SCHIP Financing: Funding Projections and State Redistribution Issues

Order Code RL32807

SCHIP Financing: Funding Projections

and State Redistribution Issues

Updated January 30, 2007

Chris L. Peterson

Specialist in Social Legislation

Domestic Social Policy Division

SCHIP Financing: Funding Projections

and State Redistribution Issues

Summary

The Balanced Budget Act of 1997 (BBA 97, P.L. 105-33) created the State

Children’s Health Insurance Program (SCHIP), which has authorized appropriations

through FY2007. The purpose of the program is to help states pay for health

coverage of uninsured children in families whose income is above levels that would

allow them to be eligible for the state’s Medicaid program as of March 31, 1997.

At the time of enactment, Congress appropriated to SCHIP nearly $40 billion

for the 10-year period of FY1998-FY2007, with each state receiving access to a

portion of the annual amount. Because SCHIP is a capped-grant program, it is

possible for states to exhaust all of the federal SCHIP funds available to them in a

given year.

Prior to FY2006, only one state exhausted all of its available federal SCHIP

funds in a single year. Alaska faced shortfalls in FY2000 ($419,000) and FY2001

($2,000). Rhode Island faced shortfalls in FY2003 ($30,000) and FY2004 ($19

million). These states had the option to file most of their SCHIP claims under regular

Medicaid when their SCHIP funds were exhausted. By claiming under Medicaid,

however, they received a 17% to 19% smaller federal payment than they would have

received under SCHIP for those claims.

Six states faced a shortfall of federal SCHIP funds in FY2005 (Arizona,

Minnesota, Mississippi, Nebraska, New Jersey, and Rhode Island). However, the

Secretary of Health and Human Services was able to target unspent FY2002

allotments from other states to cover these six states’ shortfalls. As a result, no state

finished FY2005 with a shortfall of federal SCHIP funds.

The methodology that eliminated the FY2005 shortfalls could not cover the

FY2006 projected shortfalls. In an effort to cover the remaining projected shortfalls,

Congress appropriated $283 million in the Deficit Reduction Act of 2005 (DRA, P.L.

109-171). This eliminated the FY2006 shortfalls in all but two states — Illinois

(approximately $95 million) and Massachusetts (approximately $7 million).

In the waning hours of the 109th Congress, the National Institutes of Health

(NIH) Reform Act of 2006 (H.R. 6164, P.L. 109-482) was passed, which included

SCHIP provisions to address states’ shortfalls. The goal of the SCHIP provisions

was to delay as long as possible the date in FY2007 on which any state faces a

shortfall. The law provides additional funding, projected at $124 million, from other

states’ unspent FY2005 allotments and is projected to delay shortfalls until the first

week of May. Even with the SCHIP provisions of H.R. 6164, the shortfalls for the

remainder of the fiscal year are projected at $745 million in 14 states. However, all

but three of these states (Georgia, Minnesota, and Mississippi) are permitted to

receive Medicaid funds for at least a portion of their shortfall amount.

This report describes federal SCHIP financing and provides state-level

projections of FY2007 shortfalls and an analysis of the situation moving forward.

Contents

SCHIP Financing and Spending Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

FY2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Projections of States’ FY2007 Federal SCHIP Shortfalls . . . . . . . . . . . . . . . . . . . 5

Net shortfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Long-Term Projections of States’ Federal SCHIP Shortfalls . . . . . . . . . . . . . . . 11

Analysis and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

List of Tables

Table 1. National Figures on Federal SCHIP Financing . . . . . . . . . . . . . . . . . . . . 2

Table 2. Projected Redistribution, Spending, and Balances

of Federal SCHIP Funds, FY2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Table 3. Projected Shortfalls Net

of Potential Federal Medicaid Funding, FY2007 . . . . . . . . . . . . . . . . . . . . . . 9

Table 4. Long-Term Projections

of States’ Federal SCHIP Shortfalls (Baseline Assumptions) . . . . . . . . . . . 12

SCHIP Financing: Funding Projections

and State Redistribution Issues

The Balanced Budget Act of 1997 (BBA 97, P.L. 105-33) created the State

Children’s Health Insurance Program (SCHIP). The purpose of the program is to

help states pay for health insurance coverage of uninsured children in families whose

income is above the levels that would allow them to be eligible for the state’s

Medicaid program as of March 31, 1997.1 States can cover SCHIP enrollees by

expanding their Medicaid program or by creating a separate SCHIP program, or by

a combination of both.

At the time of enactment, Congress appropriated to SCHIP nearly $40 billion

for the 10-year period of FY1998-FY2007, as shown in Table 1, with each state

entitled to a portion of the annual amount based on a formula.2 Amounts unspent

after three years, also shown in Table 1, are available to other states that exhausted

that particular year’s allotment.3

Because SCHIP is a capped-grant program, it is possible for states to exhaust

all of the federal SCHIP funds available to them in a given year. For a state to

experience such a shortfall, it would have to exhaust all of its available allotments as

well as the available funds that had been redistributed to it from other states. Prior

to FY2006, no more than one state had ever exhausted all of its available federal

SCHIP funds in a single year. Alaska faced shortfalls in FY2000 ($419,000) and

FY2001 ($2,000). Rhode Island faced shortfalls in FY2003 ($30,000) and FY2004

($19 million). These states had the option to file most of their SCHIP claims under

regular Medicaid when their SCHIP funds were exhausted. By claiming under

Medicaid, however, they received a 17% to 19% smaller federal payment than they

would have received under SCHIP for those claims. No state experienced a shortfall

in FY2005. Shortfalls were experienced by Illinois ($95 million) and Massachusetts

($7 million) in FY2006. Fourteen states are projected to face shortfalls in FY2007,

totaling $745 million. This report describes federal SCHIP financing and provides

state-level projections of shortfalls and the impact of proposals to reduce or eliminate

them.

1

For a more in-depth overview of the program, see CRS Report RL30473, State Children’s

Health Insurance Program (SCHIP): A Brief Overview, by Elicia J. Herz and Chris L.

Peterson.

2

For information on the formula for determining states’ SCHIP original allotments, see CRS

Report RL33366, SCHIP Original Allotments: Funding Formula Issues and Options, by

Chris L. Peterson.

3

In this report, “balances,” “spending,” and “expenditures” refer only to the federal dollars

available, paid or claimed through the enhanced SCHIP match; states’ matching

expenditures are not provided or discussed in this report.

CRS-2

Table 1. National Figures on Federal SCHIP Financing

(in millions of dollars)

Allotments

Fiscal

SCHIP

unspent

year allotments after 3 years Spending

$4,235

$122

1998

$4,247

$922

1999

$4,249

$1,929

2000

$4,249

$2,034

$2,672

2001

$3,115

$2,819

$3,776

2002

$3,175

$2,206

$4,276

2003

$3,175

$1,749

$4,645

2004

$4,082

$643

$5,089

2005

$4,082

$173

$5,556

2006

$5,040

$147

$6,395

2007

Total

Number of

amount of shortfall

shortfalls

states

a

a

a

Funds

expiring

1

1

$19

1

1

$102

$745

2

14

$1,281

$128

Source: Congressional Research Service (CRS) SCHIP Projection Model and CRS analysis of data

from the Centers for Medicare and Medicaid Services.

Note: Projected amounts are italicized.

a. Less than $1 million.

If Congress intends to cover state shortfalls of federal SCHIP funds in FY2007,

legislative action would be needed. If, however, Congress decides that the intent of

the original legislation was to ensure states did not treat the program as an openended entitlement, no action would be necessary. States with annual SCHIP

spending well in excess of their annual allotments would then face the consequences

of that spending through the shortfall of federal funds.

Beyond FY2007, assuming that annual allotments continue at the FY2007 level

of $5 billion,4 many more states are poised to exhaust their federal SCHIP funds

beyond FY2007. This is because 34 states are projected to spend more than they

received in their FY2007 annual allotment. More than half of these do not face

FY2007 shortfalls because of balances remaining from prior years. But with no other

changes, as those balances are used up and projected spending continues to exceed

the annual allotments, additional shortfalls are inevitable in the long run. Thus, in

the future, the funding formula may therefore determine not only how the annual

allotments are distributed among states but, in the process, how potential shortfalls

are distributed among states.

4

In making its cost estimates, the Congressional Budget Office (CBO) is required to assume

that programs in existence on or before the enactment of BBA97 (which would include

SCHIP) that lack future appropriations but with current-year outlays of at least $50 million

will continue operating at the last appropriated level. SCHIP’s last appropriated level is

approximately $5 billion in FY2007. Thus, legislation that simply appropriates $5 billion

annually beyond FY2007 would not be scored by CBO as increasing federal government

spending above its current baseline.

CRS-3

SCHIP Financing and Spending Overview

States that set up an SCHIP program are entitled to federal reimbursement, up

to a cap, for a percentage of the incurred costs of covering enrolled individuals. This

percentage, which varies by state, is called the enhanced Federal Medical Assistance

Percentage (FMAP). It is based on the FMAP used for the Medicaid program but is

higher in SCHIP than in Medicaid. In other words, the federal government

contributes more toward the coverage of individuals in SCHIP (65% to 83% in

FY2007) than it does for those covered under Medicaid (50% to 76% in FY2007).5

States are reimbursed for their SCHIP costs up to a capped amount. Nationally,

the total annual federal allotments range from $3.1 billion (FY2002) to $5.0 billion

(FY2007). The amount available to each state is determined annually through a

formula that takes into account factors such as the state’s number of low-income

uninsured children.6 State allotment amounts are published annually in the Federal

Register for each upcoming fiscal year.

BBA 97 established that a state’s allotment for a given year is available for use

for three years. For example, each state’s FY2003 allotment was available through

FY2005 (September 30, 2005). At the end of the three years, if there is still a balance

in that “pot” of money, BBA 97 requires that the Secretary of Health and Human

Services redistribute that money to those states which had exhausted that pot. Those

states that exhausted a given year’s pot are called redistribution states for that year.

Under BBA 97, redistributed funds are available to those states for one year, after

which the money expires, reverting back to the Treasury. Congress intervened to

permit states to retain a portion of their FY1998-FY2001 original allotments unspent

after three years. Congress also specified how the funds not retained would be

redistributed. Any balances remaining from the FY1998-FY2000 reallocated funds

expired at the end of FY2004. Of the FY1998-FY2000 reallocated funds, $1.28

billion expired at the end of FY2004, as shown in Table 1.

FY2005. Beginning with the redistribution of unspent FY2002 funds that went

to other states in FY2005, the original BBA 97 provisions applied to redistribution.

This meant that no state would retain any leftover FY2002 balance after having had

access to it for three years. Moreover, the amounts would be redistributed as

determined by the Secretary. As in previous reallocations, the territories received

1.05% of the total unspent funds from states’ FY2002 allotments.7 The remainder

of the redistribution took place as follows: States that were projected to exhaust all

5

Department of Health and Human Services, “Federal Financial Participation in State

Assistance Expenditures; Federal Matching Shares for Medicaid, the State Children’s Health

Insurance Program, and Aid to Needy Aged, Blind, or Disabled Persons for October 1, 2006

Through September 30, 2007,” 70 Federal Register 71856, November 30, 2005, and 71

Federal Register 28041, May 15, 2006.

6

For information on the formula for determining states’ SCHIP original allotments, see CRS

Report RL33366, SCHIP Original Allotments: Funding Formula Issues and Options, by

Chris L. Peterson.

7

The five territories (and commonwealths) are American Samoa, Guam, the Northern

Mariana Islands, Puerto Rico, and the U.S. Virgin Islands.

CRS-4

of their available federal SCHIP balances in FY2005, based on their estimated

FY2005 expenditures and their own available balances of federal SCHIP funds,

received redistribution money equal to that estimated shortfall. These six states were

Arizona, Minnesota, Mississippi, Nebraska, New Jersey, and Rhode Island. The

remaining balance of unspent FY2002 funds was divided among the 28 redistribution

states, including the six that had received funds to cover their initial projected

shortfalls.

As a result of this redistribution, no state experienced a shortfall of federal

SCHIP funds in FY2005. Also according to BBA 97, this reallocation pot expired at

the end of one year. As a result, at the end of FY2005, $56 million of these

redistributed funds reverted to the Treasury. This amount, combined with the expired

FY2001 reallocation funds, totaled $128 million in federal SCHIP funds that expired

at the end of FY2005.

FY2006. The initial redistribution of unspent FY2003 original allotments and

the allocation of the $283 million DRA appropriation for SCHIP, both of which were

to be available for spending in FY2006 only, were announced by the Centers for

Medicare and Medicaid (CMS) on April 21, 2006.8 The amounts from both accounts

were determined by the HHS Secretary, based on his broad discretion to allocate the

funds to the FY2006 shortfall states.9

DRA said that “the Secretary shall allot to each shortfall State described in

paragraph (2) such amount as the Secretary determines will eliminate the estimated

shortfall described in such paragraph for the State.” Paragraph (2) of §2104(d)

defined shortfall states as those that projected their FY2006 expenditures to exceed

the amounts available from (i) their balances of the FY2004 and FY2005 original

allotments, (ii) the redistribution of funds from other states’ unspent FY2003 original

allotments, and (iii) the newly available FY2006 original allotment. Taking these

funds into account, a shortfall of approximately $283 million was projected for the

states. This was the basis for the $283 million appropriated in DRA.

However, DRA also included a provision that the territories would receive

1.05% of the $283 million appropriation (approximately $3 million). This

percentage was consistent with the share the territories historically received of the

total annual original allotment and redistribution funds. The $3 million from the

DRA funds for the territories meant that the Secretary would not be able to eliminate

8

Centers for Medicare & Medicaid Services, “State Children’s Health Insurance Program

(SCHIP); Redistribution of Unexpended SCHIP Funds From the Appropriation for Fiscal

Year 2003; Additional Allotments to Eliminate SCHIP Fiscal Year 2006 Funding Shortfalls;

and Provisions for Continued Authority for Qualifying States to Use a Portion of Certain

SCHIP Funds for Medicaid Expenditures,” 71 Federal Register 20697-20707, April 21,

2006.

9

The funds from FY2003 available for redistribution could have gone to all redistribution

states (those that had exhausted their FY2003 original allotment), but the Secretary targeted

this redistribution to shortfall states, as was done in the redistribution of unspent FY2002

funds. In that year’s redistribution, however, there was enough money to cover the

shortfalls and provide funds to all redistribution states. For the redistribution of FY2003

funds, all the money went only to the states projected to face shortfalls.

CRS-5

the states’ shortfalls altogether, based on the projections at the time. In addition, the

DRA funds came with restrictions: “Additional allotments provided under this

subsection [the $283 million] are only available for amounts expended under a State

plan approved under this title for child health assistance for targeted low-income

children.” This prohibited states from using the DRA funds to pay for benefits

provided to adult SCHIP enrollees. Both of these factors — the DRA appropriation

carved out for territories and the prohibition against spending on adults — raised the

prospect that the Secretary would be unable to “eliminate the estimated shortfall.”

Based on the states’ FY2006 spending projections used at that time (from November

2005), DRA and FY2003 redistributed funds were provided to a dozen states, with

four that covered adults (Illinois, Minnesota, New Jersey, and Rhode Island)

projected to still experience shortfalls totaling just under $3 million.

By the end of FY2006, all but two of the states that initially projected shortfalls

experienced lower federal SCHIP spending than what they had projected when DRA

was developed. As a result, Illinois and Massachusetts, which experienced higherthan-projected SCHIP expenditures, were the only states to experience federal SCHIP

shortfalls in FY2006. Both states stopped claiming SCHIP funds before exhausting

every dollar in their SCHIP accounts, leaving nominal balances. But Illinois

estimated that its shortfall of federal SCHIP funds in FY2006 was approximately $95

million and Massachusetts’ was approximately $7 million. In other words, these are

the amounts of additional federal SCHIP spending these two states would have had

in FY2006 if the funds were available. The options these states tended to use in

response to these shortfalls was (1) to delay claiming until the beginning of FY2007,

when the new original allotment was available (although this would merely add to

their FY2007 shortfall), and/or (2) to receive Medicaid funding for eligible claims,

although at the regular FMAP rather than the enhanced SCHIP FMAP.

Projections of States’

FY2007 Federal SCHIP Shortfalls

In FY2007, $147 million in unspent FY2004 original allotments will be

redistributed. In the closing hours of the 109th Congress, a bill was passed to specify

how those funds are to be redistributed. The National Institutes of Health (NIH)

Reform Act of 2006 (H.R. 6164, P.L. 109-482) requires that the funds go to states “in

the order in which such [shortfall] States realize monthly funding shortfalls ... for

fiscal year 2007.” The purpose is to delay any state facing a shortfall as far into the

year as possible with the available funds. CRS projections indicate that this

particular provision would delay shortfalls until the end of March. To delay

shortfalls even further, the SCHIP provisions of H.R. 6164 call for an initial

redistribution of up to half of unspent FY2005 original allotments as of March 31,

2007 (capped at $20 million per state) — after 2½ years of availability. For a state

to forgo unspent FY2005 funds on that date, H.R. 6164 requires not only that the

state have unspent FY2005 balances but that the state’s total SCHIP balances (from

the FY2005-FY2007 original allotments) as of March 31, 2007, are at least double

what the state projects to spend in federal SCHIP funds in FY2007. CRS projects

this provision will provide an additional $124 million for shortfall states and will

delay the exhaustion of federal SCHIP funds by any state until the first week of May

CRS-6

2007. The shortfalls remaining for the rest of the fiscal year are projected at $745

million in 14 states.10

Table 2 shows states’ federal SCHIP balances as of the beginning of FY2007

along with projections of the impact of the SCHIP provisions of H.R. 6164 on the

initial redistribution of unspent FY2005 funds on March 31, 2007. Taking these

projections into account, as well as states’ own projections of total federal SCHIP

spending, Table 2 also shows states’ projected total end-of-year balances of federal

SCHIP funds. The shortfall states are shaded in the table and show negative balances

in the last column. For the most recent information on states’ SCHIP upper-income

eligibility levels and their number of children and adult enrollees, see Table 1 of

CRS Report RL30473, State Children’s Health Insurance Program (SCHIP): A Brief

Overview, by Elicia J. Herz and Chris L. Peterson, available at

[http://www.congress.gov/erp/rl/pdf/RL30473.pdf].

No single factor can be pinpointed as causing shortfalls among all of these

states. For example, there are five shortfall states that cover adults — but not all

shortfall states cover adults, and not all states that cover adults face shortfalls. A

relatively high FMAP means that for the same amount of total SCHIP expenditures

(including the state’s share) a state will exhaust its federal SCHIP balances faster

than a state with the same total expenditures but with a relatively low FMAP. The

list of shortfall states includes those with the highest FMAP in the country

(Mississippi) and five states with the lowest allowable FMAP. Similarly, the upperincome eligibility levels among the shortfall states range from a relatively low 175%

of poverty to the nation’s highest level of 350% of poverty. Shortfall states with

relatively low upper-income eligibility levels believe their shortfalls are at least partly

the fault of the SCHIP funding formula and the data on which it is based.11

Another of the many contributing factors to the multi-state FY2007 projected

shortfalls is the relatively small amount of money available for redistribution in

FY2007. The largest amount unspent from any original allotment after three years

was $2.8 billion, as shown in Table 1. This was from the FY1999 allotment,

available for redistribution in FY2002. Since that year, the amount available for

redistribution has steadily declined. The unspent FY2004 funds available for

redistribution to the shortfall states in FY2007 is projected to be $147 million — a

mere 5% of the unspent FY1999 original allotment. This decline has resulted from

states that once surrendered a much larger amount of funds to redistribution

increasing their own federal SCHIP spending, primarily through increased

enrollment.

10

For additional detail on the legislation and its projected impact on SCHIP, see CRS Report

RS22553, SCHIP Provisions of H.R. 6164 (NIH Reform Act of 2006), by Chris L. Peterson.

11

See comments from state officials in CRS Congressional Distribution memorandum,

“Status of Federal SCHIP Financing Among Nine States Reporting Identical Lower- and

Upper-Income SCHIP Eligibility Levels,” by Chris L. Peterson, September 12, 2006,

available upon request. For information on the formula for determining states’ SCHIP

original allotments, see CRS Report RL33366, SCHIP Original Allotments: Funding

Formula Issues and Options, by Chris L. Peterson.

CRS-7

Table 2. Projected Redistribution, Spending, and Balances of Federal SCHIP Funds, FY2007

(millions of dollars)

A

State

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

DC

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

B

C

D

E

F

G

H

I=H-G

Projected

Balance of Balance of FY2007

Projected

Projected total States'

redistribution of FY2005

FY2006

SCHIP

redistribution of

amount

FY2007 Projected endof-FY2007

unspent FY2004 original

original

original

unspent FY2005

available in spending

balance

allotmentsa

allotments allotments allotments allotments on 3/31/07b

FY2007

estimatec

$2.6

$64.2

$74.3

$141.0

$98.6

$42.4

$5.2

$11.5

$1.0

$17.7

$30.2

($12.5)

$22.9

$127.9

$150.8

$115.1

$35.6

$32.2

$43.8

$49.3

$125.3

$54.3

$70.9

$486.0

$790.8

$1,276.8

$1,103.3

$173.5

$41.8

$58.0

$71.5

($5.0)

$166.3

$63.5

$102.8

($7.5)

$36.6

$34.5

$39.9

($11.8)

$99.2

$25.9

$73.3

($0.8)

$9.0

$9.0

$11.1

($2.4)

$26.7

$8.4

$18.3

$8.7

$9.6

$11.7

($2.0)

$28.0

$9.3

$18.7

$189.4

$249.3

$296.1

($20.0)

$714.8

$258.9

$455.9

$17.8

$165.9

$183.7

$312.1

($128.5)

$5.0

$12.4

$15.3

$32.7

$19.4

$13.2

$19.2

$20.6

$24.3

($4.5)

$59.6

$20.3

$39.3

$68.5

$3.3

$209.8

$54.4

$335.9

$578.5

($242.6)

$40.9

$73.0

$93.5

$207.3

$84.0

$123.4

$5.5

$36.2

$41.7

$56.7

($15.1)

$0.5

$27.5

$36.5

$64.6

$50.0

$14.6

$16.2

$57.8

$70.1

$144.1

$81.2

$62.9

$67.2

$89.6

$156.8

$98.6

$58.3

$9.3

$15.2

$24.5

$25.0

($0.5)

$2.4

$4.7

$67.0

$14.7

$88.8

$151.1

($62.4)

$30.8

$0.0

$73.3

$20.6

$124.8

$212.5

($87.7)

$65.9

$149.4

$215.3

$175.6

$39.7

$14.3

$48.6

$62.9

$78.7

($15.8)

$36.4

$60.5

$96.9

$120.6

($23.7)

$23.2

$72.1

$95.4

$98.7

($3.3)

$4.0

$12.6

$15.7

$32.2

$17.2

$15.0

$11.7

$21.9

$33.6

$33.7

($0.1)

($3.7)

$40.4

$41.9

$52.1

($12.4)

$121.9

$31.1

$90.8

$7.4

$9.2

$10.8

($1.2)

$26.2

$10.2

$16.0

$32.0

$2.7

$105.2

$27.3

$167.2

$286.5

($119.3)

($1.4)

$42.2

$42.2

$52.0

$136.4

$55.4

$81.0

CRS-8

A

B

C

D

E

F

G

H

I=H-G

Balance of Balance of FY2007

Projected total States'

Projected

Projected

FY2006

amount

FY2007 Projected endSCHIP

redistribution of

redistribution of FY2005

original

available in spending

original

unspent FY2005

of-FY2007

unspent FY2004 original

allotments allotments allotments allotments on 3/31/07b

FY2007

estimatec

balance

State

allotmentsa

New York

$158.1

$272.5

$340.8

$771.3

$337.8

$433.6

North Carolina

$46.3

$136.1

$182.4

$169.4

$12.9

North Dakota

$4.7

$7.7

$12.4

$11.4

$1.0

Ohio

$91.3

$158.0

$249.3

$202.5

$46.9

Oklahoma

$2.0

$57.4

$70.8

$130.2

$82.4

$47.7

Oregon

$26.9

$46.9

$56.7

$130.5

$67.1

$63.4

Pennsylvania

$31.5

$134.1

$173.6

$339.1

$177.2

$162.0

Rhode Island

$13.2

$6.5

$14.0

$6.4

$40.0

$70.3

($30.3)

South Carolina

$34.6

$55.5

$70.7

($3.9)

$156.9

$53.5

$103.4

South Dakota

$5.3

$10.4

$15.6

$13.9

$1.7

Tennessee

($58.0)

$78.9

$80.4

$97.5

($20.0)

$236.8

$22.9

$213.9

Texas

($61.5)

$450.0

$454.7

$558.0

($20.0)

$1,442.7

$452.8

$989.9

Utah

$6.5

$32.2

$40.5

$79.2

$39.0

$40.2

Vermont

$3.9

$4.8

$5.8

($1.1)

$13.4

$3.5

$9.9

Virginia

$9.7

$72.3

$94.1

$176.1

$108.3

$67.8

Washington

($14.1)

$64.7

$64.7

$79.9

($20.0)

$189.3

$27.1

$162.2

West Virginia

$7.9

$23.3

$27.5

$58.7

$37.1

$21.7

Wisconsin

$26.7

$69.6

$96.2

$99.1

($2.8)

Wyoming

$4.7

$5.9

$6.9

$17.5

$8.1

$9.4

Puerto Rico

$16.5

$41.7

$48.1

$106.3

$40.2

$66.0

Guam

$1.8

$1.8

$3.6

($1.8)

Virgin Islands

$0.6

$1.4

$2.0

$2.1

($0.1)

American Samoa

$0.6

$0.6

$0.8

($0.2)

N. Mariana Islands

$0.1

$0.6

$0.6

$0.5

$0.2

US

$0.0

$1,391.8

$3,069.5

$5,040.0

$0.0

$9,648.2

$6,395.3

$3,252.9d

Source: Congressional Research Service (CRS), based on states’ projections and data from the Centers for Medicare and Medicaid Services (CMS).

a. Projected redistribution of FY2004 original allotments unspent after three years ($146.9 million from seven states) projected to go to five

shortfall states. FY2004 original allotments are not available for FY2007 spending; only redistributed amounts are available. Thus,

negative amounts in this column do not reduce total available shown for FY2007.

b. Projected redistribution of FY2005 original allotments available on March 31, 2007 ($124.4 million from 13 states) projected to go to six

shortfall states.

c. Data reported by states to CMS as of December 2006, except for territories, which are based on FY2006 expenditures

d. This is comprised of $4.00 billion in balances projected to be held by states and territories at the end of FY2007, less $746.5 million in shortfalls

(including three territories’ combined projected shortfall of $2.0 million).

CRS-9

Table 3. Projected Shortfalls Net

of Potential Federal Medicaid Funding, FY2007

(in millions of dollars)

A

% of FY2006

Projected

SCHIP spending

FY2007

eligible for

shortfall states Medicaid fallback

Alaska

90%

Georgia

0%

Illinois

11%

Iowa

30%

Maine

67%

Maryland

85%

Massachusetts

67%

Minnesota

0%

Mississippi

0%

Missouri

97%

Nebraska

90%

New Jersey

18%

Rhode Island

98%

Wisconsin

24%

Total

B

Shortfall

$12.5

$128.5

$242.6

$15.0

$0.5

$62.4

$87.7

$15.8

$23.7

$3.3

$0.1

$119.3

$30.3

$2.8

$744.5

C

Potential

federal

Medicaid

funding

$10.2

$0

$49.8

$12.7

$0.5

$48.0

$67.5

$0

$0

$2.8

$0.1

$39.7

$23.8

$2.3

$257.3

D=B-C

Net shortfall

$2.3

$128.5

$192.8

$2.3

$0.1

$14.4

$20.2

$15.8

$23.7

$0.5

$0.0

$79.6

$6.5

$0.5

$487.2

Source: Congressional Research Service (CRS) SCHIP Projection Model and data from the Centers

for Medicare and Medicaid Services (CMS).

Note: Column C is estimated on the basis of states maximizing the amount of their shortfalls eligible

for a Medicaid fallback. In addition to the amounts in Column A, the potential Medicaid funding also

reflects the difference between states’ enhanced (SCHIP) FMAP and regular (Medicaid) FMAP.

Net shortfalls. Of the 14 states that CRS currently projects to experience

shortfalls in FY2007, all but three (Georgia, Minnesota, and Mississippi) have the

ability to draw down federal Medicaid funds as a fallback provision. This can occur

in one of two ways:

First, states with Medicaid expansion programs that have exhausted their

available federal SCHIP allotments may fall back to Medicaid to finance coverage

for such children by accessing federal Medicaid funds at the regular Medicaid FMAP

rate. The 11 shortfall states that are able to revert to Medicaid have all or a portion

of their SCHIP programs through such a Medicaid expansion. Georgia, Minnesota,

and Mississippi have their enrollees in SCHIP programs entirely separate from

Medicaid and therefore cannot revert to Medicaid funds when their SCHIP funds are

exhausted.12

12

Officially, Minnesota is a combination state — that is, it has both a Medicaid-expansion

and a separate SCHIP program. However, eligibility in its Medicaid-expansion program is

for a very limited population: 0- to 2-year-olds with income of 275%-280% of poverty. The

state’s separate SCHIP program covers adults only. In its FY2006 expenditure report,

Minnesota reported no Medicaid-expansion expenditures.

CRS-10

Second, some states have CMS approval under Section 1115 waiver authority

to draw federal Medicaid funds in the portion of their SCHIP program that is not a

Medicaid expansion. In general, Section 1115 of the Social Security Act provides

the Secretary of Health and Human Services (HHS) with broad authority to waive

certain statutory requirements in the Medicaid (and/or SCHIP) program(s) allowing

states to conduct research and demonstration programs that further the goals of Title

XIX (and/or XXI). Costs associated with waiver programs must be budget neutral

to the federal government over the life of the waiver program. To meet this budget

neutrality test, estimated spending under the waiver cannot exceed the estimated cost

of the state’s existing Medicaid program under current law program requirements.

Massachusetts and Rhode Island are the two shortfall states with Section 1115 waiver

authority to draw federal Medicaid funds once their federal SCHIP funds are

exhausted.13

Although Section 1115 waivers provide states with flexibility, the federal

government’s financial liability is limited through budget-neutrality caps. For

example, in FY2007, Massachusetts is projected to come quite close to hitting their

cap on total Medicaid spending. As a result, if the state experiences a shortfall of

federal SCHIP funds in FY2007, it may not be able to use its Medicaid fallback. For

Rhode Island, this is not a concern; its cap is based on per-capita spending rather than

total spending.

North Carolina is another state that took financing-related action due to the

prospects of shortfalls. Prior to 2006, North Carolina had all of its SCHIP enrollees

in a separate SCHIP program. However, as of January 2006, North Carolina is now

a “combination state” because it created a Medicaid-expansion SCHIP program for

the former 0-to-5-year-old separate-SCHIP enrollees. As a result, North Carolina can

draw down the regular federal matching rate (FMAP) from Medicaid funds for at

least these children. Even though North Carolina did not face a shortfall in FY2006,

the state began drawing down Medicaid funds at the regular FMAP (instead of

SCHIP funds at the enhanced FMAP) for those 0-to-5-year-olds, as of January 2006.

This was done because state officials anticipated exhausting their federal SCHIP

funds in FY2007. As a result of this action, North Carolina’s projected federal

SCHIP spending for FY2007 has fallen by nearly $100 million (from $265 million

projected in May 2006 to $169 million projected in November 2006), and the state

is no longer projected to face an FY2007 shortfall.14

13

For example, the following is from Rhode Island’s waiver term and conditions: “In order

to continue operation of the [Section 1115] demonstration if the State exhausts the available

Title XXI [SCHIP] Federal funds for the claiming period, the State will continue to provide

coverage to its approved Title XXI State plan population and the demonstration population

with Title XIX [Medicaid] funds until further Title XXI Federal funds become available.”

14

Previous versions of this report projected 17 states would face federal SCHIP shortfalls

in FY2007. The three states no longer projected to face FY2007 shortfalls are Louisiana,

North Carolina, and South Dakota. One reason is that all three states experienced FY2006

federal SCHIP expenditures that were lower than what they had projected. In addition, the

current FY2007 expenditure projections from North Carolina (as discussed above) and

Louisiana are much lower than they had projected before.

CRS-11

Long-Term Projections of States’

Federal SCHIP Shortfalls

As previously mentioned, 34 states are projected to spend more than they

received in their FY2007 annual allotment. More than half of these do not face

FY2007 shortfalls because of balances remaining from prior years. But with no other

changes, as those balances are used up and projected spending continues to exceed

the annual allotments (assuming CBO’s baseline of $5 billion annual allotments into

the future), additional shortfalls are inevitable in the long run.

Table 4 and Figure 1 project long-run shortfalls of federal SCHIP funds,

using states’ projected FY2008 spending, increased annually by projected increases

in national per-capita health care spending. Current projections after 2006 are that

per-capita health care spending will increase by 6.1% to 6.5%.15 Thus, the numbers

in Table 4 and Figure 1 hold enrollment constant at states’ FY2008 projected levels.

Even with annual spending increases reflecting only increases in per-capita health

care spending, and with annual allotments continuing at $5 billion and the BBA 97

redistribution structure, 42 states are projected to face shortfalls totaling $6.6 billion

in FY2017. Over the five-year period of FY2008-FY2012, the total shortfalls are

projected at $12.1 billion. Over the 10-year period of FY2008-FY2017, the total

shortfalls are projected at $38.3 billion.

These projections assume no change in behavior by states. Undoubtedly,

some states would take actions to reduce the size of their projected federal SCHIP

shortfalls, depending on a number of factors, including the extent to which they have

a Medicaid fallback. If federal SCHIP spending needed to be reduced, states could

drop enrollees or otherwise restrict eligibility, convert SCHIP enrollees into

traditional Medicaid (using flexibility from DRA and other Medicaid provisions),

decrease plan benefits, and/or raise cost-sharing. A state may also decide that once

it exhausts its federal SCHIP funds, it will continue to cover its enrollees at 100%

state cost. On the other hand, a state may decide to drop all of its separate SCHIP

program enrollees. Thus, any long-run projections of shortfalls, and projections of

their impact on enrollment, will be highly speculative.

Increasing the total allotment levels by per-capita growth in health care

spending would reduce projected shortfalls in FY2008 by 10%, compared to baseline

assumptions. The FY2012 shortfalls would be reduced by 38%, but would still

amount to an estimated $2.1 billion in 28 states. Thus, if one’s goal is to eliminate

future shortfalls, then increasing the $5 billion allotment into the future by per-capita

growth in health care expenditures and using the current-law formula for dividing

that among states (which does not take states’ actual SCHIP spending or enrollment

into account) would not accomplish that goal by itself.16

15

Christine Borger et al., “Health Spending Projections Through 2015: Changes on the

Horizon,” Health Affairs Web exclusive, February 22, 2006, pp. w61–w73. The updated

projections are slated for publication on February 21, 2007.

16

Issues regarding the SCHIP funding formula are discussed in CRS Report RL33366,

SCHIP Original Allotments: Funding Formula Issues and Options, by Chris L. Peterson.

CRS-12

Table 4. Long-Term Projections of States’ Federal SCHIP

Shortfalls (Baseline Assumptions)

(in millions of dollars)

Fiscal

year

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

20082012

20082017

Number of

Total

amount of shortfall

shortfalls

states

$1,483

20

$2,050

23

$2,391

29

$2,853

34

$3,340

35

$3,765

35

$4,627

38

$5,288

39

$5,911

40

$6,625

42

Allotments

SCHIP

unspent

allotments after 3 years Spending

$5,040

$54

$6,913

$5,040

$92

$7,363

$5,040

$139

$7,823

$5,040

$149

$8,303

$5,040

$143

$8,813

$5,040

$130

$9,354

$5,040

$119

$9,927

$5,040

$114

$10,537

$5,040

$110

$11,183

$5,040

$105

$11,869

$25,200

$576

$39,215

$12,117

$50,400

$1,154

$92,085

$38,333

Funds

expiring

Figure 1. Federal SCHIP Financing

$12

Actual

Projected

Billions of Dollars

$10

Federal SCHIP

spending

$8

$6

Original allotments

$4

$2

Federal SCHIP

shortfalls

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

$0

Fiscal Year

Source: Congressional Research Service (CRS) SCHIP Projection Model.

Note: Shortfalls are also based on states’ own prior-year balances (not shown). Projected spending

is based on states’ FY2007 and FY2008 prjections, increased annually by national projected increases

in per-capita health care spending from Christine Borger et al., “Health Spending Projections Through

2015: Changes on the Horizon,” Health Affairs Web exclusive, February 22, 2006, pp. w61–w73.

CRS-13

Analysis and Options

SCHIP was created in BBA 97 as a capped grant program to states. Fixed

annual balances of federal funds are available to states, which they can exhaust. This

contrasts with Medicaid, SCHIP’s older and much larger companion in providing

health insurance to low-income individuals, which was created as an individual

entitlement program that states cannot exhaust.17

Although it is theoretically possible for states to be in a chronic state of

shortfall of federal SCHIP funds, this was largely avoided through FY2005 using the

funds within SCHIP’s original appropriation and redistribution structure. In an

attempt to cover shortfalls projected for FY2006, Congress appropriated an

additional $283 million.

The shortfalls in FY2007 are projected at approximately $745 million. If an

appropriation were used to address this shortfall, as was done for the FY2006

shortfall, a much larger amount would be required. In addition, because of CBO’s

scoring requirements, any change to the FY2007 SCHIP appropriation would also be

reflected in all future years, making this option appear even more costly, at least on

paper. In his FY2006 and FY2007 budget, the President proposed shortening the

period of availability of the FY2005 original allotment from three years to two years.

This would use funds currently in SCHIP without requiring an additional

appropriation. The potential drawback to this option is that these funds would be

coming directly from other states’ balances of federal SCHIP funds (nearly $1.4

billion from 29 states, as shown in column C of Table 2).

Redistribution and appropriation are two alternatives available for eliminating

states’ shortfalls of SCHIP funds. In addition, the SCHIP program could be turned

into an open-ended entitlement, perhaps by folding it into the Medicaid program.

This would spare the administration and Congress from having to periodically

rearrange funds or funding methodologies to cover shortfalls. However, states would

likely oppose folding SCHIP into Medicaid if it meant reverting to the regular FMAP

and following all of Medicaid’s other myriad rules (although many of these rules can

now be bypassed, due to DRA18). Some federal policymakers may oppose this

approach because treating SCHIP as an individual entitlement could result in greater

federal outlays than would occur under SCHIP as a capped grant program.

Although the SCHIP program has been successful in covering millions of

uninsured children, and has therefore been politically popular, more states are poised

to exhaust their federal SCHIP funds as their projected spending exceeds their annual

allotment of federal SCHIP funds. If Congress decides to prevent these shortfalls,

legislative action would be needed. If, however, Congress decides that the intent of

17

States have to provide matching funds, though, since Medicaid is a joint federal-state

program. States also have some flexibility in determining eligibility and benefit levels. A

state’s ability to draw federal Medicaid funds may be limited if the state is operating under

a Section 1115 waiver, as previously discussed.

18

See for example CRS Report RS22578, Medicaid Cost-Sharing Under the Deficit

Reduction Act of 2005 (DRA), by Elicia J. Herz, January 25, 2007.

CRS-14

the original legislation was to ensure that states did not treat the program as an openended entitlement, no action would be necessary through FY2007. States with

annual SCHIP spending well in excess of their annual allotments would then face the

consequences of that spending through a shortfall of federal funds.