Order Code RL32807
CRS Report for Congress
Received through the CRS Web
SCHIP Financing: Funding Projections
and State Redistribution Issues
Updated March 21, 2006
Chris L. Peterson
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

---

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 through FY2007.
The purpose of the program is to help states pay for health 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.
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.
Only two states (Alaska and Rhode Island) have ever exhausted all of their
available federal SCHIP funds. 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 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 was projected to be
inadequate for the FY2006 projected shortfalls. For FY2006, the unspent funds
available for redistribution were projected to be approximately $283 million shy of
covering the projected shortfalls. To cover this difference, Congress appropriated
$283 million in the Deficit Reduction Act of 2005 (DRA, P.L. 109-171). The
Congressional Research Service (CRS) SCHIP Projection Model projects that two
states will still experience shortfalls in FY2006, totaling $20 million, because the
DRA funds cannot be used to pay for SCHIP enrollees who are non-pregnant adults.
The CRS model projects that 18 states will experience shortfalls of federal
SCHIP funds in FY2007. The amount of these shortfalls is projected to total $946
million, although some states may use Medicaid funds to cover some of that.
This report provides an overview of SCHIP financing and spending since the
program’s inception and provides state-level projections of the FY2006 and FY2007
shortfalls. The report also provides state-level projections of the impact of the
SCHIP proposal outlined in the President’s budget. Depending on the actual details
of that plan, it may eliminate the FY2007 shortfalls. This report will be updated as
new data become available that might substantially alter the results.

---

Contents
SCHIP Financing and Spending Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Annual Reallocations/Redistributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Reallocation of Unspent FY1998 and FY1999
Original Allotments (P.L. 106-554) . . . . . . . . . . . . . . . . . . . . . . . . 5
Reallocation of Unspent FY2000 and FY2001
Original Allotments (P.L. 108-74) . . . . . . . . . . . . . . . . . . . . . . . . . 6
Reallocation of Unspent FY2002 Original Allotments
Onward (Reversion to BBA 97, P.L 105-33) . . . . . . . . . . . . . . . . . 6
CRS SCHIP Projection Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Projecting Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Availability of Federal SCHIP Funds: FY2006-FY2007 . . . . . . . . . . . . . . . 8
Model Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Current Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
President’s Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Analysis and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Figures
List of Tables
Table 1. National Figures on Federal SCHIP Financing . . . . . . . . . . . . . . . . . . . . 3
Table 2. Projected Final Distribution of DRA Funds
and Projected Shortfalls of Federal SCHIP Funds, 2006 and 2007 . . . . . . . 10
Table 3. Projected Shortfalls Net of Potential
Federal Medicaid Funding, FY2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 4. Annual Historical and Projected Reallocation Amounts,
by Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 5. Characteristics of States Projected to Have Funds
Redistributed Under President’s SCHIP Proposal, FY2007 . . . . . . . . . . . . 15

---

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 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 its authorization, as shown in Table 1, with each state
entitled to a portion of the annual amount. Besides these annual allotments, 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.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 two states, Alaska and Rhode Island, have ever exhausted all
of their available federal SCHIP funds.
In FY2000, Alaska planned to spend $18.1 million in federal SCHIP funds.
However, its prior-year balances of $9.9 million plus its newly available FY2000
original allotment of $7.7 million were insufficient to meet the demand for funds.
Thus, Alaska experienced a shortfall of approximately $419,000.
In FY2001, Alaska’s amount of planned spending of federal SCHIP funds
increased to $24.0 million. Even though its FY2001 original allotment ($9.0 million)
was higher than the previous year’s ($7.7 million), the state had no rollover of prior-
year funds. Its shortfall would have been quite large, except that FY2001 was the
first year that redistributions took place. After an original allotment’s three-year
period of availability, any unspent funds are redistributed to states that had spent all
of that particular allotment, with some exceptions discussed later. As a result, for
spending in FY2001, Alaska received $15.0 million from other states’ unspent
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.

---

CRS-2
FY1998 original allotments. Thus, Alaska’s shortfall was only about $2,000 in
FY2001. Because Alaska’s SCHIP program is a Medicaid expansion, the state was
able to claim its shortfalls under regular Medicaid when its federal SCHIP funds were
exhausted. Thus, Alaska received federal Medicaid payments that covered 83% of
its federal SCHIP shortfall.3 Since FY2001, Alaska has not had a shortfall, even
though its annual federal SCHIP expenditures have been double or triple its annual
original allotment. This is because of the additional funds provided by the
redistributions from other states’ unspent funds.
In FY2003, Rhode Island had approximately $38.6 million in SCHIP spending,
resulting in a relatively small shortfall of approximately $29,000. 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
also qualify for payment under Medicaid, Rhode Island opted to take most of that
shortfall and receive federal Medicaid funds. In doing so, Rhode Island received
81% of the federal payment it would have received under SCHIP for those claims.
On September 29, 2005, nearly the last day of FY2005, a notice in the Federal
Register announced the final form of the redistribution of unspent FY2002 original
allotments for use in FY2005. The methodology, determined by the Secretary of
Health and Human Services (HHS), eliminated what would have been a shortfall of
federal SCHIP funds in six states (Arizona, Minnesota, Mississippi, Nebraska, New
Jersey, and Rhode Island) in FY2005.
The methodology that eliminated shortfalls for FY2005 was projected to fall
short for FY2006. The pool of unspent funds available for redistribution were
projected to be insufficient (by approximately $283 million) to prevent shortfalls of
federal SCHIP funds in 13 states, according to the Congressional Research Service
(CRS) SCHIP Projection Model. To cover this shortfall, Congress appropriated $283
million in the Deficit Reduction Act of 2005 (DRA, P.L. 109-171). The CRS model
projects that two states will still experience shortfalls in FY2006, totaling
approximately $20 million, because the DRA funds cannot be used to pay for SCHIP
enrollees who are non-pregnant adults. These two states are Minnesota and Rhode
Island. This shortfall is based on certain assumptions, discussed below.
The CRS model also projects that under current law, 18 states will experience
shortfalls of federal SCHIP funds in FY2007, also shown in Table 1. The amount
of these shortfalls is projected to total $946 million, although some states may use
Medicaid funds to cover some of that. The SCHIP proposal in the President’s
Budget, depending on its details, may eliminate the FY2007 shortfalls.
3 As described in greater detail below, under SCHIP, states receive an “enhanced” federal
matching percentage, whereas expenditures under Medicaid are reimbursed at the “regular”
matching percentage, officially known as the Federal Medical Assistance Percentage
(FMAP).

---

CRS-3
Table 1. National Figures on Federal SCHIP Financing
(in millions of dollars)
Spending
Total
Number of
Fiscal
SCHIP
Funds
(or projected
amount of
shortfall
year
allotments
expiring
demand)
shortfalls
states
1998
$4,235
$122
1999
$4,247
$922
2000
$4,249
$1,929
a
1
2001
$4,249
$2,672
a
1
2002
$3,115
$3,776
2003
$3,175
$4,276
a
1
2004
$3,175
$4,645
$19
1
$1,281
2005
$4,082
$5,089
$128
2006
$4,082
$5,984
$20
2
$16
2007
$5,040
$6,343
$946
18
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.
This report provides an overview of SCHIP financing and spending since the
program’s inception. The report then describes the CRS SCHIP Projection Model
and the assumptions its results are based on. The report provides state-level
projections of the FY2006 and FY2007 shortfalls as well as other key financing data.
The report provides state-level projections of the impact of the SCHIP proposal
outlined in the President’s Budget. Depending on the actual details of that plan, it
may eliminate the FY2007 shortfalls. It does so by redistributing additional funds
from many non-shortfall states, the implications of which are discussed in the final
section of the report. This report will be updated as new data become available that
might substantially alter the model results.
If Congress intends to prevent state shortfalls of federal SCHIP funds in
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.
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

---

CRS-4
contributes more toward the coverage of individuals in SCHIP (65% to 83.2% in
FY2006) than it does for those covered under Medicaid (50% to 76% in FY2006).4
States are reimbursed for their costs up to a capped amount. Nationally, the
total annual federal allotments range from $3.1 billion (FY2002) 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 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 reallocated 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
original allotment’s period of availability) minus the FY1998 original allotment
amount.
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
4 For more information on the FMAP, see CRS Report RL32950, Medicaid: The Federal
Medical Assistance Percentage (FMAP), by Christine Scott, and CRS Report RS22333,
Budget Reconciliation FY2006: Provisions Affecting the Medicaid Federal Medical
Assistance Percentage (FMAP), by April Grady.

---

CRS-5
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
Reallocation of Unspent FY1998 and FY1999 Original Allotments
(P.L. 106-554). 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 original allotments.
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.
Redistribution states continued 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

---

CRS-6
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.
Reallocation of Unspent FY2000 and FY2001 Original Allotments
(P.L. 108-74). 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.
The FY2001 reallocation pot expired after two years, at the end of FY2005, with $72
million reverting to the Treasury.
Reallocation of Unspent FY2002 Original Allotments Onward
(Reversion to BBA 97, P.L 105-33). As previously mentioned, the final notice
regarding the redistribution of unspent FY2002 funds was published in the
September 29, 2005, issue of the Federal Register. Because no law was enacted
specifying otherwise, the process took place according to BBA 97, which allows the
Secretary to determine 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

---

CRS-7
SCHIP balances in FY2005, based on their estimated FY2005 expenditures (provided
to the Centers for Medicare and Medicaid Services (CMS) in August 2005), received
redistribution money equal to that estimated shortfall. These six “shortfall 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 shortfall states, based on their percentage of overall excess
spending.5 As a result, the six shortfall 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
expired at the end of one year, at the end of FY2005, with $56 million reverting to
the Treasury. This amount, combined with the expired FY2001 reallocation funds,
totals $128 million in federal SCHIP funds that expired at the end of FY2005.
The initial redistribution of unspent FY2003 original allotments and the
allocation of the $283 million DRA appropriation for SCHIP, both of which are to
be available for spending in FY2006, has not yet been announced by CMS.
CRS SCHIP Projection Model
The Congressional Research Service (CRS) SCHIP Projection Model combines
data available on federal SCHIP allotments, spending and reallocations in the
program reported as of December 5, 2005. 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 FY2006 and
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.
5 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.

---

CRS-8
Previous versions of the model projected demand in multiple ways. This was
done partly because the estimates provided by states were only offered for the current
fiscal year and the following fiscal year. As a result, the state did not provide
projections through SCHIP’s current authorization. Methods were then used to
provide projections through FY2007. However, beginning with FY2006, which
began October 1, 2006, states now provide projections through FY2007. These state
projections are used in the model. In particular, these are state estimates as of
December 5, 2005, with a couple exceptions.6
Availability of Federal SCHIP Funds: FY2006-FY2007
At the beginning of FY2006, a state could have had balances left in three
original allotments — FY2004, FY2005 and the newly available FY2006 pots. In
addition, states projected to have inadequate federal funds from these three pots to
cover their demand in FY2006 will also have access to funds from the redistribution
of other states’ FY2003 original allotments as well as from the DRA appropriation.
Although the state-by-state initial allocation of these funds has not yet been
announced, the CRS model assumes a particular allocation.
The model assumes that the redistribution of unspent FY2003 original
allotments occurs along the same lines as the redistribution of unspent FY2002
original allotments. The territories receive 1.05% of the total unspent funds. States
that were projected to exhaust all of their available federal SCHIP original allotments
in FY2006 will receive redistribution money equal to that estimated shortfall.
DRA also called for the territories to receive 1.05% of the $283 million
appropriation. Because the $283 million appropriation was based solely on the
projected shortfall, the additional provision for the territories could have led to a
shortfall of just under $3 million. However, the DRA funds to states come with
limitations. DRA said,”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
prohibits states from using the DRA funds to pay for benefits of SCHIP enrollees
who are non-pregnant adults.
Regardless of the initial allocation of the DRA funds that will be announced by
CMS, and the extent to which it reflects state expenditures for non-pregnant adults,
the CRS model assumes that the final allocation of these funds will take any unspent
DRA funds and let another state still facing a shortfall have it before closing out the
accounts for FY2006. This is similar to what was done with the redistribution of
unspent FY2002 original allotments: An initial redistribution was announced, but a
final redistribution was announced later in the year that reflected more recent and
6 For the CRS model, the state-level projections were updated for two states. California’s
amounts were updated to reflect implementation of its state plan amendment for prenatal
coverage expansion (including coverage of pregnant women). For West Virginia, a final
estimate of the federal share of total SCHIP spending covered by federal SCHIP funds was
not provided. CRS estimated this amount by multiplying the state’s total projected SCHIP
spending by the enhanced FMAP for the state in FY2006 (81.09%) and FY2007 (80.97%).

---

CRS-9
more accurate expenditure information. That being the case, the CRS model was not
designed to project the initial allocation of DRA funds but to estimate how the funds
would be distributed in final form.7
To maximize the amount of federal funds used to pay benefits, it is assumed that
states receiving DRA funds will use their non-DRA funds to cover SCHIP adults.
If the available non-DRA funds are adequate to cover their enrolled adults, the DRA
funds can be used exclusively for targeted low-income children and could therefore
cover their entire shortfall, assuming the amount available was adequate.
Based on these assumptions and the projected demand for FY2006, the model
draws down the available pots of money. Once that process is completed, the model
calculates the amount of unspent FY2004 original allotment funds that will be
redistributed and made available in FY2007. The balances that remain from the
FY2005 and FY2006 original allotments, along with the new FY2004 redistribution
and the FY2007 allotment, are available in FY2007.
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 in FY2006 and FY2007.
Table 2 shows the amount of DRA funds that 13 states are projected to spend
in FY2006. Only Minnesota and Rhode Island are projected to have inadequate
non-DRA funds to cover their SCHIP-enrolled non-pregnant adults. Because the
DRA funds cannot pay for benefits of SCHIP-enrolled non-pregnant adults,
Minnesota and Rhode Island are projected to have a shortfall in FY2006 totaling
$20.1 million, as shown in Table 2. As a result, the $3 million of DRA funds to
territories will have no impact on filling projected shortfalls. In sum, $16 million of
the $283 million DRA appropriation for SCHIP is projected to expire.

In FY2007, 18 states are projected to have inadequate balances in their FY2005,
FY2006 and FY2007 original allotments to cover their demand for federal SCHIP
funds. These states are projected to receive all of the unspent FY2004 original
allotments from other states. However, the amount of these unspent funds is
projected to be only $96 million. This would be the fifth year in a row in which the
amount of unspent funds available for reallocation is smaller than any of the
preceding years in which reallocations occurred (beginning in FY2001, with
approximately $2 billion available for reallocation from states’ unspent FY1998
original allotment). The shortfall among these 18 states in FY2007 is projected at
$946 million, as shown in Table 2.
7 If the final allocation must be announced before the end of the fiscal year, as was done
with the final redistribution of FY2002 funds at the end of FY2005, then the final allocation
of DRA funds will not reflect final expenditure data for FY2006, since that comes in
following the close of the fiscal year. As a result, the final allocation announced before the
end of the fiscal year may vary from one based on final expenditure data for the fiscal year,
although the differences may not be substantial.

---

CRS-10
Table 2. Projected Final Distribution of DRA Funds and
Projected Shortfalls of Federal SCHIP Funds, 2006 and 2007
(in millions of dollars)
DRA funds
Projected shortfalls
State
2006
2006
2007
Alaska
$0.9
$14.6
Georgia
$39.7
Illinois
$73.9
$151.3
Iowa
$3.8
$28.0
Louisiana
$20.9
Maine
$0.9
Maryland
$8.6
$91.3
Massachusetts
$13.7
$101.4
Minnesota
$5.1
$7.6
$36.2
Mississippi
$45.9
$74.0
Missouri
$5.0
$45.6
Nebraska
$9.8
$12.2
New Jersey
$66.4
$149.8
North Carolina
$1.8
$113.1
North Dakota
$5.6
Rhode Island
$29.0
$12.5
$46.6
South Dakota
$0.3
$6.7
Wisconsin
$8.6
Totala
$264.0
$20.1
$946.3
Source: Congressional Research Service (CRS) SCHIP Projection Model and CRS analysis of data
from the Centers for Medicare and Medicaid Services.
Notes: “DRA funds” refers to the $283 million for federal SCHIP funding appropriated in the Deficit
Reduction Act of 2005 (P.L. 109-171).
a. Excludes projected DRA funds and shortfalls for territories.
Of the 18 states projected to exhaust their federal SCHIP funds in FY2007,
four (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 14 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. The percentage of SCHIP expenditures that
come from these states’ SCHIP Medicaid expansions varies, from 10% (Illinois) to
98% (Nebraska), based on states’ expenditure for FY2005.
Table 3 shows estimates of the net shortfall that would remain under current
law after taking into account the federal Medicaid funds these states could draw for
their Medicaid-expansion SCHIP programs. Column A of the table shows the same
shortfalls as in Table 2. Column B provides estimates of the maximum amount of
shortfalls payable by federal Medicaid funds. This was estimated by assuming states
facing a shortfall would claim as much of its separate-SCHIP spending in its
available SCHIP balances, maximizing the amount of shortfall funds for which
Medicaid funding could be received. Under this assumption, and reflecting

---

CRS-11
Medicaid’s regular FMAP versus the SCHIP enhanced FMAP, column B shows that
$350 million of the projected SCHIP shortfall in FY2007 could be covered by federal
Medicaid funds. This would leave a net shortfall of approximately $600 million in
FY2007.
It must be noted that there is some uncertainty about the limitations of
claiming the regular Medicaid FMAP to cover SCHIP expenditures in a shortfall
situation. There is little federal guidance on the issue. The only sizeable shortfall
was experienced by Rhode Island ($20 million) in FY2004. State officials had
informed CRS that they were 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 qualified for the regular Medicaid
FMAP. CRS has not been able to confirm how this can occur. If separate SCHIP
spending can be funded by federal Medicaid dollars in lieu of available SCHIP
balances, then the amounts payable by Medicaid could be much higher than shown
in column B of Table 3.
Table 3. Projected Shortfalls Net of Potential Federal Medicaid
Funding, FY2007
(in millions of dollars)
A
B
C
Potential federal
Net shortfall
Shortfall states
Shortfall
Medicaid funding
(A-B)
Alaska
$14.6
$11.9
$2.6
Georgia
$39.7
$0.0
$39.7
Illinois
$151.3
$30.0
$121.3
Iowa
$28.0
$16.9
$11.1
Louisiana
$20.9
$18.5
$2.4
Maine
$0.9
$0.7
$0.1
Maryland
$91.3
$70.2
$21.1
Massachusetts
$101.4
$78.0
$23.4
Minnesota
$36.2
$0.0
$36.2
Mississippi
$74.0
$0.0
$74.0
Missouri
$45.6
$38.5
$7.2
Nebraska
$12.2
$10.0
$2.2
New Jersey
$149.8
$36.1
$113.7
North Carolina
$113.1
$0.0
$113.1
North Dakota
$5.6
$4.8
$0.8
Rhode Island
$46.6
$21.3
$25.3
South Dakota
$6.7
$5.7
$1.0
Wisconsin
$8.6
$7.1
$1.6
Total
$946.3
$349.6
$596.7
Source: Congressional Research Service (CRS) SCHIP Projection Model and CRS analysis of states’
FY2005 SCHIP expenditures and FY2007 FMAP rates from the Centers for Medicare and Medicaid
Services (CMS).

---

CRS-12
President’s Budget. The SCHIP proposal in the President’s Budget is to
reduce the period of availability of the FY2005 original allotment from three years
to two.8 There may be additional details that have not yet been announced, but the
effect of reducing the period of availability of the FY2005 original allotment is the
focus of this section.
As previously mentioned, the amount of unspent funds available for
redistribution has been decreasing over the past several years, as shown in Table 4.
Historically these funds have been able to forestall much of the federal SCHIP
shortfalls that would otherwise have occurred. FY2005 was the last year in which
the amount available for redistribution was adequate to cover states’ shortfalls of
federal SCHIP funds. Because the $173 million available for redistribution in
FY2006 was inadequate to cover the projected shortfalls, Congress appropriated an
additional $283 million to SCHIP. In FY2007, only $96 million is projected to be
available for redistribution, far short of the amount needed to cover the shortfalls.
The CRS model projects that at the end of FY2007 there will be
approximately $155 million in unspent FY2005 original allotments. Assuming
current authorization rules continue, this would be the amount available for
redistribution in FY2008. This would be the first time in several years in which the
amount of unspent original allotments at the end of its applicable period exceeded
that of the previous year. This is because the total original allotments for FY2005
($4.1 billion) were markedly higher than in FY2004 ($3.2 billion), resulting in some
additional monies remaining at the end of the FY2005 original allotment’s period of
availability.
The president’s proposal would make states’ unspent FY2005 original
allotments available for redistribution at the beginning of FY2007 rather than at the
beginning of FY2008. As a result, unspent FY2005 funds available for redistribution
would total $1,142 million, shown in Table 4. Although the details of the plan have
not been released, the CRS projections assume that only funds necessary to close
states’ FY2007 shortfalls ($946 million), plus the territories typical 1.05% of the total
unspent funds ($12 million), would be used from the unspent FY2005 original
allotments. Based on these assumptions, the president’s proposal would eliminate
the FY2007 shortfall, with states that had unspent FY2005 original allotments at the
end of FY2006 retaining about 16% of those funds ($183 million). Column D of
Table 5, on the last page of this report, shows the projected amount that states would
have redistributed from their unspent FY2005 original allotments to other states as
a result of the president’s proposal. Column E of the table shows the percentage of
the $958 million redistributed to other states that each state contributes.9
8 The President’s Budget does not provide this detailed of an explanation, but individuals
in the executive branch have confirmed this description.
9 These results are not intended to approximate a cost estimate, like those done by the White
House’s Office of Management and Budget (OMB) or the Congressional Budget Office
(CBO). Budgetary cost estimates take into account offsets and other effects that these
projections do not attempt to address.

---

CRS-13
Table 4. Annual Historical and Projected Reallocation Amounts,
by Fiscal Year
(in millions of dollars)
Additional reallocations due to
Current-law reallocations
President’s Budget
Fiscal
Fiscal year
Total
Fiscal year
Total
year
reallocated
amount
Redist.
Retain
reallocated amount
Redist.
Retain
2001
1998
$2,034
$720
$1,313
2002
1999
$2,819
$1,638
$1,181
2003
2000
$2,199
$1,099
$1,099
2004
2001
$1,749
$875
$875
2005
2002
$643
$643
$0
2006
2003
$173
$173
$0
2007
2004
$96
$96
$0
2005
$1,142
$958
$183
Source: Congressional Research Service (CRS) SCHIP Projection Model and CRS analysis of data
from the Centers for Medicare and Medicaid Services.
Notes: “Total amount” is the total amount of unspent original-allotment funds available for
reallocation. It is the sum of the amounts redistributed to other states (and territories) and retained by
states that keep a portion of their unspent original allotments. The redistributed amounts include the
1.05% of the “total amount” provided to the territories. FY2006 and FY2007amounts are projections.
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.10
Although it is theoretically possible for states to be in a chronic state of
shortfall of federal SCHIP funds, this had been avoided through FY2005 using the
funds in the program’s original appropriation. To cover shortfalls projected for
FY2006, Congress appropriated an additional $283 million. To cover the shortfalls
in FY2007, an appropriation of approximately $1 billion would be required.
Alternatively, Congress could alter redistributions to tap into other federal money
available in SCHIP. The president’s proposal appears to do this by shortening the
period of availability of the FY2005 original allotment from three years to two years.
This was also part of the SCHIP package in the first Senate-passed version of DRA
(S. 1932), which was ultimately replaced by the $283 million appropriation targeted
to FY2006 and therefore not addressing the FY2007 projected shortfall.
Redistribution and appropriation are two alternatives if the policy goal is to
ensure that states never exhaust their federal balances 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
10 States have to provide matching funds, though, since Medicaid is a joint federal-state
program.

---

CRS-14
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.
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 many states with annual SCHIP spending well
in excess of their annual allotments face the consequences of that spending through
the shortfall of federal funds.

---

CRS-15
Table 5. Characteristics of States Projected to Have Funds Redistributed Under President’s SCHIP Proposal, FY2007
A
B
C
D
E
State’s portion of total
Demand for federal
Current-law beginning-
Beginning-of-year balances
FY2005 funds redistributed
FY2005 redistributed funds
SCHIP funds
of-year balances
under president’s proposal
under president’s proposal (B-C)
under president’s proposal
Arkansas
$51.2
$132.5
$103.4
$29.1
3.0%
Colorado
$53.4
$173.0
$136.5
$36.5
3.8%
Connecticut
$18.0
$113.7
$83.0
$30.7
3.2%
Delaware
$8.2
$29.3
$21.7
$7.6
0.8%
DC
$8.2
$29.7
$22.7
$7.0
0.7%
Florida
$373.9
$585.8
$561.7
$24.0
2.5%
Hawaii
$13.4
$32.8
$28.5
$4.3
0.4%
Idaho
$31.5
$57.0
$47.8
$9.2
1.0%
Indiana
$89.3
$201.4
$169.3
$32.1
3.4%
Kentucky
$78.5
$144.3
$131.5
$12.8
1.3%
Montana
$15.8
$33.5
$28.9
$4.5
0.5%
Nevada
$31.2
$134.0
$100.1
$33.9
3.5%
New Hampshire
$9.4
$29.2
$21.9
$7.3
0.8%
New Mexico
$42.7
$134.9
$100.7
$34.2
3.6%
New York
$411.1
$700.4
$623.5
$76.9
8.0%
Oklahoma
$69.9
$141.5
$130.3
$11.1
1.2%
Oregon
$30.0
$152.0
$112.4
$39.7
4.1%
Pennsylvania
$168.9
$343.8
$306.7
$37.0
3.9%
South Carolina
$62.4
$148.8
$128.1
$20.7
2.2%
Tennessee
$3.9
$258.6
$192.4
$66.2
6.9%
Texas
$409.0
$1,431.5
$1,082.9
$348.6
36.4%
Utah
$39.2
$85.5
$74.2
$11.4
1.2%
Vermont
$2.9
$15.7
$11.6
$4.1
0.4%
Virginia
$106.4
$170.8
$163.0
$7.7
0.8%
Washington
$39.5
$209.3
$155.0
$54.3
5.7%
West Virginia
$41.2
$56.4
$52.9
$3.6
0.4%
Wyoming
$8.0
$17.5
$13.8
$3.7
0.4%
Total
$2,217.0
$5,563.0
$4,604.7
$958.3
100.0%
Source: Congressional Research Service (CRS) SCHIP Projection Model and CRS analysis of data from the Centers for Medicare and Medicaid Services.
Notes: The impact modeled is that the period of availability of the FY2005 original allotment will be reduced from three years to two. It is assumed that the FY2005 funds unspent
as the end of FY2006 will be redistributed as necessary to meet states’ shortfalls, as well as 1.05% of the unspent total going to the territories. These results are not intended to
approximate a cost estimate, like those done by the White House’s Office of Management and Budget (OMB) or the Congressional Budget Office (CBO). Budgetary cost estimates
take into account offsets and other effects that these projections do not attempt to address

---