By Rebecca Adams, CQ Staff

June 22, 2015 -- The mood at a White House Rose Garden reception with President Barack Obama on April 22 was jovial. Advocates celebrated the signing a week earlier of a Medicare law that included two years of continued federal funding for the Children's Health Insurance Program (CHIP) along with a little-discussed but dramatic boost in aid to states.

Starting in October, states will get a 23-percentage-point increase in the share of the coverage costs that the federal government will pick up. As a result, no state in the country will have to pay more than 12 percent of CHIP costs for the next two years. Eleven states and the District of Columbia will no longer have to contribute a cent.

Children's advocates hadn't been sure that fiscally conservative Republicans would allow the increase, which was originally part of Obama's 2010 health care overhaul, to take effect this fall. It was a big victory for the program, which since 1997 has provided medical coverage for low-income families who are not poor enough for Medicaid.

But worries persist. Some of the most ardent supporters of children's health coverage are uneasy about the unintended consequences of letting states off the hook for so much of the program's costs. They fear that state officials will no longer have an incentive to scrutinize spending and will fail to plan for the day when their states have to pick up their contributions after the two-year authorization runs out.

Most of all, the advocates say that the $5.6 billion net increase for CHIP for the next 11 years won't do much to expand coverage for kids. That's largely because states are free to use the money they save as they see fit. In Pennsylvania, for instance, a Democratic governor is using some of the funds to plug the state's budget gap.

"Is the money staying in health care, or something for kids? Where is the money going?" asks Bruce Lesley, a former Democratic congressional staffer who is president of First Focus, an advocacy group for families. "Don't be under the illusion that you're helping kids."

State Decisions

Children's advocates would like states to spend the money that they ordinarily would spend on CHIP on greater efforts to find and enroll children who qualify for health insurance but are not covered, or other programs that help poor children. But the law enacted in April is silent on what states do with the money they would have spent on CHIP.

"It relieves some of the pressure on overall state budgets but we can't track really what states will do with that relieved pressure," says Robin Rudowitz, a former Congressional Budget Office expert and associate director for the nonpartisan Kaiser Commission on Medicaid and the Uninsured.

It's a state and local decision, says Wayne Turnage, director of the District of Columbia Department of Health Care. "They may give tax cuts to taxpayers, or they may use it to relieve budgetary pressures elsewhere."

Governors in 12 states, led by Texas and Florida, proposed net tax cuts in fiscal 2016, according to a June 16 report of data compiled through April by the National Association of State Budget Officers. Governors in another 16 states, led by Pennsylvania, proposed tax increases to fill budget holes.

Pennsylvania Gov. Tom Wolf is taking a broad view of the $63 million the state will save this year from the federal CHIP aid. He "took great care in his budget to address the fact that the commonwealth is facing a significant structural budget deficit and costs continue to increase year-to-year in other human services areas," spokesman Jeffrey Sheridan said in an email.

Matt Salo, executive director of the National Association of Medicaid Directors, believes that many states will consider using the extra money in the state budget for health care needs, such as potentially expanding Medicaid.

In the District of Columbia, where the local contribution to children's health insurance costs is declining this fall from 21 percent of costs to nothing, officials will use much of the money to offset rising costs in Medicaid, Turnage says. "We are certainly not cutting health care costs," says Turnage.

The District expanded Medicaid coverage for adults earlier than most states and has more generous eligibility requirements than many states. "We have a very ambitious program," Turnage says, "and any extra dollars help."

Some states led by Democrats are using at least some of the money for other priorities.

In California, advocacy groups were angry that Gov. Jerry Brown planned to use some of the $381 million the state is saving in its children's coverage costs for other programs not connected to health care for children.

"The diversion of the CHIP dollars to backfill the general fund is unacceptable," wrote Anda Kuo, associate clinical professor at the University of California-San Francisco, and Kelly Hardy, senior managing director of health policy for Children Now, in a May 30 op-ed. "It's like stealing from a child's piggy bank."

Brown countered that he wants to devote part of the funds to additional Medicaid coverage for low-income adults and children. He also proposed an earned income tax credit to benefit lower-income families.

"If you look at the overall budget, some programs receiving increased funding will have a benefit to kids' health," says California Department of Finance Deputy Director for External Affairs H.D. Palmer.

Advocates were less upset after a budget deal added about $40 million in Medicaid funds for undocumented children.

In Alabama, the money is going into the general treasury fund. That means it could be spent on anything that the state funds except for education, which is financed through a separate account, says CHIP Director Cathy Caldwell. The federal government will pay all of Alabama's CHIP costs through fiscal 2017, so that the state no longer has to put in its annual share of about $47 million, Caldwell says.

"There are huge deficits so I have no doubt that legislators trying to pass the budget were thankful there was a little less of a request" from the CHIP program, she says. "I really doubt that money will go to expand coverage. It should provide a little bit of general fund relief."

Questioning Incentives

Alabama is one of the 11 states that will pay nothing for children's health coverage through fiscal 2017, along with Arizona, Arkansas, Georgia, Idaho, Kentucky, Mississippi, New Mexico, South Carolina, Utah and West Virginia. Neither will the District of Columbia.

Seven states will have 98 percent or more of costs paid by the federal government: Indiana, Michigan, Montana, Nevada, North Carolina, Oregon and Tennessee.

That could lead to a lack of accountability and scrutiny or the potential for misuse of funds, some advocates say. If a health insurer asks a state for a large increase in payment rates, will the state have an incentive to say no if the federal government is picking up almost all of the costs?

Similarly, a possible scandal involving CHIP funds could undermine support for the entire program when it comes up for reauthorization in 2017.

"There has never been an argument before that CHIP is not effective or efficient," says Ed Walz, a spokesman for First Focus. "If all of a sudden, we're having a Las Vegas vacation paid for out of CHIP funds, that'll be a very different reauthorization discussion than what we've had so far."

First Focus supported increasing the federal matching rate for CHIP this year somewhat above the normal levels, but preferred that all states keep sharing some costs.

Other children's advocates say that the increases are important. The program is credited with keeping the uninsured rate among children far lower than that of adults during recent difficult economic times.

"I don't see any downside to additional federal investments in a proven coverage program that has only helped kids," says Elisabeth Wright Burak, senior program director for the Georgetown Center for Children and Families. "At a time when we see the federal government passing many costs to states, it's refreshing to see additional federal investments in CHIP, giving states more ability to invest state dollars in other ways that can benefit kids. It may also mean preventing harmful cuts."

Before the law passed, officials in 18 states needed the money so much that they counted on the 23-percentage-point influx in planning for the state budget, according to a January survey by the National Academy for State Health Policy. At the time the survey was conducted, it wasn't clear when Congress would even extend the regular matching rate funds for CHIP, much less add support. Burak notes that since the law's passage, some states, including Nebraska and Ohio, are backing away from some Medicaid cuts that they initially proposed. That could be because they are saving money on CHIP.

After the law passed, a children's health coalition ran ads applauding lawmakers for providing extra money for CHIP. But just as pleased were the nation's governors and state legislators, who will control the state budget savings.

"This legislation provides much-needed certainty for states," the National Governors Association said in a statement when the House passed the bill.