Congress should not reward state officials' irresponsibility.
Lawmakers should take a hard look at efforts to bail out those
states facing funding shortfalls in their State Children's Health
Insurance Programs (SCHIP). Policymakers must consider the
underlying issues contributing to these shortfalls-specifically,
some states' chronic fiscal mismanagement, excessive income
eligibility limits, and extensive coverage of adults. Congress
should resist rewarding states that have ignored the program's
intent and exceeded the program's scope.
Unlike Medicaid, the entitlement program for the indigent and
poor, SCHIP was designed as a block grant program. The 1997 law
appropriated $40 billion over 10 years to assist states in helping
low-income, uninsured children with health care coverage. States
receive a fixed federal contribution each year. State allotments
are based on a formula that includes the number of low-income,
uninsured children and the cost of health care in the state. Each
state can access its annual allotment for three years. After the
three-year period, any unused funds are subject to a redistribution
process, whereby unused funds are reallocated to states that have
exhausted their original allotments.
Shortfall states are those states expected to exhaust all their
available funds. According to the Congressional Research Service,
14 states are projected to have a shortfall in fiscal year 2007:
Alaska, Georgia, Illinois, Iowa, Maine, Maryland, Massachusetts,
Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode
Island, and Wisconsin.
State overspending of allotments is not a new phenomenon, but it
was less obvious in the past because shortfall states usually
received unspent funds from other states. Today, however, fewer
states are leaving funds unspent, resulting in a smaller pool of
funds to be redistributed. In FY 2001, 39 states had unspent
allotments, while 12 had spent their original allotments. In FY 2006,
only 11 states had unspent allotments, compared to 40 states that
had exhausted their allotments. Moreover, in FY 2001, over $2 billion in
unused allotments was available for redistribution, compared to
$173 million in FY 2006. Shortfall states are repeatedly requesting
additional federal dollars to bail them out.
FY 2006: To address FY 2006 shortfalls, Congress recently
approved $283 million in new spending in the Deficit Reduction Act
for bailouts of 12 projected shortfall states. At the end of FY 2006, the
unused funds from FY 2003 also became available for redistribution.
Four of the 12 states expecting shortfalls received an additional
bailout of $172 million through the redistribution process.
FY 2007: Congress has also already acted to address
projected shortfalls for FY 2007. The National Institutes of Health
Reform Act, passed in the waning days of the 109th Congress,
released FY 2004 funds that will soon expire and part of unspent FY
2005 funds to bail out some of the 14 states facing shortfalls in
These funds, however, were not distributed under the usual
procedure of redistributing funds among all shortfall states. The
legislation instead directed the Secretary of Health and Human
Services to distribute these funds to those states facing
shortfalls earlier in the fiscal year. Five of the 14 states
projected to face shortfalls in FY 2007 received redistributed FY
2004 funds, and six (including the five states receiving FY 2004
funds) received the partial FY 2005 funds. Even with this infusion of
additional funds, all 14 states expect to face shortfalls for FY
Analyzing the bailouts from FY 2006 and FY 2007 reveals a
pattern. Besides possible flaws in its formula, SCHIP's funding
structure encourages states to exceed their original allotments at
the expense of more fiscally prudent states and, as recent activity
has proven, can lead to pressure for Congress to bail out states
Illinois, New Jersey, and Rhode Island have all received more
funding in each of the four bailouts, and Maryland and
Massachusetts are not much further behind, receiving funds three of
the four times. In addition, these states have also received the
lion's share of the funds: Illinois has received $236.6 million;
New Jersey, $164.4 million; Rhode Island, $84.9 million; Maryland,
$31.5 million; and Massachusetts, $77.8 million. Eighty-three percent of
all bailout funding has gone to these five states.
Other Characteristics of the Shortfall
Two other characteristics should also be examined when
considering further bailouts of shortfall states.
Income Eligibility. The original intent of SCHIP was to
help low-income, uninsured children whose families earned too much
for Medicaid but not enough to purchase private coverage. The law
defines as "low income" those children whose family's income is
below 200 percent of the Federal poverty line (FPL), or $40,000 for
a family of four. Of the 14 projected shortfall states,
seven have set SCHIP eligibility above 200 percent of the FPL. Of those
seven, four states (Maryland, Massachusetts, Missouri, and New
Jersey) are at or above 300 percent of FPL, or $60,000 for a family
Four states are at 200 percent of the FPL, and three states
(Alaska, Nebraska, and Wisconsin) are below 200 percent of the
Adult Eligibility. Moreover, some of the projected FY
2007 shortfall states use SCHIP funds to cover adults. Five of the
14 shortfall states-Illinois, Minnesota, New Jersey, Rhode Island,
and Wisconsin-cover parents, pregnant women, or childless adults. According
to the General Accountability Office, "Adults accounted for an
average of 55% of enrollees in the shortfall states" in FY 2005. While the
Deficit Reduction Act prohibited the Secretary of Health and Human
Services from approving any new state waivers to cover
childless adults, existing waiver states are exempt. As a way to
prioritize those shortfall states that remained focused on
children, states were prohibited from applying DRA redistribution
funds toward coverage of non-pregnant adults, but the
redistributions since then have not been limited in this way.
SCHIP was not designed to be an entitlement program with an
open-ended commitment from the federal government. The
redistribution process and recent infusions of additional federal
funding rewards overreaching, fiscally irresponsible states that
exceed SCHIP guidelines.
Before Congress provides another bailout, federal policymakers
should consider its effects. At the very least, Congress should
differentiate between shortfall states that remain within the
original intent of the law and those states that exploit its
funding structure and the scope of the program at the expense of
States know their federal SCHIP contributions and should plan
accordingly. If they choose to exceed these fiscal allocations or
the boundaries of the program, they should be prepared to use their
own dollars to pay for it.
Owcharenko is Senior Policy Analyst for Health Care in the
Center for Health Policy Studies at The Heritage Foundation.
Peterson, "SCHIP Provisions of H.R. 6164 (NIH Reform Act of 2006),"
Congressional Research Service Report for Congress RS22553,
December 13, 2006, p. 5.
 Kathryn G.
Allen, "Children's Health Insurance: States' SCHIP Enrollment and
Spending Experiences in Implementing SCHIP and Considerations for
Reauthorization," United States Government Accountability Office
Testimony GAO-07-447T, February 17, 2007, p. 29, at .
includes shortfall states that exhausted all their
Peterson, "Federal SCHIP Financing: Testimony Before the Senate
Finance Health Subcommittee," Congressional Research Service, July
25, 2006, p. 1.
 DRA funds
were limited to removing shortfalls for children, but redistributed
FY 03 funds were allocated to states that also cover adults. Chris
Peterson, "SCHIP Financing: Funding Projections and State
Redistribution Issues," Congressional Research Service Report
for Congress RL32807, May 8, 2006, p. 11.
"SCHIP Provisions of H.R. 6164."
Calculations based on Peterson, "SCHIP Financing: Funding
Projections and States Redistribution Issues," p. 11 and "SCHIP
Provisions of H.R. 6164," p. 5.
 Of the
remaining shortfall states, Mississippi has received the most, with
a one-time infusion of $73.6 million through the Deficit Reduction
 U 42
U.S.C. § 1397jj. An exception was made for states with
Medicaid eligibility levels at or close to 200 percent of FPL by
allowing them to expand SCHIP coverage to children in families
earning 50 percent above the state's Medicaid eligibility
 Based on
shortfall projections in Peterson, "SCHIP Provisions of H.R. 6164,"
p. 5, and eligibility data (as of July 2006) provided by the U.S.
Health and Human Services, Centers for Medicare and Medicaid
Services, Centers for Medicaid and States Operations, October 5,
 As of
January 2007, 15 states cover adults through waivers. See Allen,
"Children's Health Insurance," p. 21.
"Children's Health Insurance," p. 32.
Peterson, "SCHIP Financing," p. 8.