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The State Children's Health Insurance Program: Past, Present, and Future

Executive Summary

At the end of fiscal year (FY) 2007, congressional authorization for the State Children's Health Insurance Program (SCHIP)—widely considered a success for expanding health insurance for low-income children—is set to expire. The reauthorization process has historically been a chance to review, refine, and revamp programs. For SCHIP, the process will take place at a time when the uninsured rate for children is once again on the rise, budget pressures are leading to constraints on publicly financed coverage, and general concerns about the health system are growing.

This report examines the policy options that may be considered for SCHIP in 2007. It describes how eligibility, benefits, and financing might be modified in reauthorization. It also includes a review of the program's history, goals, and performance, and concludes with a discussion of the policy and political implications of change.

Past: History and Design of SCHIP
SCHIP was created in 1997 to insure children in families with too much income to qualify for Medicaid and too little to afford private insurance. It emerged from a budget negotiation between a Democratic president and Republican Congress. As such, the program represents a fine balance, designed to maintain equilibrium between states and the federal government, as well as between political conservatives and liberals. It contains elements of both an entitlement program and a block-grant.

States have the option of providing child health assistance in SCHIP through Medicaid, a separate program, or a combination of the two. There is also flexibility in benefit design, though benefits must meet certain set standards. As in Medicaid, state payments for child health assistance under SCHIP qualify for federal matching payments. On average, the federal government pays 70 percent and state governments pay 30 percent of program costs. Unlike Medicaid, however, these enhanced federal matching payments are limited by national and state-specific "allotments," or annual limits on federal funding. SCHIP has a system to redistribute federal allotments from states that did not spend the full amount to others that may need higher amounts. States may use up to 10 percent of their annual allotments on outreach, administration, and other activities.

Present: Achievements and Challenges
A federally funded evaluation found SCHIP to be successful in nearly all of the areas examined. Since inception in 1997, enrollment has increased steadily to 6.1 million children in FY 2005. This was complemented by a 6.8 million increase in children enrolled in Medicaid from 1997 to 2004. As a result, between 1997 and 2005, the percentage of low-income, uninsured children dropped from 22.3 percent to 14.9 percent. Despite gains in coverage, about 9 million children under age 19 were uninsured in 2005, and many were eligible for public programs. Enrollment barriers and misunderstandings concerning eligibility are two of the major reasons for their lack of enrollment.

Relative to uninsured children, children enrolled in Medicaid or SCHIP reported much lower unmet health care needs (2% vs. 11%). Uninsured children who gained coverage through SCHIP received more preventive care; in addition, their parents reported better access to care and better communications with providers. One evaluation found that children who were uninsured and gained coverage through Medicaid or SCHIP had fewer asthma-related attacks after enrollment (3.8 versus 9.5 attacks), with significant improvements in quality of care.

The funding structure for SCHIP is both successful and flawed. It has succeeded in meeting its goal of encouraging state expansions while limiting federal liability, with a matching rate sufficient to encourage all states to expand coverage. However, the program's success in enrolling children has come up against its federal funding limits. Congress has acted six times in SCHIP's brief history to modify the program's rules.

Future: Major Issues in SCHIP Reauthorization
Three major questions are likely to be contemplated by Congress.

Who should SCHIP cover? One option is to concentrate on enrolling those children who are already eligible for the program. While roughly two-thirds of eligible children participate, millions more could be signed up. The task of enrolling eligible children is made more difficult by concerns about "crowd out," which occurs when public coverage substitutes for private coverage. To limit this, SCHIP requires that children be uninsured prior to joining SCHIP. Burdensome enrollment and re-enrollment policies have proven to be impediments. From a state's perspective, the most significant barrier to outreach may be cost.

Congress could also change who is eligible for SCHIP. It could eliminate the exclusion of children who are income-eligible but otherwise barred from participating in SCHIP, like immigrant children or children of state employees. It could also open SCHIP to all uninsured children, regardless of income. In fact, some children's health advocates believe Congress should use SCHIP as a means to achieve universal coverage for children.

What coverage should children receive? Currently, coverage must meet either the legislation's benchmarks or the approval of the Secretary of Health and Human Services. State SCHIP directors have expressed a desire for greater flexibility to implement partial benefit packages. States would also like the option to design packages that wrap around other coverage and fill in gaps. The original SCHIP legislation included an option for states to subsidize employer-based family coverage for eligible children if such coverage meets certain rules. But these rules, which include minimums for benefits and the employer contribution, are considered onerous by states; consequently, few states have implemented premium-assistance programs.

There are also concerns over substandard benefits in SCHIP and out-of-pocket costs that limit access to care, particularly for special-needs children and other vulnerable populations. Concerns have also been raised that SCHIP has failed to address emerging health threats like childhood obesity. In terms of quality improvement, SCHIP and Medicaid have made progress, but more remains to be done.

How should SCHIP be financed? A number of options exist for extending, modifying, or overhauling SCHIP's financing structure. Three options likely to be considered by Congress are:

  • Making better use of existing funding. Congress could target or even restrict the use of SCHIP funding to low-income, uninsured children—the program's core population. Limiting states' use of allotments for higher-income children and other populations like low-income adults would increase the amount of the existing federal funding available to cover low-income children populations. However, this would create tension among states, since limited funds are redistributed; it would also run counter to the theme of state flexibility in SCHIP.
  • Making improvements within the current structure of SCHIP. When it reauthorizes SCHIP, Congress could mitigate problems that have emerged, for example, by refining the formula for allocating and redistributing funds. Congress, alternatively, could raise the overall level of federal funding, increasing the total allotment to keep pace with medical inflation, projected enrollment growth, or national health expenditure growth. If the new federal funding is not sufficient for an allocation that meets all states' needs, then the current allotment and redistribution formula concerns will persist.
  • Changing SCHIP's financing structure. The federal spending limit on SCHIP could be changed to accommodate enrollment increases, or it could be lifted altogether. In addition, creating one federal matching rate for Medicaid and SCHIP programs would limit the incentive to enroll children into the program with the higher federal funding. It would also encourage states to encourage enrollment in Medicaid as well as SCHIP. Major changes in SCHIP's funding structure would likely raise concerns about the federal budget exposure as well as the elimination of SCHIP's block-grant feature.

The challenges of expanding and improving children's health insurance are serious but surmountable, as proven by the original passage of SCHIP. Regardless of outcome, the debate over SCHIP reauthorization will offer an opportunity to reassess health coverage priorities and approaches. The balance of federal and state governance, the relative roles of public and private insurers, the definition of coverage, and the public's willingness to pay for results will be reviewed, argued, and potentially resolved in SCHIP reauthorization. This will not only affect the health insurance coverage for millions of low-income children, but will inform future debates over improving the coverage system for all Americans.

Publication Details



J. M. Lambrew, The State Children's Health Insurance Program: Past, Present, and Future, The Commonwealth Fund, February 2007