Revised March 14, 2006

ADMINISTRATION'S FISCAL YEAR 2007 BUDGET IS LIKELY STILL TO LEAVE SCHIP COVERAGE FOR LOW-INCOME CHILDREN IN JEOPARDY
 By Matt Broaddus

The State Children’s Health Insurance Program (SCHIP), jointly financed by states and the federal government, provides comprehensive health insurance coverage to more than 4 million low-income children who would otherwise be uninsured.[1]  In fiscal year 2007, under current law, 18 states will have insufficient federal funding under SCHIP to sustain their existing enrollment of low-income children.

To address this issue, the Administration's budget proposes to redistribute $635 million in already available federal SCHIP funds.  These funds would be redistributed from states now holding them to meet needs in future years to the states that are projected to face federal funding shortfalls in their SCHIP programs in 2007.

New analyses by the Congressional Research Service (CRS) and the Center on Budget and Policy Priorities (CBPP) indicate, however, that federal SCHIP funds available under current law are approximately $1 billion less than states’ needs for such funds in 2007.  Thus, the Administration’s proposal will fall short of fully funding states’ needs for SCHIP funding in 2007.  Our analysis suggests that more than 200,000 children could go without SCHIP coverage next year as a result.[2]

The CRS and CBPP estimates show that these 18 shortfall states will face an aggregate federal financing shortfall in SCHIP in 2007 of about $1 billion, or about $355 million more than the additional expenditures projected under the Administration’s proposal.[3] (See Table 1 for a complete list of shortfall states and the estimated remaining shortfalls after implementation of the Administration’s proposal).  The Administration’s proposal thus would appear to leave the 18 states with inadequate federal SCHIP funds in fiscal year 2007.  The 18 states would either have to increase their own state funding to make up for the shortfall of federal SCHIP funds, or cut back their SCHIP programs by reducing eligibility, eliminating benefits, or cutting provider payments.  In states that cut back their programs, SCHIP beneficiaries would be at significant risk.

Background

The federal government, on average, covers 70 percent of the cost of serving children in SCHIP.  Federal funding for SCHIP is capped annually, with each state receiving a portion of an annual national allotment that is available for three years.  In the early years of SCHIP, the combination of annual allotments and redistributions of unspent federal funds from lower-utilization states enabled the higher-utilization states to have sufficient federal funding to sustain and grow their programs.  Since then, however, most states’ SCHIP programs have matured and have reached more children, resulting in higher levels of state usage of federal SCHIP funds, greater need for federal funds, and fewer unspent federal funds available for redistribution to meet the needs of other states.  In addition, overall federal SCHIP funding declined significantly in 2002, 2003, and 2004.  Finally, $1.4 billion in unspent SCHIP funds was allowed to revert to the Federal Treasury over the last two years, rather than being redistributed to states that could use these funds.

As a result, beginning in 2005, a number of states began facing federal financing shortfalls in their low-income children’s health insurance programs.  In 2005 and 2006, these shortfalls were largely or entirely eliminated through legislative and administrative action.  But states now face more serious federal financing shortfalls in 2007.

Congressional Research Service Projects Shortfalls for 2007

Based on states’ estimates of future SCHIP spending in fiscal year 2007, more aggressive action will need to be taken to prevent the health care needs of significant numbers of eligible low-income children from going unmet next year.  The Congressional Research Service projects that the need for federal SCHIP funds will exceed available federal SCHIP funds in 18 states in 2007 by a collective $1.04 billion.  Assuming that the unspent funds expected to be available for redistribution in 2007 are targeted only to these 18 shortfall states (as was done in 2005 and is expected to be done in 2006), a collective $946 million shortfall will remain.  Analysis using the CBPP SCHIP financing model, which is similar to CRS’ model, results in an estimate of the aggregate shortfall of $1.07 million, and a net shortfall after the regular redistribution of funds of $990 million among the same 18 states.  Our analysis indicates that net shortfalls of this amount represent the annual cost of providing health care to up to 730,000 children.[4]

The Administration’s FY2007 Budget Proposal

The Administration’s budget proposes to spend an additional $635 million in the SCHIP program by redistributing existing SCHIP funds in fiscal year 2007 to shortfall states, beyond the funds that normally would be redistributed.  The budget states that this would be accomplished through “better targeting SCHIP funds in a more timely fashion.”[5]  The method by which the Administration would accomplish the enhanced redistribution is not entirely clear from Health and Human Services budget documents.[6]

Whatever the approach, however, it is clear that this provision, while helpful, will not fill states’ shortfalls completely.  Assuming that $635 million in additional funds are made available to the shortfall states in 2007, the 18 shortfall states will be left with an aggregate shortfall of $311 million under the CRS estimates and $355 million under the CBPP estimates.  (This assumes that the $635 million in redistributed funds will be made available to all 18 shortfall states in proportion to each state’s share of the overall shortfall.)

Implications for Affected States and Low-income Children

Under CBPP estimates, the shortfalls that would remain among the 18 states — of $311 million to $355 million after implementation of the Administration proposal — represent the annual cost of providing health care coverage to up to 230,000 low-income children.  The 18 states would be forced either to reduce eligibility or limit benefits in their SCHIP programs or to increase the share of the costs that states bear, potentially compromising other state budget priorities.

As Congress prepares to craft a fiscal year 2007 budget resolution, it is important that the budget include adequate federal SCHIP funding to fully address the funding shortfalls in the 18 states.  As this analysis demonstrates, the level of additional SCHIP spending proposed by the Administration's budget, while well-intended, is not sufficient and needs to be increased by up to another $355 million to avert federal SCHIP funding shortfalls in 2007.[7]

End Notes:

[1] The most recent data available indicate that more than 4 million children are enrolled in SCHIP at any given point in time.  The Department of Health and Human Services reports that the number of children enrolled at any point over the course of a year stood at more than 6 million in 2004.

[2] Under SCHIP, some states have elected to use SCHIP funds to expand Medicaid coverage to more low-income children as opposed to creating a separate state program.  In the event of a federal SCHIP funding shortfall, these states can decide to continue to cover their SCHIP children in Medicaid.  However, the federal contribution to the cost of these children’s care would be reduced to the regular Medicaid matching rate.  States would thus be responsible for generating additional state funds to compensate for the lost federal matching funds.  The SCHIP enrollment reduction in 2007 due to funding shortfalls would be less than estimated if states choose to cover some of their SCHIP children in Medicaid at the lower Medicaid matching rate.

[3] Evelyne Baumrucker and Chris Peterson, Reconciliation and Financing Issues for SCHIP, presentation before the National Academy of State Health Policy, Congressional Research Service, February 22, 2006.  The Center on Budget and Policy Priorities’ SCHIP financing model is based on a model created by the Office of the Actuary at the Centers for Medicare and Medicaid Services.

[4] We use per capita cost figures in SCHIP as estimated by the Office of the Actuary at the Centers for Medicare and Medicaid Services.  Assuming the CRS projected net shortfall of $946 million, we would estimate that this shortfall represents the cost of serving roughly 700,000 children in SCHIP for a full year.

[5] The Department of Health and Human Services Budget in Brief for Fiscal Year 2007, page 68.

[6] The Administration’s 2006 budget included a proposal to shorten the initial availability of states’ annual SCHIP allotments from three to two years and to target funds unspent after two years to shortfall states.

[7] Congress also should increase accordingly the five year level of additional SCHIP funding to account for the future year budget effects of fully filling in the state shortfalls in 2007.