to both mandatory and discretionary spending.  As part of this package, the Administration has proposed a package that would reduce the growth of Medicare spending from 7.2% to 5.0% to meet requirements under the Medicare Modernization Act.

Mandatory Spending—Medicaid/SCHIP:

The budget proposal includes $1.8 billion in Medicaid savings in Fiscal Year 2009 and $17.4 billion over the next five years.  Budgetary savings would be achieved by realigning reimbursement rates for family planning services at the statutory Federal Medical Assistance Percentage (FMAP) rate ($3.3 billion in savings over five years), and by aligning reimbursement rates for all administrative services and case management at 50% (total $6.6 billion in savings over the five-year window).  Additional savings over the next five years would be achieved through adjustments to pharmacy reimbursements ($1.1 billion), asset verification ($1.2 billion), and cost allocation ($1.77 billion).

The budget proposes an additional $2.2 billion in SCHIP spending for Fiscal Year 2009, and $19.7 billion over the five year period.  The budget includes outreach grants of $50 million in 2009, and $100 million annually in subsequent years, for state and local governments as well as community-based organizations to engage in activities designed to increase enrollment of eligible children.  Lastly, the budget proposes to simplify SCHIP eligibility by clarifying the definition of income, eliminating the “income disregard” system that has been a source of concern among many conservatives.

Mandatory Spending—Medicare:

The budget includes several proposals to reduce the overall growth in Medicare spending.  Overall, Medicare funding would fall $178 billion below the baseline over the next five years.  These proposals would not constitute overall “cuts” to the Medicare program, but would instead reduce its growth from 7.2% to 5.0%.  Highlights of the budget submission include the following:

Provider Adjustments: The Administration proposal would freeze payment rates for hospitals, skilled nursing facilities, long-term care and outpatient hospitals, ambulatory surgical centers, inpatient rehabilitation facilities, and home health providers through Fiscal Year 2011, and provide a –0.65% annual market basket update thereafter, saving $112.93 billion over five years.  The savings derived from flat-level payments would not mean that providers would not continue to receive increased reimbursements from the federal government, as the level, number, and intensity of services provided would still continue to grow.

Disproportionate Share Hospital (DSH) Payments: Medicare DSH payments, which compensate hospitals that serve large numbers of low-income individuals, would be reduced by 30% over two years, saving $20.7 billion over five years.  This modest reduction in payments to hospitals would recognize the significantly enhanced benefits provided to seniors, particularly those with low incomes, as part of the Medicare Modernization Act.

Medical Education: The budget would eliminate duplicate Indirect Medical Education (IME) payments made to hospitals on behalf of Medicare Advantage beneficiaries, and would reduce the IME add-on by 60% over the next three years, saving a total of $21.75 billion over five years.

Means Testing:  The budget proposes to end annual indexing of income-related Part B premiums and establish an income-related Part D premium consistent with the Part B “means testing” included in Title VIII of the Medicare Modernization Act.  The proposals would achieve total savings of $5.75 billion over five years.  The RSC has previously included similar proposals in its budget documents as one way to constrain costs and ensure consistency between a Part B benefit that is currently means-tested and a Part D benefit that is not.

Other Savings:  Additional savings over the five year budget window would come from a reduction in the rental period for oxygen equipment ($3 billion), extending Medicare Secondary Payor for the End-Stage Renal Disease (ESRD) program from 30 to 60 months ($1.1 billion), eliminating bad debt payments over four years ($8.5 billion), and other regulatory and administrative actions ($4.7 billion).

Medicare Funding Trigger

Concurrent with the budget submission, the Medicare Modernization Act (MMA) requires the President to submit to Congress within 15 days a proposal to remedy the Medicare “excess general revenue Medicare funding” warning announced by the Medicare trustees last spring.  In addition to the savings package described above, the opportunity afforded by the trigger could be used to advance more comprehensive proposals, which could include:

Premium Support: This model would convert Medicare into a system similar to the Federal Employees Benefit Health Plan (FEHBP), in which beneficiaries would receive a defined contribution from Medicare to purchase a health plan of their choosing.  Previously incorporated into alternative RSC budget proposals, a premium support plan would provide a level playing field between traditional Medicare and private insurance plans, providing comprehensive reform, while confining the growth of Medicare spending to the annual statutory raise in the defined contribution limit, thus ensuring long-term fiscal stability.

Restructure Cost-Sharing Requirements:  This concept would restructure the existing system of deductibles, co-payments, and shared costs, which currently can vary based on the type of service provided.  Additionally, Medicare currently lacks a catastrophic cap on beneficiary cost-sharing, leading some seniors to purchase Medigap policies that insulate beneficiaries from deductibles and co-payments and therefore provide little incentive to contain health spending.  Reforms in this area would rationalize the current system, generating budgetary savings and reducing the growth of health spending.

Increase Medicare Part B Premium:  The RSC has previously proposed increasing the Part B premium from 25% to 50% of total Medicare Part B costs, consistent with the original goal of the program.  This concept would not impact low-income seniors, as Medicaid pays Medicare premiums for individuals with incomes under 120% of the federal poverty level.

Medical Liability Reform: This proposal would help bring down health spending both within and outside Medicare by helping to eliminate frivolous lawsuits and providing reasonable levels of compensation to victims of medical malpractice.  In 2003, the Congressional Budget Office scored a liability reform bill (H.R. 5) as lowering Medicare spending by $11.2 billion over a ten-year period.

Bipartisan Commission:  This proposal would provide an expedited mechanism requiring Congress to hold an up-or-down vote on the recommendations of a bipartisan commission examining ways to reform Medicare and other federal entitlements.

Value-based Purchasing:  This concept, also known as “pay-for-performance,” would seek to adjust physician and provider reimbursement levels to reflect successful patient outcomes on a risk-adjusted basis.  While advocates believe pay-for-performance can yet achieve the significant budgetary savings not present in existing Congressional Budget Office models, some conservatives may be concerned that this methodology would deepen the government’s role in health care by altering the fundamental doctor-patient relationship.

Sequestration Mechanism: This proposal would cap the growth of overall Medicare spending levels, and provide adjustments in benefit structures in the event that spending exceeded statutory levels.  The budget submission to Congress did include the proposal that physician payments be reduced 0.4% for every year in which general tax revenues cover more than 45% of Medicare costs—the level at which the Medicare Modernization Act required that a funding warning be issued, and action taken by Congress.  The Administration proposal is designed to provide Congress with an impetus to embrace comprehensive entitlement reform by requiring across-the-board cuts absent pre-emptive legislative action.

Discretionary Proposals:  Overall, the President’s proposed discretionary budget for the Department of Health and Human Services (HHS) is $68.5 billion, $1.7 billion less than last year.  Preliminary highlights of funding levels on health programs include the following:

Centers for Disease Control (CDC): The proposal reduces overall spending by $412 million from current year levels.  Significant reductions within the CDC account include a proposed $111 million reduction for the Occupational Safety and Health Administration (OSHA), and an $83 million reduction in the World Trade Center screening and treatment program.

Earmarks: The budget proposes $451 million in savings by eliminating earmarked projects from the HHS budget.

Food and Drug Administration (FDA): The budget provides a $130 million increase for FDA over Fiscal Year 2008 levels.  More than half ($68 million) of the proposed increase comes from additional resources for drug and biologic safety programs, with an additional $33 million increase in the food safety budget.

Health Resources and Services Administration (HRSA): A total of nearly $1 billion in reductions in the HRSA account comes from several proposed sources—grants to train nurses and health professionals (reduced by $240 million); training doctors at children’s hospitals (eliminated, saving $302 million); rural health programs (reduced by $150 million); and public health buildings and projects (eliminated, saving $304 million).  Reductions in the rural health and health training accounts have previously been proposed in previous RSC budget documents.  Since that time, reconciliation legislation passed last September (P.L. 110-84) provided student loan forgiveness to public health workers, raising additional questions about the duplicative nature of the HRSA-funded grant programs.

National Institutes of Health (NIH): The National Institutes of Health would receive flat-level funding from Fiscal Year 2008, $29.5 billion in total, after years of substantial increases.  Funding for most institutes within NIH would likewise remain at constant levels for the upcoming Fiscal Year.

Conclusion: The Administration’s Fiscal Year 2009 budget includes several reasonable proposals to slow the growth of health spending and thereby help return federal entitlements to a more sustainable trajectory.  Such measures are needed urgently, as Medicare faces $34.1 trillion in unfunded liabilities over the next 75 years, according to the Government Accountability Office.  The need for immediate action is great: the first Baby Boomer becomes eligible for Medicare in 2011, and every year that Congress does not address unfunded entitlement obligations, their size grows an additional $2 trillion, according to Comptroller General David Walker.  Some conservatives may believe that these measures proposed by the Administration to constrain reimbursements to providers, while helpful, can constitute the starting point for a comprehensive discussion about entitlement reform.

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.