June 24, 1997

The Commerce Committee Child Health Block Grant:
Health Insurance for Children or Windfall for States?
by Jocelyn Guyer and Cindy Mann


The House Commerce Committee has proposed to spend $14.4 billion of the $16 billion in new child health funds on a block grant to states. Given the size of this initiative, it is reasonable to expect that it would result in large numbers of children receiving health insurance coverage. This, however, is not the case — the Congressional Budget Office (CBO) projects that only 300,000 uninsured children will be insured with these block grant funds.(1)

Part of the reason so few children will receive coverage under the Commerce Committee proposal is that the block grant contains loopholes allowing states to use a large portion of the child health funds to offset proposed cuts in federal Medicaid disproportionate share hospital ("DSH") payments (called for in the budget agreement). CBO's analysis of the Commerce Committee proposal indicates that it assumes nearly 70 percent of the child health funds will end up backfilling DSH reductions by the year 2002.(2) This means that some $2 billion of the $2.88 billion in block grant funds available in that year will not be spent on providing coverage to children. State treasuries — rather than uninsured children — will be the primary beneficiaries of this proposal.




The Purpose of the $16 Billion Included in the Budget Agreement
Is to Provide Health Insurance Coverage to up to 5 Million Children in Fiscal Year 2002

The budget agreement includes $16 billion for a child health initiative. The inclusion of these funds reflects bipartisan concern about the 10 million children in the United States who lack health insurance coverage. The budget agreement stipulates that these funds will be used "to provide up to five million additional children with health insurance coverage by 2002." The agreement allows for the $16 billion to be used to expand Medicaid, to create a block grant for states, or for other approaches that are "mutually agreeable." However, it explicitly contemplates that even under a block grant approach, the funds must be used "to finance health insurance coverage for uninsured children." Moreover, it says that the $16 billion must be used in "the most cost-effective manner possible."(3)


The Commerce Committee Proposal Creates Loopholes That Allow States
to Use the Block Grant Funds to Offset Federal Medicaid DSH Cuts

Contrary to the apparent intention of the budget agreement, the Commerce Committee proposal does not require states to use the new block grant funds to finance health insurance coverage for uninsured children. Under the Commerce Committee proposal, a state can use its block grant to finance "direct services" for low-income children.(4)

The Commerce bill lists 28 broad categories of services for which block grant funding may be used, including any kind of service "furnished by a health care facility operated by a State or local government or licensed under State law and operating within the scope of its license." It also explicitly allows states to use block grant funds for substance abuse treatment and inpatient mental health services, including services furnished in a state-operated mental hospital.

The "direct service" option is so broad that it makes it easy for states to use their block grant funds as a source of general revenue sharing. It allows states to replace existing state spending on services for children — including state spending on public health departments, hospitals, or mental health institutions — with federal block grant funds. The state funds "freed-up" by this substitution can be used to offset federal Medicaid DSH cuts or for virtually any other state purpose. (See Box 1 for an example.)

Moreover, the proposal does not require that federal child health funds be used to finance the actual cost of providing a particular service or set of services to a particular child or group of children. Instead, a state could make what would essentially be a general support payment to a mental health hospital or a public health department. Thus, a state could offset the impact of DSH cuts on its hospitals by directly providing them with general support payments financed with federal child health funds. (See Box 1 for an example.)

In light of the potential under the block grant for states to replace existing spending on a wide range of services with federal child health funds and to use the withdrawn state funds for whatever purpose they chose, states may treat the Commerce Committee block grant as a source of general revenue. While many states may decide to use the new block grant funds to finance health care for children, others are likely to use it for their own spending priorities, which may include paving roads, financing tax cuts, or offsetting DSH cuts.


CBO's Analysis of the Commerce Committee Block Grant Assumes
States Will Use Their Child Health Funds to Offset Medicaid DSH Cuts

The budget agreement includes substantial reductions in federal spending on Medicaid DSH payments. DSH payments are intended to provide financial support to hospitals that serve large numbers of uninsured and Medicaid beneficiaries, although some states have used DSH funds for other purposes.(5) While legislation enacted over the past decade substantially reduced what previously had been high rates of growth in federal DSH payments to states, CBO projects that federal DSH spending will total nearly $60 billion over the next five years, in the absence of new legislation. The Commerce Committee has approved, as part of the pending legislative package, cuts in federal DSH funding of $13 billion over the five-year period, with the depth of the cuts increasing sharply throughout the period. By fiscal year 2002, the Commerce proposal would reduce DSH spending 37 percent below baseline levels.

Box 1:

Examples of How the Commerce Committee Block Grant
Could Be Used to Offset DSH Cuts

There are two ways in which states may be able to offset DSH cuts with federal child health block grant funds. First, a state can replace existing state spending on a wide range of services for low-income children with federal block grant funds and use the "freed-up" resources for whatever purposes that they elect, including to offset DSH cuts. Alternatively, a state could use block grant funds to make general support payments directly to hospitals and other institutions facing DSH cuts.

Example 1: Substituting federal child health funds for existing state spending

Consider a state that already spends $20 million on services for low-income children. The spending could be attributable to state spending on a wide range of activities, including grants to local public health departments for immunization campaigns, substance abuse treatment programs for teenagers, and paying for the treatment and care of children residing in state mental institutions. Under the Commerce Committee proposal, nothing prevents the state from replacing $16 million of this $20 million in state spending with federal block grant funds. Total spending on all of these services for children would remain at $20 million, but the state would finance only $4 million of the $20 million in spending. Thus, the state can use the $16 million in state resources that it has "freed up" for whatever purpose it elects, including to offset cuts in federal DSH spending.

Example 2: Making payments directly to public institutions

Assume that a state owns and operates a psychiatric hospital supported with $4 million in state spending and $1 million in federal DSH payments. As long as the institution serves some low-income children, under the block grant the state could determine the cost of serving those children as it wished. Thus, even if the institution serves only a small number of children, it could replace the institution's $1 million federal DSH payment with a "child health" payment of comparable size. In this example, the DSH cut would be directly offset by the child health payment.

The magnitude of the DSH cuts, particularly in the latter part of the five-year budget period, creates a strong fiscal incentive for states to take advantage of the opportunities the child health block grant creates to replace existing state spending with federal child health funds and to use the "freed-up" resources to offset the DSH cuts. CBO's analysis of the Commerce Committee's child health and Medicaid proposals explicitly takes this outcome into account.(6) CBO's estimates indicate it assumes that 40 percent of the child health funds will be used to offset DSH cuts between fiscal year 1998 and fiscal year 2002. The amount of the offset rises over the five-year period. By fiscal year 2002, when DSH cuts have grown to 37 percent, nearly 70 percent of the child health block grant funds will be used to offset DSH cuts. In other words, in fiscal year 2002, at least $2 billion of the $2.88 billion available under the block grant will be used for a purpose other than helping low-income children secure health care coverage.(7)


CBO Estimates That the Block Grant Will Provide
Health Insurance to Only 300,000 Previously Uninsured Children a Year

To the extent that states take advantage of opportunities provided under the Commerce Committee block grant proposal to syphon off block grant funds to offset DSH cuts, fewer dollars will be available to provide health insurance coverage to uninsured children. CBO has estimated that the Commerce Committee block grant will provide health insurance to only 300,000 previously uninsured children a year. Given the $14.4 billion five-year cost of the block grant, this means that it will cost the federal government an average of $8,000 a year to add a child to the ranks of the insured under the Commerce Committee block grant.(8) This is a far cry from the stipulation in the budget agreement that the child health dollars be used "in the most cost-effective manner possible."



Box 2

The Congressional Research Service has released a table at the request of the majority staff of the Commerce Committee that, at first glance, might suggest the Commerce Committee block grant will offer insurance coverage to 2.5 million children between fiscal year 1997 and fiscal year 2002. In actuality, this figure essentially restates CBO's estimate that the Commerce Committee child health initiative will cover only 500,000 children a year, only 300,000 of whom would not otherwise be covered by private health insurance. The 2.5 million figure needs to be divided by five to get the annual number of children who will be provided insurance with block grant funds. This produces CBO's original estimate of 500,000. Since the goal of the budget agreement is to reduce permanently the number of uninsured children, not merely to offer a single year of health insurance coverage to children, the 500,000 figure is the appropriate one to use.

Stated another way, if the 2.5 million figure is used to measure the impact of the Commerce Committee block grant on children's insurance coverage, it should be compared to the total number of "uninsured years" that children can be expected to experience over the five-year period. Each year there are about 10 million children without health insurance coverage. Over a five-year period, they represent approximately 50 million uninsured years.

Using the 2.5 million figure is comparable to saying that the Medicare program will cover a total of 182 million people over the five-year budget period. Such a figure is misleading. While Medicare will pay for approximately 182 million years of coverage for Medicare beneficiaries, in any given year it will provide health care to between 36 million and 37 million people.

To avoid the debacle of investing $14.4 billion in a block grant that will do little to reduce the number of uninsured children, a fiscally responsible alternative to the Commerce Committee proposal needs to be developed. Most important, any child health initiative should explicitly require states to use the federal child health funds to insure children. By allowing states to use federal child health funds for "direct services," the Commerce Committee block grant threatens to waste much of the funds the budget agreement allocated to reducing the number of uninsured children.

End Notes

1. Specifically, CBO projects that 500,000 children a year will be covered by state health insurance programs funded with the block grant funds and that 40 percent of these children would have had health insurance coverage without the enactment of the block grant. See letter to Honorable Tom Bliley from June E. O'Neill, Director, CBO, June 18, 1997.

2. This figure is based on the Center's review of a CBO analysis — Congressional Budget Office Cost Estimate, Non-Medicare Reconciliation Recommendations of the House Committee on Commerce (Title III), as approved on June 11, 1997, June 16, 1997.

3. Bipartisan Budget Agreement Between the President and the Leadership of Congress, H. Rept. 105-100, Appendix A, p. 145.

4. States can also use the funds to expand their state Medicaid programs or to create state health insurance programs for children.

5. Some states have used DSH payments as part of illusory financing schemes to transform federal Medicaid dollars into funds that can be used as a state chooses. See General Accounting Office, States Use Illusory Approaches to Shift Program Cost to Federal Government, August 1994. Many of these schemes were outlawed as a result of DSH reforms in the late 1980s and early 1990s. Regardless of whether a state relies on DSH as a source of health care financing or as a more general source of revenue, states will face fiscal pressure to use the child health block grant to offset the impact of the cuts.

6. CBO, Non-Medicare Reconciliation Recommendations of the House Committee on Commerce (Title III), June 16, 1997, p. 11.

7. Not all of the child health funds not used to offset DSH cuts are likely to be used for child health insurance coverage. The block grant allows states to use their child health funds for purposes other than insuring children, such as paving roads or tax relief.

8. CBO estimates that the total number of children likely to be insured under the Commerce Committee block grant in any given year will be 500,000 but that 200,000 of these children will already have had private health insurance coverage. Under some circumstances, it might be appropriate to treat these 200,000 children as receiving a significant benefit. For example, children who sign up for Medicaid despite prior coverage under a private health insurance policy may be exchanging a policy that covers only a narrow range of benefits and charges substantial cost-sharing for the more comprehensive and affordable coverage that Medicaid offers. However, children who receive coverage under the Commerce Committee block grant are guaranteed neither a particular benefit package nor protections from cost-sharing. Decisions about benefits and cost-sharing rules are left almost entirely up to the states.