State Legislatures Magazine: March 2003

Editor's Note: This article appeared in the March 2003 issue of NCSL's magazine, State Legislatures. To order copies or to subscribe, contact the marketing department at (303) 364-7700.

Insuring Kids in Hard Times

The SCHIP Dip
Retention and Redistribution of Funds
Important Safety Net

States Want Extension

Insuring Kids in Hard Times

Since it began, SCHIP has been taking care of children's medical needs. The question
now, however, is how will it be funded.

By Leah Oliver
Devastated by losing both his job and family health insurance, Collin Andersen and his wife, Marie, found themselves desperately searching for options for medical care for their children. When they discovered Vermont's Dr. Dynasaur program--the state's health insurance program for families that earn too much to qualify for Medicaid, but too little to afford private insurance--they immediately enrolled the children. Help came just in time: The Andersens' son was admitted to the hospital for complications from a previous surgery.

"I don't know what I would have done without your program!" says Marie.

For the last five years, states have been enrolling eligible children in the State Children's Health Insurance Program (SCHIP). Since it began in 1998, nearly 5 million children have been signed up, and now many of them depend on it for medical care.

The early legwork invested in the program, however, may be at risk due to funding constraints. Five years ago, money went to outreach and education. Now, all 50 states have SCHIP programs actively serving working families with a focus on keeping children in the program and providing health insurance.

The federal share of costs is greater under SCHIP than Medicaid-between 65 percent and 85 percent of expenses, depending on the state.

While some states still have SCHIP dollars left, others have fully expended their federal allotments. Current state spending patterns do not seem to align with a "one-size-fits-all" approach-states are allowed some flexibility in determining the kind of program and how to provide services. And states that have used their full share of federal funds will feel the sting of the "SCHIP dip"-a significant decrease in federal funding between 2002 and 2004 of the 10-year authorized program-more keenly than those that have not.

Across the nation, SCHIP programs are experiencing the strain of deteriorating state budgets, significant increases in enrollment, decreases in federal funding and the potential loss of funds allocated from earlier years due to requirements in the federal law. Although most states are facing budget constraints, SCHIP program personnel are especially concerned about two major funding issues: the requirement that states forfeit unspent SCHIP money to the federal treasury, and the so-called "SCHIP dip."

THE SCHIP DIP
Originally, the feds set aside approximately $40 billion over 10 years for states to provide health coverage for millions of children, which included the three-year "dip" in funding due to a projected downturn in federal revenues. The first dip-a 26 percent drop in federal funding from $4.275 billion to $3.15 billion-came in 2002. Funding will drop again this year and next. Then federal allocations will increase in 2005 and for the next two years. Although this may pose a problem for some states, the federal government may not be able to intervene because of budget constraints.

"Many people were unaware of the fact that the federal funding would drop," says New Hampshire Representative Rogers Johnson, an insurance consultant and member of the Finance Committee. "We are now in deficit spending, and it is unlikely that the federal government will make up for the drop in funding."

The SCHIP dip may not be a problem for states that have not yet spent their FY 2000 and FY 2001 allotments because they can carry over unspent funds into the next budget year for up to three years. But it does present significant problems for states that are using their total allotments. The dip also comes at a difficult time for states that are already experiencing budget problems.

RETENTION AND REDISTRIBUTION OF FUNDS
In SCHIP's initial start-up, some critics thought some states were moving too slowly to enroll children. A few states already had programs providing children's health insurance and were unable to use all the funds allotted for outreach and enrollment. Other states started from square one. Once they devised a plan, they were able to spend money on services very quickly. Programs have progressed from the initial phases in which money was spent on planning, enacting legislation, budgeting state funds and creating a state plan. Now, SCHIP is widely recognized and is providing millions of children with medical care.

States have not spent all available funds for a number of reasons, most notably because they were allocated the bulk of the money during the first three years when the programs were new and small. The programs have grown substantially and need even more federal funding at the very time it is being cut because the time allotted to states to spend it has passed. Funding limitations are becoming a serious problem and are catching up with states quickly.

The original SCHIP law directs the federal government to allocate funds to states annually. Then it gets more complicated. States are given three years to spend each annual allocation. After three years, any unspent money will be redistributed to other states that have fully spent their allotments. The redistributed funds can then be used for an additional year before reverting to the federal treasury. The Benefits Improvement and Protection Act of 2000 modified the redistribution method to allow states to retain funds until the end of FY 2002-a one time fix.

Most states and jurisdictions had spent their 1998 federal SCHIP allotments as of Sept. 30, 2002; 36 had spent their 1999 allotments; 19 had spent their 2000 allotments; and five had spent their 2001 allotments. Only American Samoa, Northern Mariana Islands, Puerto Rico and Rhode Island have begun spending their 2002 allotments. Some states that spent their original FY 1998 and FY 1999 allotments were provided with additional "redistributed" funds, which they have not spent.

States returned $1.26 billion in federal funds in 2002 and will return a projected $1.5 billion at the end of FY 2003. Nineteen states returned funds at the end of FY 2002. The Centers for Medicare and Medicaid Services has not published projections on which states might return unspent SCHIP funds to the federal treasury at the end of FY 2003; however, the Center on Budget and Policy Priorities estimates that 14 will.

Alaska, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, New Jersey, New York, Rhode Island, South Carolina, West Virginia and Wisconsin have now spent all their federal SCHIP allotments from FY 1998, 1999 and 2000. A few of them were not able to spend their original allotments on time, but they were allowed to keep the money and continue spending it.

Alaska Senator Bettye Davis, member of the Senate Finance Sub-committee on Health and Social Services, explains that the federal contribution to Alaska's Denali KidCare "has been a wonderful thing for us to have, but there are still so many children who are not covered. We could have used more money from the federal government, and now we are faced with state budget cuts in many programs."

Other states were not able to spend their federal allotments. Healthy Kids Gold and Healthy Kids Silver in New Hampshire, for example, have used most of their 1998 allotment, but have spent only 23 percent of their 1999 allotment. State health officials, however, assert that under current SCHIP rules, it is not possible to use all the money allotted to the state's program. In fact, estimates show that 95 percent of the state's children are already insured, and the state ranks fourth in the nation in providing children's health insurance, according to a Kaiser Family Foundation study.

Representative Johnson believes that New Hampshire is becoming too reliant on federal funding. "Now that we have set the benchmark for coverage at a high level, what happens when the federal government cuts its appropriation? How do we sustain the state's share? We don't have the money," he says.

However, he also explains that "federal funds were given in anticipation of the number of children who could be eligible for the program, but New Hampshire is unique in the fact that many people are already insured through employer plans."

States have now passed the 2002 deadline, which marked the return of the unspent SCHIP funds to the treasury. Many people, including President George W. Bush and members of Congress, feel that the unspent money should be used for children rather than returned to the federal treasury. At press time, widely supported legis-lation (HR531, S312) had just been introduced that would ensure that $2.7 billion in SCHIP funds remain in states to provide health care to children. President Bush's FY 2004 budget plan does not restore the $1.2 billion in lost SCHIP funds, but it does support reallocation of expiring FY 2000 funds totaling $1.5 billion. However, legislation is needed to implement it. To date, no action has been taken.

IMPORTANT SAFETY NET
SCHIP is an important "safety net" for children who live in families that cannot afford private insurance; it provides care to children who might otherwise be served at a much higher cost by emergency rooms. Although SCHIP provides a valuable service to many families, it still strains state and federal budgets in a time of shortfalls. Due to the dip in federal funding, SCHIP spending may drop in states with the greatest enrollment, but others that have not yet used their allotments may not feel the strain. (Only Congress can address the issue of unspent SCHIP funds.) States must not only cope with budget constraints at home, they must also deal with the reality that less federal money is available for the program at least until 2005.

Leah Oliver is NCSL's expert in maternal and child health policy.

States Want Extension

NCSL policy supports the extension to allow states to use expiring SCHIP funds and supports additional flexibility. NCSL is urging legislation that will:

Keep all the SCHIP funds in the states.
Assist states that have used up all of their SCHIP allotments.
Provide additional flexibility to states that have not expended all of their funds by providing more time to spend the money.

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