Order Code RL34357
Medicaid and the State Children’s Health
Insurance Program (SCHIP):
FY2009 Budget Issues
Updated May 23, 2008
Cliff Binder, Evelyne P. Baumrucker, April Grady,
Jean Hearne, Elicia J. Herz, and Julie Stone
Domestic Social Policy Division

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Medicaid and the State Children’s Health Insurance
Program (SCHIP): FY2009 Budget Issues
Summary
Each year, the President is required to submit a comprehensive federal budget
proposal to Congress no later than the first Monday in February. The House and
Senate Budget Committees then develop their respective budget resolutions.
Although it is not binding, the resolution provides a framework for subsequent
legislative action on the budget.
The President’s FY2009 budget contains a number of proposals that would
affect Medicaid and the State Children’s Health Insurance Program (SCHIP). While
certain proposals would require legislative action, others could be implemented
administratively (e.g., via regulatory changes, issuance of program guidance, or other
possible methods). One of the more notable changes from the Bush Administration’s
previous budget proposal is an increase in SCHIP funding — increasing federal
funding for allotments by $1.5 billion in FY2009 and by $19.7 billion over the five-
year period from FY2009 to FY2013. The administration’s budget proposes
spending reductions to other Medicaid components that would offset much of the
additional funding proposed for SCHIP so that total SCHIP and Medicaid spending
would increase by $230 million in FY2009 and $1.3 billion from FY2009-FY2013
if this budget proposal were enacted without changes.
On March 3, 2008, the Senate Budget Committee reported a budget resolution
(S.Con.Res 70), which subsequently was amended and passed by the Senate on
March 6. The Senate budget resolution provides 36 deficit-neutral reserve funds and
sense of the Senate provisions, which include measures on Medicaid administrative
regulations; a demonstration for Medicaid coverage for low-income HIV-infected
individuals; funds to established Internet sites for states to disclose Medicaid
payments; and funds to improve access to quality affordable health insurance.
On March 7, the House Budget Committee reported its own budget resolution
(H.Con.Res. 312), which was passed by the House on March 13. The House budget
resolution provides 17 deficit/surplus-neutral reserve funds, such as SCHIP; health
care quality, effectiveness, and efficiency; and Medicaid regulations. H.Con.Res. 312
also contains 12 sense of the House provisions, which would identify ways to
decrease health care waste, fraud, and abuse, and legislation to increase access
affordable health coverage.
On May 20, the Senate and House filed a conference agreement on the budget
resolution (H.Rept 110-659 accompanying S.Con.Res. 70). The conference
agreement provides a deficit-neutral reserve fund of up to $50 billion for SCHIP
legislation, a variety of other deficit-neutral reserve funds, up to $198 million for
health care fraud and abuse control, a sense of the Senate provision on delaying
Medicaid administrative regulations and a sense of the Congress provision on
improving access to affordable health coverage.
This report will be updated to reflect relevant activity as the FY2009 budget
advances and until the next President’s FY2010 budget is released.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Medicaid and SCHIP in the President’s FY2009 Budget . . . . . . . . . . . . . . . . . . . 1
Legislative Versus Administrative Proposals . . . . . . . . . . . . . . . . . . . . . . . . 2
Medicaid Legislative Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Medicaid: Maintain Substantial Home Equity Amount of $500,000 . . . . . . 4
Medicaid: Redesign Acute Care Benefits for Optional LTC Groups . . . . . . 4
Medicaid: Repeal Section 1932(a)(2)Special Rules . . . . . . . . . . . . . . . . . . . 5
Medicaid: Extend Section 1915(b) Waiver Period . . . . . . . . . . . . . . . . . . . . 6
Medicaid: Replace Best Price with Budget Neutral Rebate . . . . . . . . . . . . . . 7
Medicaid: Rationalize Pharmacy Reimbursement . . . . . . . . . . . . . . . . . . . . . 7
Medicaid: Enhance Third Party Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Medicaid: Modify Asset Verification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Medicaid: Publish Annual Actuarial Report . . . . . . . . . . . . . . . . . . . . . . . . . 9
Medicaid: Implement Cost Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Medicaid: Implement Medicaid Pay-for-Performance Incentives . . . . . . . . 10
Medicaid: Require State Participation in the Public Assistance Reporting
Information System (PARIS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Medicaid: Mandate National Correct Coding Initiative . . . . . . . . . . . . . . . . 11
Medicaid: Align Administrative Match Rates . . . . . . . . . . . . . . . . . . . . . . . 12
Medicaid: Align Family Planning Match Rate . . . . . . . . . . . . . . . . . . . . . . 13
Medicaid: Align Case Management Match Rate . . . . . . . . . . . . . . . . . . . . . 13
Medicaid: Align Qualified Individuals (QI) Program Match Rate . . . . . . . 14
Medicaid: Extend QI Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Medicaid: Extend Transitional Medical Assistance . . . . . . . . . . . . . . . . . . 15
Medicaid: Modify HIPAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Medicaid: Increase Flexibility for Premium Assistance . . . . . . . . . . . . . . . 16
Medicaid: Extend Refugee Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Medicaid Administrative Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Medicaid: Clarify Inflation Protection in Partnership Programs . . . . . . . . . 17
Medicaid: Issue Regulation Defining 1915(b)(3) Services . . . . . . . . . . . . . 18
Medicaid: Issue Free Care Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SCHIP Legislative Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SCHIP: SCHIP Reauthorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Congressional Budget Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Conference Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

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List of Tables
Table 1. Cost (Savings) of Medicaid and SCHIP Proposals in the President’s
FY2009 Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. CRS Staff Contact Information, by Medicaid and SCHIP
Topic Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

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Medicaid and the State Children’s Health
Insurance Program (SCHIP):
FY2009 Budget Issues
Introduction
Each year, the President is required to submit a comprehensive federal budget
proposal to Congress no later than the first Monday in February. Once it is
submitted, the Congressional Budget Office (CBO) analyzes the proposal using its
own economic assumptions and estimation techniques. The House and Senate
Budget Committees then develop their respective budget resolutions after reviewing
the President’s budget, the views of other committees, and information from CBO.
Differences between the houses are supposed to be resolved by April 15, but this
deadline is rarely met. Although it is not binding, the resolution provides a
framework for subsequent legislative action.
This report provides information on Medicaid and the State Children’s Health
Insurance Program (SCHIP). It will be updated to reflect relevant activity until the
FY2009 budget is passed and until the next President’s FY2010 budget is released.
Congressional Research Service (CRS) staff contact information by topic area is
provided in Table 2 at the end of the report.
Medicaid and SCHIP
in the President’s FY2009 Budget
The President’s FY2009 budget contains a number of proposals that would
affect Medicaid and SCHIP. Some are program expansions, and others are designed
to reduce federal spending. For each proposal, this report provides:
! background;
! a description of the proposal based on available information;1 and
! a list of relevant CRS reports.
1 Sources include Department of Health and Human Services (HHS), Fiscal Year 2009
Budget in Brief, available at [http://www.hhs.gov/budget/docbudget.htm]; the Office of
Management and Budget, Budget of the United States Government, Fiscal Year 2009,
available at [http://www.whitehouse.gov/omb/budget/fy2009/]; and HHS, Centers for
Medicare and Medicaid Services, Fiscal Year 2009 Justification of Estimates for
Appropriations Committees, available at [http://www.cms.hhs.gov/PerformanceBudget/
Downloads/CMSFY09CJ.pdf].

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CRS-2
Legislative Versus Administrative Proposals
As shown in Table 1, some of the President’s proposals would require
legislative action, while others would be implemented administratively (e.g., via
regulatory changes, issuance of program guidance, etc.).
In their analyses of the President’s budget, both CBO and executive branch
agencies such as HHS and the Office of Management and Budget (OMB) provide
baseline (current law) estimates of Medicaid and SCHIP spending along with
estimated costs and savings of proposed changes. However, CBO and the executive
branch differ in their treatment of legislative and administrative proposals.
In executive branch documents describing the President’s budget,
implementation of proposed administrative changes is assumed in estimates of
baseline Medicaid and SCHIP2 spending, and estimates for legislative proposals are
presented separately. In general, CBO assesses the likelihood that a particular
administrative action will take place before adjusting its baseline,3 and only provides
separate estimates for legislative proposals. For this reason and others, CBO and
executive branch estimates of Medicaid and SCHIP spending differ.
Table 1. Cost (Savings) of Medicaid and SCHIP Proposals
in the President’s FY2009 Budget
Outlays in $ millions
HHS estimate
CBO estimate
FY2009-
FY2009-
Proposal
FY2009
FY2013
FY2009
FY2013
Medicaid
Legislative proposals
Maintain Substantial Home Equity Amount
of $500,000
(80)
(480)
(70)
(440)
Redesign Acute Care Benefits for Optional
LTC Groups
(20)
(650)
35
515
Repeal Section 1932(a)(2) Special Rule
(100)
(2,100)
(10)
(390)
Extend Section 1915(b) Waiver Period
—
—
—
—
Replace Best Price with Budget Neutral
Rebate
—
—
—
—
Rationalize pharmacy reimbursement
(195)
(1,110)
(375)
(3,025)
Enhance Third Party Liability
(35)
(470)
(65)
(365)
Modify Asset Verification
(82)
(1,200)
(70)
(570)
Publish Annual Actuarial Report
—
—
—
—
Implement Cost Allocation
(280)
(1,770)
(280)
(1,770)
2 For a description of adjustments made to arrive at baseline Medicaid expenditures, see
HHS, Fiscal Year 2008 Justification of Estimates for Appropriations Committees, pp. 135-
141 [http://www.cms.hhs.gov/PerformanceBudget/Downloads/CMSFY09CJ.pdf].
3 CBO, letter to the Honorable John M. Spratt Jr., May 2, 2007, available at
[http://www.cbo.gov/ftpdocs/80xx/doc8060/05-02-LetterOnRegs.pdf].

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CRS-3
Outlays in $ millions
HHS estimate
CBO estimate
FY2009-
FY2009-
Proposal
FY2009
FY2013
FY2009
FY2013
Implement Medicaid Pay-for-Performance
Incentives
—
(310)
—
(290)
Require State Participation in PARIS
(5)
(135)
(10)
(65)
Mandate National Correct Coding Initiative
(5)
(105)
(5)
(105)
Align Administrative Match Rates
(950)
(5,485)
(1,220)
(8,720)
Align Family Planning Match Rate
(570)
(3,335)
(635)
(3,955)
Align Case Management Rate
(200)
(1,100)
(240)
(1,470)
Align Qualified Individuals (QI) Program
Match Rate
(200)
(200)
(32)
—
Extend QI Program
470
470
75
0
Extend Transitional Medical Assistance
(TMA)
485
695
566
1,155
Modify HIPAA
—
—
—
—
Increase Flexibility for Premium Assistance
—
(140)
20
290
Subtotal, Medicaid Legislative Proposals
(1,767)
(17,425)
(2,316)
(19,205)
Other Medicaid Interactions
Extend Refugee Exemption
32
92
4
10
SCHIP Reauthorization (Medicaid Impact)
130
235
174
2,352
QI Adjustment
(270)
(270)
155
237
Subtotal, Medicaid Interactions
(108)
57
333
2,599
Total, Medicaid Legislative Proposals
(1,875)
(17,368)
(1,983)
(16,606)
SCHIP
Legislative proposals
2,105
18,685
499
11,936
SCHIP reauthorization
2,105
18,685
499
11,936
[Allotments (non-add)]
[1,500]
[19,740]
—
—
Total Outlays, SCHIP Legislative Proposals
2,105
18,685
499
11,936
Total Medicaid and SCHIP Legislative Proposals
230
1,317
(1,484)
(4,670)
Medicaid, Administrative Actions
Clarify Inflation Protection in Partnership LTC
Programs
—
—
—
—
Issue Regulation Defining 1915(b)(3) Services
(100)
(800)
—
—
Issue Free Care Regulation
—
—
—
—
Total, Medicaid Administrative Actions
(100)
(800)
—
—
Source: Department of Health and Human Services, Fiscal Year 2009 Budget in Brief, available at
[http://www.hhs.gov/budget/docbudget.htm] and Congressional Budget Office, CBO Estimates of
Medicaid and SCHIP Proposals in the President’s Budget for Fiscal Year 2009, available at
[http://cbo.gov/budget/factsheets/2008b/medicaid.pdf].
Notes: Numbers in parentheses represent savings. Estimates for proposals that do not show a dollar
figure were not provided in the documents cited above. In executive branch documents describing the
President’s budget, implementation of proposed administrative changes is assumed in estimates of
baseline Medicaid and SCHIP spending, and estimates for legislative proposals are presented
separately. In general, CBO only adjusts its baseline estimates to account for administrative changes
as they are implemented — rather than as they are proposed — and only provides separate estimates
for legislative proposals.

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CRS-4
Medicaid Legislative Proposals
Medicaid: Maintain Substantial Home Equity Amount
of $500,000
Background. The Deficit Reduction Act of 2005 (DRA, P.L. 109-171)
amended the Social Security Act to exclude from Medicaid eligibility for nursing
facility or other long-term care services, certain individuals with an equity interest
in their home of greater than $500,000. Under DRA, the state may elect without
regard to Medicaid’s requirements concerning statewideness and comparability, to
substitute an amount that exceeds $500,000, but does not exceed $750,000. These
dollar amounts are increased, beginning in 2011, from year-to-year based on the
percentage increase in the consumer price index (CPI) for all urban consumers (all
items, United States city average), rounded to the nearest $1,000. The Secretary
establishes a process for waiving this provision in the case of a demonstrated
hardship. The homes of individuals whose spouse, child under age 21, or child who
is blind or disabled (as defined by the Section 1614 of the Social Security Act) and
lawfully resides in the individual’s home are excluded.
Proposal. The President’s budget seeks legislation that would limit the
allowable home equity amount to $500,000 for all states by eliminating the state
option to increase the equity limit to a number between $500,000 and $750,000.
Starting in 2011, this limit would be adjusted by the CPI inflation factor. HHS
estimates that the proposal would save $80 million in FY2009, and $480 million over
the FY2009-FY2013 period.
Reports. For more information about home equity and Medicaid eligibility, see
CRS Report RL33593, Medicaid Coverage for Long-Term Care: Eligibility, Asset
Transfers, and Estate Recovery, by Julie Stone. For information on DRA’s change
to eligibility rules for counting home equity, see CRS Report RL33251, Side-by-Side
Comparison of Medicare, Medicaid, and SCHIP Provisions in the Deficit Reduction
Act of 2005, by Karen Tritz, Sibyl Tilson, Julie Stone, Chris L. Peterson, Jennifer
O’Sullivan, Paulette C. Morgan, Elicia J. Herz, Jean Hearne, Jim Hahn, April Grady,
Hinda Chaikind, and Evelyne P. Baumrucker.
Medicaid: Redesign Acute Care Benefits for
Optional LTC Groups
Background. Eligibility for Medicaid’s long-term care services, such as
nursing home care or a range of home- and community-based supportive services, is
limited to beneficiaries who meet state-designed assessments for functional need and
financial standards. The assessment for functional need examines physical and/or
cognitive functioning that evaluates whether applicants would require the level of
care provided in an institution (e.g., a nursing facility, intermediate care facility for
the mentally retarded, or a hospital). Financial standards refer to a variety of optional
eligibility pathways, including pathways that allow states to cover people with long-
term care needs who have income above 74% of the federal poverty level, which is
equivalent to the level of cash payments under the Supplemental Security income
program.

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CRS-5
Beneficiaries who are enrolled in Medicaid, because they need long-term care
services, also are generally entitled to a range of acute care benefits (e.g., hospital
care, physician services, rehabilitation, private duty nursing, home health services,
case management, among many others) that a state offers, as long as these services
are medically necessary. For dual eligibles, individuals enrolled in both Medicare
and Medicaid, Medicaid covers just those acute care services that are not covered by
Medicare, often referred to as wrap around services.
Proposal. The President’s budget would establish a state plan amendment
option to allow states to offer a modified benefit package of acute care services for
selected long-term care beneficiaries. States would be given the authority under this
provision to expand on the DRA-flexibility to adapt private sector health insurance
benefit packages to better meet the needs of specific Medicaid beneficiary groups.
The DRA option is modeled on benefit packages available under SCHIP (i.e.,
FEHBP preferred provider option, coverage for state employees, the largest
commercial HMO in a state, or Secretary-approved coverage). HHS estimates that
by redesigning acute care benefits, Medicaid would save $20 million in FY2009 and
$650 million over the FY2009-FY2013 period.
Reports. Currently, no other CRS reports address this topic.
Medicaid: Repeal Section 1932(a)(2)Special Rules
Background. To control costs and quality of care, many states contract with
managed care organizations to deliver services to Medicaid beneficiaries. These
arrangements can include contracts with health maintenance organizations (HMOs),
primary care case management (PCCM) programs, and pre-paid health plans (PHPs),
which vary in the comprehensiveness of services they provide and the degree of
financial risk assumed in the managed care contracts. Prior to the Balanced Budget
Act of 1997 (BBA, P.L. 105-33), federal Medicaid laws contained provisions that
limited states’ ability to use managed care, including requirements regarding freedom
of choice of provider for beneficiaries, statewideness (i.e., all covered services must
be available statewide), and comparability (i.e., the amount, duration and scope of
any services available to one individual must be available to all individuals in the
same eligibility category). Special waivers were required to override these rules.
BBA added Section 1932 to the Medicaid statute. This provision gave states the
option of requiring Medicaid beneficiaries covered under states’ Medicaid plans to
enroll with a managed care entity without a waiver. Specific groups, identified in
Section 1932(a)(2) were exempted from mandatory enrollment in managed care,
including children under age 19 with special health care needs, defined as:
! those eligible for the Supplement Security Income or SSI program,
! children eligible for the Title V Maternal and Child Health Block
Grant program,
! children under 18 who meet the SSI disability standards who require
institutional care, but receive care outside the institution, and for
whom the cost of that care does not exceed institutional care (also
known as Katie Beckett or TEFRA children), and

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CRS-6
! those receiving foster care or adoption assistance under Title IV-E
or who are in foster care or otherwise in an out-of-home placement.
Other exempted groups include individuals who are dually eligible for Medicare
and Medicaid. Indians are also exempted from mandatory enrollment in Medicaid
managed care plans, unless the participating managed care entity is the Indian Health
Service, or certain Indian Health Programs operated by Indian tribes, tribal
organizations, or urban Indian organizations.
Proposal. The President’s FY2009 Budget repeals Section 1932(a)(2). This
change would allow states to require the currently exempted populations identified
above to enroll in Medicaid managed care programs covered under Medicaid state
plans. HHS estimates that by repealing the Section 1932(a)(2) special rules, Medicaid
would save $100 million in FY2009 and $2.1 billion over the FY2009-2013 period.
Reports. Currently, no other CRS reports address this topic. For a general
overview of managed care under Medicaid, see CRS Report RL33711, Medicaid
Managed Care: An Overview and Key Issues for Congress, by Elicia J. Herz.
Medicaid: Extend Section 1915(b) Waiver Period
Background. Section 1915(b) of the Social Security Act gives the Secretary
of HHS the authority to waive certain Medicaid program requirements (including
statewideness, comparability of services, and freedom of choice of provider)4 to
allow states to establish mandatory managed care programs that restrict the providers
from whom a beneficiary may obtain covered services, or that create a “carve out”
delivery system for specialty care as long as such programs do not reduce beneficiary
access and quality of care.5
Section 1915(b) waiver programs are generally approved for a two-year period
and must be cost effective (cannot cost more than what the Medicaid program would
have cost without the waiver). They may not be used to expand eligibility to
individuals not otherwise eligible under the Medicaid state plan, but cost savings
achieved under the waivers may be used to provide additional services (i.e., those not
typically provided under the state plan) to Medicaid beneficiaries.
Proposal. The President’s budget seeks legislation to extend the Section
1915(b) waiver renewal period from two years to three years. HHS estimates that the
proposal would have no cost impact in FY2009 or over the FY2009-FY2013 period.
4 “Freedom of choice” refers to a requirement that Medicaid beneficiaries have the freedom
to choose their medical care providers. “Comparability” refers to a requirement that services
be comparable in amount, duration, and scope for all persons in each eligibility group.
“Statewideness” refers to the requirement that states provide services on a state-wide basis,
rather than in only a portion of the state.
5 Prior to passage of the Balanced Budget Act of 1997 (BBA 97), a state had to obtain a
Section 1115 or a Section 1915(b) (“freedom-of-choice”) waiver from the Secretary of HHS
if it wanted to require Medicaid recipients to enroll in a managed care program.

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CRS-7
Reports. For more information on Medicaid managed care, see CRS Report
RL33711, Medicaid Managed Care: An Overview and Key Issues for Congress, by
Elicia J. Herz.
Medicaid: Replace Best Price with Budget Neutral Rebate
Background. Under Medicaid, drug manufacturers that wish to have their
drugs available for Medicaid enrollees are required to enter into rebate agreements
with the Secretary of HHS, on behalf of the states. Under the agreements,
pharmaceutical manufacturers must provide state Medicaid programs with rebates on
drugs paid on behalf of Medicaid beneficiaries. The formulas used to compute the
rebates are intended to ensure that Medicaid pays the lowest price that the
manufacturers offer for the drugs. Rebate calculations depend on the type of drug.
For single source and innovator multiple source drugs, basic rebate amounts are
determined by comparing the average manufacturer price (AMP) for a drug (the
average price paid by wholesalers) to the “best price,” which is the lowest price
offered by the manufacturer in the same period to any wholesaler, retailer, nonprofit,
or public entity. The basic rebate is the greater of 15.1% of the AMP or the difference
between the AMP and the best price. Additional rebates are required if the weighted
average prices for all of a given manufacturer’s single source and innovator multiple
source drugs rise faster than inflation. For non-innovator multiple source drugs, basic
rebates are equal to 11% of the AMP.
Proposal. The President’s budget seeks legislation to eliminate the “best price”
from the rebate formula for single source and innovator multiple source drugs,
changing the best price-based formula to a flat rebate. This change is intended to be
made in a budget neutral manner. HHS explanatory materials describe the proposal
as a way to simplify drug rebate calculations and as a way to allow private purchasers
to negotiate lower prices without affecting Medicaid drug costs. HHS estimates that
the proposal would have no cost impact in FY2009 or over the FY2009-FY2013
period.
Reports. For a general background on Medicaid prescription drug coverage and
pricing including a description of drug rebates, see CRS Report RL30726,
Prescription Drug Coverage Under Medicaid, by Jean Hearne.
Medicaid: Rationalize Pharmacy Reimbursement
Background. Under current law, state Medicaid programs set the prices paid
to pharmacies for Medicaid outpatient drugs. Federal reimbursements for those
drugs, however, are limited to a federal upper limit (FUL). The Deficit Reduction Act
of 2005 (DRA) established that FULs applying to drugs available from multiple
sources (generic drugs, for the most part) be re-calculated by CMS to be equal to
250% of the average manufacturer’s price (AMP, the average price paid by
wholesalers to manufacturers) as reported to CMS by the manufacturers. Those FUL
formulas, however, have not yet been reissued based on the DRA provisions and
remain calculated by CMS as equal to 150% of the published price for the least
costly therapeutic equivalent. At this point, important components of the new FUL
formula have been issued in a proposed federal rule. The rule has been contested and

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CRS-8
CMS is prohibited from implementing its provisions until the court hears the case
and makes a final determination of its legality.
Proposal. The President’s budget seeks legislation that would build on changes
made by DRA to achieve additional savings in the Medicaid program. The proposal
would reduce the FULs on multiple source drugs from 250% of the AMP to 150%
of the AMP of the lowest priced drug in the group. HHS estimates that the proposal
would save $195 million in FY2009, and $1.1 billion over the FY2009-FY2013
period.
Reports. For more information on the Medicaid provisions of DRA 2005, see
CRS Report RL33131, Budget Reconciliation FY2006: Medicaid, Medicare, and
State Children’s Health Insurance Program (SCHIP) Provisions, by Evelyne P.
Baumrucker, et al. and CRS Report RL33251, Side-by-Side Comparison of Medicare,
Medicaid, and SCHIP Provisions in the Deficit Reduction Act of 2005, by Karen
Tritz et al. Additional background information on Medicaid prescription drugs can
be found in CRS Report RL30726, Prescription Drug Coverage Under Medicaid, by
Jean Hearne.
Medicaid: Enhance Third Party Liability
Background. Third party liability (TPL) refers to the legal obligation of third parties
— individuals, entities, or programs — to pay all or part of the expenditures for
medical assistance furnished under Medicaid. In general, federal law requires
Medicaid to be the payer of last resort, meaning that all other available third parties
must meet their legal obligation to pay claims before the Medicaid program pays for
the care of an individual.
States are required to take all reasonable measures to ascertain the legal liability
of third parties to pay for care and services available under the state Medicaid plan.
If a state has determined that probable liability exists at the time a claim for
reimbursement is filed, it generally must reject the claim and return it to the provider
for a determination of the amount of third-party liability (referred to as “cost
avoidance”). If probable liability has not been established or the third party is not
available to pay the individual’s medical expenses, the state must pay the claim and
then attempt to recover the amount paid (referred to as “pay and chase”).
States are generally required to cost avoid claims unless they have an approved
waiver that allows them to use the pay-and-chase method. However, there are two
statutory exceptions to this rule. In the case of prenatal and preventive pediatric care,
states are required to use pay and chase. In the case of a Medicaid beneficiary whose
parent provides medical support (e.g., health insurance coverage via an employer) as
part of a child support order being enforced by the state, the state must use pay and
chase if a provider has not been paid under the medical support arrangement within
30 days.
In some cases, a Medicaid beneficiary may be required to reimburse the state for
Medicaid expenses paid on his or her behalf. To facilitate such reimbursement, the
state may place a lien on the Medicaid beneficiary’s property. With certain
exceptions, federal law generally prohibits states from imposing Medicaid liens on

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CRS-9
the property of living beneficiaries. In contrast, federal law permits Medicaid liens
on the estates of deceased beneficiaries in a wider variety of situations.
Proposal. The President’s budget seeks legislation to allow states to avoid costs
for prenatal and preventive pediatric claims where a third party is responsible; collect
for medical child support where health insurance is derived from a non-custodial
parent’s obligation to provide coverage; and recover Medicaid expenditures from
beneficiary liability settlements. HHS estimates that the proposal would save $35
million in FY2009 and $470 million over the FY2009-FY2013 period.
Reports. Currently, no other CRS reports address this topic.
Medicaid: Modify Asset Verification
Background. The Social Security Administration is piloting a financial account
verification system (in field offices located in New York and New Jersey) that uses
an electronic asset verification system to help confirm that individuals who apply for
Supplemental Security Income (SSI) benefits are eligible. The process permits
automated paperless transmission of asset verification requests between SSA field
offices and financial institutions. Part of this demonstration involved a
comprehensive study to measure the value of such a system for SSI applicants as well
as recipients already on the payment rolls. The study identified a small percentage
(about 5 percent) of applicants and recipients who were overpaid based on this
financial account verification system. The TMA, Abstinence Education, and QI
Programs Extension Act of 2007 (P.L. 110-90) applied the SSA demonstration to
Medicaid for the period of October 1, 2007 through September 30, 2012.
Proposal. The President’s budget seeks legislation to provide technical
corrections to the demonstration and extend it permanently. HHS estimates that the
proposal would save $82 million in FY2009, and $1.2 billion over the FY2009-
FY2013 period.
Reports. Currently, no other CRS reports address this topic.
Medicaid: Publish Annual Actuarial Report
Background. As required by the Social Security Act, a Medicare Board of
Trustees oversees the financial operations of the Hospital Insurance trust fund that
covers Medicare Part A services and the Supplementary Medical Insurance trust fund
that covers Medicare Parts B and D. The act requires that the Board report annually
to Congress on the financial and actuarial status of the funds. No such requirement
exists for the Medicaid program, which does not have a trust fund and is financed
with state dollars and federal general revenues.
Proposal. The President’s budget seeks legislation to increase transparency
through the publication of an annual actuarial report. HHS estimates that the
proposal would have no cost impact in FY2009 or over the FY2009-FY2013 period.
Reports. Currently, no other CRS reports address this topic.

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Medicaid: Implement Cost Allocation
Background. Because of the overlap in eligible populations, states often
undertake administrative activities that benefit more than one program. Under the
former Aid to Families with Dependent Children (AFDC) cash welfare program,
AFDC and Medicaid program eligibility were linked, and many AFDC families also
qualified for food stamps. As a result, states often collected necessary information
for all three programs during a single eligibility interview or performed other shared
administrative tasks and charged the full amount of the cost to AFDC as a matter of
convenience. Since the federal government reimbursed states for 50% of
administrative expenditures for all three programs, total federal spending was not
affected by the way in which states allocated the programs’ common administrative
costs.
When Congress replaced AFDC with the Temporary Assistance for Needy
Families (TANF) block grant program in 1996, the 50% federal match for
expenditures related to cash welfare assistance ended and the automatic link between
cash welfare and Medicaid eligibility was severed. Later, HHS clarified that states
are required to allocate common administrative costs for TANF, Medicaid, and food
stamps based on the relative benefits derived by each program. A remaining issue
of controversy stems from the fact that TANF block grants are calculated in part on
the basis of pre-1996 federal welfare spending, including any amounts received by
states as reimbursement for common administrative costs. As a result, TANF block
grants are higher in many states than they would be if common administrative costs
attributable to Medicaid and food stamps were excluded from block grant
calculations. To compensate, Congress has permanently reduced federal
reimbursement for food stamp administrative costs in most states by a flat dollar
amount that reflects the administrative costs attributable to food stamps that are
included in states’ TANF block grants (the annual reductions total about $200
million). Congress has not reduced federal reimbursement for Medicaid
administrative costs in a similar manner.
Proposal. The President’s budget seeks legislation to recoup Medicaid
administrative costs included in states’ TANF block grants. HHS estimates that the
proposal would save $280 million in FY2009, and approximately approximately $1.8
billion over the FY2009-FY2013 period.
Reports. See CRS Report RS22101, State Medicaid Program Administration:
A Brief Overview, by April Grady.
Medicaid: Implement Medicaid Pay-for-Performance
Incentives
Background. The Budget Act of 1997 mandated performance monitoring as
a tool for ensuring the delivery of quality services in Medicaid and SCHIP. Among
several initiatives, the Centers for Medicare and Medicaid Services (CMS) formed
the Performance Measurement Partnership Project to select a common set of
measures that can be used by Medicaid and SCHIP programs on a voluntary basis to
assess the quality of care.

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Proposal. The President’s budget proposal would seek legislation to require
states to monitor and report on Medicaid performance measures aimed at improving
quality of care, program integrity, and efficiency, and would link performance to
federal Medicaid grant awards. Reporting would begin in FY2009 with a three-year
phase-in for the performance measures. Beginning in 2012, states that fail to meet
performance thresholds would be subject to Federal Medical Assistance Percentage
(FMAP) or Medicaid grant award reductions, depending on the performance
measure. These reductions would remain in effect until the state meets the
designated thresholds for specific performance measures. Budget documents further
indicate that performance measures currently being considered include increasing
estate recovery collection rates and reducing the prevalence of daily physical
restraints in nursing homes. HHS estimates that this proposal will have no cost
impact in FY2009, but will produce $310 million savings over the FY2009-FY2013
period.
Reports. Currently, no other CRS reports address this topic.
Medicaid: Require State Participation in the Public
Assistance Reporting Information System (PARIS)
Background. The Administration on Children and Families (ACF) began a
program that coordinated with state public assistance agencies (SPAA) and other
federal agencies in 1993, which became the Public Assistance Reporting Information
System (PARIS) PARIS is an information-sharing project used by SPAAs and
federal agencies (e.g., Medicaid, Department of Defense, Department of Veterans
Affairs) to help in verifying clients’ public assistance circumstances — - PARIS data-
matching enables agencies to determine if public assistance clients are receiving
benefits from other agencies. ACF assisted a number of states with start-up funds to
establish PARIS demonstrations through a grant program. Although grant funding
was exhausted, 42 states, the District of Columbia and Puerto Rico participate in
PARIS in some form. PARIS is a voluntary program and commitment to the project
by states varies considerably. The voluntary nature of the PARIS program and
differing levels of state adherence to common approaches and use of matching data
may decrease the program’s effectiveness in neighboring states and nationally.
Proposal. This proposal would require states to participate in PARIS. States
might receive guidance in rules or regulations from the Secretary of Health and
Human Services on how best to collect and use the PARIS data-matching
information, as well as other program participation issues. HHS estimates a PARIS
program mandate would reduce Medicaid spending by $5 million in FY2009 and
$135 million over the five year period from FY2009-FY2013.
Reports. Currently, no other CRS reports address this topic.
Medicaid: Mandate National Correct Coding Initiative
Background. The Centers for Medicare and Medicaid Services (CMS)
administers the Medicare program. Working through contractors, primarily health
insurance companies, CMS processes Part B Medicare claims which include

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CRS-12
payments for physician, laboratory, and radiology claims. To ensure correct payment
for claims, CMS implemented the correct coding initiative (CCI) in 1996. Under
CCI CMS’ contractors use automated edits to review Medicare claims submitted by
Part B providers. Medicare contracts use software to scan claims using CCI edits to
detect duplicate services delivered to the same beneficiary on the same date of
service. In addition, by using pairs of matched Healthcare Common Procedure
Coding System (HCPCS) codes6 which generally are not billed together, CCI
software identifies individual services billed erroneously as service bundles (when
individual services are grouped together, but cheaper comprehensive codes are
available to describe the same services) or in other cases as separate services which
should have been billed individually and not as bundled services.
Proposal. This proposal would mandate Medicaid participate in a National
Correct Coding Initiative, presumably similar to Medicare’s correct coding initiative.
HHS estimates that CCI would reduce Medicaid spending in FY2009 by $5 million
and would decrease Medicaid spending by $105 million for the period FY2009-
FY2013.
Reports. Currently, no other CRS reports address this topic.
Medicaid: Align Administrative Match Rates
Background. The federal government pays a share of every state’s spending
on Medicaid services and program administration. For most Medicaid services, this
share is based on the federal medical assistance percentage (FMAP). The FMAP is
based on a formula that provides higher reimbursement to states with lower per
capita incomes (and vice versa); it has a statutory minimum of 50% and maximum
of 83%. The federal match for administrative expenditures does not vary by state and
is generally 50%, but certain administrative functions have a higher federal match.
Functions with a 75% federal match include:
! compensation or training of skilled professional medical personnel
(and their direct support staff) of the state Medicaid or other public
agency;
! preadmission screening and resident review for individuals with
mental illness or mental retardation who are admitted to a nursing
facility;
! survey and certification of nursing facilities;
! operation of an approved Medicaid Management Information
System (MMIS) for claims and information processing;
! performance of medical and utilization review activities or external
independent review of managed care activities; and
! operation of a state Medicaid fraud control unit (MFCU).
In the case of MMISs and MFCUs, the federal match is 90% for startup
expenses. There is a 100% match for the implementation and operation of
immigration status verification systems. Section 1903(a)(7) of the Social Security
6 HCPCS codes are used to bill for physicians’ services and outpatient procedures.

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CRS-13
Act specifies that a 50% match will be provided for remaining expenditures that are
found necessary by the Secretary of HHS for the proper and efficient administration
of the state Medicaid program.
Proposal. The President’s budget seeks legislation to set the federal
reimbursement rate for all Medicaid administrative activities at 50%. HHS estimates
that the proposal would save $950 million in FY2009, and approximately $5.5 billion
over the FY2009-FY2013 period.
Reports. See CRS Report RS22101, State Medicaid Program Administration:
A Brief Overview, by April Grady.
Medicaid: Align Family Planning Match Rate
Background. The federal government’s share of most Medicaid service costs
is based on the FMAP (see background on “Medicaid: Align Administrative Match
Rates” proposal above). However, certain Medicaid services receive a higher federal
match, including family planning services (which receive 90%) and those provided
through an Indian Health Service facility (which receive 100%) or to certain women
with breast or cervical cancer (which receive the enhanced FMAP used for SCHIP).
Proposal. The President’s budget seeks legislation that would provide federal
reimbursement for family planning services based on the FMAP. HHS estimates that
the proposal would save $570 million in FY2009, and $3.3 billion over the FY2009-
FY2013 period.
Reports. See CRS Report RL32950, Medicaid: The Federal Medical
Assistance Percentage (FMAP), by April Grady.
Medicaid: Align Case Management Match Rate
Background. Under current law, case management is an optional Medicaid
service that assists Medicaid beneficiaries in gaining access to needed medical,
social, educational and other services. The term targeted case management refers to
situations in which the service is provided only to specific classes of beneficiaries
(e.g., those with AIDS, tuberculosis, chronic physical or mental illness,
developmental disabilities, or children in foster care) or to those who reside in a
specific area. When case management is claimed as a service, the federal
government’s share of the cost is based on the FMAP (see background on “Medicaid:
Align Administrative Match Rates” proposal above).
Case management can also be claimed as a Medicaid administrative activity, in
which case the federal match is 50%. Thirty-eight states will have an FMAP that
exceeds 50% in FY2009, meaning that the federal government would pick up a larger
share of the cost in these states when case management is claimed as a Medicaid
service.
Proposal. The President’s budget seeks legislation that would set the federal
reimbursement rate for all case management activities at 50%. HHS estimates that

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the proposal would save $200 million in FY2009, and $1.1 billion over the FY2009-
FY2013 period.
Reports. See CRS Report RL34426, Medicaid Targeted Case Management
Benefits, by Cliff Binder; CRS Report RS22101, State Medicaid Program
Administration: A Brief Overview, by April Grady; and CRS Report RL32950,
Medicaid: The Federal Medical Assistance Percentage (FMAP), by April Grady.
Medicaid: Align Qualified Individuals (QI) Program Match
Rate
Background. Congress requires state Medicaid programs to pay monthly
Medicare Part B premiums on behalf of certain low-income Medicare beneficiaries,
including Qualifying Individuals (QI-1s) whose income is between 120% and 135%
of the federal poverty level. Unlike the reimbursement procedure used for most
Medicaid costs (see background on “Medicaid: Align Administrative Match Rates”
proposal above), each state is allocated a fixed amount of federal funds to pay for the
Medicare Part B premium costs of QI-1s and no state share is required. At the
federal level, Medicaid amounts allocated to the states for QI-1s are offset by a
reimbursement from Medicare Part B.
Proposal. The President’s budget seeks legislation that would provide federal
reimbursement to state Medicaid programs for the Medicare Part B premium costs
of QI-1s based on the FMAP, thereby requiring a state share. HHS estimates that the
proposal would save $200 million in FY2009, and $200 million over the FY2009-
FY2013 period. As explained in the next section, “Extend QI Program,” under this
budget proposal the QI-1 program is re-authorized only for one year. Thus, funding
to align the QI match rate also is only for one year at $200 million.
Reports. For more information about the QI-1 program, see CRS Report
RL32977, Dual Eligibles: A Review of Medicaid’s Role in Providing Services and
Assistance, by Karen Tritz.
Medicaid: Extend QI Program
Background. Congress requires state Medicaid programs to cover the
Medicare Part B premiums for certain groups of low-income Medicare beneficiaries.
The Qualifying Individual (QI-1) program is one of these groups and includes
individuals who have Medicare Part A benefits and whose income is between 120%
and 135% of the federal poverty level. Medicaid already covers premiums for
individuals below 120% of FPL. The Balanced Budget Act of 1997 established this
group of eligibles for a temporary period between January 1998 and December 2002.
Congress has extended eligibility for this group several times since its expiration.
The most recent extension was authorized under the Medicare, Medicaid, and SCHIP
Extension Act of 2007 ((P.L. 110-173), which extended the QI-1 program from
January 1, 2008 through June 30, 2008. The prior extension, authorized the QI-1
Program through December 31, 2007 (P.L. 110-90). Without changes to current law,
eligibility for this group would expire in September 2008.

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Proposal. The President’s budget seeks legislation to extend premium
assistance for QI-1s through September 30, 2009. HHS estimates that the proposal
would cost Medicaid $470 million in FY2009 and $470 million over the FY2009-
FY2013 period, but that the net cost to Medicaid would be zero because the amounts
paid are offset by state dollars obtained under the “Align QI Program Match Rate”
proposal described earlier and a continued reimbursement from Medicare Part B.
Reports. For more information about the QI-1 program, see CRS Report
RL32977, Dual Eligibles: A Review of Medicaid’s Role in Providing Services and
Assistance, by Karen Tritz.
Medicaid: Extend Transitional Medical Assistance
Background. States are required to continue Medicaid benefits for certain
low-income families who would otherwise lose coverage because of changes in their
income. This continuation of benefits is known as transitional medical assistance
(TMA). Federal law permanently requires four months of TMA for families who
lose Medicaid eligibility due to increased child or spousal support collections. It also
permanently requires four months of TMA for families who lose Medicaid eligibility
due to an increase in earned income or hours of employment.
However, Congress expanded work-related TMA benefits in 1988, requiring
states to provide at least six, and up to 12, months of TMA coverage to families
losing Medicaid eligibility due to increased hours of work or income from
employment, as well as to families who lose eligibility due to the loss of a
time-limited earned income disregard (such disregards allow families to qualify for
Medicaid at higher income levels for a set period of time). Congress has acted on
numerous occasions to extend these expanded TMA requirements (which are
outlined in Section 1925 of the Social Security Act) beyond their original sunset date
of September 30, 1998. They are currently set to expire on June 30, 2008.
Proposal. The President’s budget seeks legislation to extend expanded TMA
requirements through September 30, 2009. HHS estimates that the President’s
proposal would cost Medicaid $35 million in FY2008, $485 million in FY2009, and
$695 million over the FY2009-FY2013 period (the budgetary effects extend beyond
FY2009 because families are still entitled to up to 12 months of TMA if they qualify
on or before the expiration date).
Reports. See CRS Report RL31698, Transitional Medical Assistance (TMA)
Under Medicaid, by April Grady.
Medicaid: Modify HIPAA
Background. The Health Insurance Portability and Accountability Act of 1996
(HIPAA, P.L. 104-191) established a number of rules for employer-based health
insurance plans to improve access to and portability of plans for people enrolled or
enrolling into those plans. One of those provisions requires employer-based health
plans to allow for new enrollment into the plan during periods outside of the typical
annual open enrollment period for certain special reasons. Examples of those reasons

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include when an eligible employee (or their dependent) exhausts COBRA
continuation coverage, or when an employee gains a new dependent through birth or
adoption. Another HIPAA provision limits the ability of private health insurance
plans to exclude coverage for pre-existing conditions during what are known as “pre-
existing condition exclusion periods.” The allowable length of such pre-existing
condition exclusion periods depends on the amount of time the new enrollee had
been covered by prior “creditable” health insurance coverage.7 A beneficiary can
prove they have had prior creditable coverage by providing certificates issued by
insurers at the end of each year. Because HIPAA was created in law before SCHIP
was established, SCHIP was not included on the list of types of health insurance that
can be considered as prior creditable coverage.
Proposal. The President’s budget seeks several legislative changes relating to
HIPAA. The first would define a determination of Medicaid or SCHIP eligibility as
a qualifying event allowing for a special enrollment period into employer-based
health insurance plans. This provision is intended to improve Medicaid and SCHIP
programs’ ability to coordinate coverage with private employer-offered coverage.
The second proposal would require SCHIP programs to issue certificates of
creditable coverage. This provision is intended to improve the reach of HIPAA’s
portability provisions by recognizing SCHIP coverage as prior creditable coverage.
Both of these interpretations have previously been promulgated in a final regulation
implementing HIPAA’s portability for group health plan provisions.8 HHS estimates
that the proposal would have no cost impact in FY2009 or over the FY2009-FY2013
period.
Reports. For general information on HIPAA, see CRS Report RL31634, The
Health Insurance Portability and Accountability Act (HIPAA) of 1996: Overview and
Guidance on Frequently Asked Questions, by Hinda Chaikind, Jean Hearne, Bob
Lyke, and C. Stephen Redhead.
Medicaid: Increase Flexibility for Premium Assistance
Background. Under Medicaid, states may pay a Medicaid beneficiary’s share
of costs for group (employer-based) health coverage for any Medicaid enrollee for
whom coverage is available, comprehensive, and cost-effective for the state. An
individual’s enrollment in an employer plan is considered cost effective if paying the
premiums, deductibles, coinsurance and other cost sharing obligations of the
employer plan is less expensive than the state’s expected cost of directly providing
Medicaid-covered services. States must also provide coverage for those Medicaid
covered services that are not included in the private plans.
7 Not all prior health insurance coverage is considered to be creditable. For a discussion of
creditable coverage, see CRS Report RL31634, The Health Insurance Portability and
Accountability Act (HIPAA) of 1996: Overview and Guidance on Frequently Asked
Questions, by H. Chaikind, J. Hearne, B. Lyke, and C. Redhead.
8 69 Federal Register 78720, Final Regulations for Health Coverage Portability for Group
Health Plans and Group Health Insurance Issuers Under HIPAA Titles I and IV, December
30, 2004.

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CRS-17
Proposal. The President’s budget seeks legislation and administrative action
to provide states with greater flexibility in determining cost effectiveness and
information sharing with employers. Reportedly, the administration also seeks to
align Medicaid Employer-Sponsored Insurance options with open enrollment periods
for group (employer-based) health coverage in an effort to streamline the
implementation of these programs.9 HHS estimates that the proposal would have no
cost impact in FY2009 and would generate $140 million in savings over the FY2009-
FY2013 period.
Reports. Currently, no other CRS reports address this topic.
Medicaid: Extend Refugee Exemption
Background. Under current law, most legal immigrants who entered the
country on or after August 22, 1996, and some who entered prior to that date, are not
eligible for Supplemental Security Income (SSI) benefits — and thus, SSI-related
Medicaid — until they have resided in the country for five years or have obtained
citizenship. Refugees and asylees are currently exempted from this ban for the first
seven years they reside in the United States.
Proposal. The President’s budget seeks legislation to extend the exemption for
refugees and asylees from seven years to eight years, allowing additional time for
individuals to complete the citizenship process without penalty. HHS estimates that
the proposal would cost $32 million in FY2009, and $92 million over the
FY2009-FY2013 period.
Reports. For general background information, see CRS Report RL31269,
Refugee Admissions and Resettlement Policy, by Andorra Bruno; CRS Report
RL31630, Federal Funding for Unauthorized Aliens’ Emergency Medical Expenses,
by Alison M. Siskin; and CRS Report RL33809, Noncitizen Eligibility for Federal
Public Assistance: Policy Overview and Trends, Ruth Ellen Wasem.
Medicaid Administrative Proposals
Medicaid: Clarify Inflation Protection in Partnership
Programs
Background. The Deficit Reduction Act of 2005 (DRA, P.L. 109-171) added
new requirements to the Social Security Act that specify, among other things,
minimum inflation protection standards for long-term care (LTC) insurance policies
to qualify under Medicaid’s LTC Insurance Partnership program. Under this
program, states with approved Medicaid state plan amendments may extend
Medicaid coverage, including LTC benefits (i.e., nursing home and home- and
community-based services), to certain persons who have purchased private LTC
insurance policies without requiring them to meet the same means-testing
9 HHS Budget Briefing for House Staff, February 4, 2008.

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CRS-18
requirements applicable to other groups of Medicaid eligibles. During the eligibility
determination for Medicaid, these states may disregard either a portion, or all assets,
of the Medicaid applicant to the extent that payments have been made under a LTC
insurance policy or because an individual has received (or is entitled to receive)
benefits under a LTC insurance policy.
Under current law, the inflation protection standards required for a LTC
Insurance Partnership policy specify that if, at the date of purchase, the purchaser is
younger than age 61, the policy must provide for compound inflation; if the purchaser
is at least age 61 but not older than age 76, the policy must provide some level of
inflation protection; and if the purchaser is age 76 or older, the policy may, but is not
required to, provide some level of inflation protection.
Some LTC insurance policies offer consumers a choice to purchase a feature
known as a Future Purchase Option. This feature allows a purchaser to choose to
increase the plan’s benefits periodically, such as every second or third year, with a
premium increase and no new underwriting. For purchasers who decline to take up
the Future Purchase Option when it is offered, access to an inflation protection
increase likely would be accompanied by new medical underwriting.
Proposal. The President’s proposal seeks to take regulatory or sub-regulatory
action to prohibit LTC Insurance policies that contain Future Purchase Option
inflation protection from qualifying as state-approved LTC Partnership policies. HHS
estimates that there would be neither no cost to Medicaid for this administrative
change in FY2009 nor over the FY2009-FY2013 period.
Reports. For more information on the Medicaid LTC insurance program see,
CRS Report RL33251, Side-by-Side Comparison of Medicare, Medicaid, and SCHIP
Provisions in the Deficit Reduction Act of 2005, by Karen Tritz, Sibyl Tilson, Julie
Stone, Chris L. Peterson, Jennifer O’Sullivan, Paulette C. Morgan, Elicia J. Herz,
Jean Hearne, Jim Hahn, April Grady, Hinda Chaikind, and Evelyne P. Baumrucker;
and CRS Report RL32610, Medicaid’s Long-Term Care Insurance Partnership
Program, by Julie Stone.
Medicaid: Issue Regulation Defining 1915(b)(3) Services
Background. Section 1915(b) of the Social Security Act gives the Secretary
of HHS the authority to waive certain Medicaid program requirements (see above)
to allow states to establish mandatory managed care programs that restrict the
providers from whom a beneficiary may obtain covered services, or that create a
“carve out” delivery system for specialty care as long as such programs do not
negatively impact beneficiary access and quality of care of services. Under Section
1915(b)(3) states also have the option to use savings achieved by using managed care
to provide additional health-related services (i.e., those not typically provided under
the state plan) to Medicaid beneficiaries.
Section 1915(b) waiver programs are generally approved for a two-year period
and must be cost effective (cannot cost more than what the Medicaid program would
have cost without the waiver).

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Proposal. The President’s budget would, through administrative action, clarify
which additional services may be provided under Section 1915(b)(3) out of cost
savings achieved under Section 1915(b) waiver programs. HHS estimates that the
proposal would generate $100 million in savings in FY2009 and $800 million over
the FY2009-2013 period.
Reports. For more information on Medicaid managed care, see CRS Report
RL33711, Medicaid Managed Care: An Overview and Key Issues for Congress, by
Elicia J. Herz.
Medicaid: Issue Free Care Regulation
Background. Generally, Medicaid pays for covered benefits provided to
Medicaid beneficiaries by Medicaid participating providers. However, third party
payer and “free care” rules limit Medicaid’s liability. For example, when private
insurance is available, Medicaid must pay only the remainder of allowable costs for
covered services after other third party coverage has been taken into account. This
may result in no Medicaid payments. In addition, the “free care” principle precludes
Medicaid from paying for Medicaid-covered services which are generally available
without charge, and for which no other sources for reimbursement are pursued.
Both the Clinton and current Bush Administrations provided guidance on these
payment principles in the context of school-based services. Services would not be
considered to be “free” if certain conditions are met. Providers must: (1) establish
a fee schedule for the services provided, (2) determine whether other third parties are
liable for every individual served, and (3) bill the beneficiary and/or any liable third
parties.
According to Administration guidance, there are exceptions to the “free care”
principle. Covered services provided to children with an Individualized Education
Plan (IEP) or an Individualized Family Service Plan (IFSP) pursuant to the
Individuals with Disabilities Education Act (IDEA) are reimbursable under
Medicaid. Also, Medicaid-covered services provided to individuals who qualify for
benefits provided under the Title V Maternal and Child Health Services Block Grant,
and the Women, Infants and Children’s (WIC) program are also exempt from the free
care principle. School providers can bill Medicaid for these services even when such
services are provided to non-Medicaid eligible children free of charge. But in each
case, the requirement to pursue all other liable third parties would still apply.
Proposal. The Administration proposes to codify through regulation, the long-
standing Medicaid “free care” policy. Under this policy, providers cannot bill
Medicaid for services furnished to the public and other payers at no cost. HHS
estimates that the free-care regulation would not have a cost impact in FY2009 or
over the five-year budget forecast period, FY2009-FY2013.
Reports. Currently, no other CRS reports address this topic.

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SCHIP Legislative Proposals
SCHIP: SCHIP Reauthorization
Background. The Balanced Budget Act of 1997 (BBA, P.L.105-33)
established SCHIP. In general, this program allows states to cover targeted low-
income children with no health insurance in families with income that is above
Medicaid eligibility levels. States may choose among three benefit options when
designing their SCHIP programs. They may enroll targeted low-income children in
Medicaid, create a separate state program, or devise a combination of both
approaches. All states, the District of Columbia, and the five territories have SCHIP
programs.
BBA appropriated nearly $40 billion for SCHIP for the period FY1998 through
FY2007. The formula for determining annual state allotments is based on the
estimated number of low-income children and low-income uninsured children in the
state, adjusted by a state health cost factor. In FY2008, while reauthorization of the
SCHIP program was under consideration, there were four continuing resolutions that
maintained appropriations through December 31, 2007. For SCHIP allotments in
FY2008, the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA, P.L.
110-173, enacted December 29, 2007, appropriated funds to ensure that no state’s
exhausted their federal SCHIP program funds before March 31, 2009, but did not
make other changes to the program.
States that established SCHIP programs 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 (E-FMAP). E-FMAP is based on states’ Medicaid program
matching rates (FMAPs), but is higher in SCHIP. In other words, the federal
government contributes more toward the coverage of individuals in SCHIP (ranging
from 65% to 83.09% in FY2009) than it does for those covered under Medicaid (50%
to 75.4% in FY2009).10
States have three years to spend their annual allotment (e.g., states have until the
end of FY2007 to spend their FY2005 allotments). At the end of the applicable
three-year period, unspent funds are reallocated among states based on year-specific
rules. In the early years of SCHIP, both states that did and did not fully exhaust their
original allotments received unspent funds. In more recent years, only those states
that fully exhausted their original allotments received unspent funds. Some states
have experienced shortfalls in SCHIP funds, meaning at the end of a given fiscal
year, they have spent all federal SCHIP funds available to them at that point in time,
including original allotments and reallocations of unspent funds from other states.
10 Department of Health and Human Services, “Federal Financial Participation in State
Assistance Expenditures; Federal Matching Shares for Medicaid, the State Children’s Health
Insurance Program, and Aid to Needy Aged, Blind, or Disabled Persons for October 1, 2008
through September 30, 2009,” Federal Register, Vol. 72, No. 228 / Wednesday, November
28, 2007 / Notices.

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Proposal. Through a legislative proposal, the President’s FY2009 Budget
would increase SCHIP state allotments by $19.7 billion through FY2013, on top of
the assumed $5 billion per year in the baseline.
As reported at a Health and Human Services (HHS) press conference on the
budget, a CMS FY2009 budget briefing for House staff on February 4, 2008, and
discussions with HHS’ staff, the Administration proposes to target SCHIP funds at
children and pregnant women with annual family income under 200% of the federal
poverty level (FPL). The SCHIP proposal also sets a “hard cap” upper income
eligibility threshold at 250% FPL based on families’ gross annual incomes. HHS
estimates that the proposed SCHIP allotments will cover eligible children below
200% FPL as well as enrollees with income between 200% and 250% FPL.11 The
enhanced SCHIP matching rate would apply to children in families with income
below 250% FPL.
The Administration’s policy assumes no new children would be enrolled in
SCHIP if their annual family income exceeds the 250% “hard cap.” However,
children currently enrolled in SCHIP whose annual family income exceeds 250%
FPL would be “grandfathered in” under current eligibility rules, and state
expenditures on their behalf would be matched at the regular Medicaid FMAP.
Under the SCHIP budget proposal, children in higher-income families (above 250%
FPL) who lose eligibility based on current eligibility policies, but later wish to re-
enroll in SCHIP would, after a continuous year off of SCHIP, be subject to the new
250% FPL “hard-cap” based on gross family income.
Further, under the SCHIP budget proposal, HHS plans to continue efforts to
prevent the substitution of SCHIP for private insurance. The proposed “crowd-out”
policy would apply to states seeking to exceed 200% FPL for SCHIP eligibility,
rather than 250% FPL as stipulated in an August 17, 2007, letter from CMS’s Center
for State Operations to state health officials. States would be required to have the
“crowd-out” strategies in place and meet the assurances listed in the August 17 letter,
or face penalties for non-compliance. For example, states with SCHIP income
eligibility thresholds greater than 200% FPL would be required to enroll 95% of their
Medicaid- and SCHIP-eligible children with annual family income less than 200%
FPL. States that do not comply with the 95% enrollment target would be subject to
a one percentage point reduction in their federal matching rate (i.e., enhanced SCHIP
FMAP for children in families with income between 200-250% FPL, and regular
Medicaid FMAP for “grandfathered” children in families with income above 250%
FPL), subject to annual matching rate changes, but capped at 5 percentage points.
States that enroll 95% or more of the SCHIP eligible population below the 200% FPL
target would be permitted to expand their SCHIP income eligibility threshold up to
250% FPL.
11 HHS estimates that the proposed federal SCHIP allotments also would be adequate to
cover eligible, but not enrolled, children in families with annual income between 200%-
250% FPL in the states that also meet the Administration’s criteria for the proposed “crowd-
out” policy (described below).

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Moreover, the Administration proposes to transition adults out of SCHIP into
the Medicaid program by December 31, 2008. Finally, the administration proposes
to work with Congress to create a new allotment distribution formula that emphasizes
enrollment of children in families with income under 200% FPL. HHS estimates that
the proposal would increase SCHIP outlays by $2.1 billion in FY2009, and $18.7
billion over the FY2009-FY2013 period, and also will increase Medicaid outlays by
$130 million in FY2009 and $235 million over the FY2009-FY2013 period.
Through a separate grant initiative, annual outreach grants in the amount of $50
million in FY2009, and $100 million in each of FY2010 through FY2013, would be
available to states to identify and enroll uninsured children who are eligible for
Medicaid and SCHIP.
Reports. For more information on the SCHIP, see CRS Report RL30473, State
Children’s Health Insurance Program (SCHIP): A Brief Overview by Elicia J. Herz,
Chris L. Peterson, and Evelyne P. Baumrucker, and CRS Report RS22739, FY2008
Federal SCHIP Financing, by Chris L. Peterson.
Congressional Budget Action
The House and Senate adopted their respective budget resolutions for FY2009
in March of 2008. A conference agreement on the budget was adopted by both
chambers on May 20.
Senate
On March 3, 2008, the Senate Budget Committee reported a budget resolution
(S.Con.Res 70), which was amended and passed by the Senate March 6. The Senate
budget resolution includes 36 deficit-neutral reserve fund and sense of the Senate
provisions, including a number of provisions that specifically could affect Medicaid
and SCHIP:
! SCHIP. Would reserve up to $50 billion in outlays over five years
for reauthorization of SCHIP.
! Medicaid rules or administrative actions. Would reserve funding
to impose moratoria on federal rules covering aspects of the
Medicaid or SCHIP programs, including targeted case management,
rehabilitation, school-based transportation and administration, and
graduate medical education; transitional medical assistance. In
addition, a sense of the Senate provision adds more discussion on
how the administrative rules and actions should not undermine
Medicaid nor shift Medicaid expenditures to states.
! Other improvements in health. Would reserve funds to make
health insurance coverage more affordable; improve health care and
provide quality health insurance coverage for under- and uninsured;
improve and re-balance LTC; increase parity between health

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insurance coverage for mental health and medical-surgical services;
and improve access to pediatric dental care for children from low-
income families.
! Pilot project on LTC provider background checks. Provides up
to $160 million for a three-year extension of a pilot program for
national and state background checks for direct patient access
employees of LTC facilities or providers.

! State Internet sites to disclose Medicaid payments. Would
authorize creation of state internet sites for the disclosure of
information on providers that participate in and receive payment
from state Medicaid programs.
! Demonstration waivers for low-income individuals with HIV.
Would provide for a demonstration project to use 1115 waivers for
extending Medicaid coverage to low-income HIV-infected
individuals.
House
The House Budget Committee reported a budget resolution (H.Con.Res. 312)
on March 7, which was passed by the House on March 13. The House’s budget
resolution contained 17 deficit-neutral provisions and 12 sense of the House
provisions. The budget-neutral and sense of the House provisions that would affect
Medicaid and SCHIP include the following:
! SCHIP. The House budget resolution would reserve up to $50
billion in outlays over five years for reauthorization of SCHIP.

! Health care quality, effectiveness, and efficiency. This provision
would include incentives and other support for health care
information technology and electronic prescribing to protect privacy
and improve quality. The provision also would include a public-
private initiative for comparative effectiveness research, as well as
mental health parity with medical surgical services including public
programs, such as Medicaid.
! Medicaid regulations and administrative actions. The House
budget would provide deficit-neutral reserve funds to prevent or
delay Medicaid regulations such as case management/targeted case
management, rehabilitation, graduate medical education, and
intergovernmental transfers.
! Program integrity. Up to an additional $198 million in FY2009
discretionary funding could be appropriated for the health care fraud
and abuse control program.
! Waste, fraud, and abuse, and health coverage affordability.
Sense of the House provisions describe the need for additional

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initiatives to identify and reduce health care waste, fraud, and abuse,
as well as funding and programs to increase affordable health
insurance coverage.
Conference Agreement
On May 20, the House and Senate filed a conference agreement on the budget
resolution (H.Rept. 110-659 accompanying S.Con.Res. 70). Medicaid provisions in
the conference agreement include:
! A reserve fund up to $50 billion in outlays over five years for
reauthorization of SCHIP that is deficit-neutral in the Senate and
House.
! Deficit-neutral reserve funds for: (1) Medicaid and SCHIP
regulations and administrative actions; (2) a demonstration project
to provide Medicaid health coverage for low-income HIV-infected
individuals; (3) increasing access for low-income families to
pediatric dental care services; (4) extending transitional medical
assistance; (5) health information technology, including e-
prescribing; (6) comparative effectiveness research; (7) parity
between health insurance coverage for mental health and medical
surgical services, including public programs, such as Medicaid; (8)
providing quality health insurance for uninsured/underinsured
individuals; and (9) the use of Medicare data to evaluate health care
issues (i.e., quality, safety, effectiveness, and resource utilization) in
federal programs and the private health care system.
! Up to an additional $198 million in FY2009 discretionary funding
could be appropriated for the health care fraud and abuse control
program.
! Sense of the Senate provision on Medicaid administrative
regulations. The conference agreement would prevent Medicaid
administrative regulations from undermining the role of Medicaid,
capping federal medicaid spending or shifting costs to states or
beneficiaries, undermining the federal guarantee of safety net health
coverage.
! Sense of the Congress resolutions on seeking opportunities to reduce
health care waste fraud and abuse and increasing public access to
affordable health coverage.

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Table 2. CRS Staff Contact Information,
by Medicaid and SCHIP Topic Area
Topic
Staff member
Phone number
Medicaid
Administration
April Grady
7-9578
Benefits and eligibility
Aged
Julie Stone
7-1386
Children, families, immigrants, other non-
Evelyne Baumrucker
7-8913
disabled adults
Jean Hearne
7-7362
Elicia Herz
7-1377
Individuals with disabilities, medically needy
Cliff Binder
7-7965
Julie Stone
7-1386
Dual eligibles
Julie Stone
7-1386
Expenditures
April Grady
7-9578
Financing
Disproportionate share hospital payments
Jean Hearne
7-7362
Federal medical assistance percentage
April Grady
7-9578
April Grady
7-9578
General issues
Jean Hearne
7-7362
Elicia Herz
7-1377
Intergovernmental transfers
Jean Hearne
7-7362
Elicia Herz
7-1377
Upper payment limits
Elicia Herz
7-1377
HCBS & Section 1915(i) SPAs
Cliff Binder
7-7965
Integrity (waste, fraud, and abuse)
April Grady
7-9578
Long-term care
Cliff Binder
7-7965
Julie Stone
7-1386
Managed care
Elicia Herz
7-1377
Prescription drugs
Jean Hearne
7-7362
Provider payment issues
Jean Hearne
7-7362
Regulations
Case and targeted case management (TCM)
Cliff Binder
7-7965
Graduate medical assistance (GME)
Elicia Herz
7-1377
Outpatient hospital services
Elicia Herz
7-1377
Rehabilitation
Cliff Binder
7-7965
School-based services/administration
Elicia Herz
7-1377
Territories
Evelyne Baumrucker
7-8913
Waivers
Section 1115
Evelyne Baumrucker
7-8913
Section 1915(c)
Cliff Binder
7-7965
Julie Stone
7-1386
SCHIP
Financing
Evelyne Baumrucker
7-8913
Chris Peterson
7-4681
General issues
Evelyne Baumrucker
7-8913
Elicia Herz
7-1377
Section 1115 waivers
Evelyne Baumrucker
7-8913
crsphpgw

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