SCHIP: HHS Continues to Approve Waivers That Are Inconsistent	 
with Program Goals (05-JAN-04, GAO-04-166R).			 
                                                                 
States provide health care coverage to about 60 million 	 
low-income uninsured adults and children largely through two	 
federal-state programs--Medicaid and the State Children's Health 
Insurance Program (SCHIP). Medicaid, established in title XIX of 
the Social Security Act, generally covers low-income families and
elderly and disabled individuals, and SCHIP, established in title
XXI of the act, covers children in families whose incomes,	 
although low, are above Medicaid's eligibility requirements. In  
2001, the Secretary of Health and Human Services announced a new 
initiative--the Health Insurance Flexibility and Accountability  
Initiative (HIFA)--under which states could expand coverage to	 
uninsured populations using Medicaid and SCHIP funds. HIFA	 
encourages states to develop coordinated public and private	 
health insurance coverage options and to target program resources
to uninsured individuals with incomes below 200 percent of the	 
federal poverty level (FPL). Authority for this initiative comes 
from section 1115 of the Social Security Act, which allows the	 
Secretary to waive many of the statutory requirements of Medicaid
or SCHIP in the case of experimental, pilot, or demonstration	 
projects that promote program objectives. Within the Department  
of Health and Human Services (HHS), the Centers for Medicare &	 
Medicaid Services (CMS) has the lead role in reviewing HIFA	 
waiver applications. In a July 2002 report, we raised legal and  
policy concerns about the need to clearly establish purposes and 
populations for which SCHIP funds may be spent. Our specific	 
concerns related to HHS's approval of a HIFA waiver for Arizona, 
which proposed using unspent SCHIP funds to cover childless	 
adults. We reported that, in our view, approving a waiver to use 
SCHIP funds for expanding coverage to childless adults was	 
inconsistent with SCHIP's statutory objective to expand health	 
coverage to low-income children. Because the SCHIP statute	 
requires that unused funds be redistributed to states that have  
spent their allotments, states' coverage of childless adults	 
using SCHIP funds decreases the funding available in future years
for reallocation to states with unmet SCHIP needs. We also	 
reported that HHS had approved HIFA waivers for Arizona and	 
California to use SCHIP funds to cover parents of SCHIP- and	 
Medicaid-eligible children without regard to cost-effectiveness, 
even though the SCHIP statute provides that families may be	 
covered only if such coverage is cost-effective--that is, only if
covering the family costs no more than covering the eligible	 
children. We suggested that Congress consider specifying in	 
statute that SCHIP funds are not available to cover childless	 
adults and recommended that HHS deny any pending or future state 
proposals to spend SCHIP funds for such coverage. We also	 
suggested that Congress consider establishing which statutory	 
objectives should take precedence: those of the SCHIP statute,	 
which authorizes family coverage only if cost-effective, or those
of section 1115, which allows certain statutory provisions--such 
as cost-effectiveness tests--to be set aside. Congress requested 
that we update our analysis of states' HIFA waiver proposals and 
approved by HHS after July 2002.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-166R					        
    ACCNO:   A09081						        
  TITLE:     SCHIP: HHS Continues to Approve Waivers That Are	      
Inconsistent with Program Goals 				 
     DATE:   01/05/2004 
  SUBJECT:   Aid for the disabled				 
	     Aid for the elderly				 
	     Children						 
	     Disability benefits				 
	     Disadvantaged persons				 
	     Elderly persons					 
	     Federal funds					 
	     Funds management					 
	     Health care cost control				 
	     Health care programs				 
	     Health insurance					 
	     Waivers						 
	     Health Insurance Flexibility and			 
	     Accountability Initiative				 
                                                                 
	     Medicaid Program					 
	     State Children's Health Insurance			 
	     Program						 
                                                                 

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GAO-04-166R

United States General Accounting Office Washington, DC 20548

January 5, 2004

The Honorable Charles Grassley
Chairman
The Honorable Max Baucus
Ranking Minority Member
Committee on Finance
United States Senate

Subject: SCHIP: HHS Continues to Approve Waivers That Are Inconsistent
with Program Goals

States provide health care coverage to about 60 million low-income
uninsured adults and children largely through two federal-state
programs-Medicaid and the State Children's Health Insurance Program
(SCHIP). Medicaid, established in title XIX of the Social Security Act,
generally covers low-income families and elderly and disabled individuals,
and SCHIP, established in title XXI of the act, covers children in
families whose incomes, although low, are above Medicaid's eligibility
requirements. In 2001, the Secretary of Health and Human Services
announced a new initiative-the Health Insurance Flexibility and
Accountability Initiative (HIFA)-under which states could expand coverage
to uninsured populations using Medicaid and SCHIP funds. HIFA encourages
states to develop coordinated public and private health insurance coverage
options and to target program resources to uninsured individuals with
incomes below 200 percent of the federal poverty level (FPL). Authority
for this initiative comes from section 1115 of the Social Security Act,
which allows the Secretary to waive many of the statutory requirements of
Medicaid or SCHIP in the case of experimental, pilot, or demonstration
projects that promote program objectives. Within the Department of Health
and Human Services (HHS), the Centers for Medicare & Medicaid Services
(CMS) has the lead role in reviewing HIFA waiver

1

applications.

1Although CMS has lead responsibility for administering Medicaid and
SCHIP, throughout this report we refer to HHS as the primary program
entity because section 1115 waiver authority resides with the Secretary,
and other HHS entities are also involved in the review process.

In a July 2002 report, we raised legal and policy concerns about the need
to clearly establish purposes and populations for which SCHIP funds may be
spent.2 Our specific concerns related to HHS's approval of a HIFA waiver
for Arizona, which proposed using unspent SCHIP funds to cover childless
adults. We reported that, in our view, approving a waiver to use SCHIP
funds for expanding coverage to childless adults was inconsistent with
SCHIP's statutory objective to expand health coverage to low-income
children. Because the SCHIP statute requires that unused funds be
redistributed to states that have spent their allotments, states' coverage
of childless adults using SCHIP funds decreases the funding available in
future years for reallocation to states with unmet SCHIP needs.3

We also reported that HHS had approved HIFA waivers for Arizona and
California to use SCHIP funds to cover parents of SCHIP- and
Medicaid-eligible children without regard to cost-effectiveness, even
though the SCHIP statute provides that families may be covered only if
such coverage is cost-effective-that is, only if covering the family costs
no more than covering the eligible children. We suggested that Congress
consider specifying in statute that SCHIP funds are not available to cover
childless adults and recommended that HHS deny any pending or future state
proposals to spend SCHIP funds for such coverage. We also suggested that
Congress consider establishing which statutory objectives should take
precedence: those of the SCHIP statute, which authorizes family coverage
only if cost-effective, or those of section 1115, which allows certain
statutory provisions-such as cost-effectiveness tests-to be set aside.

After receiving our July 2002 report, you wrote to the Secretary of HHS to
express concern about the agency's justification for using SCHIP funds to
provide health coverage for childless adults.4 In your letter, you
indicated that the Secretary should not continue to approve waivers that
divert SCHIP funds set aside by Congress for children to insure childless
adults. You also indicated that if these approvals

2U.S. General Accounting Office, Medicaid and SCHIP: Recent HHS Approvals
of Demonstration Waiver Projects Raise Concerns, GAO-02-817 (Washington,
D.C.: July 12, 2002).

3Congress in 1997 appropriated a fixed amount for SCHIP-approximately $40
billion in federal matching funds over 10 years (fiscal years 1998 through
2007). Annual allotments are made to states for use over a 3-year period,
and the Secretary is required to determine an appropriate procedure for
redistributing the unused SCHIP funds to those states that have already
spent their SCHIP allotments. Pub. L. No. 108-74, 117 Stat. 892, signed
into law on August 15, 2003, made SCHIP allotments for fiscal years 1998
through 2001 available for a longer period (for example, 1998 and 1999
allotments will be available through 2004). It also allows states that do
not spend their entire 2000 and 2001 allotments within a 3-year period to
keep half the unspent amounts, while the other half is redistributed to
states that have spent their entire allotments (for example, half a
state's unspent 2001 allotment shall remain available to that state
through the end of fiscal year 2005).

4Letter to the Honorable Tommy G. Thompson from Max Baucus, Chairman, and
Charles E. Grassley, Ranking Member, Senate Committee on Finance, August
6, 2002.

continued, you intended to take legislative action to prevent them, which
you have subsequently done.5

This report responds to your request that we update our analysis of
states' HIFA waiver proposals reviewed and approved by HHS after July
2002. This report provides information on HHS's approvals of states'
proposals to use SCHIP funds to extend health insurance coverage to
childless and other groups of adults, including whether such proposals
were subject to a cost-effectiveness test, and outlines the status of
other HIFA waiver applications that HHS has reviewed but not approved. Our
analysis covers states' HIFA waiver proposals considered by HHS from July
2002 through December 2003.6 For approved waivers, we analyzed the waiver
applications as submitted by the states; HHS decision memorandums and
approval letters; waiver applications as approved; waiver terms and
conditions; and, when available, the states' plans (called operational
protocols) for how the waivers will operate. We also discussed these
waiver approvals with officials at CMS. We conducted our work from January
through December 2003 in accordance with generally accepted government
auditing standards.

Results in Brief

Despite SCHIP's statutory objective of expanding coverage to low-income
children, HHS has continued to approve HIFA waivers that allow states to
use SCHIP funds to cover childless adults. From July 2002 through December
2003, HHS approved three states' proposals to use SCHIP funds for
childless adults. Without requiring the states to meet the statutory
cost-effectiveness test, the agency also approved four states' proposals
to use SCHIP funds to cover parents or guardians of SCHIP- or
Medicaideligible children. Unless Congress and HHS take actions in
response to the matters for congressional consideration and
recommendations to HHS presented in our July 2002 report, it appears
likely that HHS will continue to allow states to use SCHIP funds for
childless adults, and for parents and guardians, without regard to whether
this use is cost-effective.

5Since our July 2002 report, several legislative proposals have been
introduced that expressly prohibit the Secretary from using section 1115
waiver authority to make SCHIP funds available for childless adults. As of
December 2003, however, none of these proposals had been enacted into law.
See Beneficiary Access to Care and Medicare Equity Act of 2002, S. 3018,
107th Cong., S: 706, placed on Senate Legislative Calendar on October 2,
2002; Health Care Coverage Expansion and Quality Improvement Act of 2003,
S. 10, 108th Cong., S: 801, introduced in the Senate on January 7, 2003;
and Personal Responsibility, Work, and Family Promotion Act of 2003, H.R.
4, 108th Cong., S: 602, reported in S. Rep. 108-162, at 182 (2003). A
prior version of the Jobs Growth Tax Relief Reconciliation Act of 2003
also contained a provision that would have prohibited the agency from
spending SCHIP funds on childless adults. See H.R. 2, 108th Cong., S: 383
of Engrossed Amendment as Agreed to by Senate, discussed in H.R. Conf.
Rep. No. 108-126 at 169 but not enacted in Pub. L. No. 108-27, 117 Stat.
752.

6HHS also reviews non-HIFA section 1115 waivers, including some with
provisions similar to those proposed under HIFA, such as Tennessee's
TennCare II and Utah's Primary Care Network. We did not include non-HIFA
applications in this review. HHS approved one additional HIFA waiver that
we also omit: a waiver for Maine, approved September 13, 2002, that would
cover childless adults but would not use SCHIP funds. The Maine waiver
instead uses funds from its Medicaid disproportionate share hospital
allocation for this coverage.

HHS reviewed a draft of this report and reiterated its position responding
to our July 2002 report. HHS continues to believe that using section 1115
waiver authority to approve spending SCHIP funds to cover childless adults
is appropriate because this practice helps low-income Americans who do not
have health insurance. We believe that in allowing states to use unspent
SCHIP funds for their own adult populations, HHS is reducing the unspent
SCHIP funds available for future redistribution to states that have
exhausted their allotments for covering uninsured low-income children. HHS
has not, in our view, adequately explained how the objectives of the SCHIP
statute are promoted by insuring childless adults or by covering
populations besides children without regard to cost-effectiveness.

Background

Medicaid and SCHIP are the nation's largest health-financing programs for
lowincome people, accounting for about $250 billion in federal and state
expenditures in fiscal year 2002. To receive federal funding-which
reimbursed states, on average, for about 57 percent of their Medicaid
expenditures and 70 percent of SCHIP expenditures in fiscal year
2002-states must meet certain statutory requirements. Medicaid is an
open-ended entitlement program: as long as the federal government has
approved a state's Medicaid plan, the federal government will pay its
share of the state's expenditures to cover eligible populations; the
number of enrollees in the state's program cannot be limited. SCHIP, in
contrast, is not open-ended. Congress in 1997 appropriated a fixed amount
for SCHIP, specifically, $40 billion in federal matching funds over 10
years (fiscal years 1998 through 2007). Annual allotments are made to
states for use over a 3-year period, and the Secretary of HHS is required
to determine an appropriate procedure for redistributing unused funds to
states that exhaust their allotments. As of the end of fiscal year 2002,
few states had spent their full SCHIP allotments, and Congress in 2003
passed legislation allowing the states to retain their unspent funds for a
longer period.7 At the same time, however, SCHIP enrollment has been
growing. CMS estimates that 3.4 million children were covered through
SCHIP in fiscal year 2000, compared with more than 5.3 million children in
fiscal year 2002.

Under the authority of section 1115, HIFA gives states considerable
flexibility to increase cost sharing and reduce benefits for some Medicaid
and SCHIP beneficiaries to help fund coverage for additional uninsured
populations within existing program resources. The initiative allows
states to provide different benefit packages to different groups of people
covered under the waiver. To be considered, HIFA proposals must be
statewide and seek to coordinate coverage with private health insurance
options for low-income uninsured individuals-for example, through premium
assistance programs that would pay a portion of covered individuals'
premiums to purchase employer-based insurance. Typically, waivers are
approved for 5 years.

7The Congressional Research Service reports, for example, that as of the
end of fiscal year 2002, 29 states (including the District of Columbia)
had spent less than half their available SCHIP funds. See Congressional
Research Service, CRS Report to Congress: SCHIP Financing Issues for the
108th Congress (Washington, D.C.: Library of Congress, Aug. 15, 2003).

At the time of our July 2002 report, HHS had approved two HIFA waivers,
Arizona's and California's. Arizona's HIFA waiver allows the state to
cover previously uninsured low-income adults, including those with no
children. Coverage of childless adults with incomes at or below 100
percent of FPL was implemented in November 2001. Coverage of parents of
children enrolled in Medicaid or SCHIP with family incomes from 100 to 200
percent of FPL was implemented in January 2003. According to CMS, as of
July 1, 2003, combined state and federal SCHIP spending on childless
adults covered in Arizona's waiver totaled more than $214 million, and
coverage for parents totaled about $12.8 million. California's HIFA
waiver, which had not been implemented as of December 2003, would allow
that state to use SCHIP funds to cover the parents of children who are
enrolled in Medicaid or SCHIP.

Five Approved HIFA Waivers Use SCHIP Funds to Cover Uninsured Adults

From July 2002 through December 2003, HHS approved five states' waiver
proposals that would use SCHIP funds to provide health care coverage for
adults, including three that would cover childless adults. Specifically,
HHS approved HIFA waiver proposals from Illinois, New Mexico, and Oregon
to use unspent SCHIP funds to cover uninsured adults who have no children,
as well as parents of Medicaid- or SCHIP-eligible children. Two other
approved HIFA waiver proposals-New Jersey's and Colorado's-do not cover
childless adults but do cover other groups of adults. New Jersey's HIFA
waiver uses SCHIP and Medicaid funds to cover uninsured parents and
relative caretakers of children covered by Medicaid or SCHIP, and
Colorado's HIFA waiver used SCHIP funds along with state tobacco
settlement funds to expand coverage to pregnant women not otherwise
eligible for Medicaid.8 Table 1 presents more specific information on
covered populations and the expected sources of funding.

8On November 1, 2003, Colorado suspended its waiver because budget
constraints forced it to close its SCHIP program to new enrollment, and
under the terms and conditions of its waiver, the state could not close
enrollment in SCHIP while the waiver demonstration program was in effect.

Table 1: HIFA Waivers Approved from July 2002 through December 2003

       State and       Approved coverage expansion and funding sources
approval date Projected populationa       SCHIP     Medicaid         Other 
                                            $246.8              
                 Approximately 40,000      million              
                 individuals: 11,000        total:              
      New Mexico childless adults           $193.3              
      August 23, 29,000 parents of         million              
           2002b Medicaid or SCHIP         federal              
                 children              share $53.5              
                                           million              
                                       state share              
                 Approximately 300,000      $889.1                            
                 individuals: Up to        million       $209.0               
                 1,000 adults who are       total:      million 
                 uninsurable because        $577.9       total: 
Illinois      of their medical          million       $104.5 State general
September 13, conditions (including     federal      million      revenues
2002          childless adults) Up        share      federal 
                 to 43,000 children Up      $311.2 share $104.5 
                 to 268,000 parents of     million      million 
                 Medicaid or SCHIP     state share  state share 
                 children                                       
                                             $64.0                            
                                           million                            
                 13,000 pregnant women      total:                            
Colorado             (Closed to new       $41.6                    Tobacco
September 27,     enrollment in May     million                 settlement
2002          2003 and suspended on     federal                      funds
                         Nov. 1, 2003) share $22.4              
                                           million              
                                       state share              
                 Approximately 581,000                          
                 individuals (535,000  $379        $12.9        
                 current plus 46,000   million     billion      
                 expansion eligibles): total: $272 total: $9    
         Oregonc 99,900 childless      million     billion      
     October 15, adults 10,000         federal     federal      
            2002 pregnant women        share $107  share $3.9   
                 234,400 parents of    million     billion      
                 Medicaid or SCHIP     state share state share  
                 children 236,700                               
                 children                                       
                                       $134              $866.8               
                                       million          million               
                 12,000 uninsured      total:            total: State general 
      New Jersey parents and relative  $87.1             $433.4  revenues and 
     January 31, caretakers of         million          million       tobacco 
            2003 children covered by   federal          federal    settlement
                 Medicaid or SCHIP     share $46.9 share $433.4         funds
                                       million          million 
                                       state share  state share 

Source: HHS.

aPopulations to be covered and projected numbers of enrollees over 5 years
of the HIFA waiver, with the exception of Colorado, whose waiver was
approved for 4 years. On November 1, 2003, Colorado suspended its waiver
because budget constraints forced it to suspend new enrollment in its
SCHIP

program, and under the terms and conditions of its waiver, the state could
not close enrollment in SCHIP while the waiver demonstration program was
in effect.

bNot yet implemented.

cThe projected population and funding sources and amounts for Oregon
represent the HIFA waiver combined with the existing statewide waiver
program known as the Oregon Health Plan. Expansions approved under the
HIFA waiver in October 2002 have been implemented only in part (see
enclosure I for details). According to CMS officials, Oregon's proposal
would use Medicaid funds to cover pregnant women.

Four of the five approved HIFA waivers allow states to cover eligible
parents and guardians of children in Medicaid or SCHIP, and three include
a provision that would require parents and guardians with access to
employer-sponsored health insurance to enroll in premium assistance
programs.9 For three of these HIFA waivers, the states will also directly
cover certain eligible parents and guardians who do not have access to
employer-sponsored insurance.

In approving the four waivers covering parents and guardians, HHS did not
require the states to demonstrate that their waivers met the SCHIP
statutory costeffectiveness test.10 As we reported in July 2002, in
creating SCHIP, Congress authorized states to cover health benefits for
entire families-parents or custodians and their children-if it was
cost-effective to do so. The cost-effectiveness test for family coverage
specifies that the expense of covering adults as well as children in a
family must not exceed the cost of covering the eligible children. Under
these circumstances, achieving cost-effectiveness appears possible only
when the cost to SCHIP of covering a family is subsidized by employer
contributions or other state funds. In our view, this statutory test
demonstrated congressional priority for covering children before their
parents. We reported in 1999 that some states and advocacy groups were
nevertheless seeking increased flexibility to tailor their SCHIP programs
to cover uninsured parents through the use of section 1115 waiver
authority.11 The agency questioned waiver proposals to cover parents
during the first year of SCHIP implementation, expressing concern that
waivers should not circumvent the SCHIP goal of insuring low-income
children. The agency indicated to states that the waivers' purpose was to
test innovative approaches, not to waive statutory provisions that the
states found objectionable. In July 2000, however, the agency announced to
states that it would consider waivers to use unspent SCHIP funds to cover
parents, but it was silent on the application of the cost-effectiveness
test.

9HHS approved Colorado's HIFA demonstration waiver without a premium
assistance provision because of the difficulty of designing a
cost-effective premium assistance program for pregnant women only. The
agency required Colorado to include a premium assistance program as a
second phase of the state's waiver.

10For premium assistance programs, HHS's guidelines for HIFA waivers
indicate that states are not required to meet a specific
cost-effectiveness test but that states should monitor their waivers to
ensure that aggregate costs for those enrolled are not "significantly
higher" than they would be under a direct coverage program. For
direct-coverage programs, HIFA guidelines are silent on the application of
a cost-effectiveness test.

11See U.S. General Accounting Office, Children's Health Insurance Program:
State Implementation Approaches Are Evolving, GAO/HEHS-99-65 (Washington,
D.C.: May 14, 1999).

Four Other HIFA Waiver Proposals Reviewed by HHS

In addition to the five HIFA waivers approved from July 2002 through
December 2003, HHS reviewed four other states' HIFA proposals involving
the use of SCHIP funds. These proposals targeted coverage to various
populations, such as childless adults, parents and guardians of SCHIP- and
Medicaid-eligible children, and pregnant women. Of these four, one
proposal was denied, two were pending as of December 2003, and one was
withdrawn by the state. (See enclosure I for a summary of HIFA waiver
proposals.)

In March 2003, HHS denied Delaware's HIFA application. The state proposed
using SCHIP funds to cover childless adults and pregnant women and, in the
future, uninsured parents of Medicaid or SCHIP children. The proposal
sought to move some current Medicaid beneficiaries into SCHIP, thereby
reducing their benefits and increasing their share of costs. Had the
proposal been approved, the shift of existing coverage from Medicaid to
SCHIP would also have enabled the state to cap enrollment for those
beneficiaries previously covered by Medicaid and to claim SCHIP's higher
federal matching rate.12 HHS denied the waiver because, contrary to HIFA
requirements, Delaware's proposal did not expand coverage or plan to
coordinate with the private health insurance market.

As of December 2003, HHS was reviewing HIFA applications from two states.
A January 2003 proposal from Arkansas would use SCHIP funds, an employer
tax, and enrollee cost sharing to provide a basic benefit package to cover
as many as 55,000 uninsured adults working for small employers. The state
proposes to coordinate with private insurers to help pay the costs of
health insurance premiums for the adults covered by the waiver. Michigan
submitted a HIFA application in March 2002, withdrew the submission 4
months later, and resubmitted a new application in April 2003. The state's
proposal, currently under review, would use SCHIP funds to cover childless
adults with incomes at or below 35 percent of FPL. Participants would pay
unspecified cost sharing, which the state expects to be about 3.2 percent
of monthly countable income. The benefit package would include hospital
and physician services, laboratory tests and X-rays, prescription drugs,
and mental health and substance abuse services.

HHS also reviewed a HIFA application submitted in August 2002 by
Washington, which proposed using SCHIP funds to cover parents of Medicaid
children and also childless adults with incomes at or below 200 percent of
FPL. After making changes that put its proposal outside of HHS's HIFA
guidelines, the state withdrew its application and, in July 2003,
submitted a non-HIFA waiver application to require premiums for some
Medicaid families.

12Arizona's HIFA demonstration waiver permitted the state to use SCHIP
funds to cover a population that was already covered under the state's
Medicaid plan. Because the federal matching rate is higher for SCHIP than
for Medicaid (77 percent in Arizona in fiscal year 2003 for SCHIP and 67
percent for Medicaid), moving a population from existing Medicaid coverage
into SCHIP shifts costs to the federal government.

Concluding Observations

The legal and policy concerns that we raised in our July 2002 report
remain: HHS continues to approve waivers allowing states to use SCHIP to
fund health insurance coverage for childless adults, despite SCHIP's
statutory objective of expanding coverage to low-income children. We
believe that these approvals are inconsistent with SCHIP's goals because
they allow SCHIP funds to be diverted from the needs of low-income
children. In the absence of congressional clarification of whether SCHIP
funds may be used to cover parents and guardians of Medicaid- or
SCHIP-eligible children without regard to cost-effectiveness, we also
question HHS's approval of additional waiver proposals for such coverage.

Unless Congress and HHS take action in response to the matters for
congressional consideration and recommendations to the Secretary that we
presented in our July 2002 report-namely that (1) Congress consider
amending title XXI of the Social Security Act to specify that SCHIP funds
are not available to provide health insurance coverage for childless
adults; (2) Congress consider establishing, for parents or guardians of
SCHIP-eligible children, which statutory objectives should take
precedence, those of title XXI to provide family coverage only if it is
cost-effective or those of section 1115, which allow the
cost-effectiveness test to be waived; and (3) the Secretary of HHS amend
approval of all section 1115 waivers to prevent future use of SCHIP funds
for childless adults and deny any pending or future state applications to
spend SCHIP funds for such coverage-it appears likely that HHS will
continue to allow states to use SCHIP funds for childless adults and, in
the case of low-income parents or guardians, without regard to the
cost-effectiveness of such coverage.

Agency Comments and Our Evaluation

We provided a draft of this report for comment to HHS. In its response,
the department stated that it continues to believe that its actions to
increase coverage through waivers are appropriate to help low-income
Americans who do not have health insurance, and that it maintains its
position in response to our July 2002 report. The department stated that
the approved demonstrations are required to prioritize use of SCHIP funds
for children over other uses and that these demonstrations are anticipated
to reduce the number of uninsured children. The department also expects
that these waivers will increase health insurance to adults who
potentially could become parents or caretaker relatives in the future and
will strengthen the health status of the low-income community in general.
HHS's comments are reprinted in enclosure II.

We believe that in allowing states to use unspent SCHIP funds for their
own adult populations, HHS is reducing the unspent SCHIP funds available
for future redistribution to states that have exhausted their allotments
for covering uninsured low-income children. HHS has not adequately
explained how the objectives of the SCHIP statute are promoted by insuring
childless adults.

HHS also provided technical comments that we incorporated where
appropriate.

As arranged with your offices, unless you release its contents earlier, we
plan no
further distribution of this report until 30 days after its date. At that
time, we will
send copies to the Secretary of HHS, the Acting Administrator of CMS, and
other
interested parties. We will also make copies available to others upon
request. In
addition, the report will be available at no charge on the GAO Web site at
http://www.gao.gov.

If you or your staff have any questions, please contact me at (202)
512-7118 or
Katherine Iritani at (206) 287-4820. Other major contributors to this
report include
Ellen W. Chu, Jennifer DeYoung, Suzanne Rubins, and Ellen M. Smith.

Kathryn G. Allen
Director, Health Care-Medicaid and

Private Health Insurance Issues

Enclosures - 2

Enclosure I Enclosure I

        Summary of HIFA Waivers Reviewed by HHS, July 2002-December 2003

From July 2002 through December 2003, the Department of Health and Human
Services (HHS) reviewed nine Health Insurance Flexibility and
Accountability Initiative (HIFA) waiver proposals that would use State
Children's Health Insurance Program (SCHIP) funds to cover individuals
other than children, approved five of them, and denied one. As of December
2003, two applications were under review, and one had been withdrawn by
the state. Table 2 provides additional details on these HIFA waiver
proposals.

Table 2: Approved, Denied, Pending, and Withdrawn HIFA Waivers

    State and waiver status                                       Description 
                   Approved 
                            Projected enrollment: 40,000 individuals.         
                            Projected expenditures: Total $246.8 million in   
                            SCHIP funds over 5 years; federal share $193.3    
                            million, state share $53.5 million. Highlights:   
                            Uses SCHIP funds to expand coverage, through      
                            subsidized private insurance, to 40,000 uninsured 
                            adults ages 19 through 64 with incomes at or      
       New Mexico Submitted below 200 percent of the federal poverty level    
     April 3, 2002 Approved (FPL), including 29,000 parents of Medicaid and   
        August 23, 2002 Not SCHIP children and 11,000 single or childless     
          implemented as of adults. Benefits: Premium assistance for a        
December 2003 because of state-established reduced commercial benefit      
state budget constraints package, to be delivered under contracts with     
                            managed care organizations. Beneficiaries to pay  
                            premiums and sliding-scale copayments; employers  
                            to contribute monthly premiums of $75 per         
                            enrollee. Employer-sponsored insurance component: 
                            The entire waiver is to be implemented as a       
                            premium assistance program to enable eligible     
                            beneficiaries to obtain private insurance         
                            coverage through their employers.                 

                            Enclosure I Enclosure I

    State and waiver status                                       Description 
                            Projected enrollment: Approximately 300,000       
                            individuals. Projected expenditures: Total $1.1   
                            billion over 5 years, including $889.1 million    
                            SCHIP funds (federal share $577.9 million, state  
                            share $311.2 million) plus $209.0 million in      
                            Medicaid funds (federal and state shares each     
                            $104.5 million). Highlights: Uses SCHIP,          
                            Medicaid, and state general revenues to expand    
                            coverage to approximately 300,000 individuals     
                            over 5 years, including as many as 268,000        
                            parents of Medicaid and SCHIP children with       
                            incomes up to a maximum of 185 percent of FPL, as 
                            many as 1,000 adults who are low income and       
                            uninsurable because of their medical conditions   
                            with incomes up to 185 percent of FPL (including  
                            those without children), and as many as 43,000    
                            children from a state-funded premium assistance   
                            program with family incomes up to 185 percent of  
        Illinoisa Submitted FPL. As implemented, in October 2002, the waiver  
          February 15, 2002 covered parents with incomes up to 49 percent of  
     Approved September 13, FPL and other groups with incomes up to 185       
        2002 Implementation percent of FPL, including SCHIP children,         
    started October 1, 2002 children from a state-funded premium assistance   
                            program, and low-income uninsurable adults. HHS   
                            has reviewed several proposed changes to          
                            Illinois' waiver and approved, effective July     
                            2003, expanding coverage for parents to those     
                            with incomes from 49 to 90 percent of FPL.        
                            Benefits: Depend on whether waiver enrollees      
                            choose direct state coverage or premium           
                            assistance to purchase coverage through an        
                            employer. State benefits for parents are nearly   
                            the same as children's Medicaid or SCHIP          
                            coverage; cost sharing varies by income. State    
                            provides defined benefits for individuals who are 
                            uninsurable because of their medical conditions,  
                            with variable premiums and cost-sharing           
                            requirements. Employer-sponsored insurance        
                            component: Illinois already had a premium         
                            assistance program in place for low-income people 
                            including children, and the waiver continues that 
                            option.                                           

                            Enclosure I Enclosure I

      State and waiver status                                     Description 
                              Projected enrollment: 13,000 pregnant women.    
                              Projected expenditures: Total $64.0 million in  
                              SCHIP funds over 4 years; federal share $41.6   
                              million, state share $22.4 million. Highlights: 
                              Uses SCHIP and state tobacco settlement funds   
                              to expand coverage to 13,000 pregnant women     
                              with incomes from 134 through 185 percent of    
                              FPL who are not otherwise eligible for Medicaid 
                              or SCHIP in Colorado. Benefits: Waiver extends  
                              comprehensive SCHIP benefits, excluding dental  
                              coverage; services are to be delivered through  
                              a SCHIP network of managed care providers.      
    Colorado Submitted May 8, Employer-sponsored insurance component: HHS did 
      2002 Approved September not require this component in Colorado's waiver 
      27, 2002 Implementation because the agency agreed with state officials  
      started October 9, 2002 that a population comprising only pregnant      
Closed to new enrollees in women is not appropriate for a premium          
    May 2003; suspended as of assistance program. HHS is considering this     
             November 1, 2003 waiver as phase I while awaiting submission of  
                              a separate, phase II HIFA waiver with an        
                              employersponsored insurance component and       
                              including parents. Suspension: Colorado         
                              suspended enrollment in the prenatal program in 
                              May 2003. Services continued for waiver         
                              participants until November 1, 2003, which      
                              coincided with the date that the state closed   
                              enrollment in its SCHIP program because of      
                              budget constraints. According to the waiver's   
                              terms and conditions, Colorado could not close  
                              enrollment in SCHIP while the waiver            
                              demonstration program was in effect.            

                            Enclosure I Enclosure I

     State and waiver status                                      Description 
                             Projected enrollment: As originally approved,    
                             approximately 581,000 people, including about    
                             535,000 currently eligible individuals plus      
                             46,000 expansion individuals. Projected          
                             expenditures: Total $13.3 billion over 5 years   
                             for combined HIFA and statewide Medicaid         
                             waivers, including $379 million in SCHIP funds   
                             (federal share $272 million, state share $107    
                             million) and $12.9 billion in Medicaid funds     
                             (federal share $9 billion, state share $3.9      
                             billion). Highlights: Approved to use SCHIP and  
                             Medicaid funds to expand coverage to             
                             approximately 46,000 additional individuals over 
                             5 years, including pregnant women and children,  
                             with incomes from 170 through 185 percent of FPL 
                             and other individuals in a state-funded premium  
                             assistance program with incomes up to 185        
                             percent of FPL (includes children, parents, and  
                             childless adults). The HIFA waiver restructures  
                             the existing statewide waiver, known as the      
                             Oregon Health Plan. Since approval of the        
                             original HIFA waiver, HHS has approved revisions 
Oregon Submitted May 31,  that reduce certain benefits. The state informed 
2002 Approved October 15, HHS in May 2003 that a planned expansion in the  
2002 Implementation       Oregon Health Plan for parents and childless     
started November 1, 2002, adults with incomes above 100 percent of FPL     
for premium assistance    would not occur because of state budget          
component; February 1,    constraints. In September 2003, Oregon requested 
2003, for coverage        additional amendments to the Oregon Health Plan  
expansion to pregnant     to implement state legislation. These            
women and children with   amendments, which were under review by HHS as of 
incomes to 185 percent of December 2003, include some proposed service     
FPL                       reductions, the addition of a prescription       
                             drug-only benefit for some new low-income        
                             seniors and disabled individuals, expanded       
                             coverage under SCHIP from 185 to 200 percent of  
                             FPL, and expanded coverage under the premium     
                             assistance program for individuals with incomes  
                             from 185 to 200 percent of FPL. Benefits: The    
                             Oregon Health Plan expands coverage to pregnant  
                             women and children with incomes from 170 to 185  
                             percent of FPL and covers parents and other      
                             adults with incomes from 100 to 185 percent of   
                             FPL only if they choose to enroll in the premium 
                             assistance program. The Oregon Health Plan also  
                             reduces benefits (eliminating dental, durable    
                             medical equipment, mental health, and chemical   
                             dependency services) and caps enrollment for     
                             some previously eligible parents and adults, and 
                             it expands cost-sharing requirements, such as    
                             copayments. Employer-sponsored insurance         
                             component: Oregon expanded its existing          
                             state-funded premium assistance program and      
                             offers it as an option to previously eligible    
                             and new beneficiaries.                           

                            Enclosure I Enclosure I

State and waiver status                                        Description 
                           Projected enrollment: 12,000 parents and caretaker 
                           relatives. Projected expenditures: Total $1        
                           billion over 5 years, including $134 million in    
                           SCHIP funds (federal share $87.1 million, state    
                           share $46.9 million) and $866.8 million in         
                           Medicaid funds (federal share $433.4 million,      
                           state share $433.4 million). Highlights: Uses      
                           SCHIP funds to expand coverage to as many as       
                           12,000 uninsured parents and caretaker relatives   
                           of Medicaid- and SCHIP-eligible children with      
                           family incomes at or below 200 percent of FPL.b    
                           This expansion group comprises individuals whose   
                           applications for the New Jersey FamilyCare         
      New Jersey Submitted program, under an existing SCHIP waiver, were      
    July 15, 2002 Approved pending when enrollment for that program was       
          January 31, 2003 frozen in June 2002. Benefits: The state will      
    Implementation started reduce benefits for all parents and adults in its  
             March 1, 2003 existing SCHIP waiver to health maintenance        
                           organization-equivalent coverage, and it will use  
                           the savings to fund the expansion group of parents 
                           and caretaker relatives. Premiums and co-payments, 
                           capped at 5 percent of adjusted family income per  
                           year (in keeping with federal SCHIP rules), are    
                           required for families with incomes above 150       
                           percent of FPL. Employer-sponsored insurance       
                           component: The state's existing SCHIP waiver       
                           includes a premium assistance program implemented  
                           in July 2001. The HIFA waiver requires             
                           beneficiaries who have access to                   
                           employer-sponsored private insurance to enroll in  
                           this premium assistance program.                   
                    Denied 
                           Projected enrollment: 7,075 individuals. Projected 
                             expenditures: Total $68.9 million in SCHIP funds 
                             over 5 years; federal share $44.8 million, state 
                              share $24.1 million. Highlights: Proposed using 
                           SCHIP funds and other sources to cover about 7,000 
                              low-income uninsured adults, including those in 
                                   transitional medical assistance (temporary 
                                  coverage for individuals who have lost full 
    Delaware Submitted May Medicaid eligibility), pregnant women with incomes 
     16, 2002 Denied March     from 133 through 200 percent of FPL, uninsured 
                  19, 2003     adults with incomes at or below 100 percent of 
                             FPL, and other eligible adults with incomes from 
                           65 through 75 percent of FPL. Also proposed future 
                                 expansion, with sufficient funding, to cover 
                            uninsured parents of Medicaid and SCHIP children. 
                              Benefits: Proposed moving some current Medicaid 
                           beneficiaries into SCHIP, reducing their benefits, 
                             increasing cost sharing (including sliding-scale 
                                           premiums), and capping enrollment. 

                            Enclosure I Enclosure I

State and waiver status                                        Description 
                                                                      Pending
                           Projected enrollment: 55,000 individuals.          
                           Projected expenditures: Total $147.3 million in    
                           SCHIP funds over 5 years; federal share $120.7     
                           million, state share $26.5 million (numbers do not 
                           add because of rounding). Highlights: Would use an 
        Arkansas Submitted employer tax, SCHIP funds, and beneficiary cost    
          January 23, 2003 sharing to expand coverage to uninsured adults     
                           working for small employers by providing premium   
                           assistance for a basic benefit package. To be      
                           implemented in two phases: (1) a pilot program     
                           capped at 15,000 individuals and (2) coverage for  
                           an additional 40,000 uninsured adults with incomes 
                           up to 200 percent of FPL.                          
                           Projected enrollment: 62,000 childless adults.     
                           Projected expenditures: Total $858.6 million in    
                           SCHIP funds over 5 years; federal share $593.3     
                           million, state share $265.3 million. Highlights:   
                           Proposes using unspent SCHIP allocation to expand  
        Michigan Submitted coverage to 62,000 childless adults with incomes   
            April l4, 2003 at or below 35 percent of FPL. Benefits: Include   
                           inpatient and outpatient hospital, physician       
                           medical and surgical, laboratory and X-ray,        
                           pharmacy, and mental health and substance abuse    
                           services. State estimates that cost sharing        
                           represents approximately 3.2 percent of family     
                           monthly adjusted income.                           
                                                                    Withdrawn
                                    Projected enrollment: 20,000 individuals. 
                                Projected expenditures: Total $401 million in 
                                 SCHIP funds over 5 years; federal share $260 
                               million, state share $141 million. Highlights: 
      Washington Submitted   Proposed using SCHIP funds to expand coverage to 
           August 13, 2002    20,000 individuals with incomes at or below 200 
        Withdrawn May 2003   percent of FPL, including parents of children in 
                             Medicaid and childless adults. Expansion also to 
                              be supported by increased cost sharing, benefit 
                               reductions, and a possible Medicaid enrollment 
                             freeze for previously eligible groups, including 
                                                                    children. 

Source: Centers for Medicare & Medicaid Services (CMS).

Note: Information in this table is based on waiver documentation,
including initial applications, terms and conditions, and operational
protocols, and on clarifications and updates provided by CMS officials.

aIllinois also asked to expand coverage in three programs-the Illinois
Comprehensive Health Insurance Program (ICHIP, a program for uninsurable
low-income individuals), Hemophilia, and KidCare Rebate (for parents of
children in Medicaid or SCHIP)-to include those with incomes from 185 to
200 percent of FPL. HHS informed the state that the department could not
approve this waiver amendment because it would cover childless adults
before parents. The state has asked HHS to reconsider its decision on
KidCare Rebate, since that program currently includes only children, and
this request for reconsideration was under review as of December 18, 2003.

bHHS's approval letter and press release for this waiver say that
eligibility extends to individuals with incomes at or below 133 percent of
FPL, but HHS representatives confirmed to us that eligibility extends to
individuals with incomes at or below 200 percent of FPL.

                           Enclosure II Enclosure II

           Comments from the Department of Health and Human Services

                           Enclosure II Enclosure II

(290319)

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