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The SCHIP Challenge: Finding Funding

By Alex Wayne, CQ Staff

August 6, 2007 -- House and Senate Democrats brushed off a veto threat from President Bush and some fierce Republican opposition to pass ambitious expansions of children's health insurance coverage last week. But Democratic leaders face difficult negotiations ahead over how to pay for the enlarged program.

On Aug. 1, the House passed, 225–204, a bill that would expand the State Children's Health Insurance Program (SCHIP) by $47.4 billion over five years. The Congressional Budget Office (CBO) estimates that the extra spending would add 7.5 million uninsured children to the current 6 million covered under the program.

The Senate followed suit the next day, passing a narrower, $35 billion expansion on a 68–31 vote. The plan would provide coverage for an additional 6.1 million children.

The Senate measure relies on a 61-cents-per-pack increase in the federal cigarette tax to offset its costs, which is highly unpopular with some House Democrats. Conferees will have to tamp down resistance to the increase or find other savings, most likely from significant cuts to Medicare Advantage, a Republican-championed program in which private managed-care plans provide benefits to seniors in place of the government.

"We have to cover all of the kids who are eligible for SCHIP in this country and not enrolled, and we have to pay for it," said Colorado Democratic Rep. Diana DeGette. "Any creative suggestions would be welcomed."

Further complicating matters is a veto threat from Bush, who has characterized the Democratic measures as thinly veiled attempts to expand government-run health care. Bush has said SCHIP can be sustained with a $5 billion increase over five years, to $30 billion.

The senior Republican on the Senate Finance Committee, Charles E. Grassley of Iowa, said he planned to ask for a meeting with Bush to try to persuade him not to veto the bill. Many Republicans fear political backlash for opposing an SCHIP expansion but also are chagrined that the program has been used in some states to cover adults and children in families with incomes three or four times the federal poverty level.

Senate Minority Whip Trent Lott, R-Miss., acknowledged that a veto override is possible but only if negotiators accept the lower spending total in the Senate bill. "If it goes one iota above what's in [the Senate] bill, we will be able to sustain the veto," he said.

Lott also said Senate Republicans would block a formal conference from convening until there was an agreement on spending. "Grassley is going to hold the line pretty strong on this," Lott said.

SCHIP provides capped block grants to states in order to cover families not poor enough to qualify for Medicaid. Bush has supported it, vowing at the 2004 Republican National Convention to "lead an aggressive effort to enroll millions of poor children who are eligible but not signed up for the government's health insurance program."

However, the current showdown has evolved into both a test of fiscal discipline and a trial run for Democrats and Republicans to perfect health care messages before the 2008 elections.

In the House, Republicans forced a handful of roll call votes on procedural motions to slow the bill's progress before they won the concession of an extra hour of debate. Democratic leaders brought the bill (HR 3162) to the floor under a closed rule that didn't allow amendments and limited debate to two hours.

Republican Study Committee Chairman Jeb Hensarling of Texas said the delays were intended to draw attention to what he characterized as a sweeping expansion of government health care and Democrats' attempts to create a new entitlement program.

Democrats disagreed. "This is not an entitlement, this is a block grant set up by Newt Gingrich," said Democratic Rep. Frank Pallone Jr. of New Jersey, invoking the name of the former GOP Speaker from Georgia, who presided over the chamber when SCHIP was enacted in 1997.

Before the vote on passage, Republicans offered a motion to recommit the bill that would have scrapped Democratic provisions and replaced them with a one-year extension of the existing program. The House defeated the motion, 202–226.

Last-Minute Tweaks
House Democrats made several last-minute changes to the bill in an early-morning Rules Committee markup Aug. 1 in order to comply with pay-as-you-go budget rules.

To save $20.4 billion over 10 years, Democrats eliminated bonus payments to states for enrolling more children in SCHIP after five years. An additional $35.7 billion over 10 years would come from cuts in Medicare physician payments—cuts unlikely to ever take place. The bill actually would increase physician payments over the next two years.

The bill would eliminate the current Medicare payment formula, which uses a single formula to determine national payment rates. It would rely instead on a system that breaks payment calculations into six different medical areas, including preventive care, imaging procedures, and major medical procedures. Payment levels would be tied to economic growth, with preferences given to preventive and primary care.

Other offsets would come from minor changes to SCHIP, including the imposition of new age limits that would save $3.6 billion. Democrats also added a provision that would bar SCHIP payments to illegal immigrants.

But other financing mechanisms exposed rifts within the Democratic caucus. Eight Democrats voted against the House bill because it would increase cigarette taxes by 45 cents per pack, to 84 cents. Their ranks would almost certainly grow if Senate conferees prevail in enacting an even larger increase.

The holdout Democrats and many Republicans believe that tobacco-tax boosts are unwise because they rely on a declining source of revenue to fund a fast-growing government program. Beyond creating long-term budget problems, critics contend, a large tax increase will also cause tobacco consumption—and resulting revenues—to decline even faster.

Medicare Politics
Instead of a larger tobacco tax, House Democrats included in their bill a cut in spending for Medicare Advantage. Under the program, private health plans are paid about 12 percent more per beneficiary than traditional Medicare costs, according to CBO and the Medicare Payment Advisory Commission, which has recommended reducing the imbalance. The cuts in the House bill would raise $157 billion over 10 years—enough, with the tobacco-tax increase, to pay for both the SCHIP expansion and the reversal of the scheduled cut in Medicare reimbursements for doctors.

But Medicare Advantage is championed by Republicans, and the insurance industry is lobbying to preserve it. Several Republicans who voted for the Senate SCHIP bill, notably Gordon H. Smith of Oregon, say they will not vote for a compromise that includes Medicare Advantage cuts.

Negotiators also must decide whether to keep the Medicare provisions and SCHIP expansion linked. The American Medical Association is lobbying for the physician payment change. Nearly everyone in Congress seems to agree that the cut must be averted.

"The idea of linking these does make sense, and I haven't heard that the Senate would be unwilling to link them," said Pallone, the chairman of the Energy and Commerce Subcommittee on Health.

But that drags Medicare Advantage into the debate because reversing the physicians' payment cuts is expensive, costing $67 billion over 10 years, according to CBO. Lawmakers have had trouble identifying other cuts that would yield that kind of money, and further tax increases probably are not an option.

Senate Action
In the Senate, Democrats dispensed with several Republican attempts to modify the bill (S 1893), which was debated as a substitute to a House-passed tax measure (HR 976).

An amendment by Elizabeth Dole of North Carolina that would have created a new budget point of order against increases in excise taxes, such as tobacco taxes, failed, 32–64. Points of order are a procedural hurdle against legislation that require 60 votes in the Senate to waive.

An alternative SCHIP reauthorization offered in the form of an amendment by Lott and Minority Leader Mitch McConnell of Kentucky failed, 35–61. It would have expanded SCHIP to nearly $35 billion over the next five years, which they said would allow about 1.3 million more children to be covered by the program. It would be offset by reducing federal reimbursements for administration expenses in the program and by health insurance proposals in the bill, including a long-debated proposal to allow small businesses to band together across state lines to purchase health insurance plans.

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