HFP—SCHIP Reauthorization, Rule Changes Expected Very Soon

In the “Background” section of this analysis, we discussed SCHIP, a federal program to provide health coverage for children that is the source of funding for HFP. Federal authority and funding for SCHIP expires March 30, 2009. At the time this analysis was prepared, the House of Representatives and the Senate appeared to be close to agreement on federal legislation that would reauthorize SCHIP for four and a half years, through September 2013. This reauthorization, funded through a 61–cent increase in federal excise tax on cigarettes and tobacco products, would approximately double federal funding for SCHIP.

In its current form, the legislation under consideration contains several provisions which may have a fiscal impact on California. These provisions are summarized in Figure 12 and include the following:

• New Funding Formula. The current formula used to allocate SCHIP funding among the various states is based on estimates of the number of low–income uninsured children in each state. The new formula instead allocates funds based on actual and projected expenditures for SCHIP programs in each state. This new methodology should increase the stability of federal funding for HFP by basing future funding levels on actual program costs.
• Identity Documentation Requirement. This legislation extends the Medicaid citizenship and identity documentation requirement to SCHIP effective October 1, 2009. Currently, MRMIB collects citizenship documentation (such as a birth certificate), but not documentation of the identity of recipients (such as a school identification card with a student’s photograph). This new provision would require MRMIB to operationalize new administrative procedures in order to collect identity information. The state cost to implement these new procedures is unknown at this time, pending a final decision on what type of identification documentation MRMIB and the federal government will require and negotiations with the administrative vendor on the associated additional workload.
• Federal Funding Match for Newly Qualified Immigrants. Currently, states are prohibited from using federal funds to cover legal immigrant children who have been in the country less than five years. California currently covers these children entirely with state funds. The pending legislation modifies this provision, which could eventually result in General Fund savings of about $12 million annually in HFP, provided that California can satisfactorily comply with new identification requirements mentioned above.
• Other Options for Expanding Coverage. The pending legislation contains provisions that would provide SCHIP funding to states to cover children in families with somewhat higher incomes than at present. Currently, California covers children up to 250 percent of the FPL and receives SCHIP funds at a matching rate of about two federal dollars for every state dollar. The new federal law would allow states to draw down the enhanced SCHIP matching funds to cover children up to 300 percent of the FPL. This would cost the state an additional $13.2 million General Fund. (If the state combined this option with the option to draw down federal funds for newly qualified immigrants, the net cost to the state would be less than $1 million.) The legislation also contains provisions that allow the state to cover children over 300 percent of the FPL, although state expenditures for these children would be matched by the federal government at the 50 percent Medi–Cal rate.
• Provisions Restricting SCHIP Funding for Certain Groups. The pending legislation also prohibits states from offering coverage to nonpregnant childless adults under SCHIP, and prohibits states that do not currently cover parents from covering them under SCHIP in the future.
• New State Reporting Requirements. The pending legislation requires states to collect additional data on the quality of health care provided to children in the program. States will receive additional funding for collecting and reporting such data.

New Rules Bring Benefits, Choices for California

Overall, we find that the federal legislation to reauthorize SCHIP contains several provisions that will benefit California: an increased federal appropriation, increased stability of federal funding, and the opportunity to expand coverage to higher income levels at the state’s discretion. Notably, California could eventually draw down some additional federal funds without increasing General Fund support, resulting in General Fund savings. At the very least, this legislation will allow MRMIB to maintain HFP at current levels of eligibility and caseload growth.

If the Legislature wishes to expand eligibility for coverage under HFP, increased federal support for this purpose will be contingent on providing matching General Fund or other state support. Considering the success of HFP in providing health insurance to currently eligible low–income children and the favorable federal matching rate available for covering children, we believe that expanding the program to 300 percent of the FPL has merit on a policy basis. However, in light of the state’s current fiscal situation, we recommend against an eligibility expansion of HFP at this time.

Federal Tax Increase to Fund SCHIP Will Reduce State Tobacco Tax Revenues

The federal government proposes to pay for the SCHIP reauthorization with a 61–cent increase in federal excise tax on cigarettes and tobacco products, which could go into effect as early as April 1, 2009. The new tax is predicted to decrease consumption of tobacco products, which would reduce the revenues collected under current state tobacco taxes for various special funds and the General Fund.

Overall, we estimate that the new federal tax would reduce state tobacco tax revenues for various special funds by approximately $60 million in 2009–10. This estimate includes a reduction of about 7 percent for each of these programs, or about $21 million in Proposition 99, $38 million in Proposition 10, and $1.4 million for breast cancer research.

However, the imposition of the increased federal excise tax will also result in a net increase in General Fund revenues of about $9.3 million. The net increase in General Fund revenues is a combination of (1) a reduction in revenues collected through the General Fund portion of the tobacco excise tax of $7.1 million (because tobacco sales will have declined), coupled with (2) an increase in sales tax revenues of $16.4 million (because the federal excise tax would increase the price of cigarettes subject to the sales tax).