[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                       H.R. 5998, THE PROTECTING
                 CHILDREN'S HEALTH COVERAGE ACT OF 2008

=======================================================================

                                HEARING

                               BEFORE THE

                         SUBCOMMITTEE ON HEALTH

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 15, 2008

                               __________

                           Serial No. 110-118


      Printed for the use of the Committee on Energy and Commerce

                        energycommerce.house.gov



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                    COMMITTEE ON ENERGY AND COMMERCE

    JOHN D. DINGELL, Michigan,       JOE BARTON, Texas
             Chairman                    Ranking Member
HENRY A. WAXMAN, California          RALPH M. HALL, Texas
EDWARD J. MARKEY, Massachusetts      FRED UPTON, Michigan
RICK BOUCHER, Virginia               CLIFF STEARNS, Florida
EDOLPHUS TOWNS, New York             NATHAN DEAL, Georgia
FRANK PALLONE, Jr., New Jersey       ED WHITFIELD, Kentucky
BART GORDON, Tennessee               BARBARA CUBIN, Wyoming
BOBBY L. RUSH, Illinois              JOHN SHIMKUS, Illinois
ANNA G. ESHOO, California            HEATHER WILSON, New Mexico
BART STUPAK, Michigan                JOHN B. SHADEGG, Arizona
ELIOT L. ENGEL, New York             CHARLES W. ``CHIP'' PICKERING, 
GENE GREEN, Texas                        Mississippi
DIANA DeGETTE, Colorado              VITO FOSSELLA, New York
    Vice Chairman                    ROY BLUNT, Missouri
LOIS CAPPS, California               STEVE BUYER, Indiana
MIKE DOYLE, Pennsylvania             GEORGE RADANOVICH, California
JANE HARMAN, California              JOSEPH R. PITTS, Pennsylvania
TOM ALLEN, Maine                     MARY BONO MACK, California
JAN SCHAKOWSKY, Illinois             GREG WALDEN, Oregon
HILDA L. SOLIS, California           LEE TERRY, Nebraska
CHARLES A. GONZALEZ, Texas           MIKE FERGUSON, New Jersey
JAY INSLEE, Washington               MIKE ROGERS, Michigan
TAMMY BALDWIN, Wisconsin             SUE WILKINS MYRICK, North Carolina
MIKE ROSS, Arkansas                  JOHN SULLIVAN, Oklahoma
DARLENE HOOLEY, Oregon               TIM MURPHY, Pennsylvania
ANTHONY D. WEINER, New York          MICHAEL C. BURGESS, Texas
JIM MATHESON, Utah                   MARSHA BLACKBURN, Tennessee        
G.K. BUTTERFIELD, North Carolina     
CHARLIE MELANCON, Louisiana          
JOHN BARROW, Georgia                 
BARON P. HILL, Indiana               
_________________________________________________________________

                           Professional Staff

 Dennis B. Fitzgibbons, Chief of 
               Staff
Gregg A. Rothschild, Chief Counsel
   Sharon E. Davis, Chief Clerk
  David Cavicke, Minority Staff 
             Director

                                  (ii)
                         Subcommittee on Health

                FRANK PALLONE, Jr., New Jersey, Chairman
HENRY A. WAXMAN, California          NATHAN DEAL, Georgia,
EDOLPHUS TOWNS, New York                 Ranking Member
BART GORDON, Tennessee               RALPH M. HALL, Texas
ANNA G. ESHOO, California            BARBARA CUBIN, Wyoming
GENE GREEN, Texas                    HEATHER WILSON, New Mexico
DIANA DeGETTE, Colorado              JOHN B. SHADEGG, Arizona
LOIS CAPPS, California               STEVE BUYER, Indiana
    Vice Chair                       JOSEPH R. PITTS, Pennsylvania
TOM ALLEN, Maine                     MIKE FERGUSON, New Jersey
TAMMY BALDWIN, Wisconsin             MIKE ROGERS, Michigan
ELIOT L. ENGEL, New York             SUE WILKINS MYRICK, North Carolina
JAN SCHAKOWSKY, Illinois             JOHN SULLIVAN, Oklahoma
HILDA L. SOLIS, California           TIM MURPHY, Pennsylvania
MIKE ROSS, Arkansas                  MICHAEL C. BURGESS, Texas
DARLENE HOOLEY, Oregon               MARSHA BLACKBURN, Tennessee
ANTHONY D. WEINER, New York          JOE BARTON, Texas (ex officio)
JIM MATHESON, Utah
JOHN D. DINGELL, Michigan (ex 
    officio)
  
                             C O N T E N T S

                              ----------                              
                                                                   Page
 Hon. Frank Pallone, Jr., a Representative in Congress from the 
  State of New Jersey, opening statement.........................     1
 Hon. Nathan Deal, a Representative in Congress from the State of 
  Georgia, opening statement.....................................     9
Hon. Tammy Baldwin, a Representative in Congress from the State 
  of Wisconsin, opening statement................................    10
Hon. Heather Wilson, a Representative in Congress from the State 
  of New Mexico, opening statement...............................    11
Hon. Gene Green, a Representative in Congress from the State of 
  Texas, prepared statement......................................   122
Hon. Anna G. Eshoo, a Representative in Congress from the State 
  of California, prepared statement..............................   128

                               Witnesses

Peter Orszag, Director, Congressional Budget Office..............    12
    Prepared statement...........................................    14
Dayna Shah, Managing Associate General Counsel, U.S. Government 
  Accountability Office..........................................    32
    Prepared statement...........................................    34
Morton Rosenberg, Specialist in American Public Law, American Law 
  Division, Congressional Research Service.......................    49
    Prepared statement...........................................    52
Gary Alexander, director, Rhode Island Department of Human 
  Services.......................................................    75
    Prepared statement...........................................    78
Lesley Cummings, executive director, The California Managed Risk 
  Medical Insurance Board........................................    83
    Prepared statement...........................................    85

                           Submitted Material

H.R. 5998........................................................     4
.................................................................


    H.R. 5998, THE PROTECTING CHILDREN'S HEALTH COVERAGE ACT OF 2008

                              ----------                              


                         THURSDAY, MAY 15, 2008

                  House of Representatives,
                            Subcommittee on Health,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:10 a.m., in 
room 2322 of the Rayburn House Office Building, Hon. Frank 
Pallone Jr. (chairman) presiding.
    Members present: Representatives Pallone, Green, Baldwin, 
Engel, Dingell (ex officio), Deal, Wilson, Burgess, and Barton 
(ex officio).
    Staff present: Bridgett Taylor, Amy Hall, Brin Frazier, 
Lauren Bloomberg, Hasan Sarsour, Jason Powell, Ryan Long, 
Brandon Clark, and Chad Grant.
    Mr. Pallone. The meeting of the subcommittee is called to 
order, and today we are having a hearing on ``H.R. 5998, the 
Protecting Children's Health Coverage Act of 2008.'' And I will 
now recognize myself for an opening statement.

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE 
            IN CONGRESS FROM THE STATE OF NEW JERSEY

    Mr. Pallone. The legislation before us is a bill that I 
introduced recently with my friend and colleague from New 
Hampshire, Representative Carol Shea-Porter. And our 
legislation would invalidate the so-called CMS August 17 
Directive preventing CMS from applying any of the provisions 
included in the directive when it reviews state plans. It also 
requires CMS to review within 30 days the original proposals 
from States whose plans were either rejected or amended based 
on that directive.
    As you know, for over 10 years, the State Children Health 
Insurance Program, or SCHIP, has had remarkable success in 
covering millions of low-income children, who would otherwise 
have nowhere else to turn, to obtain health coverage. And 
thanks to SCHIP, more than seven million children annually are 
able to obtain health coverage and receive the medical care 
that they need to live happy and healthy lives.
    Last year we tried to build on the success of SCHIP by 
passing the Children's Health Insurance Program Reauthorization 
Act, or CHIPRA, of 2007, a bill that was negotiated on a 
bipartisan, bicameral basis. This bill would have provided 
states with the financial resources and tools they need to 
maintain their current programs as well as help them reach 
millions of low-income children who are presently eligible but 
not enrolled.
    CHIPRA passed the House two times with significant support 
from both parties, but sadly, even though a majority of 
Americans and their representatives in Congress agreed that it 
was the right thing to do to cover more kids, the President 
disagreed. And the President actually vetoed the CHIP 
Reauthorization twice, and the majority of the House 
Republicans refused to join us in overriding the veto.
    But blocking the will of Congress and the American public 
was not enough. The President also decided that he would try to 
single-handedly undermine the CHIP program to administrative 
PHEAA. In the earning evening of Friday, August 17, last year 
during the midst of a congressional recess, after many people 
had gone home for the weekend, the Bush Administration issued a 
letter to state health officials that has come to be known as 
the August 17 Directive, and I have taken issue with this 
directive on two grounds.
    First, the substance contained within it, as well as the 
process in which it came to be. The policies put forward by the 
Administration and its directive fly in the face of SCHIP's 
intended purpose as well as what we were trying to accomplish 
with last year's reauthorization. The August 17 Directive would 
impose strict new requirements on states and beneficiaries that 
are not only impossible to achieve but make little, if any, 
sense.
    For example, under the new directive, states would be 
prohibited from covering children in families with incomes 
above 250 percent of the federal poverty level or $44,000 for a 
family of three, unless 95 percent of all children eligible for 
Medicaid and CHIP with incomes below 200 percent are already 
enrolled. After talking with numerous state health officials, 
it is unclear how many states would be able to meet this 
requirement, if any.
    Even more mind-boggling, the directive prevents states from 
enrolling for 1 year eligible children who lose their private 
health insurance. The Administration has yet to provide an 
answer on what these children should do during this year, other 
than the President's suggestion that the uninsured can simply 
go to the emergency room when they need care.
    If implemented, the August 17 Directive will severely limit 
state flexibility, which has been the hallmark of SCHIP since 
its inception, and also the directive will greatly restrict 
enrollment. We have already seen its effects. The directive has 
already been used to either reject or scale back plans in 
states like Indiana, Louisiana, Ohio, Oklahoma, and New York 
that had planned to expand their programs in order to provide 
health care coverage to tens of thousands of presently 
uninsured children.
    I am also alarmed about what will happen in places like my 
home state of New Jersey, which already covers children in this 
income range. If this directive were to go into effect, it 
would severely limit my State's ability to develop solutions 
that meet the unique needs of our State's uninsured population. 
According to our state officials, this directive could reduce 
enrollment of children in this income range by 84 percent, and 
I think that is appalling.
    Aside from the substance of this directive, I am dismayed 
by the process in which it was developed and issued. The Bush 
Administration broke the law when it issued this directive 
because it bypassed Congress and blocked any opportunity for 
public comment. As we will hear today, this is not just my 
opinion. Both GAO and CRS have concluded that the directive and 
the way it was issued violates the Congressional Review Act. 
And I am looking forward to hearing their testimony in that 
regard.
    In sum, I am clearly opposed, as you can tell, to the 
Administration's August 17 Directive. It does nothing to move 
the ball forward in terms of covering more uninsured kids and, 
in fact, turns the clock back on our efforts over the past 10 
years.
    For those reasons, I think that we must block the directive 
from taking effect, which my legislation would do, and refocus 
our efforts on strengthening SCHIP.
    And I now recognize Mr. Deal, our ranking member, for an 
opening.
    [H.R. 5998 follows:]

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  OPENING STATEMENT OF HON. NATHAN DEAL, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF GEORGIA

    Mr. Deal. Thank you, Mr. Chairman. Thank you for calling 
this hearing today, which will give us an opportunity to review 
your legislation, which addresses the August 17 letter from 
CMS. The letter outlines some guidelines that CMS planned to 
use when considering whether or not a state SCHIP plan 
adequately discouraged individuals from leaving private 
coverage in order to enroll in a government-financed health 
care plan.
    This concern about government coverage crowding out private 
health insurance is a legitimate one. When the nonpartisan 
Congressional Budget Office reviewed past iterations of 
legislation to reauthorize the SCHIP Program, they concluded 
that for every 100 children who gain public coverage as a 
result of SCHIP, there is a corresponding reduction in private 
coverage of between 25 and 50 children.
    More specifically in the case of the reauthorization, CBO 
concluded that about one-third of the children who would be 
newly covered under SCHIP and Medicaid programs in the bill 
would otherwise have had private coverage.
    In last year's reauthorization efforts, I fully supported 
reforms to SCHIP which would prevent crowd out of private 
insurance. I also supported creating a meaningful test to 
ensure that states covered the poorest children before moving 
up the income scale. As my chairman has indicated, his State of 
New Jersey, which has dramatically increased the income 
eligibility under SCHIP, they have not only left their poorest 
citizens behind, but they have also increased the likelihood of 
crowd out because wealthier populations are more likely to have 
access to private insurance.
    If the chairman is dissatisfied with the method used by CMS 
to implement policies to discourage crowd out, I believe that 
members on our side of the aisle would be willing to work with 
him to achieve these goals through legislative means. However, 
as I read this legislation that we are considering, it appears 
to be an attempt to prohibit CMS from taking reasonable steps 
to ensure that states like New Jersey, which have left nearly a 
quarter of their poorest citizens behind, would actually do the 
hard work to cover the neediest children.
    In fact, New York submitted a state plan amendment to 
receive federal SCHIP matching payments for covering children 
with family incomes up to 400 percent of the federal poverty 
level, or $84,800 for a family of four. So far, this is the 
only state plan amendment to be denied based upon the policies 
described in the August 17 guidance letter.
    H.R. 5998 would force the secretary to promptly reconsider 
New York's state plan amendments to go to 400 percent of the 
federal poverty level without using the policies in the August 
17 guidance letter. It seems all too likely that this 
legislation is an attempt to allow New York to receive federal 
taxpayer dollars to subsidize the health expenditures of New 
Yorkers making nearly $85,000 a year. Coming from a state where 
the median income is just above $45,000, it is difficult for me 
to contemplate sending the federal taxpayers' dollars from my 
state to families making nearly twice the median household 
income of my state of Georgia.
    I look forward to the testimony of our witnesses today and 
in particular the insights of the officials from Rhode Island, 
whose State was able to comply with the requirements of the 
August 17 letter. And I think our witnesses should be able to 
provide us an important perspective on these issues, and I 
thank all of you for your attendance here today.
    Thank you, Mr. Chairman.
    Mr. Pallone. Thank you, Mr. Deal. The gentlewoman from 
Wisconsin, Ms. Baldwin.

 OPENING STATEMENT OF HON. TAMMY BALDWIN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF WISCONSIN

    Ms. Baldwin. Thank you, Mr. Chairman. I appreciate the fact 
that you are holding this important hearing, and I am proud to 
also be an original cosponsor of your bill, ``The Protecting 
Children's Health Coverage Act of 2008.''
    Mr. Chairman, I know that you and other members of this 
committee were very disappointed last year when the 
Administration failed to work with us in ensuring health care 
access to the 10 million kids who would have been covered under 
the House-passed SCHIP bill. And these administrative actions, 
like the August 17 Directive and the Medicaid regulations that 
the House recently voted to temporarily halt, are really like 
pouring salt into the wounds left by that disappointment last 
year with SCHIP being vetoed.
    Mr. Chairman, I believe that every American has a right to 
comprehensive, affordable health care, and I believe that 8.7 
million uninsured kids is 8.7 million too many. I believe that 
the SCHIP Program has proven to be an effective partnership 
between the Federal Government and the states in covering 
uninsured children. And I believe that states who want to 
expand their SCHIP Programs to cover more uninsured children 
should not be prevented from doing so.
    The August 17 Directive is harmful. It is overreaching, and 
it is an attack on SCHIP. Both the Government Accountability 
Office and the Congressional Research Service have issued legal 
opinions that the August 17 Directive violates the 
Congressional Review Act. This directive will result in more 
uninsured children, and that is simply unacceptable.
    So, Mr. Chairman, I am proud to be an original cosponsor of 
H.R. 5998. This bill would nullify the August 17 Directive and 
will ensure that states can continue to cover uninsured 
children to the extent that they can.
    Mr. Chairman, thank you for holding this hearing. Thank you 
to our witnesses who will testify today. I am disappointed that 
the Administration did not accept our invitation to defend 
their actions, but I look forward to today's discussion. And I 
yield back the balance of my time.
    Mr. Pallone. Thank you. The gentlewoman from New Mexico, 
Ms. Wilson.

 OPENING STATEMENT OF HON. HEATHER WILSON, A REPRESENTATIVE IN 
                 CONGRESS FROM THE STATE OF NEW
                             MEXICO

    Ms. Wilson. Thank you, Mr. Chairman. I am actually a 
supporter of the Children's Health Insurance Program. I think 
it has been an important program to reduce the number of 
uninsured children in America. In New Mexico, 25,000 low-income 
children get access to health care through the Children's 
Insurance Program. In New Mexico, we call it New MexiKids.
    I also agree with those who say that SCHIP should be 
targeted to the lowest income kids. I actually was a cabinet 
secretary for child welfare in New Mexico when we implemented 
the program initially, and it is a very good and effective 
program. But it needs some things to be fixed.
    In particular, the legislation as it was initially passed 
10 years ago did not have the same requirements that exist in 
other federal programs to make sure that those who sign up are 
American citizens. It also does not have any cap, an upper-
income cap, and a lot of states have involved adults in the 
program. This is a program that is intended to provide health 
insurance to low-income children who are American.
    The August 17 letter attempts to offer states guidance on 
how to comply with some principles which were embodied in the 
original SCHIP legislation and strengthen bipartisan SCHIP 
reauthorization legislation considered by Congress last year 
and vetoed by the President. But I think there are some 
important questions to be asked about the August 17 Directive.
    First, does the policy outlined in the letter clarify 
existing requirements and law, or does it go beyond to limit 
the ability of states to design their own SCHIP Programs as 
they see fit? Second, if it does amend existing regulations, 
should these policy changes go through the rule-making process 
to give states and interested parties the ability to provide 
public comment? And third, if it does amend existing law or 
congressional intent, should Congress consider these policy 
changes and give them statutory authority?
    I look forward to hearing the answer to some of these 
questions here today, and I hope that in this next Congress we 
can stop some of the demagoguery from the far left and the far 
right and reauthorize a program that has been effective at 
helping low-income children get access to health care and it 
also fixes some problems with SCHIP by getting adults out of 
the program, limiting it to low-income American children.
    Thank you, Mr. Chairman.
    Mr. Pallone. Thank you, Ms. Wilson. I believe that 
concludes our opening statements by members of the 
subcommittee, so we will now turn to our panel. And we do have 
but one panel today, a very good one. And I want to welcome 
everybody, welcome all of you for being here today.
    Let me introduce you from left to right, starting with Dr. 
Peter Orszag, who is Director of the Congressional Budget 
Office. Welcome. And then next to him is Ms. Dayna Shah, who is 
Managing Associate General Counsel for the GAO. And next to her 
is Mr. Morton Rosenberg, who is a specialist in American Public 
Law from the American Law Division of the Congressional 
Research Service, or CRS. And next to him is Mr. Gary 
Alexander, who is Director of the Rhode Island Department of 
Human Services. And then we have Ms. Lesley Cummings, who is 
Executive Director of the Managed Risk Medical Insurance Board 
in Sacramento, California. Welcome.
    We have 5-minute opening statements. They become part of 
the hearing record. The committee may also ask you, as you will 
notice from some of our questions as we proceed, to provide us 
some statements in writing as follow up. And we will get back 
to you with those questions so you can respond in writing. And 
those would also be included in the record once you get back to 
us.
    But we will start with Peter Orszag. Thank you for being 
here, and thank you for all you do over the years.

   STATEMENT OF PETER ORSZAG, DIRECTOR, CONGRESSIONAL BUDGET 
                             OFFICE

    Mr. Orszag. Thank you very much, Mr. Pallone, Mr. Deal, 
members of the Committee. I will be brief, and let me make four 
points. First, SCHIP has significantly reduced the number of 
low-income children who lack health insurance in the United 
States. You can see in Figure 1 of my testimony on page 8 that 
there was a dramatic reduction, about 25 percent, in the share 
of children between 100 and 200 percent of the poverty level 
who are uninsured in any given year at around the time that 
SCHIP was enacted. Those are the children who represent the 
bulk of beneficiaries under the SCHIP Program.
    At higher income levels, there was no reduction in 
uninsurance rates and it is therefore reasonable to conclude 
that the program had a lot to do with the reduction in 
uninsurance between 100 and 200 percent of poverty. There was 
also a reduction below the poverty level, and that is likely a 
reflection of the outreach efforts that were involved in SCHIP 
increasing enrollment in Medicaid where children below 100 
percent of poverty are disproportionately concentrated.
    The enrollment of children in public coverage in both SCHIP 
and Medicaid, however, as a result of SCHIP, has not led to a 
one-for-one reduction in the number of low-income children who 
are uninsured. In the specific case of SCHIP, the program 
provides a source of coverage that is less expensive to 
enrollees and often provides a broader range of benefits than 
alternative coverage, making it attractive to families.
    On the basis of our review of the research literature, CBO 
has concluded that for every 100 children covered under SCHIP, 
there is a corresponding reduction in private coverage of 
between 25 and 50 children.
    Third, CBO's analysis of CHIPRA, as passed by the House of 
Representatives, suggests that the legislation would increase 
coverage under Medicaid and SCHIP in 2012 by 5.8 million 
children, of whom 3.9 million would otherwise be uninsured and 
roughly two million would have otherwise had insurance. In 
other words, about a third of the children who would be newly 
covered under the legislation who would otherwise have had 
private coverage.
    Given the scale of the increase in coverage that was 
entailed in that program, it is extraordinarily unlikely that 
you would be able to get crowd-out rates significantly below a 
third through any feasible policy intervention.
    Finally, on August 17, 2007, as has already been mentioned, 
the Administration issued a directive to state health officials 
under CBO's baseline in which funding in future years is 
constrained to be $5 billion a year. That directive has only 
very minimal effects on enrollment of children in SCHIP 
primarily because States are so constrained under that baseline 
funding that whether children above 250 percent are newly 
covered or not doesn't matter that much because there is so 
much downward pressure on enrollment in general under that 
baseline concept.
    If you provided additional funding to the program, the 
effect of the directive could be somewhat larger, and we could 
have a discussion of that during the question-and-answer 
period.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Orszag follows:]

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    Mr. Pallone. Thank you, Doctor. Ms. Shah.

 STATEMENT OF DAYNA SHAH, MANAGING ASSOCIATE GENERAL COUNSEL, 
             U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Ms. Shah. Mr. Chairman and members of the subcommittee, I 
am pleased to be here this morning to discuss GAO's recent 
opinion about the August 17 letter issued by CMS concerning 
crowd-out or the substitution of SCHIP for other insurance 
coverage.
    In GAO's opinion, the August 17 letter is a rule. Under the 
Congressional Review Act and as required by that Act, the 
letter must be submitted to Congress and to the GAO before it 
can take effect.
    Before I get to the heart of GAO's opinion, I would like to 
note that the definition of rule in the Review Act adopts the 
definition in the Administrative Procedure Act, or APA, with 
some exceptions, none of which are applicable here.
    While the focus of inquiry under the APA is often whether a 
statement is binding and whether it must follow notice and 
comment requirements, there are many types of agency statements 
that are not binding, do require notice and comment, but 
nevertheless are rules under the APA's broad definition.
    As a result, the answer to the question of whether a 
particular agency statement is a rule under the APA and under 
the Congressional Review Act does not turn on whether the rule 
is binding or subject to notice and comment requirements.
    Three particular elements of the APA definition were 
relevant to our review of the August 17 letter. Specifically, 
the letter was applicable generally. It extended to all States 
seeking to cover children with effective family incomes above 
250 percent of the federal poverty level, as well as those 
States already covering such children.
    Second, the letter had future effect. It was not concerned 
with present or past conduct. Finally, the letter was designed 
to implement, interpret, or prescribe law or policy, in that it 
purported to clarify and explain the manner in which CMS 
supplied statutory and regulatory requirements to these states 
and sought to promote the implementation of SCHIP statutory 
requirements. The letter therefore met the general definition 
of rule.
    Three additional features of the August 17 letter supported 
our view that it is a rule that should have been submitted for 
review by Congress. First, the letter represented a marked 
departure from CMS's settled interpretation of the regulatory 
provision governing crowd-out. Case law indicates that a change 
in settled interpretation may only be made by a rule.
    Second, the letter gave a deadline for states to come into 
compliance by telling states currently covering children with 
effective family incomes over 250 percent of the federal 
poverty level that CMS expected those states to implement the 
letter's provisions within 12 months or face possible 
corrective action.
    Third, we found it striking that CMS expressly relied on 
the August 17 letter last September when it disapproved New 
York's request to amend its SCHIP plan. CMS's application of 
the letter in this way confirmed that it viewed the letter as 
having a binding effect.
    Finally, a note about general statements of policy. CMS 
told us that the August 17 letter was a statement of policy 
announcing the course that the agency intended to follow in 
adjudications concerning compliance with regulatory 
requirements. In addition, the Justice Department characterized 
the letter as being either a statement of policy or an 
interpretive rule.
    Courts have generally held that a statement of policy is a 
type of rule, although not the type of rule requiring notice 
and comment. That said, the August 17 letter does not have the 
characteristics of statements of policy identified in case law. 
Its language has little of the tentativeness that courts had 
associated with policy statements.
    In addition, as I mentioned earlier, CMS itself treated the 
letter as a binding rule rather than a policy statement when it 
expressly relied on it to disapprove a State's plan amendment.
    Mr. Chairman, that concludes my statement. I would be 
pleased to address any questions that you or other members of 
the subcommittee may have.
    [The prepared statement of Ms. Shah follows:]

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    Mr. Pallone. Thank you, Ms. Shah. Mr. Rosenberg.

 STATEMENT OF MORTON ROSENBERG, SPECIALIST IN AMERICAN PUBLIC 
   LAW, AMERICAN LAW DIVISION, CONGRESSIONAL RESEARCH SERVICE

    Mr. Rosenberg. I am Morton Rosenberg, a Specialist in 
American Public Law in the American Law Division of the 
Congressional Research Service. I thank you for inviting me 
here today to comment on the legal and practical issues 
associated with the August 17, 2007 letter issued by the 
Director of the Center of Medicaid and State Operations of the 
Centers for Medicare and Medicaid Services to all State health 
officials.
    That letter, as you are aware, ostensibly clarified how CMS 
would apply existing statutory and regulatory requirements in 
its review of state request to extend eligibility of the SCHIP 
Program to children and families with effective income levels 
above 250 percent of the federal poverty level.
    Our analysis of the statutory scheme of the CRA, its 
legislative history, opinions of the general counsel of GAO, 
indicates that the drafters of the congressional review 
provision were concerned with the then-prevalent actions that 
had the practical effect of imposing binding norms on non-
agency parties without being promulgated in conformance with 
requirements of notice and comment rulemaking. And in response, 
Congress adopted a very broad definition of the term rule that 
would capture such actions for congressional review. The 
rulings of several appellate courts recognizing the invalidity 
of such actions support the CRA's history and the GAO 
interpretations.
    The courts have also indicated that past practices of an 
agency in implementing a rulemaking may be looked at for 
insight as to the understanding the reliance that regulated 
parties and beneficiaries have placed on such past agency 
practices. In such instances, the courts have held that an 
abrupt change of course requires a new rulemaking proceeding to 
substantively alter those practices and relied-on 
interpretations.
    In this instance, the CMS practice under the 2001 crowd-out 
rules arguably have created a binding norm, and therefore 
changing such practices would be an action that is covered by 
the CRA and that such changes may not be implemented until they 
are reported to Congress and the Controller General.
    And so concluding, I have taken into account CMS's May 7 
clarification of its August 17, 2007 clarification, which does 
not alter the nature, I believe, of the 2007 letter.
    I thought it would be useful to you if I focused to provide 
you with my understanding of the nature, purpose and intent of 
the review scheme established by the CRA and how and why it 
differs from the scheme of judicial review with final agencies 
rules under the Administrative Procedure Act.
    In particular, I want to focus on Congress's adoption of a 
broader definition of the rule under the CRA that is applicable 
to judicially reviewable rules under the APA and why that may 
make a difference in how Congress might address the current 
controversy.
    The congressional review mechanism, properly known as the 
Congressional Review Act, requires that all agencies 
promulgating a covered rule must submit that report to each 
house of Congress and to the controller general. And it must 
accompany it with a copy of the rule, a concise general 
statement describing the rule, and a proposed effective date. A 
covered rule under the statute cannot take effect if the report 
is not submitted.
    The broad definition of a rule found in the CRA is adopted 
from 5514 of the Administrative Procedure Act, which provides 
that the term rule means the whole or part of agency statement 
of general applicability and future effect desired to 
implement, interpret, or prescribe law policy. The legislative 
history of that 5514 indicates that term is to be very broadly 
construed and that is covers all kinds of documents and is not 
limited to substantive rules but embraces interpretative, 
organizational, and procedural rules as well. And the courts 
have recognized that it covers virtually every statement an 
agency can make.
    The drafters of the Congressional Review Act arguably 
purposely adopted the broadest possible definition of the term 
rule when they incorporated that provision from the APA. The 
history of the CRA makes it clear that adoption of the broad 
definition of rule, the review process would not be limited to 
coverage of only rules that were required to comply with the 
notice and comment provisions of the APA or any other 
statutorily required variations of the notice and comment 
procedures but would rather encompass a wide spectrum of agency 
activities characterized by their effect on the regulated 
public.
    The committee stated the committee's intent in these 
subsections is to include matters that substantially affect the 
rights and obligations of outside parties. The essential focus 
of this inquiry is not on the type of rule but on its effect on 
the rights and obligations of the parties.
    The drafters of the CRA indicated their awareness of the 
practice of agencies at that time of avoiding the notification 
and public participation requirements of the APA by utilizing 
the issuance of other documents as a means of binding the 
public either legally or practically. And know that it was the 
intent of the legislation to subject just such documents to 
cvongressional scrutiny.
    Again the framers emphasize the adoption of the broad 
definition of a covered rule was to focus Congress not on the 
type of rule but on the rule's effect on the rights or 
obligations of non-agency parties.
    In sum, it is arguable that the heart of the drafters' 
design of the CRA was the creation of a review mechanism that 
would uncover and remedy in a timely manner what were viewed as 
agency attempts to evade congressional oversight, presidential 
executive order review, and the requirements of public comment 
and judicial review under the APA.
    Time-consuming legislation was seen as an anathema to 
achieving accountable agency public policy results. The 
critical point here then is that Congress does not have to rely 
on the uncertainty of lengthy civil litigation. It can call up 
for review any covered rule it wishes. It is not required to 
demonstrate standing, rightness, finality, jurisdiction, or any 
showing of arbitrariness or unreasonable decision making. You 
simply have to determine that it is contrary to the way that 
you expect the program to be administered. And if you use the 
CRA properly, you have the benefit of expedited consideration 
of a disapproval measure, which, if not vetoed, accomplishes a 
retroactive nullification that is not subject to judicial 
review.
    Finally, this process can be initiated even though the 
document has not been reported. Thank you.
    [The prepared statement of Mr. Rosenberg follows:]

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    Mr. Pallone. Thank you, Mr. Rosenberg. Thank you.
    Mr. Alexander.

STATEMENT OF GARY ALEXANDER, DIRECTOR, RHODE ISLAND DEPARTMENT 
                       OF HUMAN SERVICES

    Mr. Alexander. Thank you very much, Mr. Chairman, Ranking 
Member Deal, and other members of the Committee. My name is 
Gary Alexander. I am the director of the Rhode Island 
Department of Human Services. The Rhode Island Department of 
Human Services is entrusted with, among other programs, the 
Medicaid program, the TANF Program, food stamps, and the 
State's department of Veterans' Affairs.
    I would like to talk to you today about Rhode Island's 
experience with Medicaid and SCHIP crowd-out and our ability to 
comply with the provisions outlined in the CMS State health 
official letter from August 17, 2007.
    Rhode Island's Medicaid program recognized the potential 
for crowd-out of private health insurance and its managed care 
program known as Right Care almost a decade ago. As we 
experienced an increase in enrollment in the late 1990s, 
policymakers quickly identified the risks to Right Care's 
fiscal sustainability and viability and in response, adopted a 
series of health reforms aimed at stabilizing the program.
    Those reforms were guided by the following principles. The 
preservation of employer-sponsored insurance, ensuring that 
there are no incentives for employers to shift or dump their 
employees from private to public coverage, the wise and 
responsible use of public dollars, ensuring continued health 
coverage for long-income beneficiaries, and to promote personal 
responsibility through beneficiary cost sharing.
    As a result, Rhode Island created the Right Share Premium 
Assistance Program and established cost-sharing requirements 
for Right Care and Right Share beneficiaries above 150 percent 
of the federal poverty level. Rhode Island sought and received 
approval from CMS through a state plan amendment to create the 
Right Share Public/Private Partnership. This program is aimed 
at helping eligible beneficiaries maintain employer-sponsored 
insurance.
    In the Right Share program, the State pays the 
beneficiary's portion of the employer-sponsored insurance and 
provides wraparound services through the State Medicaid 
program. A portion of that state share may be paid by the 
beneficiary as a monthly premium. This arrangement has been 
extremely successful at maintaining the employee/employer link.
    CMS has agreed that this is an acceptable alternative to a 
1-year waiting period because we are able to effectively 
capture the employer coverage and avoid any crowd-out issues.
    Right Share has been very successful helping lower-income 
families maintain employer-sponsored insurance and avoid moving 
to a completely government-funded health program. Currently 90 
percent of Right Share families have an income below 185 
percent of the federal poverty level. Those families are at 
greatest risk for dropping their employer-sponsored insurance 
and becoming crowd-out statistics.
    The Right Share approach has maintained the employer share 
at a savings of $1 million for every 1,000 enrollees every 
single year. Those are costs that would have likely come to the 
state as employers have passed higher commercial premiums onto 
their employees, creating an affordability problem for lower 
income families.
    Rhode Island also received approval to require monthly 
premiums for families with incomes over 150 percent of the 
federal poverty level. For higher income enrollees, monthly 
premiums have lessened the gap between the cost of maintaining 
employer-sponsored insurance and enrolling in a government 
program. This is intended to dissuade employees from dropping 
commercial health plans for less expensive, government-funded 
coverage.
    To avoid losing the lower-income enrollees to relatively 
high cost sharing efforts, Rhode Island has opted for a sliding 
scale monthly premium based on income. Our ability to maintain 
a high percentage of eligible persons enrolled is evidence that 
we have been successful at balancing these competing interests.
    Additional measures contained in the CMS letter include the 
monitoring of possible health coverage through non-custodial 
parents, a requirement that 95 percent of eligible children 
under 200 percent of the poverty level are ensured, and an 
assurance that the number of children under 200 percent of the 
federal poverty level covered by private insurance has not 
decreased by more than 2 percent over the past 5 years.
    As part of Rhode Island's Medicaid program, Integrity 
Procedures, the state routinely conducts third-party liability 
checks in an effort to determine any other source of insurance 
coverage, which would include coverage associated with non-
custodial parents. These checks are conducted routinely and in 
conjunction with commercial insurers.
    Rhode Island has complied with the assurance that 95 
percent of eligible children under 200 percent of the federal 
poverty level are insured. Compliance was achieved through 
long-term outreach and a commitment to sustaining commercial 
insurance through the Right Share premium assistance program.
    Rhode Island has a history of strong community advocacy. 
With these community partners, the state has been able to 
enroll tens of thousands of children in this program. Efforts 
to educate the public about this program continue on a daily 
basis. The assurance that limits the potential decrease in 
commercial insurance coverage for this population to 2 percent 
over 5 years is the most difficult provision to meet.
    Statewide insurance initiatives to expand access and 
affordability are not under the purview of the state Medicaid 
program. But in Rhode Island, they have played an active role 
in those strategic discussions. The ability for long-income 
Rhode Islanders to afford commercial health insurance is 
important to the governor and to the fiscal integrity of the 
State's Medicaid program.
    In conclusion, compliance with the CMS letter dated August 
17, 2007 was not the result of last minute program changes or 
quick fixes by the Medicaid department. Rhode Island has been 
able to avoid crowd-out issues because of a long-term reasoned 
approach that seeks to maintain an enrollee's existing 
coverage, which will not create disincentives so that 
beneficiaries will migrate to big government programs.
    I thank you very much for the chance to speak.
    [The prepared statement of Mr. Alexander follows:]

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    Mr. Pallone. Thank you, Mr. Alexander. Ms. Cummings.

     STATEMENT OF LESLEY CUMMINGS, EXECUTIVE DIRECTOR, THE 
        CALIFORNIA MANAGED RISK MEDICAL INSURANCE BOARD

    Ms. Cummings. Thank you, Mr. Chairman and Mr. Deal and 
other members of the Committee. We really appreciate the 
opportunity that you invited us here to talk to you about how 
we would see the effect of the August 17 directive applying to 
California.
    First, I wanted to note that SCHIP, one of the things that 
we have all loved about it and continue to love about it, is 
that it has provided States with a lot of flexibility to look 
at the circumstances in its State and decide what it needs in 
terms of coverage of children. This is really important because 
every State has a difference in its rates of uninsurance, in 
the income of people in the State, of the incidents of 
employer-sponsored coverage. So it is really important to take 
those things into consideration when designing a program.
    In California, we designed a program that began in July 
1998 with coverage of children to 200 percent of the federal 
poverty level with the application of income disregards used by 
Medicaid. Why did we do that? Because we wanted somebody to go 
into Medicaid if they should, and if you use a different 
standard, you wouldn't be able to do that. This was approved by 
the Federal Government.
    In 1999, we expanded coverage to children up to 250 percent 
of poverty again using this net income standard. Another thing 
that was a future of our program then and was approved by CMS 
at that time was a 3-month waiting period for our entire 
program.
    Next in 2006, at the urging of the administration, 
California elected to cover pregnant women with SCHIP dollars, 
and that is to an income of 300 percent of federal poverty 
level and coverage for the woman's children for 2 years at 300 
percent poverty level. We have built a fabulous program in 
California. We cover a million people. That is through 
Medicaid, through our pregnancy program, through our program 
for children. So we have really taken the opportunity and 
worked with it to create what I think anybody in our state said 
would be a fabulous program.
    Nevertheless, despite the fact that we cover up to 250 
percent in our SCHIP program, up to 300 percent for pregnant 
women, the average family income for a child in our program is 
165 percent. Now, why? Because the incidents of employer-
sponsored coverage increases as you get higher up in the income 
so fewer people need it. But that doesn't mean there aren't 
uninsured people there. They are there, and they don't have 
access to employer-sponsored coverage. It is just that it is to 
a fewer of them. So our state would like to go to 300 percent 
of coverage would be not allowed to under the terms of the 
August 17 letter, but we see the need in that population.
    What has happened as a result of the letter? Coverage has 
been affected now in a number of other states that wanted to 
expand their coverage, and they have been denied, coverage like 
Louisiana, Oklahoma, Ohio. We ourselves in California are one 
of the 14 states that CMS has said you have a year to come into 
compliance. So we are in that category where we haven't asked 
for an expansion, but we are expected to make changes to our 
program if we are going to continue to serve children or 
pregnant women with incomes above 250 percent of the poverty 
level.
    Well, so how able are we to make these changes? People have 
talked to you about a number of these. I am not going to 
mention all of them again, but I would like to just go through 
a couple of them that seem particularly challenging to us.
    One, the provision that there have not been a decline in 
employer-sponsored coverage for children over a five-year 
period. We have had a decline higher than that for adults where 
there is no public program waiting to take somebody out. So 
that is not a feature of crowd-out. That is a feature of the 
fact that employer-sponsored coverage is declining. And that is 
true not just in California but in other states.
    Cost sharing. The letter would require you to increase your 
cost sharing up to 5 percent of family income, unless you can 
demonstrate in some way that is totally unclear that the 
relationship between private coverage and your program coverage 
is less than 1 or 2 percent. Well, I don't see how anybody 
would ever do that, and if you have to increase to 5 percent, 
in our State, you would be increasing families' premiums by 
thousands and thousands of dollars.
    We are aware of the issue of cost sharing. We also pay a 
third of the cost of this program. Our governor has proposed 
increasing premiums in the budget year but not up to 5 percent 
of family income. He has proposed it to 2.7 percent.
    So that is just a couple of the things I would bring to 
your attention, a number of them are laid out in my testimony. 
What will it mean to us in California if 817 is implemented? We 
won't be able to expand to 300. We will have to reduce services 
to children who have net incomes at 250 percent rather than 
gross. That is about 14,000 children per year. And we don't 
know what it means about our pregnant women because the 
application of these rules to pregnant women is unclear.
    And on that point of things being unclear, we think that 
one of the really challenging things about the August 17 letter 
is that it is not transparent. There are not uniform standards. 
There are negotiations going on with States on a one-on-one 
basis where you can come forward and see if this particular 
database or that particular database would satisfy.
    One of the really challenging things about doing that 
particularly to meet the 250 percent standard--I am sorry, 90 
percent of children at 200 percent, is that that is a way that 
you could then be falsely indicating that you don't have as 
many uninsured children as you really do. And it will affect 
your formula when it comes down to passing out state SCHIP 
dollars. Because if you jerry-rig databases and come in and go 
good news, according to this database, we are at 92 percent. 
But if in fact you are--and nobody will ever really know this 
number, but at 80 percent and your economy is going down and 
more people are qualifying, you will just deny your state the 
money that you need to serve those children.
    So that is my comments. Thank you.
    [The prepared statement of Ms. Cummings follows:]

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    Mr. Pallone. Thank you very much, Ms. Cummings. And thank 
you to all the panel. I think you have been very succinct in 
explaining to us the impact of the August 17 memo.
    We will now turn to questions. I will recognize myself for 
5 minutes, and I will start with Dr. Orszag. One of the 
Administration's stated goals in issuing the August 17 
directive is to improve enrollment of low-income children in 
families with incomes below $35,200, which is the 200 percent 
of the federal poverty level. But many of us have questioned 
whether this directive will actually achieve this goal. Can you 
tell me how many currently eligible but unenrolled children in 
families with incomes below $35,200 a year does CBO assume gain 
new coverage as a result of the directive?
    Mr. Orszag. Under our baseline?
    Mr. Pallone. Yes.
    Mr. Orszag. Effectively zero.
    Mr. Pallone. OK, does the CBO assume that the net effect of 
the directive is to help improve enrollment of eligible but 
uninsured children in families with incomes below that $35,200 
a year? Or does CBO assume the net effect of the directive is 
to prevent states that cover children in families with incomes 
above the $44,000 a year from continuing to cover those 
children?
    Mr. Orszag. Again, under our baseline the effect is very 
modest, but the fact that it is there is mostly because of the 
waiting period that is imposed on children above 250 percent.
    Mr. Pallone. Which is the $44,000?
    Mr. Orszag. Right.
    Mr. Pallone. OK, I personally believe, Dr. Orszag, that the 
August 17 directive is punitive to both states and children, 
and I also believe that we can increase enrollment of the 
poorest children without harming moderate-income children.
    The CHIPRA bill, the bill that we passed last year that the 
President vetoed, the expansion, that actually helps states 
enroll more of the lowest income children without penalizing 
States looking to cover children at moderate income levels. And 
I just wanted to ask you from CBO's standpoint, do you believe 
that the CHIPRA bill would have been more effective at reaching 
the lowest-income eligible but not insured children than this 
August 17 directive?
    Mr. Orszag. It is quite difficult to compare something that 
significantly expands the program to the effect of a directive. 
Again, as I said earlier, the effect of the directive relative 
to our baselines is effectively zero on take-up among low- or 
moderate-income children. Whereas the legislation that was 
proposed did have a significant increase in enrollment 
including among those who are currently eligible but 
unenrolled.
    Mr. Pallone. You may have heard Mr. Alexander's comments 
that having a beneficiary pay a portion of the state's share 
would reduce crowd-out. Would you agree with that?
    Mr. Orszag. I think the evidence on that is quite 
inconclusive. In fact, the leading researcher in this area is 
Professor John Gruber of MIT, and with regard to both waiting 
periods, but especially with regard to cost sharing, his 
results suggest that it is not clear. I actually have the study 
with me, and I will just quickly read: ``Findings suggest that 
state efforts to increase financial barriers to public 
barriers''--that would be cost sharing--``may deter the use of 
those programs by those who need them''--he means uninsured 
people--``at a faster rate than it is deterring the use of 
those programs by those who are crowded out. While the results 
are imprecise, there is certainly no evidence that imposing 
costs on beneficiaries is reducing crowd-out of private 
insurance.''
    Mr. Pallone. OK, thank you. Now, let me ask Mr. Rosenberg. 
CMS has said repeatedly that they will work with states to help 
them meet some of these tests in the August 17 directive. For 
example, CMS has initially indicated informally that there 
would be no exceptions to the 1-year waiting period or 
requirement that children must be uninsured for a full year 
before qualifying for CHIP. But in the May letter, you know, 
that they recently did, CMS now says it will consider 
exceptions.
    My fear is that working with states and these exceptions 
could be applied arbitrarily in the absence of any regulations 
and any specificity. Doesn't this give CMS the power to approve 
one state and disapprove another even if they are in the exact 
same circumstances? And for example, while Rhode Island did not 
have to change the way it calculates eligibility levels for 
CHIP, other states like Indiana and Tennessee have already been 
told by CMS that they must change that part of their program.
    I will ask either Ms. Shah or Mr. Rosenberg actually. 
Doesn't this approach have the potential to undermine 
requirements for a fair, transparent, and equitable review 
process? Mr. Rosenberg or Ms. Shah or both of you?
    Ms. Shah. I agree with you that I think it does introduce a 
great deal of uncertainty as to what states are expected to do, 
and there is a potential for inconsistency. It is especially 
unclear since the issuance of the May 7 letter what exactly is 
the position of all of the strategies and assurances that are 
set out in the August 17 letter. And I think probably further 
clarification would be needed.
    If CMS's intent was to require uniformity among states by 
issuing the August 17 letter, I don't think this strategy is 
going to work.
    Mr. Pallone. Mr. Rosenberg?
    Mr. Rosenberg. I would agree with Ms. Shah and just add 
that it provides a certain amount of leverage for CMS to the 
States to engage in perhaps disparate action. Once again, it 
appears to be an attempt to move toward and to satisfy 
potential court scrutiny that will say that we are still being 
flexible. In fact, the evidence of past practice in the 
departure and the leverage that might be affected by this, I 
agree with Ms. Shah that this doesn't change the difficulties 
in their potential legal problems that are raised by both the 
August 17 letter and the clarification, so to speak, of the May 
7 letter.
    Mr. Pallone. Thank you. I just wanted to ask unanimous 
consent to enter into the record a letter from, I guess, over 
100 different organizations that have opposed the August 17 
Directive. Mr. Deal.
    Mr. Deal. Thank you, Mr. Chairman. I am going to ask you 
all to be brief in the responses because I am going to try to 
cover a lot. Ms. Shah and Mr. Rosenberg, you have given this 
committee something that probably only a third-year law student 
who is bogged down in an administrative law class could ever 
appreciate, and that is the bureaucracy's minutiae mindset.
    Now, the thrust of this whole thing is Congress passed a 
statute called the SCHIP Program. Regulations were adopted by 
CMS, the administrative executive branch agency designed to 
implement that statutory program. And now we are arguing about 
whether a letter is a rule that must go through some 
bureaucratic process in order to have force and effect. I want 
to go back to a more simplistic approach.
    I would like to ask the two of you, the experts, and please 
be brief, can an executive branch agency such as CMS enforce a 
statute passed by Congress that delegates them the authority to 
enforce the statute without this minutiae? Does it depend on 
how specific the statute is?
    Mr. Rosenberg. Supreme Court case law and court of appeals 
case law make it clear that in delegating authority to an 
agency to promulgate rules and when that agency promulgates 
such rules, if it then----
    Mr. Deal. I am not talking about rules. I am talking about 
statute. Let me read you the statutory language. Statutory 
language says that through intake and follow-up screening, that 
only targeted low-income children are furnished child health 
assistance under state child health plan. And it also goes on 
to say that the state child health plan does not substitute for 
coverage under group health plans. That is the statutory 
language. The regulatory language as to part of it says the 
state plan must include a description of reasonable procedures 
to ensure that health benefits coverage provided under state 
plan does not substitute for coverage provided under group 
health plans as defined in the code section that it is designed 
to enforce.
    Now what I hear you saying is that--and you quoted it--said 
that a rule covers every statement that an agency can make. It 
becomes a rule and must follow the procedures of adoption of a 
rule. I would like to ask you this question, Ms. Shah, since 
you used the illustration of the New York plan being denied. 
Could CMS have denied the New York state plan amendment if they 
just never issued the August 17 letter based on the authority 
given them under the statute and under the regulation?
    Ms. Shah. Well, CMS would have to follow whatever the 
regulation and the established interpretation of that 
regulation was over the years.
    Mr. Deal. I take that to be a yes.
    Ms. Shah. But you see in the case of New York, they applied 
that letter requiring a whole host----
    Mr. Deal. I am saying if they had never written the 
letter----
    Ms. Shah. Yes.
    Mr. Deal [continuing]. Could they have denied the plan if 
they had just never written the letter?
    Ms. Shah. They may not have. It might have been viewed as--
--
    Mr. Deal. Well, then how did they approve Mr. Alexander's 
Rhode Island plan?
    Ms. Shah. But to require a whole host of strategies, which 
they required New York to comply with here, without having 
required that of any other State previously, might have been 
viewed as arbitrary and capricious and again have resulted in a 
lawsuit.
    Mr. Deal. In other words, you are really making the 
argument that some of us have made before when our colleagues 
on the other side have said and criticized the Administration 
for approving state plans that have allowed them to go above 
200 percent of poverty for their SCHIP program. You are 
basically saying that the Administration had no discretion to 
deny those plans. Is that right?
    Ms. Shah. The Administration has a great deal of discretion 
in the way it implements programs, but where there has been a 
settled interpretation of how a statute or regulation is to be 
implemented, case law is very clear that there has to be a--it 
is considered a rule and----
    Mr. Deal. OK. So in other words, we can't pass a statute 
that is specific enough that says that you don't have crowd-out 
and that you ensure poor children first. The statute is not 
specific enough. The regulation that goes further detail to 
saying how to implement that statute is not detailed enough, 
that we then have to go to implementing rules that deal with 
this minutiae before CMS can do anything to enforce this SCHIP 
Program?
    Ms. Shah. Well, very interestingly, when this rule was 
promulgated----
    Mr. Deal. Well, you said it was a letter, and the letter is 
the equivalent of a rule.
    Ms. Shah. No, I am talking about the regulation.
    Mr. Deal. OK.
    Ms. Shah. When the regulation was promulgated, there was a 
debate at that time as far as what the crowd-out strategies 
should be. And CMS at that time said that they considered 
requiring a set of specific procedures that each state would 
have to use. They rejected that option because the statute 
authorizes states to design approaches to prevent substitution, 
not the Federal Government. In other words, they questioned 
whether they had the authority to impose a certain set of 
procedures.
    Mr. Deal. Are you saying CMS has no discretion then in the 
administration of this program?
    Mr. Rosenberg. CMS, when it promulgated the 2001 rule, 
provided guidelines, provided the rules by which they would 
grant or deny. They gave great flexibility. If they want to 
change that flexibility and put in more rigid rules, they have 
to, according to the Supreme Court, go back and change the rule 
the same way they promulgated it, which is by notice and 
comment rulemaking. But remember what Ms. Shah and I are 
dealing with is not the APA. We are dealing with the 
Congressional Review Act, which has much broader standards for 
review by Congress. And if Congress wants to look at the 
amendment that has been made, or the document of August 17, 
they can do that, and they can use different kinds of analysis 
and reasons for overturning it if they can get majorities to 
affect a disapproval resolution.
    Mr. Deal. I think you both illustrated the point I was 
making in my first statement. Thank you.
    Mr. Pallone. Thank you, Mr. Deal. Next is our vice chair, 
Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, for, one, holding the 
hearing, and I apologize for jumping back and forth because we 
have a nursing home hearing downstairs in O&I, those of us who 
are on that committee. But I would like to ask unanimous 
consent to have my full statement placed into the record.
    [The prepared statement of Mr. Green follows:]

                      Statement of Hon. Gene Green

    Thank you Mr. Chairman for holding this hearing today on 
H.R. 5998, the Protecting Children's Health Coverage Act of 
2008. As an original cosponsor of this bill, I am pleased we 
are moving this quickly through the legislative process.
    The SCHIP program has been a priority for me because my 
home state of Texas has one of the highest uninsured rates of 
children in the US with nearly 20 percent uninsured compared to 
11 percent nationwide.
    Today, we will discuss H.R. 5998, which will nullify the 
August 17th directive. The August 17th directive is a letter 
the Administration sent to State Medicaid and SCHIP directors 
outlining certain conditions states must meet if they want to 
cover children in families with incomes above 250% of the 
federal poverty level.
    One other provision outlined in the directive bars children 
who have been dropped from employer based insurance from 
participating in CHIP for a full 12 months. These types of 
hurdles do not help get those uninsured children who are 
eligible for CHIP in the program.
    In Texas, SCHIP only covers children at 200% and below the 
federal poverty level, but we have still experienced some 
significant problems enrolling children in the CHIP program. In 
fact, Texas CHIP participation has never been above 85%.
    The State of Texas has not been wise with the SCHIP program 
and has lost over $850 million in matching funds due to many 
missteps including kicking children off of the SCHIP roles and 
forcing them to reregister every 6 months.
    According to the US Census Bureau, 1.5 million Texas 
children are uninsured. Many of those children are actually 
eligible for Medicaid or CHIP, but are not enrolled in either 
program. The fact of the matter is,the number of insured 
children is growing, not only in Texas, but throughout the US 
and the August 17 directive does not help reduce the number of 
uninsured children.
    The two SCHIP reauthorization bills that we passed and that 
the President vetoed actually allowed states to sustain current 
programs and cover an additional 4 million uninsured children 
by 2012.
    Adding new challenges and hurdles for states to meet before 
they can enroll additional children does nothing to solve the 
problems we have insuring children in this country.
    The last thing we need to do is make it harder to enroll 
children in the CHIP program when states like Texas are 
experiencing problems enrolling children in the first place.
    The August 17th directive represents a fundamental policy 
change in the SCHIP program and was published in the form of a 
letter from CMS to state health officials and not moved through 
the promulgated rule process, which would have required a 
comment period for stakeholders before the rule went into 
effect.
    Both the GAO and CRS have stated this letter violated the 
Congressional Review Act and while the Administration has 
attempted to clarify the underlying policy in the August 17th 
directive, the fact is it made significant changes to the SHIP 
program which made it more difficult for states to expand their 
SCHIP programs and violated congressional review processes.
    That's why I strongly support H.R. 5998 and I hope we will 
move this bill swiftly through the Committee.
    Thank you Mr. Chairman, I yield back my time.
                              ----------                              

    Mr. Green. I guess my concern in the hearing is the August 
17 Directive. In coming from Texas, I have been so frustrated, 
and the members of this committee know that, that using the 1-
year waiting period or even the not having insurance for 1 year 
is a way you reduce your enrollment. And I know that happened 
in Texas in 2003. 2005 it wasn't corrected, and in 2007, they 
did add some children back. And the formula now, I think it is 
just below 200 percent of poverty they have the year that you 
can have insurance for the full year.
    I know we are talking about two different things, but I 
think they are interrelated because if you make a child wait a 
year from losing their private sector employment--although it 
is interesting--and I will ask this question. It is interesting 
that CMS said that it didn't include unborn children. So they 
are giving health insurance to the same family for a child that 
is born within that year period, but if you are a child that is 
2 years old, you have to wait that year. I would have to 
understand the convoluted reasoning for that. You know I don't 
know why we would have an arbitrary year waiting period because 
you are the children without health care. And that was the 
original intent in '97. A number of us were here when we voted 
for that balanced budget act. I didn't vote for the balanced 
budget act, but I voted for the CHIP side because I knew that 
was needed.
    Let me ask--CMS said they will work with the states to help 
meet some of these tests to the August 17 Directive. For 
example, CMS has initially indicated informally that there will 
be no exceptions to the 1-year waiting period, a requirement 
that children must be uninsured for a full year before 
qualifying for CHIP coverage. In the May letter, CMS now says 
it will consider exceptions. My fear is that this working with 
the States, these exceptions could be applied arbitrarily and 
in the absence of regulations in any specificity. Doesn't this 
give the CMS power to approve one state and disapprove another 
even if they have the exact same circumstances? Ms. Cummings or 
anyone on the panel?
    Ms. Cummings. Mr. Green, that is exactly one of the 
concerns that we raised in our testimony is this approach of 
negotiation and different states being able to use different 
databases to make cases is one that does seem to us to lead to 
a non-uniform approach, which arouses concern.
    The other thing is that we haven't today yet mentioned that 
the August 17 letter said you must satisfy all of the 
conditions so that we in California, for example, are in a 
situation where we could satisfy a couple of them. But, for 
instance, this issue about replacement of employer-sponsored 
coverage. Given that the adults in our state have an erosion of 
employer-sponsored coverage of over that amount, there is no 
way we are going to satisfy it with children. And so you just 
end up being out of luck.
    Mr. Green. Ms. Shah and Mr. Rosenberg, I know from the GAO 
and CRS. Do you have anything from your reports on that issue, 
the arbitrariness it could have unless we actually have some 
regulations that--I like the Federal Government to work with 
the States. But I also like it to be on the same playing field, 
I guess. That is what my concern is.
    Ms. Shah. Well, I know GAO often looks at federal programs 
to see how states are implementing them and whether they have 
been consistent across states. I don't know about this 
particular concern, but I think it is something that, from a 
problematic side, they might look into some time in the future.
    Mr. Green. Mr. Rosenberg?
    Mr. Rosenberg. I did not address that and wasn't asked to 
address that in my statements.
    Mr. Green. OK. To point out, with regard to CHIP, it seems 
that the administration has used a lot of fuzzy math on it. Do 
you agree with that?
    Mr. Orszag. You are probably referring to the 95 percent 
participation rate test----
    Mr. Green. Yes.
    Mr. Orszag [continuing]. Which has been interpreted--my job 
is to evaluate the effects of how they are interpreting a 
certain test. They appear to be interpreting the test in a 
particular way whereby the vast majority of states would pass 
the test, and a substantial number of states would have 
participation rates significantly above 100 percent.
    Mr. Green. How do you get above 100 percent? Frankly, I 
would love to get there in Texas.
    Ms. Cummings. Mr. Green.
    Mr. Green. Yes?
    Ms. Cummings. There are a number of ways you can get 100 
percent. According to one set of data, we are at 130 percent. 
What does that mean? Does that mean we have served all the 
uninsured children? No. If we go to look at the CPS's, is that 
130 figure confirmed? No. If we go to our own state survey 
data, is that number confirmed? No.
    Mr. Green. OK, I know I am out of time, Mr. Chairman. Thank 
you for your patience.
    Mr. Pallone. Thank you, Mr. Green. Ranking member of the 
full committee, Mr. Barton.
    Mr. Barton. Thank you, Mr. Chairman, and thank you for 
having a hearing on this. It is good. We have been discussing 
SCHIP for over a year and a half. For the first year, all we 
did was discuss it on the floor. It is good to actually have 
real people testifying on real bills. I am not a supporter of 
your bill, but I think it is an honest bill and I think it is 
worthy of being debated.
    My first question is to Dr. Orszag. CMS has stated that of 
the 15 states that have submitted data to comply with this 
August 17 letter, they have looked at 11 of those data sets. 
Nine of those states comply with the 95 percent test, and they 
say that they think every state will be able to. I believe CBO 
has looked at that same data set and concurs with that 
assessment. Is that correct?
    Mr. Orszag. I would concur that it appears that given the 
way that CMS is interpreting or applying the 95 percent test, 
the vast majority of states will either automatically pass it 
even with no effort or very close.
    Mr. Barton. OK, and you seem to imply in your answer that 
CMS isn't looking at the data correctly? The way they look at 
it, are they using some unusual, exotic methodology?
    Mr. Orszag. I think it would be fair to say that the way 
they are applying that test is not the way that most analysts 
would do so, yes.
    Mr. Barton. Would you say that they are applying the test 
more stringently or more loosely?
    Mr. Orszag. More creatively.
    Mr. Barton. I don't understand creative.
    Mr. Orszag. Well, conceptually it is hard to get 
participation rates--or not conceptually, just simple 
mathematics that are above 100 percent. And the way that they 
appear to be applying this test, you can easily get 
participation rates above 100 percent. The reason is that they 
are looking----
    Mr. Barton. Now, what I mean----
    Mr. Orszag. What is the underlying reason? The underlying 
reason is they are saying you are insured if you have insurance 
at any point during the year. So if you have insurance just for 
half of January, you are good to go. And obviously that means 
that there are a lot of people who are uninsured for the vast 
majority or in any given month who would be counted as insured 
under their methodology. Or I should say their apparent 
methodology.
    Mr. Barton. What would a normal analyst use as a length of 
insurance? The entire year, half the year?
    Mr. Orszag. Or a point in time. You look at the population 
at a point in time or over a month or something, average 
monthly insurance and average monthly enrollment and what share 
of the population would be uninsured over a month. Or you could 
do it over different periods of time, but the way that they are 
doing both the nominator and denominator in this----
    Mr. Barton. Numerator and denominator.
    Mr. Orszag. The numerator and the denominator gives you 
answers that don't make a lot of sense.
    Mr. Barton. OK. Now, Mr. Alexander, your state has received 
a compliance letter, I believe, from CMS. Is that correct?
    Mr. Alexander. Correct, yes.
    Mr. Barton. And what did you do that you weren't doing 
before to show the CMS that you could comply with this 
directive?
    Mr. Alexander. Well, as I had stated in my testimony, Rhode 
Island has had a premium assistance program for some time, and 
this is not something new that Rhode Island had to do post-
August 17. So not only has Rhode Island had a commitment to 
insuring our poorest children, but in regards to the 95 
percent, we closely monitor those people that are coming in and 
on and off the program. So if somebody had health insurance for 
just a month or if somebody has health insurance for 6 months, 
we are watching that very closely.
    Mr. Barton. So and CMS worked with your state and you to do 
this?
    Mr. Alexander. CMS has been nothing but a big help to us in 
terms of either complying with the provisions in the letter or 
on a day-to-day basis with our program. Of course, all states 
have challenges. Rhode Island is--I am just a small boy from a 
small state. So, as I am sitting up here looking at all the big 
states in front of me----
    Mr. Barton. A state is a state.
    Mr. Alexander. Yes, well you are correct, but Rhode Island 
is more like a county. So although----
    Mr. Barton. Tell that to the Congressman from Rhode Island.
    Mr. Alexander. Well, we will, but although as you know----
    Mr. Barton. His vote counts just as much as mine.
    Mr. Alexander. As you know, we can bang with the best of 
them when it comes to the political arena.
    Mr. Barton. Yes.
    Mr. Alexander. But in regards to your question of course, 
we did not have any major problem complying with the August 17 
letter. I can only speak as to----
    Mr. Barton. Well, based on your efforts--because my time is 
about to expire--do you think that the other states that wish 
to comply will be able to work with the CMS and get compliance 
at the 95 percent rate?
    Mr. Alexander. Based on my experience, I would say yes.
    Mr. Barton. OK.
    Mr. Alexander. But I am not working the other states.
    Mr. Barton. I understand that.
    Mr. Alexander. But based on my experience, I would say yes. 
I think we have an excellent model in Rhode Island.
    Mr. Barton. Mr. Chairman, my time has expired. Let me 
simply say this before I yield back. Any states can cover any 
child in their state at any level of income with state-only 
dollars. All the CMS is trying to do is the law that we passed 
10 years ago is that if you want federal matching funds, you 
should try to cover your low-income children first at the 95 
percent level. And as we have pointed out, the states that are 
actually working in a good faith effort to do that seem to be 
able to comply with that directive. So I hope that we will take 
that into consideration before you attempt to move this piece 
of legislation. But I sincerely appreciate you holding this 
legislative hearing. I think that is the way to do it. And with 
that, I yield back.
    Mr. Pallone. Thank you, Mr. Barton. Mr. Engel for 
questions.
    Mr. Engel. Thank you, Mr. Chairman. As I was saying, right 
in the nick of time. Let me follow up on early questions 
related to New York's state plan amendment.
    New York first submitted a state plan amendment to CMS last 
April to expand on the number of individuals covered. Five 
times, and let me say that again, five times CMS stopped the 
clock on considering the proposal by asking the state of New 
York questions about the proposal. New York repeatedly engaged 
with CMS and provided answers in a timely fashion.
    Only after the draconian August 17 letter was sent out, 
which both GAO and CRS says violates the Congressional Review 
Act, did CMS deny New York's application. They used the August 
17 CMS Directive as the basis for doing so. There is no doubt 
about this. They said it time and time and time again.
    So the administration's argument that the August 17 
Directive is not binding is obviously contrary to actions they 
have already taken, as I just explained.
    So let me start with Ms. Shah. In the brief file by the 
Department of Justice in the case of New Jersey versus the U.S. 
Department of Health and Human Services, the DOJ argues that 
the directive is non-binding. Isn't it true, however, that the 
Department of Health and Human Services has already denied a 
number of states' efforts to expand coverage to uninsured 
children based on this directive?
    Ms. Shah. In the course of our legal opinion, we were 
concerned with whether it was a violation of the Congressional 
Review Act, so we didn't look at particular states except for 
New York because the denial of the New York state plan 
amendment, the August 17 letter was specifically cited in that 
denial. But I understand that some states, other states have 
been affected by the letter.
    Mr. Engel. Well, let me ask you this and perhaps Mr. 
Rosenberg as well. In addition, hasn't the Department of Health 
and Human Services forced the number of States to scale back or 
modify proposals to cover uninsured children based on the 
requirements in the directive?
    Mr. Rosenberg. I have seen reference to those kinds of 
allegations. I am not aware of actually factual--that leverage 
or whatever was used, on the basis of that, to have the state 
scale back. If that can be demonstrated in an APA case, that 
could be persuasive to the courts in addition to the New York 
state actual rejection.
    Mr. Engel. OK, isn't it true though that the Department 
of--the argument that the August 17 Directive is not binding is 
contrary to actions they have already taken? Perhaps Ms. 
Cummings could answer that.
    Ms. Cummings. Well, one thing that was in testimony 
previously submitted in a congressional hearing by Georgetown, 
by the Center for Children and Families, was that Louisiana, 
Oklahoma, and Ohio had had to--failed to pursue getting 300 
percent of federal poverty level coverage in their state 
because of the 8/17 directive.
    In our state, for example, the hammer doesn't hit until at 
some point in the future because we are one of 14 states that 
have been told that we must come into compliance. Our state 
would like to go to 300 percent of federal poverty level. If we 
tried that right now, we are sure that we would be stopped. But 
we don't actually have anything on the table to do that.
    What we do have is what happens to children who have 
incomes of 250 percent with the application of income 
deductions because that is something that CMS has indicated, 
although not said in writing, but will no longer be possible. 
That affects 14,000 children a year in our state.
    Mr. Engel. Thank you. Ms. Shah, let me go back to you. In 
spite of DOJ's argument for the district court that the 
directive is non-binding, didn't GAO determine that the August 
17 letter is, in fact, binding?
    Ms. Shah. What we did determine was that it meant the 
three-part test that needed to be of an APA rule and had to be 
submitted to GAO. But in reinforcing our determination that 
this was a rule that had to be submitted to Congress and to 
GAO, we noted that there were certain elements of the August 17 
letter that did indeed appear to have a binding effect. And one 
of those was that it was applied in the case of New York and 
also the language of the letter itself imposing a 1-year 
deadline for states to come into compliance with what was set 
forth in that letter.
    Mr. Engel. Let me ask you this, Ms. Shah. If CMS were to 
clarify if the August 17 Directive was not intended to be 
binding, would the agency still have a problem for failing to 
comply with the requirements of a Congressional Review Act?
    Ms. Shah. Yes they would because that's not one of the 
criteria that is needed to be a rule for the purposes of the 
Congressional Review Act. Basically for a rule, it just has to 
be a rule that is of general applicability, having future 
effect, and designed to implement, interpret or prescribe law 
or policy. That reaches a range of statements that are well 
beyond those that are binding.
    Mr. Engel. Mr. Rosenberg----
    Mr. Pallone. We are up to----
    Mr. Engel. Am I done?
    Mr. Pallone. You are, yes.
    Mr. Engel. OK.
    Mr. Pallone. Sorry.
    Mr. Engel. Thank you.
    Mr. Pallone. All right, thank you very much. Thanks. That 
concludes our questions. This actually went very quickly, but 
it doesn't mean that we didn't learn a lot. I thought it was 
very worthwhile and I----
    Mr. Deal. Mr. Chairman.
    Mr. Pallone. Yes?
    Mr. Deal. Since I was very hurried in my questions, I just 
want to express to all of you, and I didn't get a chance to ask 
all of you questions, I want to thank all of you for being 
here. I think this mental exercise, if it is that, and the 
substantive issues that lie behind it are much more important, 
I think, technically than the issue of the August 17 letter. 
That is the underlying purpose of the legislation, and I think 
all of us want to work cooperatively with the states in trying 
to work out the problems that they face in keeping with what 
the purpose of the SCHIP program is. Thank you very much.
    Mr. Pallone. Thank you, Mr. Deal. Let me just remind you 
that members may submit additional written questions, and we 
should have those to the clerk within the next 10 days. So in 
another 10 days or so, you may get additional written questions 
which obviously we would like you to respond to. But again, 
thank you again. And without objection, this meeting of the 
subcommittee is adjourned.
    [Whereupon, at 11:30 a.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

                    Statement of Hon. Anna G. Eshoo

    Thank you Mr. Chairman for holding this important hearing 
on the future of SCHIP.
    In the 10 years since its inception, SCHIP has been 
successful in reducing the number of uninsured low-income 
children in the United States by one-third. In California, we 
cover over 1 million children who otherwise would not have any 
coverage and care. I ever American should have healthcare and 
above all, every child should be covered, regardless of their 
parent's employment situation or wealth.
    On August 17th, 2007, CMS adopted a draconian directive 
that effectively prevents any state from covering children in 
families earning 250% above the federal poverty level ($43,000 
for a family of three) unless they can achieve impossible-to-
attain standards. For example, states must enroll 95% of all 
eligible children under 200% of poverty before they can expand 
their SCHIP program. No federal means-tested program of any 
kind comes close to 95% enrollment. The result is that states 
are forced to scale back plans to cover thousands of children.
    The bill before us today will nullify the harmful, and 
likely illegal, directive that the Administration put out last 
August. The GAO and CRS have each issued legal opinions that 
the directive violates the Congressional Review Act (CRA), a 
law intended to keep Congress and the public informed about the 
rulemaking activities of federal agencies and to allow 
congressional review of such rules.
    I look forward to hearing from our witnesses who have had 
direct experience with these cuts to SCHIP, as well as from the 
GAO and CRS about the legality of CMS's directive.

                                 
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