Medicaid and SCHIP: FY2007 Budget Issues

Medicaid and SCHIP: FY2007 Budget Issues
Updated December 28, 2006
April Grady
Analyst in Social Legislation
Domestic Social Policy Division
Jean Hearne and Elicia J. Herz
Specialists in Social Legislation
Domestic Social Policy Division

Medicaid and SCHIP: FY2007 Budget Issues
Summary
Each year, the President is required to submit a comprehensive federal budget
proposal to Congress no later than the first Monday in February. Once it is
submitted, the Congressional Budget Office (CBO) analyzes the proposal using its
own economic assumptions and estimation techniques. Then, the House and Senate
Budget Committees each develop a budget resolution after reviewing the President’s
budget, the views of other committees, and information from CBO. Differences
between the houses are supposed to be resolved by April 15, but this deadline is
rarely met. Although it is not binding, the resolution provides a framework for
subsequent legislative action on the budget (e.g., annual appropriations bills).
The President’s FY2007 budget contains a number of proposals that would
affect Medicaid and the State Children’s Health Insurance Program (SCHIP). Some
are program expansions, and others are designed to reduce federal spending. While
certain proposals would require legislative action, others would be implemented
administratively (e.g., via regulatory changes, issuance of program guidance, etc.).
On March 9, 2006, the Senate Budget Committee reported a budget resolution,
S.Con.Res. 83, which was subsequently amended and passed by the Senate on March
16. The resolution did not include reconciliation instructions for the Senate Finance
Committee, which has jurisdiction over Medicaid and SCHIP. It did include a
deficit-neutral reserve fund for the uninsured and funding for four of the President’s
Medicaid and SCHIP proposals.
On March 29, 2006, the House Budget Committee reported its own budget
resolution, H.Con.Res. 376, which was subsequently amended and passed by the
House on May 18. The resolution did not include reconciliation instructions for the
House Energy and Commerce Committee, which has jurisdiction over Medicaid and
SCHIP. Its spending levels for Medicaid and SCHIP are based on CBO’s baseline
projections under current law and policies, with no reduction in Medicaid assumed.
Although no agreement was reached by the House and Senate on a FY2007
budget resolution, current law spending for Medicaid and SCHIP is unaffected. As
entitlement programs, their spending levels are based on the underlying benefit and
eligibility criteria established in law (in the case of SCHIP, these criteria include a
statutory annual funding cap). However, legislation that would increase Medicaid
or SCHIP spending above current law could encounter procedural roadblocks in the
House or Senate if funding is not assumed in a budget resolution or in a “deeming
resolution.” The annual appropriations process also provides an opportunity for
Congress to place limitations on the availability of federal funds for specified
Medicaid and SCHIP activities.
Before the 109th Congress adjourned, it passed two bills — H.R. 6111 and H.R.
6164 — that addressed a variety of Medicaid and SCHIP issues, including some of
the proposals in the President’s FY2007 budget. This report will be updated to
reflect relevant activity until the President’s FY2008 budget is released.

Contents
In troduction ......................................................1
Medicaid and SCHIP in the President’s FY2007 Budget...................1
Legislative Versus Administrative Proposals........................2
Medicaid: Transitional Medical Assistance.........................4
Medicaid: Vaccines for Children.................................4
Medicaid: Expand Third-Party Liability............................5
Medicaid: Reduce Targeted Case Management Match................6
Medicaid: Amend Drug Rebate Formula...........................7
Medicaid: Restructure Pharmacy Reimbursement....................7
Medicaid: Optional Managed Formulary for Prescription Drugs.........8
Medicaid: Administrative Cost Allocation..........................9
Medicaid: Refugee Exemption Extension.........................10
Medicaid: Eliminate Pay and Chase for Pharmacy...................10
Medicaid: Phase Down Provider Tax.............................11
Medicaid: Issue Provider Tax Regulation..........................11
Medicaid: Cap Government Providers............................11
Medicaid: Stricter Reimbursement Policies
for Rehabilitation Services..................................12
Medicaid: Eliminate School-Based Administration
and Transportation........................................13
Medicaid: Clarify DSH Provisions in Regulation....................14
SCHIP: Modify Redistribution to Address 2007 Shortfalls............15
Medicaid and SCHIP: HIPAA Modifications.......................16
Medicaid and SCHIP: Cover the Kids............................17
Health Care Fraud and Abuse Control Account.....................18
Congressional Action..............................................18
List of Tables
Table 1. Cost (Savings) of Medicaid and SCHIP Proposals
in the President’s FY2007 Budget.................................3
Table 2. CRS Staff Contact Information
by Medicaid and SCHIP Topic Area..............................20

Medicaid and SCHIP:
FY2007 Budget Issues
Introduction
Each year, the President is required to submit a comprehensive federal budget
proposal to Congress no later than the first Monday in February. Once it is
submitted, the Congressional Budget Office (CBO) analyzes the proposal using its
own economic assumptions and estimation techniques. Then, the House and Senate
Budget Committees each develop a budget resolution after reviewing the President’s
budget, the views of other committees, and information from CBO. Differences
between the houses are supposed to be resolved by April 15, but this deadline is
rarely met. Although it is not binding, the resolution provides a framework for
subsequent legislative action on the budget (e.g., annual appropriations bills).
This report provides information on Medicaid and State Children’s Health
Insurance Program (SCHIP) budget issues for FY2007. It will be updated to reflect
relevant activity until the President’s FY2008 budget is released.
Medicaid and SCHIP
in the President’s FY2007 Budget
The President’s FY2007 budget contains a number of proposals that would
affect Medicaid and SCHIP. Some are program expansions, and others are designed
to reduce federal spending. For each of the proposals, this report provides:
^!background information;
^!a description of the proposal based on available information;¹ and
^!a list of relevant Congressional Research Service (CRS) reports.
The proposals generally are presented in the order in which they appear in the
Department of Health and Human Services’ (HHS) Fiscal Year 2007 Budget in Brief.
The description of each proposal includes HHS and CBO estimates of its cost or

¹ Sources include Department of Health and Human Services (HHS), Fiscal Year 2007
Budget in Brief, available at [http://www.hhs.gov/budget/07budget/2007BudgetInBrief.pdf];
HHS, Centers for Medicare and Medicaid Services, Fiscal Year 2007 Justification of
Estimates for Appropriations Committees; Office of Management and Budget, Budget of the
United States Government, Fiscal Year 2007, available at [http://www.whitehouse.gov/
omb/budget/fy2007]. CBO cost estimates are from Preliminary Analysis of the President’s
Budget Request for 2007 (Mar. 3, 2005), available at [http://www.cbo.gov/showdoc.cfm?
index=7055&sequence=0&from= 7].

savings in FY2007 and over the FY2007-FY2011 period. These estimates are
summarized in Table 1. CRS staff contact information by Medicaid and SCHIP
topic area is provided in Table 2, at the end of the report.
Legislative Versus Administrative Proposals
As shown in Table 1, some of the President’s proposals would require
legislative action, while others would be implemented administratively (e.g., via
regulatory changes, issuance of program guidance, etc.).
In their analyses of the President’s budget, both CBO and executive branch
agencies such as HHS and the Office of Management and Budget (OMB) provide
baseline (current law) estimates of Medicaid and SCHIP spending along with
estimated costs and savings of proposed changes. However, CBO and the executive
branch differ in their treatment of legislative and administrative proposals.
In executive branch documents describing the President’s budget,
implementation of proposed administrative changes is assumed in estimates of
baseline Medicaid and SCHIP spending, and estimates for legislative proposals are
presented separately.² In general, CBO only adjusts its baseline estimates to account
for administrative changes as they are implemented — rather than as they are
proposed — and only provides separate estimates for legislative proposals. For this
reason and others, CBO and executive branch estimates of Medicaid and SCHIP
spending will differ.
Among the administrative proposals in the President’s FY2007 budget, two
have received widespread attention — limiting the extent to which states may tax
certain health care providers to obtain additional federal Medicaid dollars, and a plan
to cap Medicaid payments to government providers to no more than the cost of
furnishing services. In May and June of 2006, respectively, members of the House
and Senate sent separate letters to HHS Secretary Leavitt urging him to not
implement changes to Medicaid via administrative action. Both letters cited the³
importance of review and input from Congress in modifying Medicaid. As
described later, before adjourning, the 109th Congress passed legislation (H.R. 6111)
that prevents the President’s provider tax proposal from being implemented.
The Congress also passed legislation to address transitional medical assistance
(H.R. 6111) and FY2007 SCHIP shortfalls (H.R. 6164), two issues for which
legislative proposals were included in the President’s FY2007 budget.

² For a description of adjustments made to arrive at baseline FY2007 Medicaid expenditures,
see HHS, Centers for Medicare and Medicaid Services, Fiscal Year 2007 Justification of
Estimates for Appropriations Committees, pp. 138-145.
³ See CQ HealthBeat News, GOP Lawmakers Warn Leavitt of Medicaid Cuts in President’s
Budget Proposal, May 18, 2006, and CQ HealthBeat News, Senators Warn Administration
Against Cutting Medicaid Payments on Its Own, June 30, 2006.

Table 1. Cost (Savings) of Medicaid and SCHIP Proposals
in the President’s FY2007 Budget
^O^u^t^l^a^y^s^{in m}^illio^ns
^HHS^es^ti^m^a^te^{CBO es}^ti^m^a^te
^FY^2007-^FY^2007-
^Prop^os^al^FY²⁰⁰⁷^FY²⁰¹¹^FY²⁰⁰⁷^FY²⁰¹¹
^Medi^cai^d⁽^$1,487)^($14,015)^($948)^($4,545)
^L^e^gⁱ^s^l^atⁱ^v^{e propos}^al^s⁽^$158)^($1,772)^($948)^($4,545)
^T^r^an^sitioⁿ^a^{l m}^e^dⁱ^{cal assistan}^{ce (}^M^ed^icaid^$180^$360^$129^$526
^im^pact)
^Vaccin^e^s^f^o^{r C}^h^ildren^$140^$700^$115^$715
^Ex^p^aⁿ^d^th^ir^d^p^a^r^t^y^liab^ility^a^($90)^($525)^($105)^($265)
^R^e^du^{ce t}^a^rg^et^{ed cas}^{e m}^aⁿ^a^g^e^m^eⁿ^t^m^a^t^c^h⁽^$208)^($1,187)^($250)^($1,485)
^A^m^en^{d dru}^g^rebat^e^f^o^rm^u^l^a^$⁰^$⁰^$⁰^$⁰
^R^e^s^t^ru^ct^u^r^{e ph}^arm^acy^rei^m^bu^rs^em^en^t⁽^$130)^($1,285)^($275)^($2,325)
^Op^tioⁿ^a^{l m}^aⁿ^a^g^e^d^f^o^r^m^u^l^ar^y^f^o^r^p^r^escr^ip^tioⁿ^($15)^($177)^($10)^($200)
^d^r^ugs
^A^d^mⁱⁿⁱ^s^t^ratⁱ^v^{e cos}^t^al^l^o^catⁱ^oⁿ⁽^$280)^($1,770)^($280)^($1,770)
^R^e^f^u^g^{ee ex}^em^ptⁱ^oⁿ^ex^t^eⁿ^sⁱ^oⁿ^$42^$134^$5^$17
^Health^Iⁿ^su^r^aⁿ^{ce P}^o^r^t^ab^ility^an^d^$0^$0^—^—
^A^cco^uⁿ^t^ab^ility^A^c^{t m}^o^dⁱ^fⁱ^catioⁿ^s
^Modi^f^y^S^C^H^I^{P redi}^s^t^ri^bu^tⁱ^oⁿ^t^o^addres^s^—^—^($290)^($235)
^F^Y^{2007 s}^h^ort^f^al^l^s^(Medi^cai^{d i}^m^pact⁾
^C^o^v^e^{r t}^h^{e K}ⁱ^ds^(Medi^cai^{d i}^m^pact⁾^$203^$1,978^$13^$477
^A^d^mⁱⁿⁱ^s^t^ratⁱ^v^{e propos}^al^s^b^($1,329)^($12,243)^—^—
^Elⁱ^mⁱⁿ^at^{e pay}^an^{d ch}^as^{e f}^o^{r ph}^arm^acy^($105)^($430)^—^—
^Ph^as^{e dow}ⁿ^provⁱ^d^{er t}^a^x^$⁰⁽^$2,070)^—^—
^I^ssu^{e p}^r^o^v^id^er^tax^r^e^g^u^l^atioⁿ^$⁰^$⁰^—^—
^C^a^{p g}^o^v^e^rn^m^eⁿ^t^provⁱ^d^ers⁽^$384)^($3,812)^—^—
^Strⁱ^cter^r^e^im^b^u^r^s^em^en^{t f}^o^r^r^e^h^a^b^ilitativ^e^($225)^($2,286)^—^—
^s^e^rv^ices
^Elimⁱⁿ^{ate s}^c^h^ool-^b^as^{ed adm}ⁱⁿⁱ^s^t^ration^an^d^($615)^($3,645)^—^—
^tr^an^sp^o^r^tatioⁿ
^C^l^ari^f^y^di^s^p^roportⁱ^oⁿ^a^t^e^s^h^{are h}^o^s^pⁱ^t^a^l^$0^$0^—^—
^p^r^o^v^isioⁿ^sⁱⁿ^r^e^g^u^l^atioⁿ
^S^C^H^I^P^$704^$440^$570^$483
^L^e^gⁱ^s^l^atⁱ^v^{e propos}^al^s^$704^$440^$570^$483
^T^r^an^sitioⁿ^a^{l m}^e^dⁱ^{cal assistan}^{ce (}^S^CHI^P^—^—^($3)^($3)
^im^pact)
^Modi^f^y^S^C^H^I^{P redi}^s^t^ri^bu^tⁱ^oⁿ^t^o^addres^s^$635^$110^$570^$460
^F^Y^{2007 s}^h^ort^f^al^l^s^(S^C^H^{IP i}^m^pact⁾
^Health^Iⁿ^su^r^aⁿ^{ce P}^o^r^t^ab^ility^an^d^$0^$0^—^—
^A^cco^uⁿ^t^ab^ility^A^c^{t m}^o^dⁱ^fⁱ^catioⁿ^s
^C^o^v^e^{r t}^h^{e K}ⁱ^ds^(S^C^H^{IP i}^m^pact⁾^$69^$330^$3^$26
^T^o^t^a^l^Medi^cai^{d an}^{d S}^C^H^I^P⁽^$783)^($13,575)^($378)^($4,062)
^Health^C^a^{re Frau}^{d an}^{d A}^b^u^s^{e C}^oⁿ^t^{rol accou}ⁿ^t^$10^$26^—^—
⁽^M^e^dⁱ^c^aⁱ^d^aⁿ^d^SCH^I^P^fi^na^ncⁱ^a^l^m^a^na^ge^m^e^nt⁾
^Source:^Departm^eⁿ^t^of^Health^an^{d Hu}^m^aⁿ^Serv^ices^,^Fi^s^c^al^Y^e^ar^{2007 Budget}ⁱⁿ^Brⁱ^e^f^{, av}^{ailable at}
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^P^r^e^lⁱ^mⁱⁿ^a^r^y^Aⁿ^a^l^y^sⁱ^s^o^f^t^h^e^P^r^e^sⁱ^d^eⁿ^t^’^s^Budget^Re^q^u^e^s^t^f^o^r²⁰⁰⁷^{(Mar. 3, 2005), av}^ai^l^a^bl^{e at}
^[^h^t^t^p^:^/^/^www.^c^b^o^.^g^o^v^/^s^h^o^w^d^o^c^.^c^f^m^?ⁱⁿ^d^e^x⁼^7055&^s^e^qu^en^ce=0&^f^r^om^=7].

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Medicaid: Transitional Medical Assistance
Background. States are required to continue Medicaid benefits for certain
low-income families who would otherwise lose coverage because of changes in their
income. This continuation of benefits is known as transitional medical assistance
(TMA). Federal law permanently requires four months of TMA for families who
lose Medicaid eligibility due to increased child or spousal support collections. It also
permanently requires four months of TMA for families who lose Medicaid eligibility
due to an increase in earned income or hours of employment.
However, Congress expanded work-related TMA benefits in 1988, requiring
states to provide at least six, and up to 12, months of TMA coverage to families
losing Medicaid eligibility due to increased hours of work or income from
employment, as well as to families who lose eligibility due to the loss of a
time-limited earned income disregard (such disregards allow families to qualify for
Medicaid at higher income levels for a set period of time). Congress has acted on
numerous occasions to extend these expanded TMA requirements (which are
outlined in Section 1925 of the Social Security Act) beyond their original sunset date
of September 30, 1998. They are currently set to expire on December 31, 2006.
Proposal. The President’s budget seeks legislation to extend expanded TMA
requirements through September 30, 2007. HHS estimates that the proposal would
cost Medicaid $180 million in FY2007, and $360 million over the FY2007-FY2011
period (the budgetary effects extend beyond FY2007 because families are still
entitled to up to 12 months of TMA if they qualify on or before the expiration date).
CBO estimates that the proposal would cost Medicaid $129 million in FY2007, and
$526 million over the FY2007-FY2011 period. CBO also estimates that the proposal
would save SCHIP $3 million in both FY2007 and over the FY2007-FY2011 period.
Congressional Action. Before adjourning, the 109th Congress passed H.R.

6111, which extends expanded TMA requirements through June 30, 2007.

Reports. See CRS Report RL31698, Transitional Medical Assistance (TMA)
Under Medicaid, by April Grady.
Medicaid: Vaccines for Children
Background. The Vaccines for Children (VFC) program is funded by federal
Medicaid appropriations and administered by the Centers for Disease Control and
Prevention (CDC). Under Section 1928 of the Social Security Act, children who are

(1) Medicaid recipients, (2) uninsured, (3) American Indians or Alaska Natives, or
(4) “underinsured” because their health insurance does not cover qualified pediatric
immunizations are entitled to receive VFC vaccines free of charge. Currently,
children in the first three categories may receive VFC vaccines from any
program-registered provider (as defined in Section 1928(c) of the Social Security
Act), while underinsured children may only receive VFC vaccines at federally
qualified health centers (FQHCs) or rural health clinics.
In 2002, there were approximately 42,000 active VFC provider sites (30,000
private and 12,000 public).⁴ In 2000, an estimated 57% of children receiving VFC
vaccines were eligible because they were Medicaid recipients. Another 36%
receiving VFC vaccines were uninsured, while 5% were underinsured and 2% were
American Indians or Alaska Natives.⁵
Proposal. The President’s budget seeks legislation to improve vaccine access
by allowing underinsured children to receive VFC vaccines at state and local health
clinics, rather than only at FQHCs and rural health clinics. HHS estimates that the
proposal would cost $140 million in FY2007, and $700 million over the
FY2007-FY2011 period. CBO estimates that the proposal would cost $115 million
in FY2007, and $715 million over the FY2007-FY2011 period.
Reports. For general information on FQHCs and rural health clinics, see CRS
Report RL32046, Federal Health Centers Program, by Sharon Kearney Coleman.
Medicaid: Expand Third-Party Liability
Background. Third-party liability (TPL) refers to the legal obligation of third
parties — individuals, entities, or programs — to pay all or part of the expenditures
for medical assistance furnished under Medicaid. In general, federal law requires
Medicaid to be the payer of last resort, meaning that all other available third parties
must meet their legal obligation to pay claims before the Medicaid program pays for
the care of an individual.
States are required to take all reasonable measures to ascertain the legal liability
of third parties to pay for care and services available under the state Medicaid plan.
If a state has determined that probable liability exists at the time a claim for
reimbursement is filed, it generally must reject the claim and return it to the provider
for a determination of the amount of third-party liability (referred to as “cost
avoidance”). If probable liability has not been established or the third party is not
available to pay the individual’s medical expenses, the state must pay the claim and
then attempt to recover the amount paid (referred to as “pay and chase”).
States are generally required to cost avoid claims unless they have an approved
waiver that allows them to use the pay-and-chase method. However, there are two

⁴ Centers for Disease Control and Prevention, VFC Program Data, available at
[ h t t p : / / www.c d c . go v/ ni p/ vf c / s t _i mmz_pr oj / d a t a / da t a .ht m] .
⁵ Institute of Medicine, Calling the Shots: Immunization Finance Policies and Practices
(Washington: National Academy Press, 2000), pp. 77-85.

statutory exceptions to this rule. In the case of prenatal and preventive pediatric care,
states are required to use pay and chase. In the case of a Medicaid beneficiary whose
parent provides medical support (e.g., health insurance coverage via an employer) as
part of a child support order being enforced by the state, the state must use pay and
chase if a provider has not been paid under the medical support arrangement within

30 days.

In some cases, a Medicaid beneficiary may be required to reimburse the state for
Medicaid expenses paid on his or her behalf. To facilitate such reimbursement, the
state may place a lien on the Medicaid beneficiary’s property. With certain
exceptions, federal law generally prohibits states from imposing Medicaid liens on
the property of living beneficiaries. In contrast, federal law permits Medicaid liens
on the estates of deceased beneficiaries in a wider variety of situations.
Proposal. The President’s budget seeks three legislative changes. The first
would require providers to bill third parties for prenatal and preventive pediatric care
services and wait at least 90 days before billing Medicaid. The second would require
providers to bill third parties in the case of medical support provided via a child
support order and wait at least 90 days before billing Medicaid. The third would
explicitly permit states to use liens against liability settlements to recover Medicaid
amounts paid on behalf of beneficiaries. HHS estimates that the proposal would save
$90 million in FY2007, and $525 million over the FY2007-FY2011 period. CBO
estimates that the first two parts of the proposal would save $105 million in FY2007,
and $265 million over the FY2007-FY2011 period (CBO noted in its preliminary
analysis that it did not have enough information to estimate the third part).
Reports. Currently, no other CRS reports address this topic.
Medicaid: Reduce Targeted Case Management Match
Background. Under current law, case management is an optional benefit under
the Medicaid state plan that assists Medicaid beneficiaries in gaining access to
needed medical, social, educational and other services. The term “targeted case
management” refers to situations in which these services are not provided statewide
to all Medicaid beneficiaries but rather are provided only to specific classes of
individuals (e.g., those with AIDS, tuberculosis, chronic physical or mental illness,
developmental disabilities, or children in foster care) or persons who reside in a
specific area. Since case management is not an administrative activity, the federal
government matches payments for such services at the rate applicable to Medicaid
benefits. This rate ranges from 50% to 83% (statutory upper boundary) depending
on the state. In FY2006, 12 states had a federal matching rate for benefits equal to

50%.

Proposal. The President’s budget seeks legislation to change the
reimbursement level for targeted case management to the 50% matching rate that
states currently receive for most Medicaid administrative costs. HHS estimates that
the proposal would save $208 million in FY2007, and $1.187 billion over the
FY2007-FY2011 period. CBO estimates that the proposal would save $250 million
in FY2007, and $1.485 billion over the FY2007-FY2011 period.

Reports. For general information on Medicaid administrative costs, see CRS
Report RS22101, State Medicaid Program Administration: A Brief Overview, by
April Grady.
Medicaid: Amend Drug Rebate Formula
Background. Under Medicaid, drug manufacturers that wish to have their
drugs available for Medicaid enrollees are required to enter into rebate agreements
with the Secretary of HHS, on behalf of the states. Under the agreements,
pharmaceutical manufacturers must provide state Medicaid programs with rebates on
drugs paid on behalf of Medicaid beneficiaries. The formulas used to compute the
rebates are intended to ensure that Medicaid pays the lowest price that the
manufacturers offer for the drugs. Rebate calculations depend on the type of drug.
For single source and innovator multiple source drugs, basic rebate amounts are
determined by comparing the average manufacturer price (AMP) for a drug (the
average price paid by wholesalers) to the “best price,” which is the lowest price
offered by the manufacturer in the same period to any wholesaler, retailer, nonprofit,
or public entity. The basic rebate is the greater of 15.1% of the AMP or the
difference between the AMP and the best price. Additional rebates are required if the
weighted average prices for all of a given manufacturer’s single source and innovator
multiple source drugs rise faster than inflation. For non-innovator multiple source
drugs, basic rebates are equal to 11% of the AMP.
Proposal. The President’s budget seeks legislation to eliminate the “best price”
from the rebate formula for single source and innovator multiple source drugs,
changing the best price-based formula to a flat rebate. This change is intended to be
made in a budget neutral manner. HHS explanatory materials describe the proposal
as a way to simplify drug rebate calculations and allow private purchasers to
negotiate lower drug prices. HHS estimates that the proposal would have no cost
impact in FY2007 or over the FY2007-FY2011 period. CBO estimates that the
proposal would have no cost impact in FY2007 or over the FY2007-FY2011 period.
Reports. For a general background on Medicaid prescription drug coverage and
pricing including a description of drug rebates, see CRS Report RL30726,
Prescription Drug Coverage Under Medicaid, by Jean Hearne.
Medicaid: Restructure Pharmacy Reimbursement
Background. Under current law, state Medicaid programs set the prices paid
to pharmacies for Medicaid outpatient drugs. Federal reimbursements for those
drugs, however, are limited to a federal upper limit (FUL). The FUL that applies to
drugs available from multiple sources (generic drugs, for the most part) is calculated
by the Centers for Medicare and Medicaid Services (CMS) to be equal to 150% of
the lowest published average wholesale price (AWP) for the least costly therapeutic
equivalent. The upper limit that applies to brand-name and other drugs is equal to
the acquisition cost as estimated by the states. Recently, the President signed the
Deficit Reduction Act of 2005 (DRA 2005) which will change the FUL formula for
multiple source drugs. Beginning January 1, 2007, the FUL for these drugs will be

equal to 250% of the average manufacturer’s price (AMP, the average price paid by
wholesalers to manufacturers).
Proposal. The President’s budget seeks legislation that would build on changes
made by DRA 2005 to achieve additional savings in the Medicaid program. The
proposal would reduce the FULs on multiple source drugs from 250% of the AMP
to 150% of the AMP. HHS estimates that the proposal would save $130 million in
FY2007, and $1.285 billion over the FY2007-FY2011 period. CBO estimates that
the proposal would save $275 million in FY2007, and $2.325 billion over the
FY2007-FY2011 period.
Reports. For more information on the Medicaid provisions of DRA 2005, see
CRS Report RL33131, Budget Reconciliation FY2006: Medicaid, Medicare, and
State Children’s Health Insurance Program (SCHIP) Provisions, by Evelyne P.
Baumrucker, et al. and CRS Report RL33251, Side-by-Side Comparison of Medicare,
Medicaid, and SCHIP Provisions in the Deficit Reduction Act of 2005, by Karen
Tritz, et al. Additional background information on Medicaid prescription drugs can
be found in CRS Report RL30726, Prescription Drug Coverage Under Medicaid, by
Jean Hearne.
Medicaid: Optional Managed
Formulary for Prescription Drugs
Background. Federal statute allows state Medicaid programs to establish
formularies, or lists of preferred pharmaceuticals to be made available to Medicaid
beneficiaries. When health care insurers or providers cover only those drugs on the
list and deny payment for others, the list is referred to as a “closed formulary.”
Medicaid formularies are seldom as restrictive as the closed formularies found in the
private market for insurance because of two requirements: (1) states are required to
provide any non-formulary drug (with the exception of drugs in specific categories,
described below) that is specifically requested and approved through a prior
authorization process, and (2) states are required to cover all drugs offered by
manufacturers entering into rebate agreements with the Secretary of HHS.
States, on the other hand, are permitted to exclude certain categories of drug
products from Medicaid coverage. These include drugs used: (a) to treat anorexia,
weight loss or weight gain; (b) to promote fertility; (c) for cosmetic purposes or hair
growth; (d) for the relief of coughs and colds; (e) for smoking cessation; and (f)
prescription vitamins and mineral products (except prenatal vitamins and fluoride
preparations; (g) non-prescription drugs; (h) barbiturates; (i) benzodiazepines; and
(j) drugs requiring tests or monitoring that can only be provided by the drug
manufacturer. Formularies may also exclude a drug for which there is no significant
therapeutic advantage over other drugs that are included in the formularies as long
as there is a written explanation of the reason for its exclusion and the explanation
is available to the public. As of January 1, 2006, federal law also prohibits federal
Medicaid funds from being used to pay for drugs for the treatment of sexual or
erectile dysfunction.

Proposal. The President’s budget seeks legislation to allow states to use private
sector management techniques to leverage greater discounts through negotiations
with drug manufacturers. Supporting material describes these management
techniques as common cost control tools for private insurers. No other description
of the management techniques is provided. HHS estimates that the proposal would
save $15 million in FY2007, and $177 million over the FY2007-FY2011 period.
CBO estimates that the proposal would save $10 million in FY2007, and $200
million over the FY2007-FY2011 period.
Reports. For a general background on Medicaid prescription drug benefits,
formularies, and other cost control mechanisms used in administering those benefits,
see CRS Report RL30726, Prescription Drug Coverage Under Medicaid, by Jean
Hearne.
Medicaid: Administrative Cost Allocation
Background. Because of the overlap in eligible populations, states often
undertake administrative activities that benefit more than one program. Under the
former Aid to Families with Dependent Children (AFDC) cash welfare program,
AFDC and Medicaid program eligibility were linked, and many AFDC families also
qualified for food stamps. As a result, states often collected necessary information
for all three programs during a single eligibility interview or performed other shared
administrative tasks and charged the full amount of the cost to AFDC as a matter of
convenience. Since the federal government reimbursed states for 50% of
administrative expenditures for all three programs, total federal spending was not
affected by the way in which states allocated the programs’ common administrative
costs.
When Congress replaced AFDC with the Temporary Assistance for Needy
Families (TANF) block grant program in 1996, the 50% federal match for
expenditures related to cash welfare assistance ended and the automatic link between
cash welfare and Medicaid eligibility was severed. Later, HHS clarified that states
are required to allocate common administrative costs for TANF, Medicaid, and food
stamps based on the relative benefits derived by each program. A remaining issue
of controversy stems from the fact that TANF block grants are calculated in part on
the basis of pre-1996 federal welfare spending, including any amounts received by
states as reimbursement for common administrative costs. As a result, TANF block
grants are higher in many states than they would be if common administrative costs
attributable to Medicaid and food stamps were excluded from block grant
calculations. To compensate, Congress has permanently reduced federal
reimbursement for food stamp administrative costs in most states by a flat dollar
amount that reflects the administrative costs attributable to food stamps that are
included in each state’s TANF block grant (the annual reductions total nearly $200
million). Congress has not reduced federal reimbursement for Medicaid
administrative costs in a similar manner.
Proposal. The President’s budget seeks legislation to recoup Medicaid
administrative costs assumed in states’ TANF block grants. HHS estimates that the
proposal would save $280 million in FY2007, and $1.770 billion over the FY2007-

FY2011 period. CBO estimates that the proposal would save $280 million in
FY2007, and $1.770 billion over the FY2007-FY2011 period.
Reports. See CRS Report RS22101, State Medicaid Program Administration:
A Brief Overview, by April Grady.
Medicaid: Refugee Exemption Extension
Background. 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 Supplemental Security Income (SSI) benefits — and thus, SSI-related
Medicaid — until they have resided in the country for five years or have obtained
citizenship. Refugees and asylees are currently exempted from this ban for the first
seven years they reside in the United States.
Proposal. The President’s budget seeks legislation to extend the exemption for
refugees and asylees from seven years to eight years, allowing additional time for
individuals to complete the citizenship process without losing SSI and SSI-related
Medicaid eligibility. HHS estimates that the proposal would cost $42 million in
FY2007, and $134 million over the FY2007-FY2011 period. CBO estimates that the
proposal would cost $5 million in FY2007, and $17 million over the FY2007-
FY2011 period.
Reports. For general background information, see CRS Report RL31269,
Refugee Admissions and Resettlement Policy, by Andorra Bruno; CRS Report
RL31630, Federal Funding for Unauthorized Aliens’ Emergency Medical Expenses,
by Alison M. Siskin; and CRS Report RL31114, Noncitizen Eligibility for Major
Federal Public Assistance Programs: Policies and Legislation, by Ruth Wasem.
Medicaid: Eliminate Pay and Chase for Pharmacy
Background. As described earlier (under the “expand third party liability”
proposal), if a state has determined that probable third party liability exists at the time
a claim for reimbursement is filed, it generally must reject the claim and return it to
the provider for a determination of the amount of third party liability (referred to as
“cost avoidance”). If probable liability has not been established or the third party is
not available to pay the individual’s medical expenses, the state must pay the claim
and then attempt to recover the amount paid (referred to as “pay and chase”). States
are generally required to cost avoid claims unless they have an approved waiver that
allows them to use the pay and chase method.
Proposal. The President’s budget would, through administrative action, require
states to use cost avoidance by eliminating the pay and chase waiver option for
pharmacy claims. HHS estimates that the proposal would save $105 million in
FY2007, and $430 million over the FY2007-FY2011 period. CBO did not provide
an estimate for the proposal (see earlier discussion under “Legislative Versus
Administrative Proposals”).
Reports. Currently, no other CRS reports address this topic.

Medicaid: Phase Down Provider Tax
Background. Under federal law and regulations, a state’s ability to use
provider-specific taxes to fund its state share of Medicaid expenditures is limited.
If states establish provider-specific taxes, those taxes generally cannot exceed 25%
of the state (or non-federal) share of Medicaid expenditures and the state cannot
provide a guarantee to the providers that the taxes will be returned to them.
However, if the taxes returned to a provider are less than 6% of the provider’s
revenues (a ceiling created in regulation by HHS), the prohibition on guaranteeing
the return of tax funds is not violated. As a result, a state could impose a provider
tax of 6% of revenues, return those revenues to the provider in the form of a
Medicaid “payment,” and receive a federal match for those amounts. In effect, the
state has temporarily borrowed funds from the provider for the purpose of inflating
federal matching funds.
Proposal. The President’s budget seeks a regulatory change to phase down the
allowable provider tax rate from 6% to 3%. HHS estimates that the proposal would
have no budget impact in FY2007, and would save $2.070 billion over the
FY2007-FY2011 period. CBO did not provide an estimate for the proposal (see
earlier discussion under “Legislative Versus Administrative Proposals”).
Congressional Action. Before adjourning, the 109th Congress passed H.R.
6111, which prevents the President’s provider tax proposal from being implemented
via administrative action. H.R. 6111 fixed the provider tax ceiling in statute at 6%,
except for the period January 1, 2008-September 31, 2011, during which the rate is
fixed at 5.5%.
Reports. For background information on provider taxes, see CRS Report

97-483, Medicaid Disproportionate Share Payments, by Jean Hearne.

Medicaid: Issue Provider Tax Regulation
Background. See the “phase down provider tax” proposal above.
Proposal. The President’s budget seeks to clarify, through regulation, existing
policies used to determine whether or not provider taxes comply with statute and
regulations. HHS estimates that the proposal would have no cost impact in FY2007
or over the FY2007-FY2011 period. CBO did not provide an estimate for the
proposal (see earlier discussion under “Legislative Versus Administrative
Proposals”).
Reports. For background information on provider taxes, see CRS Report

97-483, Medicaid Disproportionate Share Payments, by Jean Hearne.

Medicaid: Cap Government Providers
Background. Aggregate Medicaid payments to specific groups of institutional
providers (e.g., hospitals and nursing facilities) cannot exceed a reasonable estimate
of what would have been paid under Medicare payment principles. This is called the

Medicaid upper payment limit (UPL) rule. In many states, Medicare payment rates
for hospital and nursing home care are higher than corresponding Medicaid payment
rates. The UPL based on Medicare payment principles has enabled some states to
draw down additional federal dollars that exceed what they would have received
based on Medicaid payment rates. These additional funds are paid to government
providers which are sometimes required by states to transfer all or a portion of the
extra payments received (i.e., some or all of the difference between the Medicare and
Medicaid payment rates) back to the state through an intergovernmental transfer
(IGT). Instead of financing more or improved Medicaid services, in some cases
states have used the additional federal dollars for non-health services, or to make up
part of the state share of Medicaid costs to draw down another round of federal
dollars.
During 2000-2002, Congress and the Clinton and Bush Administrations revised
UPL rules by changing permissible accounting methods used to claim federal
matching payments. These changes significantly reduced the excess federal dollars
states received under approved UPL plans that involved IGTs. However, these
reforms did not eliminate all such excess payments because no changes were made
to the Medicaid UPL standard which remains tied to the Medicare payment rate, nor
to federal statute or regulations governing IGTs. Administration officials have taken
additional steps to curb what they have identified as improper state financing
mechanisms, especially certain intergovernmental transfers. In late 2003, CMS
began requesting detailed information regarding the sources of the state share of
Medicaid costs from states applying for Medicaid waivers and submitting Medicaid
state plan amendments. In some cases, these proposals were modified to minimize
the use of improper IGTs (i.e., IGTs that use “recycling mechanisms” under which
payments to providers are returned to the state, artificially inflating the federal
matching rate).
Proposal. The President’s budget would, through administrative action: (1)
recover federal payments resulting from improper IGTs and (2) cap payments to
government providers to no more than the cost of providing services to Medicaid
beneficiaries, rather than to Medicare payment principles. HHS estimates that the
proposal would save $384 million in FY2007, and $3.812 billion over the FY2007-
FY2011 period. CBO did not provide an estimate for the proposal (see earlier
discussion under “Legislative Versus Administrative Proposals”).
Reports. See CRS Report RL31021, Medicaid Upper Payment Limits and
Intergovernmental Transfers: Current Issues and Recent Regulatory and Legislative
Action, by Elicia J. Herz.
Medicaid: Stricter Reimbursement
Policies for Rehabilitation Services
Background. Since the inception of Medicaid in 1965, states have been
authorized to cover “other diagnostic, screening, preventive, or rehabilitative

services” as an optional Medicaid service.⁶ In subsequent legislation (OBRA 90, P.L.
101-508), Congress clarified the benefit as “including any medical or remedial
service (provided in a facility, a home, or other setting) recommended by a physician
or other licensed practitioner of the healing arts within the scope of their practice
under state law, for the maximum reduction of physical or mental disability and
restoration of an individual to the best possible functional level.” The rehabilitation
benefit allows states to cover a broad range of services to individuals with various
types of conditions and disabilities. Under the rehabilitation benefit, states often
cover ongoing mental health and/or substance abuse services, early intervention
services for children with disabilities, rehabilitation for individuals with physical
disabilities, school-based rehabilitation, and services for children in foster care and
juvenile justice programs.
Both the Government Accountability Office (GAO) and the HHS Office of the
Inspector General (OIG) have reported that the Medicaid rehabilitation benefit has
been used by some states to bill Medicaid for activities that are not allowable as
rehabilitation services, and/or to pay rehabilitation providers using methods that did
not meet the statutory requirement for being “efficient and economical.”⁷ ⁸ Further,
CMS financial management officials reported to GAO that they believed that states
“were inappropriately filing claims for services that were the responsibility of other
state programs.”⁹
Proposal. The President’s budget seeks to clarify, through regulation, which
services may be claimed as Medicaid rehabilitation services. HHS estimates that the
proposal would save $225 million in FY2007, and $2.286 billion over the FY2007-
FY2011 period. CBO did not provide an estimate for the proposal (see earlier
discussion under “Legislative Versus Administrative Proposals”).
Reports. Currently, no other CRS reports address this topic.
Medicaid: Eliminate School-Based
Administration and Transportation
Background. Medicaid pays for covered medical services provided to
Medicaid-eligible children with Individualized Family Service Plans (IFSP) and
Individualized Education Plans (IEP), pursuant to the Individuals with Disabilities
Education Act (IDEA). In its budget documents, the Administration notes that
Medicaid claims for services provided in school settings have been prone to abuse
and overpayments, especially with respect to transportation and administrative

⁶ Section 1905(a)(13) of the Social Security Act.
⁷ K. Allen, States’ Efforts to Maximize Federal Reimbursements Highlight Need for
Improved Federal Oversight, Government Accountability Office, Testimony Before the U.S.
Senate, Committee on Finance, GAO-05-836T, June 28, 2005. (Hereafter cited as “GAO
Testimony, June 2005.”)
⁸ HHS, Office of Inspector General, Audit of Medicaid Claims for Iowa Rehabilitation
Treatment Services Family-Centered Program, A-07-02-03023, July 2004.
⁹ GAO Testimony, June 2005.

activities. Over the past few years, several GAO and HHS OIG studies have reached
similar conclusions.¹⁰
For transportation services, examples of inappropriate Medicaid billing include
(1) no verification that transportation was in fact provided, (2) a Medicaid-covered
school health service other than transportation was not provided on the day that
transportation was billed, and (3) child/family plans did not include a
recommendation for transportation services, or there was no IEP or IFSP.
School districts may perform administrative functions for Medicaid purposes,
including for example, outreach, eligibility intake, information and referrals, health
service coordination and monitoring, and interagency coordination. Examples of
inappropriate Medicaid billing include (1) payments based on inaccurate time studies
used to allocate the cost of these administrative activities across funding sources
including Medicaid, (2) expenditures for school employees who do not perform
Medicaid administrative activities, (3) expenditures for operating costs such as
nursing supplies, non-Medicaid outreach supplies, and education-related
expenditures, (4) expenditures for personnel funded by other federal programs, and
(5) payments for personnel who render only direct medical services.
Proposal. The President’s budget would, through administrative action,
prohibit federal reimbursement for IDEA-related school-based administration and
transportation costs. HHS estimates that the proposal would save $615 million in
FY2007, and $3.645 billion over the FY2007-FY2011 period. CBO did not provide
an estimate for the proposal (see earlier discussion under “Legislative Versus
Administrative Proposals”).
Reports. See CRS Report RS22397, The Link Between Medicaid and the
Individuals with Disabilities Education Act (IDEA): Recent History and Current
Issues, by Elicia J. Herz, and CRS Report RL31722, Individuals with Disabilities
Education Act (IDEA) and Medicaid, by Richard N. Apling and Elicia J. Herz.
Medicaid: Clarify DSH Provisions in Regulation
Background. States and the District of Columbia are required to recognize, in
establishing hospital payment rates, the situation of hospitals that serve a
disproportionate number of Medicaid beneficiaries and other low-income patients
with special needs. Under broad federal guidelines, each state determines which
hospitals receive disproportionate share hospital (DSH) payments and the payment
amounts to be made to each qualifying hospital. The federal government shares in
the cost of state DSH payments at the same federal matching percentage as for most
other Medicaid services. Total federal reimbursement for each state’s DSH payments

¹⁰ For example, see HHS, Office of Inspector General (OIG), Review of Medicaid
Transportation Claims Made by the New York City Department of Education, A-02-03-
01023, Sep. 2005; HHS, OIG, Audit of LaPorte Consortium’s Administrative Costs Claimed
for Medicaid School-Based Services, A-06-02-00051, Jan. 2006; and Government
Accountability Office, Medicaid in Schools: Improper Payments Demand Improvements in
HCFA Oversight, GAO/HES/OSI-00-69, Apr. 2000.

are capped at a statewide ceiling, referred to as the state’s DSH allotment, and DSH
payments to each hospital are capped at a hospital-specific ceiling.
Proposal. The President’s budget seeks to clarify, through regulation,
provisions related to the allowable uses of DSH funds. HHS estimates that the
proposal would have no cost impact in FY2007 or over the FY2007-FY2011 period.
CBO did not provide an estimate for the proposal (see earlier discussion under
“Legislative Versus Administrative Proposals”).
Reports. For background information on Medicaid DSH payments, see CRS
Report 97-483, Medicaid Disproportionate Share Payments, by Jean Hearne.
SCHIP: Modify Redistribution to Address 2007 Shortfalls
Background. The Balanced Budget Act of 1997 established SCHIP. In
general, this program allows states to cover targeted low-income children with no
health insurance in families with income that is above Medicaid eligibility levels.
States may choose among three benefit options when designing their SCHIP
programs. They may enroll targeted low-income children in Medicaid, create a
separate state program, or devise a combination of both approaches. All states, the
District of Columbia, and five territories have SCHIP programs. Nearly $40 billion
has been appropriated for SCHIP for FY1998-FY2007. The authorized appropriation
for FY2007 is $5.0 billion. Annual allotments among the states are determined by
a formula that is based on a combination of the number of low-income children, and
low-income uninsured children in the state, and includes a cost factor that represents
the average health service industry wages in the state compared to the national
average.
States have three years to spend each annual allotment (e.g., states have until the
end of FY2007 to spend their FY2005 allotments). At the end of the applicable
three-year period, unspent funds are reallocated among states based on year-specific
rules. In the early years of the SCHIP, both states that did and did not fully exhaust
their original allotments received unspent funds. For more recent years, only those
states that fully exhaust their original allotments receive unspent funds. Some states
have experienced shortfalls in SCHIP funds, meaning at the end of a given fiscal
year, they have spent all federal SCHIP funds available to them at that point in time,
including original allotments and reallocations of unspent funds from other states.
Proposal. The President’s budget seeks legislation to better target SCHIP funds
in a more timely manner to address potential state shortfalls in FY2007. HHS
estimates the cost of the proposal at $635 million in FY2007, with a net cost of $110
million over the FY2007-FY2011 period. CBO estimates the SCHIP cost of the
proposal at $570 million in FY2007, with a net cost of $460 million over the
FY2007-FY2011 period. CBO also estimates that the proposal would save Medicaid
$290 million in FY2007, with a net savings of $235 million over the FY2007-
FY2011 period.
Congressional Action. Before adjourning, the 109th Congress passed H.R.
6164, which requires a redistribution of certain unspent FY2004 and FY2005 SCHIP
funds to delay state shortfalls in FY2007.

Reports. For more information, see CRS Report RS22553, SCHIP Provisions
of H.R. 6164 (NIH Reform Act of 2006), by Chris L. Peterson; CRS Report RL30473,
State Children’s Health Insurance Program (SCHIP): A Brief Overview, by Elicia
J. Herz, Bernadette Fernandez, and Chris L. Peterson; CRS Report RL32807, SCHIP
Financing: Funding and Projections and State Redistribution Issues, by Chris L.
Peterson; CRS Report RL33366, SCHIP Original Allotments: Description and
Analysis, by Chris L. Peterson; and CRS Report RL33251, Side-by-Side Comparison
of Medicare, Medicaid, and SCHIP Provisions in the Deficit Reduction Act of 2005,
by Karen Tritz, et al.
Medicaid and SCHIP: HIPAA Modifications
Background. The Health Insurance Portability and Accountability Act of 1996
(HIPAA, P.L. 104-191) established a number of rules for employer-based health
insurance plans to improve access to and portability of plans for people enrolled or
enrolling into those plans. One of those provisions requires employer-based health
plans to allow for new enrollment into the plan during periods outside of the typical
annual open enrollment period for certain special reasons. Examples of those reasons
include when an eligible employee (or their dependent) exhausts COBRA
continuation coverage, or when an employee gains a new dependent through birth or
adoption. Another HIPAA provision limits the ability of private health insurance
plans to exclude coverage for pre-existing conditions during what are known as “pre-
existing condition exclusion periods.” The allowable length of such pre-existing
condition exclusion periods depends on the amount of time the new enrollee had
been covered by prior “creditable” health insurance coverage.¹¹ A beneficiary can
prove they have had prior creditable coverage by providing certificates issued by
insurers at the end of each year. Because HIPAA was created in law before SCHIP
was established, SCHIP was not included on the list of types of health insurance that
can be considered as prior creditable coverage.
Proposal. The President’s budget seeks two legislative changes relating to
HIPAA. The first would define a determination of Medicaid or SCHIP eligibility as
a qualifying event allowing for a special enrollment period into employer-based
health insurance plans. This provision is intended to improve Medicaid and SCHIP
programs’ ability to coordinate coverage with private employer-offered coverage.
The second proposal would require SCHIP programs to issue certificates of
creditable coverage. This provision is intended to improve the reach of HIPAA’s
portability provisions by recognizing SCHIP coverage as prior creditable coverage.
Both of these interpretations have previously been promulgated in a final regulation
implementing HIPAA’s portability for group health plan provisions.¹² HHS
estimates that the proposal would have no cost impact in FY2007 or over the

¹¹ Not all prior health insurance coverage is considered to be creditable. For a discussion
of creditable coverage, see CRS Report RL31634, The Health Insurance Portability and
Accountability Act (HIPAA) of 1996: Overview and Guidance on Frequently Asked
Questions, by Hinda R. Chaikind, Jean Hearne, Bob Lyke, and C. Stephen Redhead.
¹² 69 Federal Register 78720, Final Regulations for Health Coverage Portability for Group
Health Plans and Group Health Insurance Issuers Under HIPAA Titles I and IV, Dec. 30,

2004.

FY2007-FY2011 period. CBO did not provide an estimate for the proposal in its
preliminary analysis.
Reports. For general information on HIPAA, see CRS Report RL31634, The
Health Insurance Portability and Accountability Act (HIPAA) of 1996: Overview
and Guidance on Frequently Asked Questions, by Hinda R. Chaikind, Jean Hearne,
Bob Lyke, and Stephen Redhead.
Medicaid and SCHIP: Cover the Kids
Background. According to the latest available official statistics, in FY2004,
the number of children ever enrolled in SCHIP reached nearly 6.2 million. In
FY2003, the number of children ever enrolled in Medicaid during that year reached
27.4 million. There have been ongoing concerns about take-up rates among children
who meet eligibility standards but are not covered by these two programs. Estimates
of the number of children eligible but not enrolled in Medicaid or SCHIP have varied
considerably over time. By 2002, national survey data showed that 2.8 million
children under age 19 were uninsured but eligible for SCHIP, and an additional 3.4
million were uninsured but eligible for Medicaid.¹³
Outreach can be financed under the Medicaid and SCHIP programs. Under
Medicaid, the federal matching rate for administrative expenses which include
outreach activities is set at 50% for all states. There is a limit on federal spending for
SCHIP administrative expenses, which also include outreach. For federal matching
purposes, a 10% cap applies to state administrative expenses. This cap is tied to the
dollar amount that a state draws down from its annual SCHIP allotment to cover
benefits, as opposed to 10% of a state’s total annual allotment.
Proposal. The Cover the Kids outreach program would provide annual grants
to states, working with schools and community organizations to enroll eligible
children in Medicaid and SCHIP. The grant is not part of the Medicaid or SCHIP
budget proposals, but rather is a component of the State Grants and Demonstrations
budget proposals under the jurisdiction of CMS (which is responsible for oversight
of Medicaid and SCHIP). The grant would cost $100 million in FY2007, and $500
million over the FY2007-FY2011 period. HHS estimates that the impact of the grant
on Medicaid spending would result in additional costs of $203 million in FY2007,
and $1.978 billion over the FY2007-FY2011 period. Likewise, HHS estimates that
the impact of the grant on SCHIP spending would be $69 million in FY2007, and
$330 million over the FY2007-FY2011 period. CBO estimates that the proposal
would increase Medicaid spending by $13 million in FY2007, and $477 million over
the FY2007-FY2011 period. CBO also estimates that the proposal would increase
SCHIP spending by $3 million in FY2007, and $26 million over the FY2007-
FY2011 period.
Reports. Currently, no other CRS reports address this topic.

¹³ Statistics taken from T. Selden, J. Hudson, and J. Banthin, “Tracking Changes in
Eligibility and Coverage Among Children, 1996-2000,” Health Affairs, vol. 23, no. 5
(Sept./Oct. 2004), pp. 39-50.

Health Care Fraud and Abuse Control Account
Background. The Health Insurance Portability and Accountability Act of 1996
established a national Health Care Fraud and Abuse Control (HCFAC) account
within the federal Hospital Insurance (HI, also known as Medicare Part A) trust fund.
The HCFAC account funds the Medicare Integrity Program within CMS and certain
health care fraud and abuse activities within the Federal Bureau of Investigation
(FBI). Additional HCFAC funds are earmarked specifically for Medicare and
Medicaid activities of the HHS OIG, and remaining “wedge” funds are divided
among other HHS agencies (including CMS) and the Department of Justice. Annual
mandatory minimum and maximum HCFAC appropriations are specified in statute.
Proposal. The President’s budget seeks legislation to increase HCFAC funding
with a discretionary appropriation. While the proposal would not directly affect
Medicaid or SCHIP spending, it would fund Medicaid and SCHIP financial
management activities at CMS and supplement HCFAC funding for other agencies
with Medicaid and SCHIP oversight responsibilities (e.g., HHS OIG). HHS
estimates that the CMS portion of the proposal would cost $10 million in FY2007,
and $26 million over the FY2007-FY2011 period. CBO did not provide an estimate
for the proposal in its preliminary analysis.
Reports. For information on HCFAC and related changes made by DRA 2005,
see CRS Report RL33251, Side-by-Side Comparison of Medicare, Medicaid, and
SCHIP Provisions in the Deficit Reduction Act of 2005, by Karen Tritz, et al.
Congressional Action
On March 9, 2006, the Senate Budget Committee reported a budget resolution,
S.Con.Res. 83, which was subsequently amended and passed by the Senate on March
16. The resolution did not include reconciliation instructions for the Senate Finance
Committee, which has jurisdiction over Medicaid and SCHIP. It did include a
deficit-neutral reserve fund for the uninsured, and a March 8 Senate Budget
Committee document indicates that it included funding for four of the President’s¹⁴
Medicaid and SCHIP proposals:
^!TMA extension ($523 million over five years);
^!Vaccines for Children proposal allowing health departments to
provide vaccines ($715 million);
^!Cover the Kids initiative ($874 million);¹⁵ and
^!SCHIP funding boost in 2007 and 2008 ($225 million).

¹⁴ Senate Budget Committee, Chairman’s Mark: FY2007 Budget (Mar. 8, 2006), available
at [http://budget.senate.gov/republican/pressarchive/MarkSummary.pdf].
¹⁵ In addition to the Medicaid and SCHIP costs, this amount presumably includes the state
grant costs of the proposal that are not borne directly by Medicaid or SCHIP.

On March 29, 2006, the House Budget Committee reported its own budget
resolution, H.Con.Res. 376, which was subsequently amended and passed by the
House on May 18. The resolution did not include reconciliation instructions for the
House Energy and Commerce Committee, which has jurisdiction over Medicaid and
SCHIP. The report accompanying the resolution as reported by the House Budget
Committee (H.Rept. 109-402) indicates that spending levels for Medicaid and SCHIP
were based on CBO’s baseline projections under current law and policies, and that
no reduction in Medicaid was assumed.¹⁶
Although no agreement was reached by the House and Senate on a FY2007
budget resolution, current law spending for Medicaid and SCHIP is unaffected. As
entitlement programs, their spending levels are based on the underlying benefit and
eligibility criteria established in law (in the case of SCHIP, these criteria include a
statutory annual funding cap).¹⁷ However, legislation that would increase Medicaid
or SCHIP spending above current law could encounter procedural roadblocks in the
House or Senate if funding is not assumed in a budget resolution or in a “deeming
resolution.”¹⁸
The annual appropriations process also provides an opportunity for Congress to
place limitations on the availability of federal funds for specified Medicaid and
SCHIP activities.¹⁹ For example, when the House reported its proposal for FY2007
Labor, Health and Human Services, and Education, and Related Agencies (L-HHS-
ED) appropriations on June 20, 2006 (H.R. 5647, H.Rept. 109-515), it included a
provision that would prohibit HHS from using any of the funds in its FY2007 budget
to implement the President’s proposal to phase down or reduce provider taxes below
6% through administrative action.²⁰ Annual L-HHS-ED appropriations also regularly
contain restrictions that limit — for one year at a time — the circumstances under
which federal funds can be used to pay for abortions.
Before the 109th Congress adjourned, it passed two bills that addressed a variety
of Medicaid and SCHIP issues, including some of the proposals in the President’s
FY2007 budget. As described earlier, H.R. 6164 requires a redistribution of certain
unspent FY2004 and FY2005 SCHIP funds to delay state shortfalls in FY2007. In
addition, H.R. 6111 prevents the President’s provider tax proposal from being
implemented via administrative action and extends expanded TMA requirements
through June 30, 2007. H.R. 6111 also addressed Medicaid issues that were not part
of the President’s budget, including technical corrections to the Deficit Reduction
Act of 2005 (P.L. 109-171) and FY2007 DSH allotments for Hawaii and Tennessee.

¹⁶ Medicaid and SCHIP are part of the Health (550) budget function.
¹⁷ See CRS Report RS20129, Entitlements and Appropriated Entitlements in the Federal
Budget Process, by Bill Heniff Jr. and CRS Report RL33291, Congressional Budget Actions
in 2006, by Bill Heniff Jr.
¹⁸ See CRS Report RL31443, The “Deeming Resolution”: A Budget Enforcement Tool, by
Robert Keith.
¹⁹ See CRS Report 98-518, Earmarks and Limitations in Appropriations Bills, by Sandy
Streeter.
²⁰ For more on FY2007 L-HHS-ED appropriations, see CRS Report RL33576, Labor, Health
and Human Services, and Education: FY2007 Appropriations, by Paul M. Irwin.

Table 2. CRS Staff Contact Information
by Medicaid and SCHIP Topic Area
^To^pic^S^t^a^f^f^m^e^m^b^er^P^h^oⁿ^{e num}^ber
^Medicaid
^A^d^mⁱⁿⁱ^s^t^ratⁱ^oⁿ^A^pri^l^G^r^ady⁷^-⁹⁵⁷⁸
^B^eⁿ^e^f^{its an}^d^elig^ib^ility
^A^g^ed^Ju^lⁱ^e^S^t^on^e⁷^-¹³⁸⁶
^Ch^ild^r^eⁿ^,^f^a^m^{ilies, im}^mⁱ^g^r^an^{ts, o}^t^h^e^rⁿ^oⁿ^-^Ev^elyⁿ^{e B}^a^u^m^ru^ck^er^7-⁸⁹¹³
^di^s^a^bl^{ed adu}^l^t^s^J^ean^Hearn^e^7-⁷³⁶²
^{Elicia Her}^z^7-¹³⁷⁷
^In^divⁱ^du^als^w^ith^dis^a^bilities^,^m^e^dicallyⁿ^eedy^J^u^{lie Ston}^e⁷^-¹³⁸⁶
^Ex^pen^dⁱ^t^u^res^A^pri^l^G^r^ady⁷^-⁹⁵⁷⁸
^D^u^al^elⁱ^gⁱ^b^l^e^s^J^u^lⁱ^e^S^t^on^e⁷^-¹³⁸⁶
^Fi^na^ncⁱⁿ^g
^Dⁱ^s^p^roportⁱ^oⁿ^a^t^e^s^h^{are h}^o^s^pⁱ^t^a^l^pay^m^en^t^s^Jean^H^earn^e^7-⁷³⁶²
^F^e^deral^m^e^di^cal^as^sⁱ^s^t^an^{ce percen}^t^a^g^e^A^p^ri^l^G^r^ady⁷^-⁹⁵⁷⁸
^Gen^e^r^a^{l issu}^es^A^p^r^{il Gr}^ad^y^7-⁹⁵⁷⁸
^J^ean^Hearn^e^7-⁷³⁶²
^{Elicia Her}^z^7-¹³⁷⁷
^In^terg^ov^ern^m^en^{tal tran}^s^f^ers^J^ean^Hearn^e^7-⁷³⁶²
^{Elicia Her}^z^7-¹³⁷⁷
^U^{pper pay}^m^en^t^lⁱ^mⁱ^t^s^Elⁱ^cⁱ^a^H^e^rz^7-¹³⁷⁷
^In^t^e^g^rⁱ^t^y^(w^as^t^e^{, f}^r^au^{d, an}^{d abu}^s^e)^A^p^ri^l^G^r^ady⁷^-⁹⁵⁷⁸
^L^oⁿ^g^-^t^e^rm^care^J^u^lⁱ^e^S^t^on^e⁷^-¹³⁸⁶
^Man^a^g^e^{d care}^E^lⁱ^cⁱ^a^H^e^rz^7-¹³⁷⁷
^Pres^cri^p^tⁱ^oⁿ^dru^g^s^Jean^H^earn^e^7-⁷³⁶²
^Provⁱ^d^{er pay}^m^en^tⁱ^s^s^u^es^Jean^H^earn^e^7-⁷³⁶²
^T^e^rritories^Ev^elyⁿ^{e B}^a^u^m^ru^ck^er^7-⁸⁹¹³
^J^ean^Hearn^e^7-⁷³⁶²
^{Elicia Her}^z^7-¹³⁷⁷
^Waⁱ^v^e^r^s
^S^ectⁱ^oⁿ¹¹¹⁵^Ev^el^yⁿ^{e Bau}^m^ru^ck^er^7-⁸⁹¹³
^S^ectⁱ^oⁿ^1915(c)^C^a^rol^O^’^S^h^a^ughne^ssy^7-⁷³²⁹
^J^u^{lie Sto}ⁿ^e^7-¹³⁸⁶
^SCHI^P
^Fi^na^ncⁱⁿ^g^E^ve^l^y^ne^B^a^um^r^u^c^k^e^r^7-⁸⁹¹³
^C^h^ri^s^P^e^t^e^rs^on^7-⁴⁶⁸¹
^Gen^e^{ral is}^s^u^es^Ev^elyⁿ^{e B}^a^u^m^ru^ck^er^7-⁸⁹¹³
^{Elicia Her}^z^7-¹³⁷⁷
^S^ectⁱ^oⁿ^{1115 w}^aⁱ^v^ers^E^v^e^l^yⁿ^e^Bau^m^ru^ck^er^7-⁸⁹¹³