SCHIP Financing: Funding Projections and State Redistribution Issues

SCHIP Financing: Funding Projections and State Redistribution Issues

Order Code RL32807
SCHIP Financing: Funding Projections
and State Redistribution Issues
Updated January 30, 2007
Chris L. Peterson
Specialist in Social Legislation
Domestic Social Policy Division

SCHIP Financing: Funding Projections
and State Redistribution Issues
Summary
The Balanced Budget Act of 1997 (BBA 97, P.L. 105-33) created the State
Children’s Health Insurance Program (SCHIP), which has authorized appropriations
through FY2007. The purpose of the program is to help states pay for health
coverage of uninsured children in families whose income is above levels that would
allow them to be eligible for the state’s Medicaid program as of March 31, 1997.
At the time of enactment, Congress appropriated to SCHIP nearly $40 billion
for the 10-year period of FY1998-FY2007, with each state receiving access to a
portion of the annual amount. Because SCHIP is a capped-grant program, it is
possible for states to exhaust all of the federal SCHIP funds available to them in a
given year.
Prior to FY2006, only one state exhausted all of its available federal SCHIP
funds in a single year. Alaska faced shortfalls in FY2000 ($419,000) and FY2001
($2,000). Rhode Island faced shortfalls in FY2003 ($30,000) and FY2004 ($19
million). These states had the option to file most of their SCHIP claims under regular
Medicaid when their SCHIP funds were exhausted. By claiming under Medicaid,
however, they received a 17% to 19% smaller federal payment than they would have
received under SCHIP for those claims.
Six states faced a shortfall of federal SCHIP funds in FY2005 (Arizona,
Minnesota, Mississippi, Nebraska, New Jersey, and Rhode Island). However, the
Secretary of Health and Human Services was able to target unspent FY2002
allotments from other states to cover these six states’ shortfalls. As a result, no state
finished FY2005 with a shortfall of federal SCHIP funds.
The methodology that eliminated the FY2005 shortfalls could not cover the
FY2006 projected shortfalls. In an effort to cover the remaining projected shortfalls,
Congress appropriated $283 million in the Deficit Reduction Act of 2005 (DRA, P.L.
109-171). This eliminated the FY2006 shortfalls in all but two states — Illinois
(approximately $95 million) and Massachusetts (approximately $7 million).
In the waning hours of the 109th Congress, the National Institutes of Health
(NIH) Reform Act of 2006 (H.R. 6164, P.L. 109-482) was passed, which included
SCHIP provisions to address states’ shortfalls. The goal of the SCHIP provisions
was to delay as long as possible the date in FY2007 on which any state faces a
shortfall. The law provides additional funding, projected at $124 million, from other
states’ unspent FY2005 allotments and is projected to delay shortfalls until the first
week of May. Even with the SCHIP provisions of H.R. 6164, the shortfalls for the
remainder of the fiscal year are projected at $745 million in 14 states. However, all
but three of these states (Georgia, Minnesota, and Mississippi) are permitted to
receive Medicaid funds for at least a portion of their shortfall amount.
This report describes federal SCHIP financing and provides state-level
projections of FY2007 shortfalls and an analysis of the situation moving forward.

Contents
SCHIP Financing and Spending Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FY2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FY2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Projections of States’ FY2007 Federal SCHIP Shortfalls . . . . . . . . . . . . . . . . . . . 5
Net shortfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Long-Term Projections of States’ Federal SCHIP Shortfalls . . . . . . . . . . . . . . . 11
Analysis and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Tables
Table 1. National Figures on Federal SCHIP Financing . . . . . . . . . . . . . . . . . . . . 2
Table 2. Projected Redistribution, Spending, and Balances
of Federal SCHIP Funds, FY2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 3. Projected Shortfalls Net
of Potential Federal Medicaid Funding, FY2007 . . . . . . . . . . . . . . . . . . . . . . 9
Table 4. Long-Term Projections
of States’ Federal SCHIP Shortfalls (Baseline Assumptions) . . . . . . . . . . . 12

SCHIP Financing: Funding Projections
and State Redistribution Issues
The Balanced Budget Act of 1997 (BBA 97, P.L. 105-33) created the State
Children’s Health Insurance Program (SCHIP). The purpose of the program is to
help states pay for health insurance coverage of uninsured children in families whose
income is above the levels that would allow them to be eligible for the state’s
Medicaid program as of March 31, 1997.1 States can cover SCHIP enrollees by
expanding their Medicaid program or by creating a separate SCHIP program, or by
a combination of both.
At the time of enactment, Congress appropriated to SCHIP nearly $40 billion
for the 10-year period of FY1998-FY2007, as shown in Table 1, with each state
entitled to a portion of the annual amount based on a formula.2 Amounts unspent
after three years, also shown in Table 1, are available to other states that exhausted
that particular year’s allotment.3
Because SCHIP is a capped-grant program, it is possible for states to exhaust
all of the federal SCHIP funds available to them in a given year. For a state to
experience such a shortfall, it would have to exhaust all of its available allotments as
well as the available funds that had been redistributed to it from other states. Prior
to FY2006, no more than one state had ever exhausted all of its available federal
SCHIP funds in a single year. Alaska faced shortfalls in FY2000 ($419,000) and
FY2001 ($2,000). Rhode Island faced shortfalls in FY2003 ($30,000) and FY2004
($19 million). These states had the option to file most of their SCHIP claims under
regular Medicaid when their SCHIP funds were exhausted. By claiming under
Medicaid, however, they received a 17% to 19% smaller federal payment than they
would have received under SCHIP for those claims. No state experienced a shortfall
in FY2005. Shortfalls were experienced by Illinois ($95 million) and Massachusetts
($7 million) in FY2006. Fourteen states are projected to face shortfalls in FY2007,
totaling $745 million. This report describes federal SCHIP financing and provides
state-level projections of shortfalls and the impact of proposals to reduce or eliminate
them.
1 For a more in-depth overview of the program, see CRS Report RL30473, State Children’s
Health Insurance Program (SCHIP): A Brief Overview, by Elicia J. Herz and Chris L.
Peterson.
2 For information on the formula for determining states’ SCHIP original allotments, see CRS
Report RL33366, SCHIP Original Allotments: Funding Formula Issues and Options, by
Chris L. Peterson.
3 In this report, “balances,” “spending,” and “expenditures” refer only to the federal dollars
available, paid or claimed through the enhanced SCHIP match; states’ matching
expenditures are not provided or discussed in this report.

CRS-2
Table 1. National Figures on Federal SCHIP Financing
(in millions of dollars)
Allotments
Total
Number of
Fiscal
SCHIP
unspent
amount of
shortfall
Funds
year
allotments after 3 years Spending
shortfalls
states
expiring
1998
$4,235
$122
1999
$4,247
$922
2000
$4,249
$1,929
a
1
2001
$4,249
$2,034
$2,672
a
1
2002
$3,115
$2,819
$3,776
2003
$3,175
$2,206
$4,276
a
1
2004
$3,175
$1,749
$4,645
$19
1
$1,281
2005
$4,082
$643
$5,089
$128
2006
$4,082
$173
$5,556
$102
2
2007
$5,040
$147
$6,395
$745
14
Source: Congressional Research Service (CRS) SCHIP Projection Model and CRS analysis of data
from the Centers for Medicare and Medicaid Services.
Note: Projected amounts are italicized.
a. Less than $1 million.
If Congress intends to cover state shortfalls of federal SCHIP funds in FY2007,
legislative action would be needed. If, however, Congress decides that the intent of
the original legislation was to ensure states did not treat the program as an open-
ended entitlement, no action would be necessary. States with annual SCHIP
spending well in excess of their annual allotments would then face the consequences
of that spending through the shortfall of federal funds.
Beyond FY2007, assuming that annual allotments continue at the FY2007 level
of $5 billion,4 many more states are poised to exhaust their federal SCHIP funds
beyond FY2007. This is because 34 states are projected to spend more than they
received in their FY2007 annual allotment. More than half of these do not face
FY2007 shortfalls because of balances remaining from prior years. But with no other
changes, as those balances are used up and projected spending continues to exceed
the annual allotments, additional shortfalls are inevitable in the long run. Thus, in
the future, the funding formula may therefore determine not only how the annual
allotments are distributed among states but, in the process, how potential shortfalls
are distributed among states.
4 In making its cost estimates, the Congressional Budget Office (CBO) is required to assume
that programs in existence on or before the enactment of BBA97 (which would include
SCHIP) that lack future appropriations but with current-year outlays of at least $50 million
will continue operating at the last appropriated level. SCHIP’s last appropriated level is
approximately $5 billion in FY2007. Thus, legislation that simply appropriates $5 billion
annually beyond FY2007 would not be scored by CBO as increasing federal government
spending above its current baseline.

CRS-3
SCHIP Financing and Spending Overview
States that set up an SCHIP program are entitled to federal reimbursement, up
to a cap, for a percentage of the incurred costs of covering enrolled individuals. This
percentage, which varies by state, is called the enhanced Federal Medical Assistance
Percentage (FMAP). It is based on the FMAP used for the Medicaid program but is
higher in SCHIP than in Medicaid. In other words, the federal government
contributes more toward the coverage of individuals in SCHIP (65% to 83% in
FY2007) than it does for those covered under Medicaid (50% to 76% in FY2007).5
States are reimbursed for their SCHIP costs up to a capped amount. Nationally,
the total annual federal allotments range from $3.1 billion (FY2002) to $5.0 billion
(FY2007). The amount available to each state is determined annually through a
formula that takes into account factors such as the state’s number of low-income
uninsured children.6 State allotment amounts are published annually in the Federal
Register for each upcoming fiscal year.
BBA 97 established that a state’s allotment for a given year is available for use
for three years. For example, each state’s FY2003 allotment was available through
FY2005 (September 30, 2005). At the end of the three years, if there is still a balance
in that “pot” of money, BBA 97 requires that the Secretary of Health and Human
Services redistribute that money to those states which had exhausted that pot. Those
states that exhausted a given year’s pot are called redistribution states for that year.
Under BBA 97, redistributed funds are available to those states for one year, after
which the money expires, reverting back to the Treasury. Congress intervened to
permit states to retain a portion of their FY1998-FY2001 original allotments unspent
after three years. Congress also specified how the funds not retained would be
redistributed. Any balances remaining from the FY1998-FY2000 reallocated funds
expired at the end of FY2004. Of the FY1998-FY2000 reallocated funds, $1.28
billion expired at the end of FY2004, as shown in Table 1.
FY2005. Beginning with the redistribution of unspent FY2002 funds that went
to other states in FY2005, the original BBA 97 provisions applied to redistribution.
This meant that no state would retain any leftover FY2002 balance after having had
access to it for three years. Moreover, the amounts would be redistributed as
determined by the Secretary. As in previous reallocations, the territories received
1.05% of the total unspent funds from states’ FY2002 allotments.7 The remainder
of the redistribution took place as follows: States that were projected to exhaust all
5 Department of Health and Human Services, “Federal Financial Participation in State
Assistance Expenditures; Federal Matching Shares for Medicaid, the State Children’s Health
Insurance Program, and Aid to Needy Aged, Blind, or Disabled Persons for October 1, 2006
Through September 30, 2007,” 70 Federal Register 71856, November 30, 2005, and 71
Federal Register 28041, May 15, 2006.
6 For information on the formula for determining states’ SCHIP original allotments, see CRS
Report RL33366, SCHIP Original Allotments: Funding Formula Issues and Options, by
Chris L. Peterson.
7 The five territories (and commonwealths) are American Samoa, Guam, the Northern
Mariana Islands, Puerto Rico, and the U.S. Virgin Islands.

CRS-4
of their available federal SCHIP balances in FY2005, based on their estimated
FY2005 expenditures and their own available balances of federal SCHIP funds,
received redistribution money equal to that estimated shortfall. These six states were
Arizona, Minnesota, Mississippi, Nebraska, New Jersey, and Rhode Island. The
remaining balance of unspent FY2002 funds was divided among the 28 redistribution
states, including the six that had received funds to cover their initial projected
shortfalls.
As a result of this redistribution, no state experienced a shortfall of federal
SCHIP funds in FY2005. Also according to BBA 97, this reallocation pot expired at
the end of one year. As a result, at the end of FY2005, $56 million of these
redistributed funds reverted to the Treasury. This amount, combined with the expired
FY2001 reallocation funds, totaled $128 million in federal SCHIP funds that expired
at the end of FY2005.
FY2006. The initial redistribution of unspent FY2003 original allotments and
the allocation of the $283 million DRA appropriation for SCHIP, both of which were
to be available for spending in FY2006 only, were announced by the Centers for
Medicare and Medicaid (CMS) on April 21, 2006.8 The amounts from both accounts
were determined by the HHS Secretary, based on his broad discretion to allocate the
funds to the FY2006 shortfall states.9
DRA said that “the Secretary shall allot to each shortfall State described in
paragraph (2) such amount as the Secretary determines will eliminate the estimated
shortfall described in such paragraph for the State.” Paragraph (2) of §2104(d)
defined shortfall states as those that projected their FY2006 expenditures to exceed
the amounts available from (i) their balances of the FY2004 and FY2005 original
allotments, (ii) the redistribution of funds from other states’ unspent FY2003 original
allotments, and (iii) the newly available FY2006 original allotment. Taking these
funds into account, a shortfall of approximately $283 million was projected for the
states. This was the basis for the $283 million appropriated in DRA.
However, DRA also included a provision that the territories would receive
1.05% of the $283 million appropriation (approximately $3 million). This
percentage was consistent with the share the territories historically received of the
total annual original allotment and redistribution funds. The $3 million from the
DRA funds for the territories meant that the Secretary would not be able to eliminate
8 Centers for Medicare & Medicaid Services, “State Children’s Health Insurance Program
(SCHIP); Redistribution of Unexpended SCHIP Funds From the Appropriation for Fiscal
Year 2003; Additional Allotments to Eliminate SCHIP Fiscal Year 2006 Funding Shortfalls;
and Provisions for Continued Authority for Qualifying States to Use a Portion of Certain
SCHIP Funds for Medicaid Expenditures,” 71 Federal Register 20697-20707, April 21,
2006.
9 The funds from FY2003 available for redistribution could have gone to all redistribution
states (those that had exhausted their FY2003 original allotment), but the Secretary targeted
this redistribution to shortfall states, as was done in the redistribution of unspent FY2002
funds. In that year’s redistribution, however, there was enough money to cover the
shortfalls and provide funds to all redistribution states. For the redistribution of FY2003
funds, all the money went only to the states projected to face shortfalls.

CRS-5
the states’ shortfalls altogether, based on the projections at the time. In addition, the
DRA funds came with restrictions: “Additional allotments provided under this
subsection [the $283 million] are only available for amounts expended under a State
plan approved under this title for child health assistance for targeted low-income
children.” This prohibited states from using the DRA funds to pay for benefits
provided to adult SCHIP enrollees. Both of these factors — the DRA appropriation
carved out for territories and the prohibition against spending on adults — raised the
prospect that the Secretary would be unable to “eliminate the estimated shortfall.”
Based on the states’ FY2006 spending projections used at that time (from November
2005), DRA and FY2003 redistributed funds were provided to a dozen states, with
four that covered adults (Illinois, Minnesota, New Jersey, and Rhode Island)
projected to still experience shortfalls totaling just under $3 million.
By the end of FY2006, all but two of the states that initially projected shortfalls
experienced lower federal SCHIP spending than what they had projected when DRA
was developed. As a result, Illinois and Massachusetts, which experienced higher-
than-projected SCHIP expenditures, were the only states to experience federal SCHIP
shortfalls in FY2006. Both states stopped claiming SCHIP funds before exhausting
every dollar in their SCHIP accounts, leaving nominal balances. But Illinois
estimated that its shortfall of federal SCHIP funds in FY2006 was approximately $95
million and Massachusetts’ was approximately $7 million. In other words, these are
the amounts of additional federal SCHIP spending these two states would have had
in FY2006 if the funds were available. The options these states tended to use in
response to these shortfalls was (1) to delay claiming until the beginning of FY2007,
when the new original allotment was available (although this would merely add to
their FY2007 shortfall), and/or (2) to receive Medicaid funding for eligible claims,
although at the regular FMAP rather than the enhanced SCHIP FMAP.
Projections of States’
FY2007 Federal SCHIP Shortfalls
In FY2007, $147 million in unspent FY2004 original allotments will be
redistributed. In the closing hours of the 109th Congress, a bill was passed to specify
how those funds are to be redistributed. The National Institutes of Health (NIH)
Reform Act of 2006 (H.R. 6164, P.L. 109-482) requires that the funds go to states “in
the order in which such [shortfall] States realize monthly funding shortfalls ... for
fiscal year 2007.” The purpose is to delay any state facing a shortfall as far into the
year as possible with the available funds. CRS projections indicate that this
particular provision would delay shortfalls until the end of March. To delay
shortfalls even further, the SCHIP provisions of H.R. 6164 call for an initial
redistribution of up to half of unspent FY2005 original allotments as of March 31,
2007 (capped at $20 million per state) — after 2½ years of availability. For a state
to forgo unspent FY2005 funds on that date, H.R. 6164 requires not only that the
state have unspent FY2005 balances but that the state’s total SCHIP balances (from
the FY2005-FY2007 original allotments) as of March 31, 2007, are at least double
what the state projects to spend in federal SCHIP funds in FY2007. CRS projects
this provision will provide an additional $124 million for shortfall states and will
delay the exhaustion of federal SCHIP funds by any state until the first week of May

CRS-6
2007. The shortfalls remaining for the rest of the fiscal year are projected at $745
million in 14 states.10
Table 2 shows states’ federal SCHIP balances as of the beginning of FY2007
along with projections of the impact of the SCHIP provisions of H.R. 6164 on the
initial redistribution of unspent FY2005 funds on March 31, 2007. Taking these
projections into account, as well as states’ own projections of total federal SCHIP
spending, Table 2 also shows states’ projected total end-of-year balances of federal
SCHIP funds. The shortfall states are shaded in the table and show negative balances
in the last column. For the most recent information on states’ SCHIP upper-income
eligibility levels and their number of children and adult enrollees, see Table 1 of
CRS Report RL30473, State Children’s Health Insurance Program (SCHIP): A Brief
Overview, by Elicia J. Herz and Chris L. Peterson, available at
[http://www.congress.gov/erp/rl/pdf/RL30473.pdf].
No single factor can be pinpointed as causing shortfalls among all of these
states. For example, there are five shortfall states that cover adults — but not all
shortfall states cover adults, and not all states that cover adults face shortfalls. A
relatively high FMAP means that for the same amount of total SCHIP expenditures
(including the state’s share) a state will exhaust its federal SCHIP balances faster
than a state with the same total expenditures but with a relatively low FMAP. The
list of shortfall states includes those with the highest FMAP in the country
(Mississippi) and five states with the lowest allowable FMAP. Similarly, the upper-
income eligibility levels among the shortfall states range from a relatively low 175%
of poverty to the nation’s highest level of 350% of poverty. Shortfall states with
relatively low upper-income eligibility levels believe their shortfalls are at least partly
the fault of the SCHIP funding formula and the data on which it is based.11
Another of the many contributing factors to the multi-state FY2007 projected
shortfalls is the relatively small amount of money available for redistribution in
FY2007. The largest amount unspent from any original allotment after three years
was $2.8 billion, as shown in Table 1. This was from the FY1999 allotment,
available for redistribution in FY2002. Since that year, the amount available for
redistribution has steadily declined. The unspent FY2004 funds available for
redistribution to the shortfall states in FY2007 is projected to be $147 million — a
mere 5% of the unspent FY1999 original allotment. This decline has resulted from
states that once surrendered a much larger amount of funds to redistribution
increasing their own federal SCHIP spending, primarily through increased
enrollment.
10 For additional detail on the legislation and its projected impact on SCHIP, see CRS Report
RS22553, SCHIP Provisions of H.R. 6164 (NIH Reform Act of 2006), by Chris L. Peterson.
11 See comments from state officials in CRS Congressional Distribution memorandum,
“Status of Federal SCHIP Financing Among Nine States Reporting Identical Lower- and
Upper-Income SCHIP Eligibility Levels,” by Chris L. Peterson, September 12, 2006,
available upon request. For information on the formula for determining states’ SCHIP
original allotments, see CRS Report RL33366, SCHIP Original Allotments: Funding
Formula Issues and Options, by Chris L. Peterson.

CRS-7
Table 2. Projected Redistribution, Spending, and Balances of Federal SCHIP Funds, FY2007
(millions of dollars)
A
B
C
D
E
F
G
H
I=H-G
Projected
Balance of
Balance of
FY2007
Projected
Projected total
States'
redistribution of
FY2005
FY2006
SCHIP
redistribution of
amount
FY2007
Projected end-
unspent FY2004
original
original
original
unspent FY2005
available in
spending
of-FY2007
State
allotmentsa
allotments
allotments allotments allotments on 3/31/07b
FY2007
estimatec
balance
Alabama $2.6
$64.2
$74.3
$141.0
$98.6
$42.4
Alaska $5.2
$11.5
$1.0
$17.7
$30.2
($12.5)
Arizona $22.9
$127.9
$150.8
$115.1
$35.6
Arkansas $32.2
$43.8
$49.3
$125.3
$54.3
$70.9
California $486.0
$790.8
$1,276.8
$1,103.3
$173.5
Colorado $41.8
$58.0
$71.5
($5.0)
$166.3
$63.5
$102.8
Connecticut ($7.5)
$36.6
$34.5
$39.9
($11.8)
$99.2 $25.9
$73.3
Delaware ($0.8)
$9.0
$9.0
$11.1
($2.4)
$26.7 $8.4
$18.3
DC
$8.7
$9.6
$11.7
($2.0)
$28.0 $9.3
$18.7
Florida $189.4
$249.3
$296.1
($20.0)
$714.8
$258.9
$455.9
Georgia $17.8
$165.9
$183.7
$312.1
($128.5)
Hawaii $5.0
$12.4
$15.3
$32.7
$19.4
$13.2
Idaho $19.2
$20.6
$24.3
($4.5)
$59.6
$20.3
$39.3
Illinois $68.5
$3.3
$209.8
$54.4 $335.9
$578.5
($242.6)
Indiana $40.9
$73.0
$93.5
$207.3
$84.0
$123.4
Iowa $5.5
$36.2
$41.7
$56.7
($15.1)
Kansas $0.5
$27.5
$36.5
$64.6
$50.0
$14.6
Kentucky $16.2
$57.8
$70.1
$144.1
$81.2
$62.9
Louisiana $67.2
$89.6
$156.8
$98.6
$58.3
Maine $9.3
$15.2
$24.5
$25.0
($0.5)
Maryland $2.4 $4.7
$67.0
$14.7
$88.8
$151.1
($62.4)
Massachusetts $30.8
$0.0
$73.3
$20.6 $124.8
$212.5
($87.7)
Michigan $65.9
$149.4
$215.3
$175.6
$39.7
Minnesota $14.3
$48.6
$62.9
$78.7
($15.8)
Mississippi $36.4
$60.5
$96.9
$120.6
($23.7)
Missouri $23.2
$72.1
$95.4
$98.7
($3.3)
Montana $4.0
$12.6
$15.7
$32.2
$17.2
$15.0
Nebraska $11.7
$21.9
$33.6
$33.7
($0.1)
Nevada ($3.7)
$40.4
$41.9
$52.1
($12.4)
$121.9 $31.1
$90.8
New Hampshire
$7.4
$9.2
$10.8
($1.2)
$26.2
$10.2
$16.0
New Jersey
$32.0
$2.7
$105.2
$27.3
$167.2
$286.5
($119.3)
New Mexico
($1.4)
$42.2
$42.2
$52.0
$136.4
$55.4
$81.0

CRS-8
A
B
C
D
E
F
G
H
I=H-G
Projected
Balance of
Balance of
FY2007
Projected
Projected total
States'
redistribution of
FY2005
FY2006
SCHIP
redistribution of
amount
FY2007
Projected end-
unspent FY2004
original
original
original
unspent FY2005
available in
spending
of-FY2007
State
allotmentsa
allotments
allotments allotments allotments on 3/31/07b
FY2007
estimatec
balance
New York
$158.1
$272.5
$340.8
$771.3
$337.8
$433.6
North Carolina
$46.3
$136.1
$182.4
$169.4
$12.9
North Dakota
$4.7
$7.7
$12.4
$11.4
$1.0
Ohio $91.3
$158.0
$249.3
$202.5
$46.9
Oklahoma $2.0
$57.4
$70.8
$130.2
$82.4
$47.7
Oregon $26.9
$46.9
$56.7
$130.5
$67.1
$63.4
Pennsylvania $31.5
$134.1
$173.6
$339.1
$177.2
$162.0
Rhode Island
$13.2
$6.5
$14.0
$6.4
$40.0
$70.3
($30.3)
South Carolina
$34.6
$55.5
$70.7
($3.9)
$156.9
$53.5
$103.4
South Dakota
$5.3
$10.4
$15.6
$13.9
$1.7
Tennessee ($58.0)
$78.9
$80.4
$97.5
($20.0)
$236.8
$22.9
$213.9
Texas ($61.5)
$450.0
$454.7
$558.0
($20.0)
$1,442.7 $452.8
$989.9
Utah $6.5
$32.2
$40.5
$79.2
$39.0
$40.2
Vermont $3.9
$4.8
$5.8
($1.1)
$13.4
$3.5
$9.9
Virginia $9.7
$72.3
$94.1
$176.1
$108.3
$67.8
Washington ($14.1)
$64.7
$64.7
$79.9
($20.0)
$189.3 $27.1
$162.2
West Virginia
$7.9
$23.3
$27.5
$58.7
$37.1
$21.7
Wisconsin $26.7
$69.6
$96.2
$99.1
($2.8)
Wyoming $4.7
$5.9
$6.9
$17.5
$8.1
$9.4
Puerto Rico
$16.5
$41.7
$48.1
$106.3
$40.2
$66.0
Guam
$1.8
$1.8 $3.6
($1.8)
Virgin Islands
$0.6
$1.4
$2.0
$2.1
($0.1)
American Samoa
$0.6
$0.6
$0.8
($0.2)
N. Mariana Islands
$0.1
$0.6
$0.6
$0.5
$0.2
US
$0.0
$1,391.8
$3,069.5
$5,040.0
$0.0
$9,648.2
$6,395.3
$3,252.9d
Source: Congressional Research Service (CRS), based on states’ projections and data from the Centers for Medicare and Medicaid Services (CMS).
a. Projected redistribution of FY2004 original allotments unspent after three years ($146.9 million from seven states) projected to go to five
shortfall states. FY2004 original allotments are not available for FY2007 spending; only redistributed amounts are available. Thus,
negative amounts in this column do not reduce total available shown for FY2007.
b. Projected redistribution of FY2005 original allotments available on March 31, 2007 ($124.4 million from 13 states) projected to go to six
shortfall states.
c. Data reported by states to CMS as of December 2006, except for territories, which are based on FY2006 expenditures
d. This is comprised of $4.00 billion in balances projected to be held by states and territories at the end of FY2007, less $746.5 million in shortfalls
(including three territories’ combined projected shortfall of $2.0 million).

CRS-9
Table 3. Projected Shortfalls Net
of Potential Federal Medicaid Funding, FY2007
(in millions of dollars)
A
B

C
D = B - C
% of FY2006
Potential
Projected
SCHIP spending
federal
FY2007
eligible for
Medicaid
shortfall states Medicaid fallback
Shortfall
funding
Net shortfall
Alaska
90%
$12.5
$10.2
$2.3
Georgia
0%
$128.5
$0
$128.5
Illinois
11%
$242.6
$49.8
$192.8
Iowa
30%
$15.0
$12.7
$2.3
Maine
67%
$0.5
$0.5
$0.1
Maryland
85%
$62.4
$48.0
$14.4
Massachusetts
67%
$87.7
$67.5
$20.2
Minnesota
0%
$15.8
$0
$15.8
Mississippi
0%
$23.7
$0
$23.7
Missouri
97%
$3.3
$2.8
$0.5
Nebraska
90%
$0.1
$0.1
$0.0
New Jersey
18%
$119.3
$39.7
$79.6
Rhode Island
98%
$30.3
$23.8
$6.5
Wisconsin
24%
$2.8
$2.3
$0.5
Total
$744.5
$257.3
$487.2
Source: Congressional Research Service (CRS) SCHIP Projection Model and data from the Centers
for Medicare and Medicaid Services (CMS).
Note: Column C is estimated on the basis of states maximizing the amount of their shortfalls eligible
for a Medicaid fallback. In addition to the amounts in Column A, the potential Medicaid funding also
reflects the difference between states’ enhanced (SCHIP) FMAP and regular (Medicaid) FMAP.
Net shortfalls. Of the 14 states that CRS currently projects to experience
shortfalls in FY2007, all but three (Georgia, Minnesota, and Mississippi) have the
ability to draw down federal Medicaid funds as a fallback provision. This can occur
in one of two ways:
First, states with Medicaid expansion programs that have exhausted their
available federal SCHIP allotments may fall back to Medicaid to finance coverage
for such children by accessing federal Medicaid funds at the regular Medicaid FMAP
rate. The 11 shortfall states that are able to revert to Medicaid have all or a portion
of their SCHIP programs through such a Medicaid expansion. Georgia, Minnesota,
and Mississippi have their enrollees in SCHIP programs entirely separate from
Medicaid and therefore cannot revert to Medicaid funds when their SCHIP funds are
exhausted.12
12 Officially, Minnesota is a combination state — that is, it has both a Medicaid-expansion
and a separate SCHIP program. However, eligibility in its Medicaid-expansion program is
for a very limited population: 0- to 2-year-olds with income of 275%-280% of poverty. The
state’s separate SCHIP program covers adults only. In its FY2006 expenditure report,
Minnesota reported no Medicaid-expansion expenditures.

CRS-10
Second, some states have CMS approval under Section 1115 waiver authority
to draw federal Medicaid funds in the portion of their SCHIP program that is not a
Medicaid expansion. In general, Section 1115 of the Social Security Act provides
the Secretary of Health and Human Services (HHS) with broad authority to waive
certain statutory requirements in the Medicaid (and/or SCHIP) program(s) allowing
states to conduct research and demonstration programs that further the goals of Title
XIX (and/or XXI). Costs associated with waiver programs must be budget neutral
to the federal government over the life of the waiver program. To meet this budget
neutrality test, estimated spending under the waiver cannot exceed the estimated cost
of the state’s existing Medicaid program under current law program requirements.
Massachusetts and Rhode Island are the two shortfall states with Section 1115 waiver
authority to draw federal Medicaid funds once their federal SCHIP funds are
exhausted.13
Although Section 1115 waivers provide states with flexibility, the federal
government’s financial liability is limited through budget-neutrality caps. For
example, in FY2007, Massachusetts is projected to come quite close to hitting their
cap on total Medicaid spending. As a result, if the state experiences a shortfall of
federal SCHIP funds in FY2007, it may not be able to use its Medicaid fallback. For
Rhode Island, this is not a concern; its cap is based on per-capita spending rather than
total spending.
North Carolina is another state that took financing-related action due to the
prospects of shortfalls. Prior to 2006, North Carolina had all of its SCHIP enrollees
in a separate SCHIP program. However, as of January 2006, North Carolina is now
a “combination state” because it created a Medicaid-expansion SCHIP program for
the former 0-to-5-year-old separate-SCHIP enrollees. As a result, North Carolina can
draw down the regular federal matching rate (FMAP) from Medicaid funds for at
least these children. Even though North Carolina did not face a shortfall in FY2006,
the state began drawing down Medicaid funds at the regular FMAP (instead of
SCHIP funds at the enhanced FMAP) for those 0-to-5-year-olds, as of January 2006.
This was done because state officials anticipated exhausting their federal SCHIP
funds in FY2007. As a result of this action, North Carolina’s projected federal
SCHIP spending for FY2007 has fallen by nearly $100 million (from $265 million
projected in May 2006 to $169 million projected in November 2006), and the state
is no longer projected to face an FY2007 shortfall.14
13 For example, the following is from Rhode Island’s waiver term and conditions: “In order
to continue operation of the [Section 1115] demonstration if the State exhausts the available
Title XXI [SCHIP] Federal funds for the claiming period, the State will continue to provide
coverage to its approved Title XXI State plan population and the demonstration population
with Title XIX [Medicaid] funds until further Title XXI Federal funds become available.”
14 Previous versions of this report projected 17 states would face federal SCHIP shortfalls
in FY2007. The three states no longer projected to face FY2007 shortfalls are Louisiana,
North Carolina, and South Dakota. One reason is that all three states experienced FY2006
federal SCHIP expenditures that were lower than what they had projected. In addition, the
current FY2007 expenditure projections from North Carolina (as discussed above) and
Louisiana are much lower than they had projected before.

CRS-11
Long-Term Projections of States’
Federal SCHIP Shortfalls
As previously mentioned, 34 states are projected to spend more than they
received in their FY2007 annual allotment. More than half of these do not face
FY2007 shortfalls because of balances remaining from prior years. But with no other
changes, as those balances are used up and projected spending continues to exceed
the annual allotments (assuming CBO’s baseline of $5 billion annual allotments into
the future), additional shortfalls are inevitable in the long run.
Table 4 and Figure 1 project long-run shortfalls of federal SCHIP funds,
using states’ projected FY2008 spending, increased annually by projected increases
in national per-capita health care spending. Current projections after 2006 are that
per-capita health care spending will increase by 6.1% to 6.5%.15 Thus, the numbers
in Table 4 and Figure 1 hold enrollment constant at states’ FY2008 projected levels.
Even with annual spending increases reflecting only increases in per-capita health
care spending, and with annual allotments continuing at $5 billion and the BBA 97
redistribution structure, 42 states are projected to face shortfalls totaling $6.6 billion
in FY2017. Over the five-year period of FY2008-FY2012, the total shortfalls are
projected at $12.1 billion. Over the 10-year period of FY2008-FY2017, the total
shortfalls are projected at $38.3 billion.
These projections assume no change in behavior by states. Undoubtedly,
some states would take actions to reduce the size of their projected federal SCHIP
shortfalls, depending on a number of factors, including the extent to which they have
a Medicaid fallback. If federal SCHIP spending needed to be reduced, states could
drop enrollees or otherwise restrict eligibility, convert SCHIP enrollees into
traditional Medicaid (using flexibility from DRA and other Medicaid provisions),
decrease plan benefits, and/or raise cost-sharing. A state may also decide that once
it exhausts its federal SCHIP funds, it will continue to cover its enrollees at 100%
state cost. On the other hand, a state may decide to drop all of its separate SCHIP
program enrollees. Thus, any long-run projections of shortfalls, and projections of
their impact on enrollment, will be highly speculative.
Increasing the total allotment levels by per-capita growth in health care
spending would reduce projected shortfalls in FY2008 by 10%, compared to baseline
assumptions. The FY2012 shortfalls would be reduced by 38%, but would still
amount to an estimated $2.1 billion in 28 states. Thus, if one’s goal is to eliminate
future shortfalls, then increasing the $5 billion allotment into the future by per-capita
growth in health care expenditures and using the current-law formula for dividing
that among states (which does not take states’ actual SCHIP spending or enrollment
into account) would not accomplish that goal by itself.16
15 Christine Borger et al., “Health Spending Projections Through 2015: Changes on the
Horizon,” Health Affairs Web exclusive, February 22, 2006, pp. w61–w73. The updated
projections are slated for publication on February 21, 2007.
16 Issues regarding the SCHIP funding formula are discussed in CRS Report RL33366,
SCHIP Original Allotments: Funding Formula Issues and Options, by Chris L. Peterson.

CRS-12
Table 4. Long-Term Projections of States’ Federal SCHIP
Shortfalls (Baseline Assumptions)
(in millions of dollars)
Allotments
Total
Number of
Fiscal
SCHIP
unspent
amount of
shortfall
Funds
year
allotments after 3 years Spending
shortfalls
states
expiring
2008
$5,040
$54
$6,913
$1,483
20
2009
$5,040
$92
$7,363
$2,050
23
2010
$5,040
$139
$7,823
$2,391
29
2011
$5,040
$149
$8,303
$2,853
34
2012
$5,040
$143
$8,813
$3,340
35
2013
$5,040
$130
$9,354
$3,765
35
2014
$5,040
$119
$9,927
$4,627
38
2015
$5,040
$114
$10,537
$5,288
39
2016
$5,040
$110
$11,183
$5,911
40
2017
$5,040
$105
$11,869
$6,625
42
2008-
$25,200
$576
$39,215
$12,117
2012
2008-
$50,400
$1,154
$92,085
$38,333
2017
Figure 1. Federal SCHIP Financing
$12
Actual
Projected
$10
Federal SCHIP
spending
rs
$8
a
$6
ions of Doll
Original allotments
$4
Bill
$2
Federal SCHIP
shortfalls
$0
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Fiscal Year
Source: Congressional Research Service (CRS) SCHIP Projection Model.
Note: Shortfalls are also based on states’ own prior-year balances (not shown). Projected spending
is based on states’ FY2007 and FY2008 prjections, increased annually by national projected increases
in per-capita health care spending from Christine Borger et al., “Health Spending Projections Through
2015: Changes on the Horizon,” Health Affairs Web exclusive, February 22, 2006, pp. w61–w73.

CRS-13
Analysis and Options
SCHIP was created in BBA 97 as a capped grant program to states. Fixed
annual balances of federal funds are available to states, which they can exhaust. This
contrasts with Medicaid, SCHIP’s older and much larger companion in providing
health insurance to low-income individuals, which was created as an individual
entitlement program that states cannot exhaust.17
Although it is theoretically possible for states to be in a chronic state of
shortfall of federal SCHIP funds, this was largely avoided through FY2005 using the
funds within SCHIP’s original appropriation and redistribution structure. In an
attempt to cover shortfalls projected for FY2006, Congress appropriated an
additional $283 million.
The shortfalls in FY2007 are projected at approximately $745 million. If an
appropriation were used to address this shortfall, as was done for the FY2006
shortfall, a much larger amount would be required. In addition, because of CBO’s
scoring requirements, any change to the FY2007 SCHIP appropriation would also be
reflected in all future years, making this option appear even more costly, at least on
paper. In his FY2006 and FY2007 budget, the President proposed shortening the
period of availability of the FY2005 original allotment from three years to two years.
This would use funds currently in SCHIP without requiring an additional
appropriation. The potential drawback to this option is that these funds would be
coming directly from other states’ balances of federal SCHIP funds (nearly $1.4
billion from 29 states, as shown in column C of Table 2).
Redistribution and appropriation are two alternatives available for eliminating
states’ shortfalls of SCHIP funds. In addition, the SCHIP program could be turned
into an open-ended entitlement, perhaps by folding it into the Medicaid program.
This would spare the administration and Congress from having to periodically
rearrange funds or funding methodologies to cover shortfalls. However, states would
likely oppose folding SCHIP into Medicaid if it meant reverting to the regular FMAP
and following all of Medicaid’s other myriad rules (although many of these rules can
now be bypassed, due to DRA18). Some federal policymakers may oppose this
approach because treating SCHIP as an individual entitlement could result in greater
federal outlays than would occur under SCHIP as a capped grant program.
Although the SCHIP program has been successful in covering millions of
uninsured children, and has therefore been politically popular, more states are poised
to exhaust their federal SCHIP funds as their projected spending exceeds their annual
allotment of federal SCHIP funds. If Congress decides to prevent these shortfalls,
legislative action would be needed. If, however, Congress decides that the intent of
17 States have to provide matching funds, though, since Medicaid is a joint federal-state
program. States also have some flexibility in determining eligibility and benefit levels. A
state’s ability to draw federal Medicaid funds may be limited if the state is operating under
a Section 1115 waiver, as previously discussed.
18 See for example CRS Report RS22578, Medicaid Cost-Sharing Under the Deficit
Reduction Act of 2005 (DRA), by Elicia J. Herz, January 25, 2007.

CRS-14
the original legislation was to ensure that states did not treat the program as an open-
ended entitlement, no action would be necessary through FY2007. States with
annual SCHIP spending well in excess of their annual allotments would then face the
consequences of that spending through a shortfall of federal funds.