Order Code RL32807
CRS Report for Congress
Received through the CRS Web
SCHIP Financing: Funding
Projections and
State Redistribution Issues
Updated July 6, 2005
Chris L. Peterson
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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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 is authorized for FY1998
through FY2007. The purpose of the program is to help states pay for health
coverage of 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.
At the time of enactment, Congress appropriated to SCHIP nearly $40 billion
for the 10-year period of its authorization, 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. However, most states have not been able to spend their allotments within
the period of time specified by law.
Only one state, Rhode Island, has ever exhausted all of its available federal
SCHIP funds. When this occurred (beginning in FY2003), Rhode Island either
deferred filing its SCHIP claims until the next fiscal year, when new federal SCHIP
money was available, or the state filed claims under regular Medicaid, which it can
do for the majority of its SCHIP expenditures. By claiming under Medicaid,
however, Rhode Island receives a 20% smaller federal payment than it would get
under SCHIP.
In January 2005, the Secretary of Health and Human Services (HHS) proposed
a procedure for redistributing states’ unspent FY2002 original allotments. States that
were projected to exhaust all available federal SCHIP balances in FY2005, based on
their estimated FY2005 expenditures, received the necessary funds to prevent a
shortfall. These five “shortfall states” were Arizona, Minnesota, Mississippi, New
Jersey and Rhode Island. The remaining unspent FY2002 allotments were to be
redistributed among all states that had spent all of their FY2002 original allotments,
including the five shortfall states. This schema was intended to prevent any shortfall
in FY2005. However, once the schema was announced, Rhode Island officials
determined that they had submitted an inaccurate expenditure estimate and, unless
the redistribution scheme is altered, the state will face a shortfall in FY2005 of at
least $17 million. HHS may revise the redistribution to address this.
The Congressional Research Service (CRS) SCHIP Projection Model projects
that seven to 14 states will exhaust their available federal SCHIP funds in FY2006,
and 13 to 22 states in FY2007. The range in the number of states projected to
exhaust their funds reflects the methodology used in the model; rather than choosing
a single amount for states’ projected demand for federal SCHIP funds, the results in
this report are based on each state’s “low-demand scenario” and “high-demand
scenario” for FY2005-FY2007. Unlike in FY2005, the funds available for
redistribution in FY2006 and FY2007 are projected to be inadequate to make up all
states’ shortfall. This is because increasing amounts of shortfalls are projected against
a shrinking pool of available unspent funds from states’ original allotments.

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Contents
SCHIP Spending Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Annual Reallocations/Redistributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
CRS SCHIP Projection Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Projecting Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Availability of Federal SCHIP Funds: FY2005-FY2007 . . . . . . . . . . . . . . . . 8
Model Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Analysis and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
List of Tables
Table 1. Federal SCHIP Allotments, Actual Federal SCHIP Expenditures,
and Projected Demand for Federal SCHIP Funds . . . . . . . . . . . . . . . . . . . . . 9
Table 2. Actual and Projected Federal SCHIP Funds, with Ranges for
Low- and High-Demand Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 3. Actual and Projected Amounts of Federal SCHIP Funds Expiring at
End of Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 4. Projected SCHIP Shortfall States After Accounting for
Estimated Redistribution Funds, by Fiscal Year . . . . . . . . . . . . . . . . . . . . . 12
Table 5. Projected Percentage of Demand Unmet by Available Federal
SCHIP Balances, Including Funds from Redistribution . . . . . . . . . . . . . . . 13
Table 6. Projected Amount of Demand Unmet by Available Federal
SCHIP Balances, Including Funds from Redistribution . . . . . . . . . . . . . . . 13
Table 7. Among States Projected to Possibly Exhaust Federal SCHIP
Funds by FY2007, Estimated Percentage of Shortfall that Could Be
Paid by Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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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), which is authorized for FY1998
through FY2007. The purpose of the program was to help states pay for health
insurance coverage of 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 its authorization, with each state entitled to a portion of the
annual amount. Besides this annual allotment, states may access additional funds;
states that exhaust a particular year’s allotment receive access to a portion of other
states’ unspent allotment for that year. In fact, most states have not been able to
spend their allotments within the period of time specified by law and have had some
of their original allotments redistributed to other states.2
Because SCHIP is a capped-grant program, it is theoretically 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. To date, only one state, Rhode Island, has ever exhausted all of its available
federal SCHIP funds.
In FY2003, Rhode Island had approximately $38.6 million in SCHIP spending,
resulting in a relatively small shortfall of $28,742. This shortfall was simply rolled
forward to FY2004 and covered with the newly available annual distribution of
federal SCHIP funds. By the end of FY2004, however, Rhode Island had a shortfall
of federal SCHIP funds of $19.0 million, according to estimates provided by the
state. Because much of Rhode Island’s SCHIP expenditures could qualify for
payment under Medicaid, Rhode Island opted to take roughly half of that shortfall
and receive federal Medicaid funds. In doing so, however, Rhode Island received a
20% smaller federal payment than it would have received under SCHIP.3 The other
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, et al.
2 In this report, “balances,” “spending,” and “expenditures” refer only to the federal dollars
available, paid or claimed through the enhanced match; state expenditures are not provided
or discussed in this report, unless specifically noted.
3 As described in greater detail below, under SCHIP, states receive an “enhanced” federal
(continued...)

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CRS-2
half of the FY2004 shortfall was rolled forward into FY2005 and covered with the
newly available annual distribution of federal SCHIP funds.
By the end of FY2005, five states were expected to exhaust their available
federal SCHIP funds — Rhode Island, Arizona, Minnesota, Mississippi and New
Jersey. To deal with this problem, the Secretary of Health and Human Services
(HHS) used his statutory authority to redistribute unspent funds through a proposed
regulation issued in January 2005.4 By doing so, the FY2005 shortfalls appeared to
have been averted.
However, once the schema was announced, Rhode Island officials became
aware they had filled out the expenditure-projection forms incorrectly. They sent a
letter to the HHS Centers for Medicare and Medicaid Services (CMS) during the
regulation’s comment period requesting that the redistribution be recalculated based
on their latest expenditure projection of $71.4 million rather than the original
projection of $27.5 million. The $71.4 million includes $52.4 million for FY2005
and the $19.0 million shortfall from FY2004. Accounting only for the change in the
FY2005 expenditure projection, unless the redistribution scheme is altered, Rhode
Island will face a shortfall in FY2005 of at least $17 million. HHS may revise the
redistribution to address this shortfall, but no decision has been announced. If HHS
takes action, enough funds from the unspent FY2002 allotments are available to
address this shortfall, although this would mean that the other states receiving funds
through the redistribution would receive a smaller amount than was proposed in
January.
For FY2006, the pool of unspent funds available for redistribution are projected
to be insufficient to prevent shortfalls of federal SCHIP funds in seven to 14 states,
according to the Congressional Research Service (CRS) SCHIP Projection Model
and based on certain assumptions discussed below. By the end of FY2007, 13 to 22
states are projected to exhaust their available federal SCHIP funds.
If Congress intends to prevent state shortfalls of federal SCHIP funds in FY2006
and FY2007, legislative action will be needed. If, however, Congress decides that
the intent of the original legislation was to ensure states did not treat the program as
an open-ended entitlement, no action will be necessary, as the states with annual
SCHIP spending well in excess of their annual allotments face the consequences of
that spending through the shortfall of federal funds.
3 (...continued)
matching percentage, whereas expenditures under Medicaid are reimbursed at the “regular”
matching percentage, officially known as the Federal Medical Assistance Percentage
(FMAP).
4 Health Human Services, press release, “HHS Reallocates SCHIP Funds, No State Will
F a l l S h o r t , ” p r e s s r e l e a s e , J a n . 1 9 , 2 0 0 5 , a t w e b s i t e
[http://www.hhs.gov/news/press/2005pres/20050119a.html]. “State Children’s Health
Insurance Program (SCHIP); Redistribution of Unexpended SCHIP Funds from the
Appropriation for Fiscal Year 2002,” Federal Register, vol. 70:12, pp. 3036-3044.

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CRS-3
SCHIP Spending Overview
States that set up an SCHIP program are reimbursed by the federal government
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 83.96% in
FY2005) than it does for those covered under Medicaid (50% to 77.08% in
FY2005).5
States are reimbursed for their costs up to a capped amount. Nationally, the
total annual federal allotments range from $3.15 billion (FY2002-FY2004) to $5
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. State allotment amounts are published annually in the Federal
Register for each upcoming fiscal year. States’ allotments for FY2006 were
published June 24, 2005.
Under current law, a state’s allotment for a given year is available for use for
three years. For example, each state’s FY1998 allotment was available through
FY2000 (September 30, 2000). 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.
Rather than leave the redistribution process up to the Secretary, Congress
intervened to determine in statute precisely how much of the unspent funds from
FY1998-FY2001 states would receive. Even though BBA 97 allowed for only
redistribution states to receive unspent funds, the later laws enacted by Congress
permitted those states that did not spend all of their original allotments to retain a
portion. These states are called retention states. When both retention and
redistribution states receive access to a portion of the unspent money, the process is
often called reallocation instead of redistribution, the latter implying that only
redistribution states receive access to the unspent funds. Congress also gave states
more than one year to spend these funds.
Redistribution states receive funds from other states’ unspent original allotments
based in part on their “excess spending.” Excess spending is defined as the
difference between a redistribution state’s spending during an original allotment’s
three-year period of availability and the amount of that allotment. For example, at
the end of FY2000, when unspent FY1998 original allotment funds were
redistributed, excess spending was calculated among redistribution states as the total
federal SCHIP expenditures in FY1998, FY1999, and FY2000 (that is, the FY1998
5 For more information on the FMAP, see CRS Report RS21262, Federal Medical
Assistance Percentage (FMAP) for Medicaid, by Christine Scott.

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CRS-4
original allotment’s period of availability) minus the FY1998 original allotment
amount. This is specified in law.
It is worth noting that states which exhausted a pot of money were not
necessarily out of federal money altogether. For example, states that exhausted their
FY1998 original allotments did so in FY1999 or FY2000, by which time the original
allotments for those years were also available.
In the program’s first few years, because SCHIP was new and states were just
getting their programs started, much of the original allotments were unspent. In fact,
there was still money left for retention states even after covering all of the excess
spending of redistribution states.
Annual Reallocations/Redistributions
At the end of FY2000, each state’s FY1998 original allotment pot was closed.
The unspent money, totaling just over $2 billion, went into a pool to be reallocated
as specified in the Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 (BIPA, P.L. 106-554). The territories (Puerto Rico, Guam,
American Samoa, the Virgin Islands, and the Northern Mariana Islands) had 1.05%
of that pool reserved for them. The redistribution states received access to an amount
equal to all of their excess spending of nearly $700 million. The remaining $1.3
billion (65% of the total pot of unspent funds) was reallocated back to the retention
states, based on their percentage contribution to the overall pool of unspent FY1998
money.
Thus, at the beginning of FY2001, all states had balances available to them
through the reallocation of unspent FY1998 funds. In addition, states would also
have available any remaining balances from their FY1999 and FY2000 allotments,
as well as the newly available FY2001 original allotment.
Typically, when states draw down federal SCHIP money, they must do so
chronologically. For example, all available FY1998 funds (whether original
allotments or reallocations) must be exhausted before funds from FY1999 or later
can be drawn down. Once the reallocated FY1998 funds became available, those had
to be drawn down before any more spending could occur out of the other available
pots of federal SCHIP funds (in this case, FY1999, FY2000, and FY2001 original
allotments). The exception is that the redistribution states may opt to have their
redistribution pot drawn in a non-chronological order they specify. (It is still the
case, however, that a pot must be exhausted before the next in the sequence can be
tapped.)
Given the option to select a non-chronological order of spending, redistribution
states have two primary competing incentives: (1) spend original allotment money
first to ensure qualification as a redistribution state in the future, and (2) spend
reallocated money first to minimize the amount of available money that expires. The
order that states most commonly chose was to have spending from the FY1998
redistribution pot begin once the FY1999 original allotment pot was emptied. They
generally opted to have the FY1999 pot drawn down first to ensure that they would
qualify for the redistribution of other states’ unspent funds from that year.

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CRS-5
Redistribution states continue to choose non-chronological spending in which
the first pot drawn down is the original allotment that will be up for reallocation at
the end of the current fiscal year, followed by the reallocation(s) that will expire at
the end of the current fiscal year, and then alternating between the next original
allotment and the next reallocation pots, for which the expiration dates are further out
into the future. For example, beginning in FY2004, when the FY2001 reallocation
and the FY2004 original allotment were first made available to states, the most
common order of spending selected by the redistribution states was as follows: (1)
FY2002 original allotment, which was up for reallocation at year’s end; (2) FY1999
and FY2000 reallocated money, which would expire at year’s end; (3) FY2003
original allotment, available through FY2005; (4) FY2001 redistribution, also
available through FY2005; and (5) FY2004 original allotment, available through
FY2006.
The reallocation of unspent FY1999 original allotments was similar to the
FY1998 reallocation. When the FY1999 allotments were closed at the end of
FY2001, the redistribution states received access to an amount equal to all of their
excess spending of approximately $1.6 billion. This allowed nearly $1.2 billion
(42%) of the unspent pool of $2.8 billion to be reallocated to the retention states.
At the end of FY2002, the unspent pool of FY2000 original allotments was
reallocated differently, according to the State Children’s Health Insurance Program
Allotments Extension Act (P.L. 108-74). The territories again received 1.05% of the
total unspent funds. Then each retention state was reallocated half of its unspent
funds. The balance was reallocated to the redistribution states based on their
percentage of the overall excess spending. For the FY2000 reallocation process, the
redistribution states’ excess spending totaled nearly $2.2 billion; they received half
of that, $1.1 billion, in the reallocation of FY2000 funds.
The reallocation of unspent FY2001 funds was calculated as in the FY2000
reallocation, where the retention states retained access to half of their unspent funds.
The redistribution states received $856 million from the FY2001 reallocation,
covering 22% of their excess spending of nearly $3.9 billion.
Although BBA 97 permits redistribution funds to be available for only one year
before expiring, the new laws pushed off the expiration of reallocated FY1998-
FY2000 funds to the end of FY2004. This permitted these reallocated funds to be
available to states for two to four years. When these pots of money expired at the end
of FY2004, $1.3 billion of reallocated money reverted back to the U.S. Treasury.
Under current law, the FY2001 reallocation pot expires after two years, at the end of
FY2005.
The proposed reallocation of unspent FY2002 funds was published in the
January 19, 2005, issue of the Federal Register. Because no law was enacted
specifying otherwise, the reallocation process took place according to BBA 97, in
which the Secretary determines the process. One limitation under BBA 97 is that the
Secretary may not distribute unspent funds to retention states.
As in previous reallocations, the territories first received 1.05% of the total
unspent funds. States that were projected to exhaust all of their available federal

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CRS-6
SCHIP balances in FY2005, based on their estimated FY2005 expenditures (provided
to CMS in November 2004), received redistribution money equal to that estimated
shortfall. These five “shortfall states” were Arizona, Minnesota, Mississippi, New
Jersey and Rhode Island. The remaining balance of unspent FY2002 funds was
divided among the 28 redistribution states, including the five shortfall states, based
on their percentage of overall excess spending.6 As a result, the five shortfalls states
received two sets of additional funds through the redistribution: (1) for qualifying
as a shortfall state, and (2) for qualifying as a redistribution state. Also according to
BBA 97, this reallocation pot will expire at the end of one year, in this case at the end
of FY2005.
CRS SCHIP Projection Model
The Congressional Research Service (CRS) SCHIP Projection Model, hereafter
referred to simply as “the model” or “the CRS model,” combines data available on
federal SCHIP allotments, spending and reallocations in the program through the end
of FY2004. In order to make projections, these data are fed through the model’s two
discrete components. The first component projects individual states’ and territories’
demand for federal SCHIP funds for FY2005-FY2007. Using this projected demand,
the second component calculates the federal SCHIP funds that are available and
drawn against each year.
Projecting Demand
Rather than just projecting spending, the model projects demand for federal
SCHIP funds. If the model were to project only federal SCHIP spending, the
maximum that a state could spend is its available balance. However, one purpose of
the model is to capture the extent to which available SCHIP funds may be inadequate
for a particular state. To capture this, states’ demand for federal SCHIP funding must
be projected — that is, the amount that states could be expected to spend if federal
SCHIP funds were not capped.
There are two ways to project state-level demand of federal SCHIP funds: (1)
trend forward historical spending of federal SCHIP money (available through
FY2004), by state; and (2) use states’ own predictions of their demand for federal
SCHIP funds (the latest data are for FY2005 and FY2006, provided by states in May
2005). Analyses of previous years’ data show that neither method is clearly superior
in projecting actual spending.
6 As previously noted, excess spending is calculated as the difference between a
redistribution state’s spending during an original allotment’s three-year period of availability
and the amount of that allotment. It is worth noting that this schema causes a single year’s
SCHIP expenditures to be included in three years of redistribution calculations. For
example, a state may have had unusually high SCHIP spending in FY2002. The FY2002
spending would have been a factor in determining whether the state qualified as a
redistribution state (and the amount of redistributed funds the state would receive) in the
reallocations that took place at the end of FY2002, FY2003, and FY2004. Respectively,
these reallocations were of the unspent FY2000, FY2001, and FY2002 original allotments.

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CRS-7
For projecting future demand, the previously mentioned amounts can be
increased by some factor. For purposes of the model, demand is projected to grow
in each state by a minimum and maximum amount. The minimum growth rate is the
projected growth in national health expenditures for the year according to the Centers
for Medicare and Medicaid Services (CMS). These projections are 6.3% for 2005
and 2006, and 6.6% for 2007.7 Using this trend for the model’s minimum growth
rate effectively assumes that enrollment in the state’s SCHIP program stays the same
and that demand increases only by the amount of per-capita growth in health
expenditures in the country as a whole.8
The maximum growth rate is the greater of (1) the previously discussed
projected per-capita growth in national health expenditures, and (2) roughly 60% of
the growth rate of the prior two years’ demand for federal SCHIP funds, with the
resulting rate not permitted to exceed 20%. The latter calculation was based on a
methodology previously used by CMS. The assumption is that states that had
substantial growth in SCHIP expenditures in the most recent year would continue
growth but at a lower rate. Both the 60% and 20% numbers are arbitrary but are
intended to simulate continued recent program growth at a tempered rate.
A case can be made for using any of these projection methods. Rather than
choosing one, the results in this report are based on two sets of demand projections
for each state — one using the lowest possible projected demand from the methods
discussed above and the other using the highest. One is the lower bound, the “low-
demand scenario,” and the other is the upper bound for the model’s results, the “high-
demand scenario.”
For 41 states and the District of Columbia, this methodology yields high-
demand projections in FY2005 that are 10% higher than the low-demand projections.
In nine states, however, the high-demand projection for expenditures exceeded the
low-demand projection by a substantial amount, usually more than 50%. These
differences were due to the states’ FY2005 spending estimates being dramatically
different from their FY2003 and FY2004 actual expenditures. After reviewing these
states’ SCHIP programs and after contacting state officials, the state estimate was
used for the basis of projecting these states’ FY2005 demand for federal SCHIP
funds. To create a range between the low- and high-demand scenarios consistent
with the 10% range of the other states, as mentioned above, the low-demand
projection was each state’s estimate reduced by 5%, and the high-demand projection
was the state’s estimate increased by 5%.9 Using these projections, demand for
7 CMS Office of the Actuary’s National Health Expenditure Projection tables are available
online [http://www.cms.hhs.gov/statistics/nhe/projections-2004/].
8 An analysis was done of the most recent available growth in per-capita health expenditures
among children in Medicaid. That growth rate was nearly the same as CMS’s projected
growth rates nationally.
9 The nine states for which this methodology was used were Arizona, Florida, Georgia,
Illinois, Massachusetts, Nebraska, New York, Rhode Island and Washington. The reasons
for the difference between their recent spending data and their spending estimates for
FY2005 are as follows: Arizona and Illinois had a new waiver take effect in FY2003 but
(continued...)

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CRS-8
federal SCHIP funds nationally is expected to range from $5.01 billion to $5.50
billion in FY2005, from $5.13 billion to $5.90 billion in FY2006, and from $5.46
billion to $6.44 billion in FY2007, as shown in Table 1.
Availability of Federal SCHIP Funds: FY2005-FY2007
Adequate information exists to estimate the balance of federal SCHIP funds
available to each state at the beginning of FY2005. A state could have had balances
left in its FY2001 reallocation pot as well as new funds available from the FY2002
redistribution. In addition, the state could have balances carried over from its
FY2003 and FY2004 original allotments. Beginning in FY2005, the state could also
begin to draw down from its FY2005 original allotment. In short, five pots of money
were potentially available to states in FY2005.
Based on the projected demand for FY2005, the model draws down the
available pots of money in a specific order, as discussed above. Once that process
is completed, the model calculates the amount of unspent FY2003 original allotment
funds that will be redistributed and made available in FY2006. In addition, the
balances remaining in the FY2001 and FY2002 reallocation pots at the end of
FY2005 are considered expired, following current law. The other balances that
remain, along with the new FY2003 redistribution and the FY2006 allotment, are
available in FY2006.
The process is then repeated for FY2006 and FY2007. Available federal SCHIP
funds are drawn down based on projected demand; the newest reallocation is
calculated; remaining funds in the appropriate pots are deemed expired; and
remaining balances, if any, are calculated and accounted for in the following year.
9 (...continued)
some of the claims for the federal dollars were not actually made until FY2004. In FY2004,
Florida had an adjustment to their SCHIP claims, reducing their federal reimbursement by
$123 million. In FY2004, Georgia and Massachusetts made claims for expenditures that
occurred in prior years. Nebraska’s computer system for determining eligibility for SCHIP
was recently adjusted to more accurately assess applicants’ family income; the effect has
prompted the state to estimate FY2005 SCHIP expenditures at 12% lower than its FY2004
expenditures. Rhode Island had a shortfall in FY2004 federal SCHIP funds not accounted
for in the expenditure data, limiting the use of their expenditure data for demand projections.
In FY2004, Washington made an extraordinary amount of claims using the 20% allowance,
which permits qualifying states to apply federal SCHIP funds toward the coverage of certain
children already enrolled in regular Medicaid (specifically, the federal SCHIP funds under
the 20% allowance are used to pay the difference between SCHIP’s enhanced FMAP and
the Medicaid FMAP that the state is already receiving for these children). An explanation
for the difference between New York’s FY2004 spending ($297 million) and its FY2005
projection ($478 million) has not yet been obtained; in the interim, the model handles New
York as it does the other eight states, basing projected demand on the state estimate.

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CRS-9
Table 1. Federal SCHIP Allotments, Actual Federal SCHIP
Expenditures, and Projected Demand for Federal SCHIP Funds
Fiscal
SCHIP
Actual federal SCHIP
Projected demand for
year
allotments
expenditures
federal SCHIP money
1998
$4.24 billion
$0.12 billion
1999
$4.25 billion
$0.92 billion
2000
$4.25 billion
$1.93 billion
2001
$4.25 billion
$2.67 billion
2002
$3.12 billion
$3.78 billion
2003
$3.18 billion
$4.28 billion
2004
$3.18 billion
$4.64 billion
2005
$4.08 billion
$5.01 - 5.50 billion
2006
$4.08 billion
$5.13 - 5.90 billion
2007
$5.04 billion
$5.46 - 6.44 billion
Source: Congressional Research Service (CRS) SCHIP projection model and CRS analysis of
data from the Centers for Medicare and Medicaid Services, including states’ projections of demand
for federal SCHIP funds, provided in May 2005.
Note: Projected amounts are italicized. Ranges reflect the low- and high-demand scenarios used
in the CRS model.
Model Results
Current Law. Based on current law, assumptions about how funds will be
allotted and redistributed, and given projected demand, the model identifies the states
that could deplete those funds from FY2005-FY2007.
As previously mentioned, five states were projected by CMS to exhaust their
balance of funds in FY2005. Combined, their “shortfall” was estimated to be $0.24
billion, as shown in Table 2. The available unspent FY2002 original allotment was
estimated at $0.64 billion. Using those funds to meet states’ estimated shortfall still
left a balance of $0.41 billion for redistribution to the 28 redistribution states,
including the five shortfall states, and the territories.
As previously mentioned, once the redistribution methodology was
announced, Rhode Island officials became aware they had filled out the expenditure-
projection forms incorrectly. They sent a letter to the HHS Centers for Medicare and
Medicaid Services (CMS) during the regulation’s comment period requesting that the
redistribution be recalculated based on their latest expenditure projection of $71.4
million rather than the original projection of $27.5 million. The $71.4 million
includes $52.4 million for FY2005 and the $19.0 million shortfall from FY2004.
HHS may revise the redistribution to address this shortfall, but no decision has been
announced. Until such an announcement, the model assumes no change to the
redistribution schema announced in January 2005. Using that schema with states’

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CRS-10
latest revised projections causes Rhode Island to have an estimated shortfall in
FY2005 of $0.02 billion (more specifically, $16.8 million to $22.9 million), not
including the FY2004 shortfall. From the unspent FY2002 allotments, enough funds
are available to wipe out Rhode Island’s projected shortfall, including the $19.0
million shortfall from FY2004, although changing the redistribution method in this
way would mean that the non-shortfall states receiving funds through the
redistribution would receive smaller amounts than those proposed in January.
Under the high-demand scenario, the model projects one other state to have
a shortfall in FY2005. Under the high-demand scenario, Arizona is estimated to have
a shortfall of nearly $800,000. Like Rhode Island and other states, Arizona submitted
projections in May 2005 that were higher than the November 2004 projections on
which the redistribution of FY2002 funds was based. In November 2004, Arizona
projected their demand for federal SCHIP funds at $174 million; in May 2005, the
projection was increased to $194 million. As previously mentioned, Arizona’s high-
demand projection in the model is based on increasing the state’s projected amount
by 5%, to $204 million. If, however, Arizona ends up with federal SCHIP claims of
$203 million or less in FY2005, the state will not experience a shortfall (again,
assuming no change in the redistribution schema).
As shown in Table 3, $47 million to $61 million are projected to expire at the
end of FY2005 (from the FY2001 and FY2002 reallocations), reverting back to the
U.S. Treasury. This compares to the nearly $1.3 billion that expired at the end of
FY2004 (from the reallocations for FY1998-FY2000), more than half of which was
from the state of New York. No states are projected to have redistribution funds
expire at the end of FY2006 or FY2007.
Table 2 also shows that seven to 14 states are projected to qualify as shortfall
states in FY2006 and therefore be the first states to receive access to unspent FY2003
original allotments. However, their combined shortfall ($0.28 billion to $0.54
billion) is projected to exceed the available unspent balance ($0.21 billion to $0.23
billion). As a result, those states are projected to still have a shortfall of $0.05 billion
to $0.33 billion. Moreover, the remaining 27 to 32 states projected to qualify as
redistribution states would receive no money in a redistribution, since the available
funds are projected to be fully consumed by the shortfall states.10 Similarly, the 13
to 22 states projected to qualify as shortfall states in FY2007 would not receive
enough funds through the redistribution to make up their shortfall, and there would
be no money left for the remaining redistribution states. (Because the shortfall states
in FY2006 and FY2007 are projected to use all of the redistribution money, no
money is projected to expire at the end of these years.)
The specific states expected to exhaust their federal SCHIP funds even after
accounting for the expected redistribution are shown in Table 4 by fiscal year. Table
5 and Table 6 show the projected demand unmet by the available federal SCHIP
funds, in percentage terms and in dollar terms, respectively.
10 For FY2006, under the high-demand scenario, there are projected to be 41 redistribution
states, including the 14 shortfall states. Under the low-demand scenario, 39 redistribution
states are projected, including the seven shortfall states.

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CRS-11
Table 2. Actual and Projected Federal SCHIP Funds, with Ranges for Low- and High-Demand Scenarios
(current-law model)
Beginning-of-
Number of
year estimate of
shortfall states
number of states
Beginning-
(depleting all
expected to
of-year
After applied to
Total number of
federal SCHIP
Amount of
deplete federal
estimated
Available
shortfalls, remaining
redistribution
funds,
federal
Fiscal
SCHIP funds
amount of
unspent
balance of available
states (including
Remaining
including
money
year
(shortfall states)a
shortfallsa
allotments
unspent allotments
shortfall states)
shortfall
redistribution)
expiring
2001
$2.03 billion
$2.03 billion
12
2002
$2.82 billion
$2.82 billion
13
2003
$2.21 billion
$2.21 billion
14
$28,742
1
2004
$1.75 billion
$1.75 billion
19
$0.02
1
$1.28 billion
billionb
2005
5
$0.24 billionc
$0.64 billionc
$0.41 billionc
28
$0.02
1-2
$0.05 - 0.06
billion
billion
2006
7 - 14
$0.28 - 0.54
$0.21 - 0.23
$0
39 - 41
$0.05 -
7 - 14
$0
billion
billion
0.33 billion
2007
13 - 22
$0.61 - 1.21
$0.10 - 0.16
$0
38 - 44
$0.46 -
13 - 22
$0
billion
billion
1.11 billion
Source: Congressional Research Service (CRS) SCHIP projection model and CRS analysis of data from the Centers for Medicare and Medicaid Services, including
states’ projections of demand for federal SCHIP funds, provided in May 2005. Additional data from the Rhode Island Department of Human Services.
Note: Projections are italicized. Ranges reflect the low- and high-demand scenarios used in the CRS model. A shortfall state is a state that depletes, or is expected
to deplete, its available federal SCHIP funds in a given year. A redistribution state is one that receives a portion of other states’ unspent allotments for a given year.
a. Data shown only for years in which these estimates were made (or are expected to be made) at the beginning of the fiscal year for purposes of calculating the
redistribution of unspent allotments. These numbers do not include the impact of the redistribution money available in that fiscal year.
b. Based on numbers provided by the state of Rhode Island Department of Human Services.
c. These amounts were based on states’ projected demand for federal SCHIP funds as submitted in November 2004, which served as the basis for the redistribution
of unspent FY2002 allotments announced in January 2005. Although the redistribution originally appeared to forestall any shortfalls in FY2005, states’ latest
projections (May 2005) result in a shortfall existing in FY2005 for one state (Rhode Island) and possibly another (Arizona).

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CRS-12
Table 3. Actual and Projected Amounts of Federal SCHIP Funds Expiring
at End of Fiscal Year
(in thousands of dollars)
State
2004
2005
Total
Alaska $8,627
$3,302 - 5,992
$11,928 - 14,618
Arkansas $11,165
$0
$11,165
Kentucky $87,628
$3,640 - 6,141
$91,268 - 93,768
Maine $5,005
$0
$5,005
Maryland $8,084
$0 - 5,795
$8,084 - 13,879
Massachusetts $31,268
$0
$31,268
New Mexico
$30,953
$1,879 - 2,671
$32,832 - 33,624
New York
$877,081
$0
$877,081
South Carolina
$152,209
$0
$152,209
Tennessee $57,607
$38,400 - 40,532
$96,006 - 98,139
Washington $11,467
$0
$11,467
National total
$1,281,092
$47,220 - 61,131
$1,328,313 - 1,342,223
Source: Congressional Research Service (CRS) SCHIP projection model and CRS analysis of data from the Centers
for Medicare and Medicaid Services.
Note: Projections are italicized. No states are projected to have redistribution funds expire at the end of FY2006 or
FY2007. Ranges reflect the low- and high-demand scenarios.
Table 4. Projected SCHIP Shortfall States After Accounting for Estimated
Redistribution Funds, by Fiscal Year
Low-demand scenario
High-demand scenario
2005
2006
2007
2005
2006
2007
Alabama
Alabama Yes
Alaska Yes
Alaska
Yes
Arizona Arizona
Yes
Yes
Florida Florida
Yes
Georgia Yes
Georgia
Yes
Yes
Illinois Yes
Yes
Illinois
Yes
Yes
Iowa Yes
Iowa
Yes
Yes
Louisiana Louisiana
Yes
Maine Yes
Maine
Yes
Yes
Maryland Yes
Maryland
Yes
Massachusetts Massachusetts
Yes
Michigan Michigan
Yes
Minnesota Yes
Yes
Minnesota
Yes
Yes
Mississippi Yes
Yes
Mississippi
Yes
Yes
Missouri Yes
Missouri
Yes
Yes
Nebraska Yes
Yes
Nebraska
Yes
Yes
New Jersey
Yes
Yes
New Jersey
Yes
Yes
North Carolina
North Carolina
Yes
Yes
North Dakota
North Dakota
Yes
Ohio Ohio
Yes
Rhode Island
Yes
Yes
Yes
Rhode Island
Yes
Yes
Yes
South Dakota
South Dakota
Yes
Yes
Wisconsin Yes
Yes
Wisconsin
Yes
Yes
Total
1
7
13
Total
2
14
22
Source: Congressional Research Service (CRS) SCHIP projection model and CRS analysis of data from the Centers
for Medicare and Medicaid Services.

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CRS-13
Table 5. Projected Percentage of Demand Unmet by Available
Federal SCHIP Balances, Including Funds from Redistribution
Low-demand scenario
High-demand scenario
2005
2006
2007
2005
2006
2007
Alabama Alabama
7.0%
Alaska 28.4%
Alaska 52.9%
Arizona
Arizona 0.4%
7.7%
Florida Florida
10.1%
Georgia 13.1%
Georgia
5.0% 32.3%
Illinois 4.0% 29.4%
Illinois
22.7% 42.8%
Iowa 8.7%
Iowa
17.9% 48.2%
Louisiana Louisiana
26.9%
Maine 8.9%
Maine
5.4% 49.4%
Maryland 32.1%
Maryland 47.8%
Massachusetts Massachusetts
19.7%
Michigan Michigan
29.8%
Minnesota 6.6% 33.3%
Minnesota
28.6% 45.3%
Mississippi 6.5% 37.2%
Mississippi 33.8% 54.6%
Missouri 16.1%
Missouri
10.6% 38.0%
Nebraska 6.5% 27.5%
Nebraska
30.6% 39.3%
New Jersey
7.0% 42.5%
New Jersey
28.5% 53.8%
North Carolina
North Carolina
1.3% 41.7%
North Dakota
North Dakota
28.4%
Ohio Ohio
5.3%
Rhode Island
33.8% 15.7% 59.7%
Rhode Island
40.1% 52.2% 75.0%
South Dakota
South Dakota
9.5% 37.6%
Wisconsin 0.2% 26.5%
Wisconsin
14.5% 37.5%
Source: Congressional Research Service (CRS) SCHIP projection model and CRS analysis of data
from the Centers for Medicare and Medicaid Services.
Table 6. Projected Amount of Demand Unmet by Available
Federal SCHIP Balances, Including Funds from Redistribution
(millions of dollars)
Low-demand scenario
High-demand scenario
2005
2006
2007
2005
2006
2007
Alabama
Alabama $8.8
Alaska $6.6
Alaska
$15.4
Arizona Arizona
$0.8
$9.5
Florida Florida
$44.0
Georgia $28.9
Georgia
$11.5
$79.9
Illinois $12.9
$101.1
Illinois $80.9
$168.1
Iowa $3.9
Iowa
$10.7
$34.0
Louisiana Louisiana
$38.7
Maine $2.3
Maine
$1.6
$15.8
Maryland $41.2
Maryland $64.9
Massachusetts Massachusetts
$24.8
Michigan Michigan
$67.9
Minnesota $5.4
$29.1
Minnesota
$25.8
$43.5

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CRS-14
Low-demand scenario
High-demand scenario
2005
2006
2007
2005
2006
2007
Mississippi $7.5
$45.7
Mississippi $47.2
$83.5
Missouri $15.5
Missouri
$11.5
$45.1
Nebraska $2.0
$9.1
Nebraska
$10.5
$14.3
New Jersey
$16.8
$108.9
New Jersey
$71.4
$143.8
North Carolina
North Carolina
$2.9
$104.2
North Dakota
North Dakota
$3.9
Ohio Ohio
$11.2
Rhode Island
$16.8
$8.8
$35.7
Rhode Island
$22.1
$32.4
$50.0
South Dakota
South Dakota
$1.5
$6.2
Wisconsin $0.2
$28.3
Wisconsin
$15.8
$43.7
Total
$16.8
$53.6
$456
Total
$22.9
$333
$1,111
Source: Congressional Research Service (CRS) SCHIP projection model and CRS analysis of data
from the Centers for Medicare and Medicaid Services.
Of the 23 states projected to exhaust their federal SCHIP funds by FY2007
under the high-demand scenario, six (Alabama, Arizona, Georgia, Minnesota,
Mississippi and North Carolina) appear to have no alternative for federal funds
besides SCHIP. This is because their SCHIP programs are separate from Medicaid.
In the other 17 states, some portion of the SCHIP federal funds could be paid by
Medicaid, albeit at the regular FMAP instead of the enhanced rate, because these
states have SCHIP programs that include, or are exclusively, a Medicaid expansion.11
Even when a state’s federal SCHIP funds are exhausted, claims under SCHIP
Medicaid expansions can be reimbursed at the regular FMAP. The percentage of
expenditures that come from these states’ SCHIP Medicaid expansions varies, from
2% (Florida) to 98% (Missouri and Ohio), as shown in Table 7, based on states’
latest expenditure projections for FY2005. The table also shows the percentage of
the enhanced SCHIP FMAP that could be covered by the regular Medicaid FMAP,
based on the FY2005 FMAPs. Finally, the table shows the product of the previous
two numbers, which yields the percentage of the state shortfalls that could be paid by
Medicaid. These numbers may differ from year to year. However, the table
illustrates that for many of the states projected to possibly exhaust their federal
SCHIP funds, other federal funds would be available to cover the projected shortfall.
It is worth noting that officials from Rhode Island, a state which experienced
shortfalls in FY2004, stated that they are able to claim approximately 95% of their
SCHIP expenditures under regular Medicaid. They stated that most of the
individuals covered under their separate SCHIP program still qualify for regular
Medicaid. CRS is currently trying to confirm this. If true, the percentages in
Table
7 likely represent the minimum percentage that can be claimed under regular
Medicaid.
11 Although Minnesota’s recent expenditure data and budget projections show no spending
in a Medicaid expansion SCHIP program, other data indicate some enrollment in such a
program [http://www.cms.hhs.gov/schip/enrollment/schip04rev.pdf]. However, the reported
enrollment is so small relative to the state’s total enrollment (110 people out of a total of
44,355 in FY2004) that their expenditures would likely be a tiny portion of the total.

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CRS-15
Table 7. Among States Projected to Possibly Exhaust Federal
SCHIP Funds by FY2007, Estimated Percentage of Shortfall that
Could Be Paid by Medicaid
State
% of federal SCHIP
% of enhanced
% of federal SCHIP
expenditures from
FMAP covered by
shortfall that could
Medicaid expansion
regular FMAP
be paid by Medicaid
Alabama
0%
89%
0%
Alaska 85%
82%
70%
Arizona 0%
87%
0%
Florida 2%
83%
1%
Georgia 0%
84%
0%
Illinois 11%
77%
9%
Iowa 32%
85%
28%
Louisiana
92%
89%
82%
Maine 63%
86%
54%
Maryland 88%
77%
68%
Massachusetts
71%
77%
55%
Michigan 12%
81%
10%
Minnesota 0%
77%
0%
Mississippi 0%
92%
0%
Missouri 98%
84%
82%
Nebraska 97%
83%
81%
New Jersey
14%
77%
11%
North Carolina
0%
85%
0%
North Dakota
57%
87%
50%
Ohio 98%
83%
81%
Rhode Island
42%
81%
34%
South Dakota
71%
87%
61%
Wisconsin 23%
82%
19%
Source: Congressional Research Service (CRS) analysis of states’ FY2005 SCHIP expenditure
projections and FY2005 FMAP rates from the Centers for Medicare and Medicaid Services.
Note: The last column is the product of the preceding two. Officials from Rhode Island, a state which
experienced shortfalls in FY2004, stated that they are able to claim approximately 95% of their SCHIP
expenditures under regular Medicaid. They stated that most of the individuals covered under their
separate SCHIP program still qualify for regular Medicaid. CRS is currently trying to confirm this
— not only whether this is true for Rhode Island but for other states as well. If true, the percentages
in this table likely represent the minimum percentage that can be claimed under regular Medicaid.

---

CRS-16
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 SCHIP’s older and much larger companion in providing health
insurance to low-income individuals, Medicaid, which was created as an individual
entitlement program that states cannot exhaust.12
Although it is theoretically possible for states to be in a chronic state of
shortfall of federal SCHIP funds, this has happened to only one state, Rhode Island,
which has been able to obtain federal funds to cover most of its shortfall through
regular Medicaid. Shortfalls projected for FY2005 appeared to have been forestalled
by then Secretary of Health and Human Services Tommy Thompson using his
authority to redistribute unspent FY2002 original allotment funds first to states
estimated to have shortfalls. However, because Rhode Island officials incorrectly
filled out the expenditure-projection forms, the state is projected to face a shortfall
in FY2005 of at least $17 million.
If the policy goal is to ensure that states never exhaust their federal balances
of SCHIP funds, the Secretary’s approach is also projected to fall short in FY2006
and FY2007. Even after applying redistribution funds to shortfall states first, seven
to 14 states are projected to exhaust federal SCHIP funds in FY2006, and 13 to 23
are projected to exhaust their federal SCHIP funds in FY2007, on the basis of their
demand for such funds. This is because increasing amounts of shortfalls are
projected against a shrinking pool of available unspent funds from states’ original
allotments. This shrinking pool is due to increased costs of states’ SCHIP programs
for a number of reasons, including program expansions, increasing health care costs,
decreasing enrollment in private health insurance, and increased outreach to those
who are eligible but not enrolled in SCHIP. States also face pressure to increase
SCHIP spending so as not to “lose” their earmarked funds to other states.
There are options to meet the policy goal of ensuring that states never exhaust
their federal balances of SCHIP funds. For example, 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 more restrictive rules. Federal
policymakers may oppose this because they believe SCHIP as an individual
entitlement could result in greater federal outlays than would occur under SCHIP as
a capped grant program.
It is worth noting that shortfalls have been prevented (with Rhode Island as
the sole exception) using the 10-year appropriations largely unaltered since BBA 97
— that is, total funds available nationally have been sufficient to meet states’
demand. Some policymakers may therefore argue that SCHIP has been effective as
12 States have to provide matching funds as well, since Medicaid is a joint federal-state
program.

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CRS-17
a capped grant program, but that the way in which funds have been distributed to
states has been flawed — that is, original allotments, and perhaps also reallocations,
do not accurately reflect states’ changing demand for funds. This could be addressed
statutorily, by changing how funds are allotted and redistributed.
Alternatively, state-level assignment of funds could be eliminated altogether,
with the program operating under a single national cap. In fact, if the projected
balances remaining at the end of FY2005, along with new redistributions and original
allotments, were made available to all states and applied based on their projected
demand, the CRS model estimates that there would be enough funds to prevent any
shortfall through the end of SCHIP’s current authorization — even under the model’s
high-demand scenario.13 However, this approach may reduce state-level incentives
to rein in SCHIP spending, or even prompt greater spending.
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 early as next fiscal year. If Congress decides
to prevent these shortfalls, legislative action will be needed. If, however, Congress
decides that the intent of the original legislation was to ensure that states did not treat
the program as an open-ended entitlement, no action will be necessary through the
end of the program’s authorization, as the states with annual SCHIP spending well
in excess of their annual allotments face the consequences of that spending through
the shortfall of federal funds.
13 Under the high-demand scenario, a total of $9.5 billion of federal SCHIP funds would be
available at the beginning of FY2006. If these balances were not tied to any particular state
and were drawn down in an order to minimize expiring funds, the $9.5 billion would be
sufficient to cover the $6.0 billion in projected demand in FY2006. The balance of $3.6
billion would be available in FY2007 and would be increased by $5.0 billion from the newly
available FY2007 original allotment. The total balance of $8.6 billion would be sufficient
to meet the high-demand scenario projected demand of $6.4 billion. Implementing this
schema would require changes to current law, including the provision that makes the state-
specified original allotments a “state entitlement.”

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