FY 2005 Budget in Brief

Centers for Medicare & Medicaid Services

On this page:
CMS Summary
Medicare Modernization Act
Medicare
Medicaid
State Children's Health Insurance Program
SCHIP Outlays
Medicaid and SCHIP Proposals
State Grants and Demonstrations
Program Management

The FY 2005 budget request for the Centers for Medicare & Medicaid Services (CMS) is $482.1 billion in net outlays.  The request finances Medicare, Medicaid, the State Children's Health Insurance Program (SCHIP), the Health Care Fraud and Abuse Control Program (HCFAC), State insurance enforcement, and CMS operating costs.  This budget reflects an increase of $29.1 billion over FY 2004.

On December 8, 2003, President Bush signed the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA) into law.  This is the most significant overhaul of the Medicare program since its inception in 1965, adding a long overdue prescription drug benefit and expanded health choices for seniors.  A top priority for CMS and HHS will be the timely implementation of the sweeping changes in the law, starting with providing Medicare beneficiaries a discount prescription drug card by June 2004.

Building upon the success of the Health Insurance Flexibility and Accountability (HIFA) and Pharmacy Plus waivers, the Administration plans to work diligently with the Congress to develop a Medicaid modernization plan.  This plan would introduce more State flexibility and fiscal stability into the program. As under last year's proposal, States will have the option of receiving their SCHIP and Medicaid funding together in an allotment.  The allotment option requires States to provide a specified benefit package for current Medicaid beneficiaries whose coverage is mandated by law.

The budget also includes significant new efforts to extend services to the disabled and those in need of long–term care services through the New Freedom Initiative.  In addition, it provides assistance to vulnerable populations transitioning from welfare to work through the extension of the Transitional Medical Assistance Program.

Finally, the budget proposes to restrict the use of certain intergovernmental transfers and cap Federal payments to individual State and local providers. This will improve program integrity and help stem the tide of rising costs in the Medicaid program.

Medicare Modernization Act

On December 8, 2003, the President signed into law the historic Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA).  This Administration and Congress worked together to provide over 40 million Medicare beneficiaries with more choices in health care coverage and better health care benefits.  This law represents the most significant and sweeping expansion of the Medicare program since its enactment in 1965.  As the President said, this new law will ease the burden of high prescription drug costs on seniors and will give them the extra help they need with these costs.  MMA will strengthen and modernize Medicare while still providing beneficiaries with the option to remain in traditional Medicare. MMA creates a new Part D prescription drug benefit, allows for competition among health plans to foster innovation and flexibility in coverage, removes restrictions on Health Savings Accounts (HSA), offers regulatory relief, and requires an analysis of Medicare's potential long-term reliance on general tax-payer revenues.

Discount Drug Card

The MMA establishes a new Medicare approved prescription drug discount card program that will immediately help Medicare beneficiaries reduce their out–of–pocket spending on drugs.  All Medicare beneficiaries, except those who already have Medicaid drug coverage, will be able to enroll in a prescription drug discount card program that allows them to use a Medicare approved discount card in their local pharmacy. Seniors and individuals with disabilities could save on average 10 to 15 percent on their total drug costs, with savings of 25 percent or more off retail prices on individual prescriptions.  Beneficiaries can find comparative information about drug card sponsors through www.medicare.gov and 1–800–MEDICARE after April 2004.  Card enrollment begins as early as May 2004, and discounts and transitional assistance begin in June 2004.

Discount cards will help to reduce out-of-pocket drug costs until the Medicare drug benefit takes effect on January 1, 2006.  HHS estimates that the typical senior without drug coverage, who spends $1,285 annually on medicine, could save as much as $300 annually with their discount card.  Beneficiaries will pay no more than $30 annually in 2004 and 2005 to enroll.  Beneficiaries can also apply for transitional assistance (TA).  TA, for individuals whose income is less than $12,123 each year or for married couples whose income is less than $16,362 (based on 2003 Federal Poverty Levels), provides up to $600 per year for purchasing drugs. Medicare will cover the cost of the enrollment fee for these low-income cardholders.

Beneficiaries will have a choice of at least two Medicare approved cards, and they can change cards during an open enrollment period prior to 2005 or if they move or enroll in a Medicare managed care plan. Any company interested in providing a discount card must offer price reductions on at least one medication per category in more than 200 therapeutic categories of drugs.

Voluntary Prescription Drug Benefit

The Administration delivered on the promise to provide Medicare beneficiaries with prescription drug coverage.  MMA establishes a new voluntary prescription drug benefit under a new Medicare Part D.  The legislation implements many of the principles outlined in the President's Framework to Modernize and Improve Medicare.  It especially helps those with low incomes and those with high drug expenses. HHS places a high priority on educating Medicare beneficiaries about these new choices and improved  benefits.  HHS will publish the proposed rule implementing the drug benefit in calendar year 2004, and the final rule in calendar year 2005.
Beginning January 1, 2006, approximately 40.7 million Medicare beneficiaries who are entitled to Part A or enrolled in Part B will have access to prescription drug benefits under the new Part D.  Beneficiaries can choose between at least two qualifying private drug plans from which to receive their benefit.  The law provides for a government fallback plan for areas without at least two plan choices.

Current Medicare beneficiaries can enroll during an initial open enrollment period between November 2005 and May 2006.  For beneficiaries eligible for Medicare in the future, Part D enrollment will correspond to the enrollment period for Part B.  At enrollees’ option, Part D premiums may be paid directly to the prescription drug plan or their Medicare Advantage plan, deducted from the beneficiary's Social Security check, or paid through an electronic funds transfer. 

Beneficiaries can choose to enroll in a stand-alone private drug plan or a Medicare Advantage prescription drug plan to get their prescription drugs.  Federal subsidies will encourage plan participation and better enrollee benefits.  Plans will negotiate drug prices with manufacturers and provide these lower prices to beneficiaries.  Beneficiaries will receive monthly detailed explanations of their drug benefits from their plan. 

Beneficiaries will be able to get the types of drugs they need.  Although plans are permitted to use formularies, formularies have to meet statutory standards.  Formularies have to include drugs within each therapeutic category and class of covered Part D drugs, so beneficiaries keep their drug choices. And, beneficiaries can appeal to have a non-formulary drug covered, if their formulary does not make their preferred drug available and a doctor certifies the drug is necessary.

HHS will develop an electronic prescription program for Part D covered prescription drugs.  Electronic standards will reduce the number of prescribing errors that occur each year and protect Medicare beneficiaries against the possibility of medication errors.

State Effects

Under Part D of the MMA, States are relieved of a significant portion of the costs of providing pharmaceutical benefits to individuals eligible for both Medicare and Medicaid.  This relief is mitigated somewhat by a provision that mandates States maintain some percentage of the financial responsibility for providing drugs to these individuals.  State contributions will be determined by first calculating the per capita payment for dually eligible individuals. This figure will be multiplied by the number of fully dually eligible individuals in the State to calculate a Statewide total.   In 2005, States will be expected to pay 90 percent of this amount.  This percentage will be phased down to 75 percent by FY 2015, where it will remain thereafter.

In addition to this Maintenance of Effort provision, States will also be expected to participate in the eligibility determination process for the drug benefit.   For the Part D low–income drug benefit, eligibility will be determined by either the State Medicaid agency, with States receiving their regular matching funds for associated administrative costs, or by SSA, with additional funds authorized to cover new administrative costs.

The MMA also includes two other provisions that will effect State Medicaid programs. The first of these introduces significant changes to the Medicaid Disproportionate Share Hospital program (DSH). The first major change increases FY 2004 DSH allotments by 16 percent without regard to a current cap, which ensures that States will not draw down DSH money in excess of 12 percent of their total spending on medical assistance.  The second major provision changes the definition of low DSH States from States with DSH programs accounting for between 0 and 1 percent of their total Medicaid program, to States whose DSH programs represent 0 and 3 percent of total Medicaid spending.  These low DSH States will be given 16 percent increases in their DSH caps each fiscal year between 2004 and 2009. 

Finally, the MMA created a new program to assist States with paying for uncompensated medical care for undocumented aliens.  The law establishes an annual $250 million fund, which will be allotted among the States each year between FY 2005 and 2008.  Two-thirds of this money will be distributed based on the relative percentages of undocumented aliens in each State and the District of Columbia.  One third will be allotted among the six States with the largest number of undocumented alien apprehensions.  The amounts set aside for each State will not be dispersed through the State itself.  The law requires the Secretary to directly pay hospitals, doctors, and other providers for their otherwise uncompensated costs of providing emergency health care to undocumented aliens.

Medicare Advantage

The new law replaces Medicare+Choice with the Medicare Advantage program under Part C of Medicare. MMA changes how private plans will be paid in 2004 and thereafter.  MMA allows for plans to be compensated appropriately for the increasing costs of caring for Medicare beneficiaries.  Private plans will be able to use these enhanced payments to offer beneficiaries more generous coverage and to provide additional benefits that traditional Medicare may not.  For example, plans can provide Medicare beneficiaries with lower premiums, broader benefits, or an improved physician network.  With better compensation, more private plans will voluntarily enter the Medicare market and improve beneficiaries' plan choices.

Local managed care plans will continue to be offered on a county-wide basis.  Beginning in 2006, Medicare Advantage will also include coordinated care plans that offer both in- and out-of-network required services on a regional basis.  There will be at least 10 regions, but no more than 50.  Each regional plan must offer a maximum limit on out-of-pocket expenses and a unified deductible.  Also beginning in 2006, the Secretary will determine Medicare Advantage payment rates by comparing plan bids to a benchmark.  Plans will bid to provide benefits, and the Federal Government will pay the plans the amounts they bid.  If the plan's bid is below the benchmark, the beneficiary will receive 75 percent of the difference, either through additional benefits or lower cost-sharing.  If the Medicare Advantage plan's bid is above the benchmark, the beneficiary will pay the additional amount.  Beneficiaries in Medicare Advantage plans will not be required to enroll in the new prescription drug program, but beneficiaries can choose to receive an integrated benefit (medical and prescription drugs) through Medicare Advantage. 

Comparative Cost Adjustment Demonstration

The MMA authorizes a six year demonstration of direct competition between Medicare fee-for-service (FFS) and private plans beginning in 2010.  The demonstration will be conducted in Metropolitan Statistical Areas (MSA) with two local Medicare Advantage plans and local private plan participation of not less than 25 percent.  The Secretary will choose not more than six qualified MSAs to participate in the demonstration.  Medicare Advantage plans will continue to be paid what they bid, and traditional FFS and Medicare Advantage premiums will vary depending on plan and local FFS costs.  Low-income beneficiaries in the demonstration areas will be protected from premium increases, and premiums of FFS beneficiaries will not increase or decrease annually by more than 5 percent relative to the FFS Part B premium.

Fee-for-Service Providers

MMA includes numerous provisions affecting Medicare providers, including rural providers.  Following are highlights of these changes:

Rural Providers: For rural hospitals, MMA equalizes urban and rural standardized amounts under the inpatient hospital prospective payments system and reduces the labor-related share of the wage index from 71.1 percent to 62 percent.  In addition, the Disproportionate Share Hospital (DSH) payment adjustment is increased from 5.25 percent to 12 percent for qualified hospitals.  Rural hospitals with fewer than 100 beds will be protected from payment reductions associated with the outpatient prospective payment system for an additional two years.

For Critical Access Hospitals (CAHs), MMA increases their bed limit from 15 to 25, allows periodic interim payments, loosens rules on distinct part rehabilitation and psychiatric units, and increases reimbursement for services to 101 percent of reasonable costs. 

Physicians in newly established scarcity areas receive a 5 percent bonus payment.  Physicians in certain low-cost areas with geographic adjustment factors below one will receive increased payments that raise this factor to one, from 2004 to 2006.  Home health agencies in rural areas will receive a 5 percent increase in Medicare payments for one year starting April 1, 2004.  Ambulance providers receive a 2 percent increase in reimbursement for rural ground trips, and an increase in payment for ground ambulance trips over 50 miles.  Rural hospice providers are allowed more freedom to allow nurse practitioners to act as the attending physician for a beneficiary who elects hospice.

Inpatient Hospitals: For fiscal years 2005 through 2007, hospitals will receive the full market basket update if they submit 10 quality measures established by the Secretary.  If hospitals do not submit the quality measures in any of these years, they will receive an update of market basket minus 0.4 percentage points. 

Physicians: The physician conversion update factor for 2004 and 2005 will be 1.5 percent, rather than the –4.5 percent update originally scheduled for 2004.  Starting in 2003, the formula for calculating the sustainable growth rate (SGR) will be modified.  The GDP factor will now be based on a 10-year rolling average, replacing the current factor which measures the one year change from the preceding year. 

Skilled Nursing Facilities (SNFs): MMA increases the per diem payment amount by 128 percent for a SNF resident with AIDS, effective until the time the Secretary certifies that SNF case mix adjustment has been appropriately modified to cover the increased costs of caring for these residents.

Home Health Agencies:   Home health payments are increased by the full market basket during the last quarter of calendar year 2003 and the first quarter of 2004.  The update for the remainder of 2004, as well as 2005 and 2006, is the home health market basket increase minus 0.8 percentage points.

Durable Medical Equipment (DME): The payment update for most DME items and services is frozen from 2004 to 2008, or until competitive bidding is implemented.

Preventive Benefits

The MMA introduces a number of provisions that will expand preventive benefits coverage beginning January 1, 2005.  Beneficiaries whose Medicare Part B coverage begins on or after January 1, 2005, will be covered for an initial preventive physical examination within six months of enrollment.  This examination will include counseling or referral with respect to screening and preventive services such as pneumococcal, influenza, and hepatitis B vaccinations; screening mammography; screening pap smear and pelvic exam; prostate cancer screening; colorectal cancer screening; diabetes outpatient self-management services; bone mass measurement; glaucoma screening; medical nutrition therapy services; cardiovascular screening blood test; and diabetes screening test.

The diabetes screening test, only given to beneficiaries at risk for diabetes, will include a fasting plasma glucose test and other such tests approved by the Secretary.

The cardiovascular screening blood tests and the diabetes screening test do not have a deductible or co-pays (since Medicare pays 100 percent for clinical laboratory tests), so beneficiaries do not incur any cost.  This is an additional incentive for those with limited resources who might not otherwise access these benefits.

Also, screening and diagnostic mammography will be excluded from the outpatient prospective payment system and paid separately under the physician fee schedule.

Part B Cost Sharing

MMA increases monthly Part B premiums for beneficiaries with higher incomes beginning in January 2007. Prior to MMA, the Part B premium for all beneficiaries, regardless of income, was set at 25 percent of estimated program spending in a given year. Under MMA, individuals with incomes above $80,000 and married couples with incomes above $160,000 will be subject to higher monthly premium amounts.  The increases will be calculated on a sliding scale basis and phased in over a five year period.  The highest category on the sliding scale will be for individuals with incomes above $200,000 (or $400,000 for a married couple).

MMA also makes changes to the Medicare Part B deductible.  The deductible will remain $100 in 2004, increase to $110 in 2005, and in subsequent years, be indexed to inflation.  Specifically, starting in 2006, the deductible will be increased by the same annual percentage as the monthly Part B premium increase (i.e., essentially the growth rate in Medicare Part B program expenditures).

Regulatory Reform

MMA includes a number of administrative and operational reforms.  For example, regulatory reform provisions require the establishment of overpayment recovery plans in case of hardship; prohibit contractors from using extrapolation to determine overpayment amounts except under specific circumstances; describe the rights of providers when under audit by Medicare contractors; require the establishment of standard methodology to use when selecting a probe sample of claims for review; and prohibit a supplier or provider from paying a penalty resulting from adherence to guidelines.  In addition, MMA allows physicians to reassign payment for Medicare services to entities with which the physicians have an independent contractor arrangement.  Finally, under the new law, final regulations are to be published within three years, and all measures of a regulation are to be published as a proposed rule before final publication.

Contracting Reform

The MMA includes provisions that allow the Secretary to introduce greater competitiveness and flexibility to the Medicare contracting process. To ensure a sufficient number of private contractors to administer the program, the original law setting up Medicare provided prospective contractors with a number of beneficial provisions such as limiting the type of contractors, requiring cost contracts, and limiting competition for specific functions. The new law:

• Removes the distinction between Part A contractors and Part B contractors;
• Allows the Secretary to renew contracts annually for up to five years;
• Requires that all contracts must be re-competed at least every five years;
• Limits contractor liability; and
• Allows incentive payments to improve contractor performance.

Fraud and Abuse

MMA includes several provisions to combat health care fraud and abuse in the Medicare and other CMS programs. Highlights of these provisions are:

• Refinement of the average wholesale price (AWP) payments for Medicare's covered outpatient drugs provided in a doctor's office.
• Establishment of a competitive bidding program that would replace the current Medicare fee schedule payments for durable medical equipment (DME), enteral nutrition, and off-the-shelf orthotics. The competitive program will phase in all metropolitan statistical areas (MSA) over a three year period beginning in 2007.
• Development of quality and clinical standards for payment to DME suppliers.
• Implementation of a three-year pilot program in up to 10 States to conduct national and State background checks on workers in long-term care settings. The pilot program would identify efficient, effective, and economical processes for long term care facilities or providers to conduct background checks on employees with direct access to residents and patients.

Cost Containment/Long Term Financial Security

A provision in the new MMA will now require that annual reports of the Medicare Board of Trustees of the Hospital Insurance Trust Fund (Part A) and the Supplementary Medical Insurance Trust Fund (Part B) assess whether Medicare's "excess general revenue funding" exceeds 45 percent.  As defined in the law, excess general revenue funding is equal to Medicare's total outlays minus dedicated financing.  Dedicated financing includes Medicare payroll taxes; premiums for Part A, Part B, and Part D; transfers from the Railroad Retirement accounts; taxation of certain OASDI benefits; State transfers for Medicare coverage of beneficiaries who receive public assistance; and gifts.  The Trustees will be required to include the following information beginning in their 2005 annual report:

• General revenue Medicare growth projections as a percentage of the total Medicare outlays for each year within a seven-fiscal-year timeframe, and 10, 50, and 75 years after the fiscal year being reported;
• Financial analysis of the combined Medicare Part A and Part B trust funds if general Medicare revenue funding were limited to 45 percent of total Medicare outlays;
• A determination as to whether there is projected to be "excess general Medicare revenue funding" for any of the succeeding six fiscal years in their annual reports.  If there is an affirmed determination of excess general Medicare revenue funding for two consecutive annual reports, this will be treated as a funding warning for Medicare.  The President may then submit to Congress proposed legislation to respond to the warning;
• Comparisons with the growth trends for the gross domestic product, private health costs, national health expenditures, and other appropriate measures; and
• Expenditures and trends in expenditures under Part D.

The law requires the Medicare Trustees to issue a "warning" if general revenues are projected to exceed 45 percent of Medicare spending in a year within the next seven years.  If the Trustees issue such a warning in two consecutive years, the law provides special legislative conditions for the consideration of proposed legislation submitted by the President to address the excess general revenue funding.

Appeals Reform

MMA changes the Medicare fee–for–service appeals process. It requires the Social Security Administration (SSA) and HHS to develop and implement a plan for transferring the Medicare hearings function from SSA to HHS, while maintaining independence of the administrative law judges hearing the cases from CMS. MMA specifies that a plan for this transfer must be submitted to Congress and the GAO by April 1, 2004, and the transfer must occur between July 1 and October 1 of calendar year 2005.  MMA struck the statutory language that requires SSA ALJs to hear appeals of local coverage determinations. 

MMA also changes the requirements for presentation of evidence, notices, and the number of qualified independent contractors (QICs).  It reduces the number of QICs required by Section 521 of the Benefits Improvement and Protection Act of 2000 (BIPA) from at least 12 to at least four.  It requires providers and suppliers to present all evidence for an appeal at the reconsideration level. Previously, evidence could be presented at any stage of the appeals process.  MMA also provides for the use of beneficiaries' medical records in reconsiderations.

MMA increases the timeframes for decision-making at the lower levels of the appeals process to 60 days from 30.  It requires the dollar amounts in controversy to be adjusted annually, and the Secretary to establish a process to expedite access to judicial review for legal issues that cannot be resolved administratively. Lastly, the MMA requires the Secretary to establish a process for waiving disapproval of nurse-aide training programs if an imposed civil money penalty (CMP) is not related to quality of care.

Health Savings Accounts

MMA establishes Health Savings Accounts (HSAs).  HSAs allow individuals with high deductible plans (a deductible of at least $1,000 for individual plans and at least $2,000 for family plans) to contribute up to the lesser of the deductible amount or $2,600 for individuals and $5,150 for families in 2004 to a tax-advantaged account. The maximum contribution amount is indexed and increases each year. Individuals may withdraw money from their HSA on a tax free basis to pay for medical expenses below the deductible, as well as other qualified medical expenses such as prescription drugs, over the counter drugs, long-term care services, and COBRA insurance. Any money used for non-qualified medical expenses is taxable and subject to an additional 10 percent tax.

Medicare

Medicare provides health insurance to 41.6 million individuals who are either 65 or older, disabled, or suffer from end–stage renal disease (ESRD).  In FY 2005, spending on Medicare benefits will total $324.5 billion.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) represents the largest transformation of the Medicare program in a generation, adding a prescription drug benefit and expanded health care choices to the existing program. The four parts of Medicare are summarized in the Medicare Fact Sheet.

Medicare has not traditionally covered outpatient prescription drugs and long-term care. As a result, many beneficiaries have some form of supplemental insurance to fill Medicare's gaps.  The four major sources of supplemental coverage include: employer-sponsored benefits, a Medigap policy, Medicaid, and Medicare Advantage plans, the majority of which are HMOs.

Program Assessment Rating Tool (PART)

The Office of Management and Budget (OMB) developed the Program Assessment Rating Tool (PART) to evaluate programs in a systematic manner, using numeric scores that rate overall program effectiveness and highlight strengths and weaknesses.  In FY 2003, the Medicare program was evaluated.  Medicare was rated as "Moderately Effective" and found to be strong overall, but needed modernizing to reflect the evolution of health care since its inception in 1965. 

The Medicare Program PART summary identified three areas of improvement:

• Greater emphasis on sound program and financial managment;
• Legislative changes to modernize the benefit package to include prescription drug coverage and protection against catastrophic costs; and
• More effort to link Medicare payment to provider performance.

The passage of MMA addresses two of these items, enacting both a prescription drug benefit and contracting reform.

Health Care Fraud and Abuse Control Program (HCFAC)

The Health Insurance Portability and Accountability Act of 1996 (HIPAA), established the Health Care Fraud and Abuse Control (HCFAC) Program to:

• coordinate Federal, State, and Local law enforcement programs;
• conduct investigations, audits, and evaluations relating to the delivery of and payment for health care;
• facilitate enforcement of statutes applicable to health care fraud and abuse;
• provide for the modification and establishment of safe harbors and to issue advisory opinions and special fraud alerts; and
• provide for the reporting and disclosure of final adverse actions against health care providers, suppliers, or practitioners.

The HCFAC Program dedicates $1.07 billion from the Medicare Part A Trust Fund toward combating health care fraud and abuse. The money is allocated into three major parts: 1) $720 million for the Medicare Integrity Program (MIP); 2) $114 million to Federal Bureau of Investigation (FBI); and, 3) $240.6 million in "wedge" funds that are divided among the Department of Justice (DOJ), the HHS Inspector General, and other HHS agencies, including CMS, AoA, and the Office of General Counsel (OGC). The programs and projects financed by these funding streams are used to detect and prevent fraud, waste, and abuse through investigations and audits, educational activities, and data analysis.  Egregious cases of health care fraud are also prosecuted in the courts.  From 1997 to 2002, the HCFAC Program has returned approximately $4.9 billion to the Medicare Trust Fund.

The MIP activity in HCFAC provides funds for: medical review; benefits integrity work to identify and refer patterns of fraud to law enforcement; provider and HMO audits of cost reports; Medicare secondary payer activities; and provider education and training.  Total funding for MIP has been capped at $720 million since 2002.  For this investment, MIP is expected to save the Medicare Trust Funds $9.9 billion in 2005 through recoveries, claims denials, and accounts receivable, a 14:1 return on investment.

The FBI uses its $114 million allocation for health care fraud enforcement and investigations.  In addition, the FBI provides operational support for national initiatives focusing on pharmaceutical diversion, chiropractic fraud, medical clinics, and transportation providers. 

The remaining $240.6 million in wedge monies finance a variety of anti-fraud and abuse activities. DOJ uses its portion of the wedge for civil and criminal prosecutions of health care professionals and providers.  The HHS Inspector General uses its share to bring about judgements and settlements related to health care fraud and abuse and to work with CMS to develop and implement recommendations to correct systemic vulnerabilities detected during HHS/OIG evaluations and audits. The remaining wedge monies go to HHS and are used primarily for: Medicaid financial management oversight and data analysis projects to detect patterns of fraud, educational activities at AoA , and investigative and litigation support at OGC.

Medicare Error Rate

Medicare Integrity Program is the primary source of funds to lower the Medicare payment error rate.  The Department has lowered the Medicare payment error rate from 14 percent in FY 1996 to 5.8 percent in FY 2003, after adjusting for an unusually high non-response rate.  We have set a goal of further reducing the error rate to 4 percent by FY 2008.  Reducing the Medicare payment error rate is a major priority in the Department's effort to implement the President's Management Agenda.

FY 2003 was the first year that CMS was responsible for estimating the national Medicare error rate.  Prior to that time, the Office of the Inspector General (OIG) performed the national Medicare payment error rate.  The OIG used a sample size of approximately 6,000 claims each year to determine its estimate. 

CMS developed the Comprehensive Error-Rate Testing (CERT) and the Health Payment Medicare Program (HPMP) to estimate the Medicare payment error rate using a sample size of 140,000-170,000 claims.  Whereas, the OIG rate produced only one statistically significant number (the national error rate), CERT and HPMP provide contractor, provider type, and benefit service-specific error rates at statistically significant levels.  CERT allows CMS to see contractor level performance data that the agency can use as a tool to manage and correct payment error.

In its first year using CERT, CMS encountered some difficulties in estimating the error rate.  CMS received fewer responses from health care providers than OIG received in previous years.  Because lack of response equated with payment error, the CERT rate was considerably higher than the OIG's 6.3 percent rate from FY 2002.  We believe that the higher non-response rate was not a fair representation of payment error in the Medicare program. The contractor was asked to re-work their estimate to lower the non-response rate to a level comparable to previous years.  When this was done, the rate came down to 5.8 percent compared to the original statistically significant 9.8 percent.  CMS is in the process of  implementing improvements to the CERT survey methodology to ensure that the adjustments made this year will not be necessary in future estimates.

The Administration's health care fraud, waste, and abuse control efforts have made progress in protecting the Medicare Trust Funds.  Recent Medicare Trustee's reports have cited our health care fraud, waste, and abuse control efforts as a contributing factor in the slower Medicare spending growth experienced over the last several years.  We hope to bring similar success to the state-administered Medicaid and SCHIP programs as well.

Quality Improvement Organizations (QIO)

QIOs (previously Peer Review Organizations) were established by Title XI, Section 1151 of the Social Security Act, Part B, to serve the following functions:

• Improve the quality of care for beneficiaries by ensuring that professionally recognized standards of care are met;
• Enhance program integrity by ensuring that Medicare only pays for items that are reasonable and medically necessary; and
• Protect beneficiaries by addressing individual beneficiary's complaints, hospital–issued notices of noncoverage, and Emergency Medical Treatment and Labor Act (EMTALA) "dumping" violations.

QIOs are a central player in this Administration's efforts to improve the quality of care provided to Medicare beneficiaries.  Under their current three year funding plan, totaling $1.1 billion (see table below), QIOs are part of groundbreaking efforts underway in Medicare to promote public awareness of the quality of care delivered in nursing homes, hospitals, home health agencies, and physicians offices, and to assist providers seeking to improve on measures of quality.  These quality improvement efforts are essential to the Administration goals to modernize and strengthen the Medicare program.

In November 2002, HHS and CMS launched the national Nursing Home Quality Initiative (NHQI).  The initiative provides new comparative information to consumers and new resources to facilities all aimed at improving nursing home quality of care.  This ground breaking initiative was followed in the spring of 2003 with Phase I of Home Health Compare, which provides comparative information on 11 home health quality indicators for beneficiaries in eight demonstration States.

CMS is in the process of completing implementation of the Hospital Quality Initiative, which will provide comparative outcomes data on hospitals. To date, over 2,300 hospitals have pledged to join this voluntary effort.  With incentives built into the MMA, most hospitals are expected to participate. The results of these public information programs will be better informed consumers and providers better able to identify what they must do to improve quality.

On January 15, 2003, a CMS study published in the Journal of the American Medical Association showed that we are making important progress in improving health care quality.  The study shows that from 1998 to 2000, there has been across-the-board improvement in a series of health care quality measures tracked by QIOs.  For instance, the study shows that the percentage of diabetic patients screened for cholesterol problems rose from 56 percent to 74 percent and that the percentage of patients receiving beta-blockers at hospital discharge, which reduce complications in patients who have had a heart attack, rose from 72 percent to 79 percent.  Despite these improvements, the study reports that more than a quarter of Medicare beneficiaries still do not receive important services that could protect them from disease or prolong life.

Clinical Laboratory Improvement Amendments of 1988 (CLIA)

The Clinical Laboratory Improvement Amendments of 1988 (CLIA ‘88) expanded survey and certification of clinical laboratories from Medicare-participating and interstate commerce laboratories to all facilities testing human specimens for health purposes.  CLIA ‘88 also introduced user fees to finance survey and certification activities at clinical laboratories. User fees are credited to the Program Management account but are available until expended for CLIA activities.  CMS determines the workloads of each State survey agency by taking the total number of laboratories and subtracting waived laboratories, laboratories issued certificates of provider-performed microscopy, State-exempt laboratories, and accredited laboratories.

The CLIA program is fully operational, with 177,400 laboratories registered with CMS, 24 percent of which are subject to routine inspection (every 2 years) under the program.  The remainder are exempted.  Workload projections for the FY 2005-2006 cycle include 20,550 surveys of non-accredited laboratories, 802 State validation surveys of accredited laboratories, and approximately 1,520 follow-up surveys and complaint investigations.

Data support the contention that CLIA has improved the overall quality of laboratory testing in the nation. The number of quality deficiencies decreased approximately 40 percent from the first laboratory survey to the second, with further decreases in subsequent surveys.

Medicare Legislative Proposals

The CMS budget includes a net savings of $130 million in FY 2005 from two Medicare legislative proposals.  One proposal will eliminate the 15 month durable medical equipment (DME) rental option by requiring that continuous rentals be converted to purchase after 13 months.  This proposal eliminates access problems beneficiaries confront when DME suppliers move, sell their business, or go into bankruptcy and can no longer offer the DME rental to the beneficiary by converting rentals to purchases under a faster time frame.  It is also more cost effective for both beneficiaries and the Medicare program to purchase rather than rent DME for long periods of time due to the additional two months worth of rental payments and the cost of semi-annual maintenance fees.
The second proposal will allow CMS to use the Administration for Children and Families' quarterly wage data base to determine secondary payer status.  The quarterly wage data base contains employment and possible employer-sponsored health insurance data.  Accessing this data base will help CMS to more quickly identify instances where Medicare coverage is secondary to a beneficiary's (or their spouse's) employee health coverage, thereby reducing improper payments.  Both of these proposals are included in appropriations language in the budget request.

Medicare Trust Fund

Medicare Outlays

Medicaid

Medicaid is a jointly-funded, Federal-State program that provides medical assistance to certain low-income groups.  In FY 2005, approximately 43.6 million individuals, including children, the aged, blind, and/or disabled, and people who meet eligibility criteria under the old Aid to Families with Dependent Children (AFDC) program will be covered by Medicaid.  Additionally, many other individuals will receive Medicaid benefits through waivers and amended state plans with higher income eligibility limits.  Under current law, the Federal share of Medicaid outlays is expected to be about $183.2 billion in FY 2005.  This is a $6.1 billion (3.4 percent) increase over projected FY 2004 spending.

Background

Under Medicaid, State expenditures for medical assistance are matched by the Federal government using a formula based on per capita income in each State relative to the national average per capita income.  Federal matching rates for FY 2005 will range from 50 to 75 percent for medical assistance payments.  The average Federal matching rate is about 57 percent. In addition to medical assistance payments, the Medicaid appropriation funds the Vaccines for Children program and the Federal share of Medicaid State and local administrative costs.

Historically, eligibility for Medicaid has been based on qualifying under the cash assistance programs of AFDC or Supplemental Security Income (SSI).  With the creation of the Temporary Assistance for Needy Families (TANF) program in 1996 (which replaced AFDC) eligibility for Medicaid and cash assistance were de-linked.  Medicaid eligibility remains tied to AFDC program rules in place as of July 16, 1996.  All those who qualify under the 1996 AFDC rules and most SSI recipients, commonly referred to as the "categorically eligible," are covered under State Medicaid programs. States must cover two additional groups: 1) pregnant women and infants whose family income does not exceed 185 percent of the Federal poverty level; and 2) all children under the age of 19 living below the poverty level.

States have the option to cover some individuals not eligible under AFDC or SSI rules and may cover people at higher incomes by disregarding a portion of their incomes.  States may also cover "medically needy" individuals.  Such individuals meet the categorical eligibility criteria, but have too much income or too many resources to meet the financial criteria.

Generally, States are required to provide a core of 13 mandatory services to eligible needy recipients, including: inpatient and outpatient hospital care; health screening, diagnosis, and treatment for children; family planning; physician services; and nursing facility services to individuals over 21.  States may also elect to cover any of over 30 specified optional services, which include prescription drugs, clinic services, dental, eyeglasses, and services provided in intermediate care facilities for those with mental retardation.

Program Developments

Medicaid Growth:  Prescription drug spending, nursing home, community-based long-term care costs, and payments to health plans are significant contributors to growth in the Medicaid outlays. These expenditures are expected to continue to contribute to growth in future years. State programs providing "enhanced payments" to institutional providers have also played a significant role in driving up Medicaid costs at an accelerated rate.  According to State estimates, the fastest growing service category in the Medicaid program is prescription drugs.  States expect the prescription drug category, which includes the drug rebate offsets, to grow by $2.4 billion, or 13 percent, between FY 2004 and FY 2005.  The State-estimated increase for prescription drugs accounts for 41.2 percent of the total FY 2005 benefit growth.

Waivers:  States have sought waivers under section 1115 of the Social Security Act to expand health care coverage to low-income, uninsured populations and to test innovative approaches in health care service delivery.  Many of the demonstrations include the Temporary Assistance for Needy Families (TANF) and related populations, and some include the elderly and the disabled.  Although demonstrations vary greatly, most employ a common overall approach: expanding the use of managed care for the Medicaid population.

To date, CMS has approved 27 Statewide comprehensive health care reform demonstrations in 23 States.  CMS has also approved two sub-State health reform demonstrations and 12 demonstrations specifically related to family planning.

Health Insurance Flexibility and Accountability (HIFA):  In August 2001, President Bush announced the Health Insurance Flexibility and Accountability (HIFA) demonstration, a new section 1115 initiative.  HIFA enables States to use Medicaid and SCHIP funds in concert with private insurance options to expand coverage to low-income, uninsured individuals, with a focus on those with incomes at or below 200 percent of the Federal Poverty Level.

A more in-depth discussion of HIFA waivers is included in the SCHIP section. 

Pharmacy Plus:  The Administration developed the Pharmacy Plus waivers under section 1115 to help low-income seniors and people with disabilities who need assistance with prescription drug costs. Pharmacy Plus is directed to Medicare beneficiaries and other low-income seniors and people with disabilities with income of 200 percent or less of the Federal Poverty Level (FPL) who are not eligible for full Medicaid benefits.  Four states have approved Pharmacy Plus demonstrations (Florida, Illinois, South Carolina, and Wisconsin) and Maryland has revised its Statewide 1115 demonstration to add a pharmacy benefit. 

The Administration is working to address how the enactment of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) will effect the management of the Pharmacy Plus initiative.

Medicaid and SCHIP Reform

The past year has witnessed increasing dialogue on the subject of Medicaid and SCHIP modernization.  States have continued to express concerns about the complexity of administering the Medicaid program.  Federal regulation of the Medicaid program is an increasing burden on the ability of the States to address the unique needs of their low-income uninsured residents. The Secretary is encouraged by the current discussion and will look for new and innovative ways to address these concerns in the coming year.  Building on the foundation of last year's Medicaid and SCHIP modernization proposal, the Secretary will work with Congress to pass an option for States to receive Medicaid and SCHIP funds in the form of flexible allotments.  This strategy will provide States with the greatest potential for innovation and stability of funding.

Medicaid Legislative Proposals

New Freedom Initiative Demonstrations: The President's Budget reproposes three demonstration projects under the New Freedom Initiative. Each promotes at-home care as an alternative to institutionalization. The demonstrations are:

• Respite services to the caregivers of disabled adults.
• Respite services to caregivers of children with severe disabilities.
• Home and community-based services for children currently residing in psychiatric residential treatment facilities.

These three demonstrations will cost $13 million in FY 2005, and $256 million over five years.  They will be funded out of mandatory Medicaid dollars.

There is a fourth demonstration project that addresses shortages of community direct care workers.  This project is funded out of the CMS Research, Demonstrations, and Evaluation budget and costs $2.9 million in FY 2005.

Money Follows the Individual Rebalancing Demonstration: The Administration is also committed to promoting the use of at-home care as an alternative to nursing homes for elderly and disabled Americans.  Under the "Money Follows the Individual" demonstration, at-home care combines cost effective benefits with increased independence and quality of life for the beneficiary.

In this five-year demonstration project, Federal grant funds would pay for home and community-based waiver services for individuals who move from institutions into at-home care.  These costs would be funded at a matching rate of 100 percent for the first year of each individual's participation. As a condition of receiving the enhanced match, the participating State would agree to continue care after the first year at the regular Medicaid matching rates and to reduce institutional long–term care. This demonstration will be have no cost in FY 2005 and will cost $500 million over five years.

Living with Independence, Freedom, and Equality (LIFE) Accounts: Under this proposal, States would have the option of allowing individuals who self-direct all of their community-based long-term care services to accumulate savings and still retain eligibility for Medicaid and Supplemental Security Income (SSI).  Under current law, beneficiaries are discouraged from accumulating savings because it could jeopardize their eligibility for Medicaid or SSI.  This legislative proposal is estimated to be cost neutral.

Spousal Exemption: This proposal extends eligibility for Medicaid benefits to the spouses of individuals with a disability individuals entering the workforce.  The lack of spousal coverage is a significant impediment to employment for many low-income individuals with a disability, and this exemption smooths the road to independence.  The Federal government will invest $17 million in this program for FY 2005 and $102 million over five years.

Presumptive Eligibility for Community-Based Services: This proposal will establish a State Medicaid option allowing presumptive eligibility for institutionally-qualified individuals who are discharged from hospitals into the community. This will increase the number of Medicaid beneficiaries who receive home and community-based services rather than institutional care.   This proposal will have no effect on the Medicaid budget.

Extension and Simplification of Transitional Medical Assistance (TMA):  TMA was created to provide health coverage for former welfare recipients after they enter the workforce. TMA allows families to remain eligible for Medicaid for up to 12 months after they lose welfare benefits due to earnings from work.  This provision was enacted along with welfare reform and was scheduled to sunset in September 2001.  Congress has extended this program under PL 108-89 through March 31, 2004.

In addition to this extension, the 2005 President's Budget includes proposals to simplify eligibility for TMA benefits to the low-income working poor.  There are three provisions to the proposal. 

• States will be given the option to offer 12 months of continuous coverage to eligible participants.
• States may waive income reporting requirements for beneficiaries.
• States that offer Medicaid eligibility for children and families with incomes up to 185 percent of poverty may waive their TMA program requirements.

This proposal will cost $558 million in FY 2005 and $3.24 billion over five years.

Partnership for Long Term Care: This proposal would eliminate the legislative prohibition on developing more Partnership programs. The Partnership for Long Term Care (LTC) was formulated to explore alternatives to current long-term care financing by blending public and private insurance.  Four States (California, Connecticut, Indiana, and New York) currently have these partnerships whereby private insurance is used to cover the initial cost of LTC.  Consumers who purchase Partnership-approved insurance policies can become eligible for Medicaid services after their private insurance is utilized, without divesting all their assets as is typically required to meet Medicaid eligibility criteria.   This proposal has no costs associated with it.

Extension of Premium Assistance to Qualified Individuals (QI): Under the QI program, Medicaid pays Medicare Part B premiums for Medicare beneficiaries with incomes between 120 and 135 percent of poverty. Currently Part B premiums cost about $799 a year.  The Administration recognizes the economic burden these premiums place on low-income beneficiaries and proposes to extend the QI benefit through FY 2005.  States will continue to be fully reimbursed for the cost of the program.  This extension is estimated to cost $136 million in FY 2005.

Disability Determination Proposal:  The Social Security Administration has proposed a management improvement that has a Medicaid impact. The proposal requires that 50 percent of all favorable adult disability benefit decisions be reviewed to verify eligibility.  The program will save money in the Medicaid program by insuring that only legally disabled individuals are eligible for Medicaid services due to their SSI status. The proposal saves the Medicaid program $3 million in FY 2005.

Improvements to the Vaccines for Children (VFC) Program:   VFC is a CDC administered, Medicaid funded program that administers free vaccines to eligible children.  The Administration is proposing two legislative changes to the program.  First, the President's Budget proposes to lift the price cap on the tetanus-diphtheria booster, thereby increasing access for VFC eligible children.  Second, the President's Budget would allow under-insured children to receive VFC administered inoculations at State and local health departments in addition to Federally Qualified Health Centers and Rural Health Centers.  These proposals will cost an additional $165 million in FY 2005. 

Medicaid Program Integrity: Throughout the life of the Medicaid program, States have used intergovernmental transfers (IGT) as a means of inappropriately drawing down inordinate amounts of Federal Medicaid funding.  Past State funding mechanisms that manipulated the Medicaid Upper Payment Limit, Disproportionate Share Hospital payments, and provider taxes and donations would have been impossible without the use of intergovernmental transfers.  The FY 2005 President's Budget proposes to further improve the fiscal integrity of Medicaid by curbing IGTs that are in place solely to undermine the statutorily determined Federal matching rate.  The budget proposes to cap Medicaid payments to individual State and local government providers at the cost of providing services to Medicaid beneficiaries and restrict the use of ceratin intergovernmental transfers.  This proposal will save the Federal Government $1.5 billion in FY 2005 and $9.6 billion over five years.

Child Support Enforcement Proposals: The Administration for Children and Families (ACF) has proposed two changes that have an effect on the Medicaid baseline.  Both proposals affect the Child Support Enforcement program.  The first proposal would allow States to seek medical child support for children from both the custodial and non-custodial parent.  States would also be able to enforce these support orders against the custodial parent.  ACF expects this change to increase children's access to private sources of health care. 

The second legislative change mandates that all States review child support orders for Temporary Assistance for Needy Families (TANF) families every three years.  Under current law, States review child support orders every three years if instructed to do so by the custodial parent or at the State's own discretion.  This change would mandate that States undertake these reviews.  ACF believes that required reviews would result in the discovery of increased levels of private health insurance among non-custodial parents.  This increased access to private health insurance would lead to a decrease in Medicaid costs among TANF families.

These two proposals will be budget neutral in FY 2005, but will save the Federal Government $50 million over five years.

Refugee and Asylee Exemption Extension: 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 SSI until they have resided in the country for five years or have obtained citizenship.  Refugees and asylees on SSI are currently exempted from this ban for the first seven years they reside in the United States.  Procedural delays and asylee waiting lists have created a situation in which seven years may not be enough for these groups of immigrants to gain American citizenship.  To assure that refugees and asylees have ample time to complete the citizenship process, the President's Budget proposes extending the current seven year exemption to eight years. The policy would continue through 2007.  The proposal will cost the Federal Government $29 million in FY 2005 and $132 million over five years.

Temporary Assistance for Needy Families (TANF) Cost Allocation Adjustment: This FY 2005 appropriations language proposal will reduce the Federal reimbursement for administrative costs of Medicaid by $300 million to reflect the share assumed in the Temporary Assistance for Needy Families (TANF) block grant and will prohibit States from using TANF funds to pay these costs during FY 2005.  In the past, costs common to AFDC, Medicaid and Food Stamps were charged to the former AFDC program and included in each State's TANF base year.  This proposal allows the recovery of amounts that were funded in the TANF block grant that States now charge to Medicaid.  This one time reduction will eliminate the dual payment to States for certain administrative costs in the administration of the Medicaid program that was created by the TANF welfare reform legislation.  This proposal will be in effect for only FY 2005, and will save approximately $300 million for the Federal Government.

Reduce the Enhanced Federal Matching Rate for Information and Claims Management Systems: Under current law States receive a 90 percent matching rate on all expenditures related to the design, development, and implementation of Medicaid claims processing and information retrieval systems.  A new proposal, included in the FY 2005 Medicaid appropriations request,  would reduce this matching rate to 75 percent, which is consistent with other enhanced matching rates.  This one-year change will save the Federal Government approximately $80 million in FY 2005. 

Medicaid Outlays

Medicaid Enrollment

State Children's Health Insurance Program

The Balanced Budget Act of 1997 (BBA) created the State Children's Health Insurance Program (SCHIP) under Title XXI of the Social Security Act.

SCHIP is a partnership between Federal and State governments that helps provide children with the health insurance coverage they need.  The program improves the access to health care and the qualify of life for millions of vulnerable children under 19 years of age.  SCHIP reaches children whose families have incomes too high to qualify for Medicaid, but too low to afford private health insurance.

The number of uninsured children has decreased since the inception of SCHIP.  In fact, even in the recent period of State budget constraints, the uninsurance rate among children continued to decline, from 10.5 percent in FY 2002 to 9.4 percent in the first half of FY 2003.

Title XXI appropriated almost $40 billion to the program over 10 years (FY 1998 through FY 2007).  States with an approved SCHIP plan are eligible to receive an enhanced Federal matching rate, which ranges from 65 to 85 percent, drawn from a capped allotment.

States have a high degree of flexibility in designing their programs.  They can implement SCHIP by:

• expanding Medicaid,
• creating a new, non-Medicaid Title XXI separate State program, or
• a combination of both approaches.

Generally, Medicaid-ineligible, uninsured children, who are under 19 years old, in families below 200 percent of the Federal Poverty Level (FPL), can receive SCHIP benefits.

Implementation and Enrollment

Every State, the District of Columbia, and all five Territories have approved SCHIP plans.  As of January 2004, States have received approval for 19 Medicaid expansion programs, 18 separate programs, 19 combination programs, and 186 State plan amendments.

Today, 40 States cover children in families with incomes up to 200 percent of the FPL.  Of these States, 13 cover children above that level.  Five of the States cover children up to 300 percent of the FPL, and one State covers children up to 350 percent of the FPL.

During FY 2003, preliminary estimates show 5.8 million children enrolled in SCHIP.  This represents an increase of half a million, or 9 percent, over FY 2002 enrollment.

SCHIP Performance

When SCHIP began in 1997, CMS adopted a goal of enrolling five million children by FY 2005.  Specifically, CMS set annual target goals for FYs 2000 through 2002 to enroll at least 1 million new children in SCHIP and Medicaid per year.  CMS has exceeded these enrollment goals every year.

The Office of Management and Budget (OMB) developed the Program Assessment Rating Tool (PART) to evaluate programs in a systematic manner, rating program effectiveness and highlighting strengths and weaknesses. SCHIP was initially evaluated by OMB in the FY 2004 cycle and received a score of 71.  It was then reassessed in the FY 2005 cycle and received a score of 66 and a rating of "Adequate."   As a result of OMB's findings, CMS developed an SCHIP Action Plan to further strengthen the program.

SCHIP Reports and Evaluations

Congress required several SCHIP evaluations in statute.  Title XXI required States to assess the operation of their SCHIP State plans and report to the Secretary by January 1 of each fiscal year.  The statute also directed each State to submit to the Secretary State evaluation reports by March 31, 2000.  These reports are available on the Centers for Medicare & Medicaid  Services (CMS) website.  As required by the statute, the Secretary submitted a report on the States' evaluations, which was made available to Congress and the public in December 2002.  In addition to this report to Congress, CMS has planned future evaluations to examine the SCHIP program in greater detail.

The Balanced Budget Refinement Act of 1999 (BBRA) also required HHS to conduct an independent evaluation of 10 States.  The interim evaluation report was submitted to Congress in February 2003.  A final report is expected to be presented to Congress in 2004.

BBRA also directed the Secretary, through the Inspector General, to evaluate SCHIP every three years.  The OIG is instructed to evaluate 1) State compliance with the requirement that Medicaid-eligible children are not enrolled in SCHIP, and 2) State progress made in reducing the number of uninsured children.  The Office of Inspector General (OIG) released two reports in February 2001 that fulfill these requirements.  To satisfy the OIG's requirement to submit these evaluations every three years, the OIG has completed the first round of studies and will publish its report in accordance with the BBRA mandate sometime this year.

As directed by BBRA, the Comptroller General submitted a report to Congress monitoring these OIG audits.  The Comptroller General's report suggests that the OIG expand the study to include a more diverse sample of States.  The scope of the OIG follow-up studies is expanded to more comprehensively assess the SCHIP program by analyzing a broader array of States.

SCHIP Waivers

The requirements of Federal law and regulations can be waived by the Department of Health and Human Services (HHS) to give States the programmatic flexibility to increase health insurance coverage and encourage innovation in their SCHIP programs.  Waivers allow States to improve children's coverage and the quality of services for children.  Using section 1115 waivers, States can more effectively tailor their programs to meet local needs and can experiment with new approaches to providing health care services to SCHIP recipients. 

As of January 2004, SCHIP waivers were approved for Maryland, Minnesota (2), New Jersey, New Mexico (2), New York, Ohio, Rhode Island (2), and Wisconsin.  These Section 1115 waivers provide health insurance to uninsured children, their parents, and pregnant women.

States can also use a new section 1115 approach, the Health Insurance Flexibility and Accountability (HIFA) waivers, to develop comprehensive insurance coverage for individuals at twice the Federal poverty level and below, using SCHIP and Medicaid funds.
Since December 2001, the Administration has approved eight HIFA demonstration waivers that affected SCHIP, in Arizona, California, Colorado, Illinois, Michigan, New Mexico, New Jersey, and Oregon.   These demonstration waivers target vulnerable, uninsured populations, such as pregnant women, parents and children on Medicaid and SCHIP, and other adults with incomes less than twice the Federal Poverty Level.

Recent Legislation

On August 15, 2003, President Bush signed P.L. 108-74.  The law restores $1.2 billion in FY 1998 and FY 1999 SCHIP  funds, and makes them available to States until September 30, 2004.  The law also extends $2.2 billion in FYs 2000 and 2001 SCHIP funds and revises the rule for redistributing the unspent funds from those allotments. For the FYs 2000 and 2001 allotments, the law allows States that do not spend their entire allotment within the three-year period of availability to keep half of those respective year's unspent amounts.  The other half would be redistributed to States that have spent their entire amount of the respective year's allotments.  The law also extends the availability of funds from the FY 2000 allotments through September 30, 2004, and the availability of the FY 2001 allotment through September 30, 2005. 

The law also gives some relief to States that expanded their Medicaid programs to cover additional, low-income children prior to the enactment of SCHIP.  These States are given the option to use up to 20 percent of any available SCHIP allotments from FYs 1998, 1999, 2000, or 2001 to pay for certain Medicaid expenditures.  Only Medicaid expenditures for individuals under age 19 whose family income exceeds 150 percent of the Federal poverty level qualify under this provision.

Under P.L. 108-74, Connecticut, Minnesota, New Hampshire, Tennessee, Vermont, Washington, and Wisconsin are considered "qualifying" States and can use these SCHIP allotments for certain Medicaid expenditures.  Subsequently, P.L. 108-127 was passed, which defines Hawaii, Maryland, New Mexico, and Rhode Island as "qualifying" States.

Legislative Proposals

Special Enrollment Period in Group Market for Medicaid/SCHIP Eligibles: This legislative proposal would make it easier for Medicaid and SCHIP beneficiaries to enroll in private health insurance, by making eligibility for Medicaid and SCHIP a trigger for private health insurance enrollment outside the plan's open season.  This proposal will help States implement premium assistance programs in Medicaid and SCHIP.

Please see the Medicaid section for additional proposals that affect SCHIP.

SCHIP Outlays

Medicaid and SCHIP Proposals