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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 applications.[Footnote 1]

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.[Footnote 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.[Footnote 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.[Footnote 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 continued, you intended to take legislative action to prevent 
them, which you have subsequently done.[Footnote 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.[Footnote 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 Medicaid-eligible 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.

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 low-income 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.[Footnote 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.

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.[Footnote 8] Table 1 presents 
more specific information on covered populations and the expected 
sources of funding.

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

State and approval date; New Mexico, August 23, 2002[B]; 
Approved coverage expansion and funding sources; Projected 
population[A]: Approximately 40,000 individuals; 
11,000 childless adults; 
29,000 parents of Medicaid or SCHIP children; 

Approved coverage expansion and funding sources; SCHIP:  $246.8 million total; 
$193.3 million federal share; 
$53.5 million state share; 

Approved coverage expansion and funding sources; Medicaid: [Empty]; 

Approved coverage expansion and funding sources; Other: [Empty].

State and approval date; Illinois, September 13, 2002; 
Approved coverage expansion and funding sources; Projected 
population[A]: Approximately 300,000 individuals; 
Up to 1,000 adults who are uninsurable because of their medical 
conditions (including childless adults); 
Up to 43,000 children; 
Up to 268,000 parents of Medicaid or SCHIP children; 

Approved coverage expansion and funding sources; SCHIP:  $889.1 
million total; 
$577.9 million federal share; 
$311.2 million state share; 

Approved coverage expansion and funding sources; Medicaid: $209.0 
million total; 
$104.5 million federal share; 
$104.5 million state share; 

Approved coverage expansion and funding sources; Other: State general 
revenues.

State and approval date; Colorado, September 27, 2002; 
Approved coverage expansion and funding sources; Projected 
population[A]: 13,000 pregnant women; 
(Closed to new enrollment in May 2003 and suspended on Nov. 1, 2003); 

Approved coverage expansion and funding sources; SCHIP: $64.0 million 
total; 
$41.6 million federal share; 
$22.4 million state share; 

Approved coverage expansion and funding source; Medicaid: [Empty]; 

Approved coverage expansion and funding sources; Other: Tobacco 
settlement funds.

State and approval date; Oregon[C], October 15, 2002; 
Approved coverage expansion and funding sources; Projected 
population[A]: Approximately 581,000 individuals (535,000 current plus 
46,000 expansion eligibles); 
99,900 childless adults; 
10,000 pregnant women; 
234,400 parents of Medicaid or SCHIP children; 
236,700 children; 

Approved coverage expansion and funding sources; SCHIP: $379 million 
total; 
$272 million federal share; 
$107 million state share; 

Approved coverage expansion and funding sources; Medicaid: $12.9 
billion total; 
$9 billion federal share; 
$3.9 billion state share; 

Approved coverage expansion and funding sources; Other: [Empty].

State and approval date; New Jersey, January 31, 2003; 
Approved coverage expansion and funding sources; Projected 
population[A]: 12,000 uninsured parents and relative caretakers of 
children covered by Medicaid or SCHIP; 

Approved coverage expansion and funding sources; SCHIP: $134 million 
total; 
$87.1 million federal share; 
$46.9 million state share; 

Approved coverage expansion and funding sources; Medicaid: $866.8 
million total; 
$433.4 million federal share; 
$433.4 million state share; 

Approved coverage expansion and funding sources; Other: State general 
revenues and tobacco settlement funds. 

Source: HHS.

[A] Populations 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.

[B] Not yet implemented.

[C] The 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.

[End of table]

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.[Footnote 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 cost-effectiveness test.[Footnote 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.[Footnote 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.

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.[Footnote 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.

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:

Signed by Kathryn G. Allen: 

Enclosures - 2:

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 wavier status: Approved: New Mexico; Submitted April 3, 2002; 
Approved August 23, 2002; Not implemented as of December 2003 because 
of state budget constraints;

Description: 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 below 200 percent of the federal poverty level (FPL), 
including 29,000 parents of Medicaid and SCHIP children and 11,000 
single or childless adults;

Benefits: Premium assistance for a state-established reduced commercial 
benefit package, to be delivered under contracts with managed care 
organizations. Beneficiaries to pay premiums and sliding-scale co-
payments; 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.

State and wavier status: Approved: Illinois[A]; Submitted February 15, 
2002; Approved September 13, 2002; Implementation started October 1, 
2002;

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 FPL. As implemented, 
in October 2002, the waiver covered parents with incomes up to 49 
percent of FPL and other groups with incomes up to 185 percent of FPL, 
including SCHIP children, 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.

State and wavier status: Approved: Colorado; Submitted May 8, 2002; 
Approved September 27, 2002; Implementation started October 9, 2002; 
Closed to new enrollees in May 2003; suspended as of November 1, 2003;

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; Employer-sponsored insurance component: HHS did 
not require this component in Colorado's waiver because the agency 
agreed with state officials that a population comprising only pregnant 
women is not appropriate for a premium assistance program. HHS is 
considering this waiver as phase I while awaiting submission of a 
separate, phase II HIFA waiver with an employer-sponsored 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.

State and wavier status: Approved: Oregon; Submitted May 31, 2002; 
Approved October 15, 2002; Implementation started November 1, 2002, for 
premium assistance component; February 1, 2003, for coverage expansion 
to pregnant women and children with incomes to 185 percent of FPL;

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 that 
reduce certain benefits. The state informed HHS in May 2003 that a 
planned expansion in the Oregon Health Plan for parents and childless 
adults with incomes above 100 percent of FPL would not occur because of 
state budget constraints. In September 2003, Oregon requested 
additional amendments to the Oregon Health Plan to implement state 
legislation. These amendments, which were under review by HHS as of 
December 2003, include some proposed service 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 co-payments; 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.

State and wavier status: Approved: New Jersey; Submitted July 15, 2002; 
Approved January 31, 2003; Implementation started March 1, 2003;

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 program, under an existing SCHIP waiver, 
were pending when enrollment for that program was frozen in June 2002;

Benefits: The state will reduce benefits for all parents and adults in 
its 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.

State and wavier status: Denied: Delaware; Submitted May 16, 2002; 
Denied March 19, 2003;

Description: 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 Medicaid eligibility), pregnant women with incomes from 133 
through 200 percent of FPL, uninsured 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.

State and wavier status: Pending: Arkansas; Submitted January 23, 2003;

Description: 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 employer tax, SCHIP funds, and beneficiary 
cost 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.

State and wavier status: Pending: Michigan; Submitted April l4, 2003;

Description: 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 coverage 
to 62,000 childless adults with incomes 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.

State and wavier status: Withdrawn: Washington; Submitted August 13, 
2002; Withdrawn May 2003;

Description: 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: Proposed using SCHIP funds to expand coverage to 20,000 
individuals with incomes at or below 200 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.

[A] Illinois 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.

[B] HHS'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.

[End of table]

Enclosure II: Comments from the Department of Health and Human 
Services:

DEPARTMENT OF HEALTH & HUMAN SERVICES	
Office of Inspector General:

Washington, D.C. 20207:

DEC 5 2003

Ms. Kathryn G. Allen:

Director, Health Care - Medicaid and Private Health Insurance Issues 
United States General Accounting Office 
Washington, D.C. 20548:

Dear Ms. Allen:

Enclosed are the Department's comments on your draft report entitled, 
"SCRIP: HHS Continues to Approve Waivers That Are Inconsistent With 
Program Goals." The comments represent the tentative position of the 
Department and are subject to reevaluation when the final version of 
this report is received.

The Department appreciates the opportunity to comment on this draft 
report before its publication.

Sincerely,

Dara Corrigan:
Acting Principal Deputy Inspector General:

Enclosure:

The Office of Inspector General (OIG) is transmitting the Department's 
response to this draft report in our capacity as the Department's 
designated focal point and coordinator for General Accounting Office 
reports. OIG has not conducted an independent assessment of these 
comments and therefore expresses no opinion on them.

Comments of the Department of Health and Human Services on the General 
Accounting Office's Draft Report "SCRIP: HHS Continues to Approve 
Waivers That Are Inconsistent with Program Goals" (GAO-04-166R):

The Department of Health and Human Services (Department) appreciates 
the opportunity to comment on the General Accounting Office's (GAO) 
draft report. The Department continues to believe that our actions to 
increase coverage through waivers are appropriate to help low-income 
Americans who do not have health insurance. The legal and policy bases 
for our positions are fully set forth in our response to the previous 
GAO report, "Medicaid and SCRIP: Recent HHS Approvals of Demonstration 
Waiver Projects Raise Concerns" (GAO-02-817 issued July 2002), and it 
would appear unnecessary to reiterate those points in detail.

While GAO does not offer recommendations to the Department in this 
correspondence, we want to emphasize that the coverage of uninsured 
low-income children remains the priority of the State Children's Health 
Insurance Program (SCRIP). We are pleased that over 5.3 million 
children were insured through SCRIP in FY 2002 and that SCRIP has 
contributed to the reduction in the number of uninsured children since 
the inception of the program in 1997.

To assure that SCRIP funds are used for children first, States that 
have received Title XXI, section 1115, demonstrations continue to be 
required, through Special Terms and Conditions, to prioritize spending 
Title XXI funds for children. States are not permitted to limit or cap 
children's enrollment and must ensure the availability of funding for 
children over funding for adult expansion populations.

As we noted in our response to the previous report, we anticipate that 
these demonstrations will reduce the number of uninsured children. The 
approved demonstrations are expected to increase health insurance to 
adults who could become parents or caretaker relatives in the future, 
some of whom may be former Medicaid recipients. Furthermore, extending 
coverage to these adults strengthens the health status and awareness of 
the low-income community in general, supports the development of 
"medical homes" to encourage preventive care, and widens the health 
delivery network available to the low-income community.

Increasing access to health insurance remains one of our highest 
priorities. We will continue to work with States in order to provide 
opportunities for them to design programs that best meet the needs of 
their citizens. We appreciate the GAO's observations and look forward 
to continuing the dialogue with Congress on these important matters.

[End of section]

(290319):

FOOTNOTES

[1] Although 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.

[2] U.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).

[3] Congress 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).

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

[5] Since 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.,  706, placed on Senate Legislative 
Calendar on October 2, 2002; Health Care Coverage Expansion and Quality 
Improvement Act of 2003, S. 10, 108th Cong.,  801, introduced in the 
Senate on January 7, 2003; and Personal Responsibility, Work, and 
Family Promotion Act of 2003, H.R. 4, 108th Cong.,  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.,  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.

[6] HHS 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.

[7] The 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).

[8] On 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.

[9] HHS 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.

[10] For 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.

[11] See 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).

[12] Arizona'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.