Revised June 22, 2000
Senate Appropriations Committee Proposal Poses Threat to SCHIP
by Jocelyn Guyer
In action earlier this month on the Fiscal Year 2001 Labor-HHS appropriations bill, the Senate Appropriations Committee adopted a provision intended to rescind $1.9 billion in funding provided for the State Children's Health Insurance Program (SCHIP). The proposed rescission would be used to free up $1.9 billion in budget authority to help finance discretionary programs in the Labor-HHS appropriations bill.
At first blush, the proposed SCHIP rescission might appear relatively innocuous. The rescission would cancel $1.9 billion in fiscal year 1998 SCHIP allotments that states are not expected to use by September 30, 2000 and would ostensibly return these SCHIP funds to states in fiscal years 2003 and 2004. A closer examination of the rescission indicates, however, that it would pose serious risks for the SCHIP program. The rescission would establish a dangerous precedent of using SCHIP funds to compensate for shortfalls in discretionary spending and consequently would call into question the extent to which states can rely on Congress to provide SCHIP funds as promised for future years.
As this analysis explains, the rescission would be likely to have a chilling effect on SCHIP programs in some states, leading those states to expand their SCHIP programs less than they otherwise would and to insure fewer children as a result. Furthermore, the SCHIP rescission would force at least one, and possibly additional, states to scale back their current child health programs during the coming year unless the state came up with additional state funds. Finally, the proposed rescission would make it more difficult for a number of the states with the most successful SCHIP programs the states that would have received (through a reallocation process) most of the $1.9 billion being rescinded to prepare for the 26 percent reduction in federal SCHIP funding slated for fiscal year 2002 under the SCHIP authorizing statute.
Background on the SCHIP Funding Structure
When Congress enacted the State Children's Health Insurance Program in August 1997, it established a formula under which each state is allocated a share of the federal funds provided for each fiscal year. A state can use its SCHIP allotment for a given year over a period of up to three years. For example, a state can use its fiscal year 1998 SCHIP allotment during fiscal years 1998, 1999, and 2000. If a state has not used its full SCHIP allotment for a given fiscal year by the end of the three-year period, the Secretary of Health and Human Services must reallocate the unused money to states that have fully spent their allotment for the given fiscal year.
This financing system for SCHIP was adopted for several reasons.
- Allowing for a start-up phase. By giving states a three-year window to use their SCHIP funds, Congress took into account that some states would need time to plan and implement their child health expansions. States establishing separate child health programs, rather than merely expanding Medicaid, have had a particular need for time to establish eligibility rules for their new programs, develop delivery systems, and educate the public about the programs.
- Preparing for the "dip" in SCHIP funding. The three-year spending window also gives states an opportunity to plan for the substantial reduction in federal SCHIP funding slated to occur in fiscal year 2002. The 1997 SCHIP legislation set the SCHIP funding levels for fiscal years 1998 through 2001 at more than $4 billion a year. In fiscal year 2002, however, federal SCHIP funding will fall by 26 percent to $3.1 billion. The funding level for SCHIP will remain at a little more than $3 billion a year through fiscal year 2004, after which it returns to more than $4 billion a year. The "dip" in SCHIP funding was written into the SCHIP authorizing legislation due to budget constraints present at the time the legislation was drafted in 1997, rather than for policy reasons.
- Making the SCHIP block grant funding structure responsive to states' need for federal funds. As a block grant, SCHIP lacks the inherent responsiveness of an entitlement program such as Medicaid to states' changing needs for, and ability to make use of, federal funds for health care coverage. Congress attempted, through the reallocation provision, to establish a mechanism within a block grant structure to match more precisely the distribution of SCHIP funds with each state's funding needs. The reallocation mechanism allows states that do not need their full allotments to return money to the Secretary of Health and Human Services after a reasonable period of time, where it can be redirected to states that can make use of the funds to insure more children.
At present, the Congressional Budget Office projects that by September 30, 2000, states will use $2.4 billion of the $4.3 billion allocated to them for SCHIP in fiscal year 1998. (September 30, 2000 represents the final day of the three-year window during which states can use their fiscal year 1998 allotments.) As a result, CBO anticipates that $1.9 billion will be available in fiscal year 2001 to be reallocated to states that have fully used their fiscal year 1998 allotments. CBO expects that $1.4 billion of this $1.9 billion will be spent by states receiving reallocated funds, while $500 million will remain unused and expire at the end of fiscal year 2001.
CBO projects that over time, as states move to full implementation of their SCHIP programs and also face the decline in SCHIP funding that takes effect in fiscal year 2002, a growing number of states will use their full SCHIP allotments, with any funds that remain unused then being fully utilized by states that receive the remaining funds through a reallocation. For example, CBO projects that states will use nearly 95 percent of their fiscal year 2002 allotments by the end of fiscal year 2004, with only $200 million in fiscal year 2002 funds remaining available for reallocation. CBO projects that the states receiving this $200 million in reallocated funds will use all of it.(1)
The Senate Appropriations Committee Provision
The Senate Appropriations Committee provision would reduce states' fiscal year 1998 SCHIP allotments by $1.9 billion. This $1.9 billion would be taken from the states that do not use their full 1998 SCHIP allotments by the end of the three-year spending window. The funds would then be "returned" to these same states in fiscal year 2003 for use in fiscal years 2003 and 2004.
Under this rescission, no unused fiscal year 1998 funds would be available for reallocation in fiscal year 2001. States that succeed in making full use of their fiscal year 1998 SCHIP allotments and that consequently would qualify for reallocated funds under current law would be denied them.
The Congressional Budget Office estimates that the SCHIP rescission would reduce budget authority by $1.9 billion and outlays by $40 million in fiscal year 2001. (The impact on outlays assumes that some of the drop in SCHIP outlays would be offset by higher Medicaid spending.) The projected reduction in SCHIP outlays in fiscal year 2001 is relatively small because CBO expects that most of the states that would lose reallocated funds due to the rescission would respond by drawing more heavily on their fiscal year 1999, 2000, and 2001 SCHIP allotments to finance their child health programs in fiscal year 2001, rather than by reducing the amount of federal funds they spend on children's health coverage in fiscal year 2001. But states that are forced to draw more heavily on their allotments to fund their SCHIP programs in fiscal year 2001 will be in a weaker position to accommodate the sharp drop in SCHIP funding slated for fiscal year 2002. (Note: CBO has not yet estimated the effects of the proposed rescission beyond fiscal year 2001.)
The proposed rescission poses a threat to the SCHIP financing structure in several ways.
- Adverse effects on the reallocation structure. The rescission dismantles for the coming fiscal year the system for reallocating unused funds to the states that have fully used their basic SCHIP allotments. Such an action is likely to create considerable uncertainty among states about whether the appropriations committees would allow any funds to be reallocated in subsequent years or would simply recapture those funds, too. States running strong SCHIP programs would not be able to count on receiving reallocated funds to supplement their basic SCHIP allocations in future years.
Some states are likely to respond to the potential of there being no reallocated funds by adopting less-ambitious outreach campaigns and expansions than they otherwise would have done, since these states could be forced to come up with additional state funds if their outreach efforts proved "too successful" and they ended up enrolling more uninsured children than can be paid for with their basic SCHIP allocations. A number of states were cautious in their initial SCHIP expansions, intending to expand their programs to children in families with modestly higher incomes once the states gained some experience under SCHIP. Some of these states may decline to proceed with further expansions if the rescission becomes law and the potential to receive reallocated funds in the future is placed in doubt.
- Establishing a dangerous precedent. If the rescission is enacted, chances are substantial that a pattern will develop of the appropriations committees turning to SCHIP funds in future years to compensate for shortfalls in the funding available for discretionary programs. Moreover, there is no assurance that the promise to return the funds now being rescinded to state SCHIP programs in future years will be fulfilled. The history of Congressional action in the early 1990s on the State Legalization Impact Assistance Grant program illustrates how an initial rescission of this nature can become a recurrent pattern. (See box on page 5.)
- Undermining the ability of states that have succeeded in using their full SCHIP allotments to prepare for the coming drop in federal funding. The proposed rescission would harm roughly a dozen states that are expected to use their fiscal year 1998 SCHIP allocations fully. Under current SCHIP rules, Alaska, Alabama, Indiana, Kentucky, Maine, Massachusetts, Mississippi, Missouri, Nevada, New York, North Carolina, and South Carolina are expected to receive the $1.9 billion in reallocated funds, since they are projected to use their full fiscal year 1998 allocations by the end of the three-year spending window. If the rescission is enacted, these states will not receive these funds. As a result, they will need to draw more heavily and rapidly upon their basic allotments, making it more difficult for them to prepare for the 26-percent reduction in federal SCHIP funding slated for fiscal year 2002.
- Forcing some states to choose between scaling back their child health expansions and providing additional state funds. New York and possibly a few other states as well are likely to use up their fiscal year 1998, 1999, and 2000 SCHIP allotments by some time in 2001, and to be in the position at some point during fiscal year 2001 of needing reallocated funds to keep their programs running at full capacity. In the absence of reallocated SCHIP funds, New York and possibly a few other states will have to cut back their programs during the coming fiscal year unless they come up with additional state funds to maintain their programs.
Earlier Experience Supports Appropriations Committees May
Develop a Pattern of Relying on CHIP Funds to Finance
A decade ago, in a step similar to the proposed rescission of SCHIP funds, Congress acted to delay the provision of funding for a capped entitlement program to generate savings to help finance discretionary programs in the Labor-HHS appropriations bill. The Immigration Reform and Control Act (IRCA) of 1986 established the State Legalization Impact Assistance Grant program (SLIAG) as a capped entitlement for states, providing nearly $1 billion a year for SLIAG grants to states in fiscal years 1988 through 1991. But appropriation acts for fiscal year 1990 and fiscal year 1991 reduced the amounts provided in each of these fiscal years, using the savings to help finance discretionary appropriations.
Those appropriations acts promised, through an advance appropriation, to restore total cumulative SLIAG funding in fiscal year 1992 to the original level IRCA had established. When the appropriation bills for fiscal years 1992 and 1993 were subsequently written, however, the restored funding was delayed again, although it ultimately was provided. The experience of repeated delays in the provision of SLIAG funds promised to the states suggests that if Congress approves the pending SCHIP rescission, appropriators could come to rely on SCHIP rescissions in future years to help finance discretionary programs.
- There are better ways to deal with the small portion of SCHIP funds expected to remain unspent. According to CBO, three-fourths of the $1.9 billion in funds that would be rescinded are slated to be reallocated to other states under current law. About one-fourth of this $1.9 billion some $500 million is expected to expire at the end of fiscal year 2001 under current law. While it is important to assure that these $500 million in funds remain available for children's health insurance in future years, there are better ways to do this than the proposed rescission. The authorization committees that exercise jurisdiction over SCHIP could take action if it becomes clear that $500 million in unspent fiscal year 1998 funds will indeed remain unused at the end of fiscal year 2001. For example, the authorizing committees could give states that receive reallocated funds more than one year to use those funds. (The authorizing committees also could allow states to retain a share of their initial allotments for a period of more than three years.(2))
Budget Resolution's Unrealistic Limits on Non-Defense Discretionary Spending Have Created Pressure to Turn to Options Such as the SCHIP Rescission
The work of the House and Senate appropriations committees this year has been made more difficult by the Congressional budget resolution, which imposes unrealistic limits on funding for non-defense discretionary programs. The budget resolution calls for large tax cuts equaling 98 percent of the projected non-Social Security surpluses for the next five years. But it proposes to cut non-defense discretionary appropriations by $121 billion or 7.5 percent over the next five years below the amount CBO estimates is needed to maintain current funding levels, adjusted for inflation.(3)* In 2001 alone, the budget resolution calls for slicing non-defense funding more than $19 billion or 6.3 percent below the inflation-adjusted 2000 level, and $29 billion below the amount the Clinton Administration budget seeks.
The proposed reductions in non-defense discretionary spending assumed in the budget resolution are not realistic; recent experience suggests it is quite unlikely Congress will impose such cuts. The funding decisions that Congress made last year are a case in point. The budget resolution that Congress adopted a year ago called for reducing non-defense discretionary spending for fiscal year 2000 nearly 16 percent below the current funding level, adjusted for inflation. After a somewhat torturous appropriations process, however, the appropriation bills that Congress finally enacted not only failed to make these reductions but actually provided a slight increase in overall non-defense discretionary spending. In light of the current bright budget outlook (which is expected to grow brighter when CBO updates its budget projections this summer) and the upcoming election, it is hard to imagine Congress will impose real (inflation-adjusted) cuts in non-defense discretionary programs in 2001.
Even though Congress is unlikely to adhere to the non-defense discretionary spending levels the budget resolution envisions, measures such as the SCHIP rescission are being advanced as part of an effort to feign compliance with the budget resolution. Such measures are likely to complicate and delay final action on the fiscal year 2001 appropriations bills, just as last year's unrealistic budget assumptions delayed final action on the fiscal year 2000 appropriations bills.
*See James Horney, Budget Resolution Would Use at Least 98 Percent of Projected Non-Social Security Surpluses for Tax Cuts, Center on Budget and Policy Priorities, April 14, 2000.
The SCHIP rescission included in the Senate Labor-HHS Appropriations bill would deny reallocated funds to states that have succeeded in using their full SCHIP allotments for fiscal year 1998. In at least one state, the rescission could result in actual cutbacks in coverage for children in fiscal year 2001. The rescission also would establish a dangerous precedent by eliminating the reallocation system in SCHIP in fiscal year 2001 and introducing great uncertainty into the program's funding structure for years after that. There is a substantial risk that some states would respond to the rescission by pulling back on their outreach campaigns or other plans to expand coverage for children. The rescission also could make it more difficult for a number of states to prepare for the fiscal year 2002 drop in SCHIP funding, which will occur just 16 months from now.
1. CBO does anticipate that a portion of fiscal year 1999, 2000, and 2001 funds will remain unspent after being reallocated and will consequently revert to the Treasury.
2. If such an option were considered, it would be important to allow states to retain only a share of their initial allotments (rather than their entire allotments) for a period of more than three years. If no unused funds were recovered at the three-year point, there would be no funds available at that time for reallocation to the states that have fully used their initial allotments. That would make the SCHIP financing structure less responsive to states' needs and the varying abilities of states to use SCHIP funds.
3. See James Horney, Budget Resolution Would Use at Least 98 Percent of Projected Non-Social Security Surpluses for Tax Cuts, Center on Budget and Policy Priorities, April 14, 2000.