Grassley, Baucus Question Administration on Children's Health Coverage

WASHINGTON – Citing a new report, Sens. Max Baucus and Chuck Grassley are asking
the Bush administration to explain projects that divert health dollars from covering uninsured
children in violation of federal law.

“We agree that covering uninsured adults is also an important public policy objective, but
that does not justify the defiance of congressional intent,” Grassley and Baucus wrote in an August
6 letter to Health and Human Services Secretary Tommy Thompson. “The use of funds dedicated
by Congress to low-income uninsured children on childless adults is an inappropriate
implementation of the SCHIP (State Children’s Health Insurance Program) statute.”

Baucus and Grassley, the chairman and ranking member of the Finance Committee, wrote
to Thompson after receiving a new General Accounting Office report “Recent HHS Approvals of
Demonstration Waiver Projects Raise Concerns.” The report says the Health and Human Services
Department approved waivers allowing four states to use SCHIP and Medicaid funds either in ways
inconsistent with federal law or in ways that might put the federal budget or the state’s Medicaid
program at risk. The report also found that HHS did not follow its own guidelines to let the public
know that major changes were being considered for Medicaid or SCHIP programs seeking waivers.

Grassley and Baucus said they are concerned that these practices divert money from its
intended use. States provide health care coverage to about 40 million low-income uninsured adults
and children, largely through SCHIP and Medicaid, two federal-state programs. Congress intended
SCHIP funds to provide health coverage for children.

“Our concern with limiting the availability of (SCHIP) funds . . . is underscored by recent
findings that nearly five million children who are fully eligible for low-income health programs are
not yet enrolled and remain uninsured,” the senators wrote. “These children should never have to
compete with childless adults for the use of remaining SCHIP funds.”

Baucus and Grassley asked the Administration to explain its policies and expressed concern
about the Department of Health and Human Services’ failure to make its waiver program activities
more public. Given the number of waivers currently pending department approval, the senators
asked for a response to their questions by August 20, 2002.

The Honorable Tommy G. Thompson
Secretary
Department of Health and Human Services
200 Independence Avenue, S.W.
Washington, DC 20201

Dear Secretary Thompson:

We are writing to follow up on the General Accounting Office (GAO) report on Medicaid
and State Children’s Health Insurance Program (SCHIP) Section 1115 waivers, Recent HHS
Approvals of Demonstration Waiver Projects Raise Concerns. After reviewing the report and your
July 12, 2002, letter, we would like to highlight some of our concerns regarding recent approvals of
comprehensive Section 1115 waivers. In expressing our thoughts about past waiver approvals, we
hope to promote the appropriate use of waiver authority in the future.

As you know, in the past year, we have had regular correspondence with the Department
regarding Section 1115 waivers. We appreciate your willingness to engage in a dialogue on the
important issues raised by these waivers, and we look forward to further constructive exchanges on
how to assure state flexibility, accountability, and the integrity of the Medicaid and SCHIP programs.

We have three main concerns arising out of the GAO’s findings, and we have also attached
a list of questions prompted by the report that we would like the Department to address. First, we
disagree with the Department’s position that using SCHIP funds to provide health coverage for
adults who do not care for or live with an eligible child (“childless adults”) is appropriate. Second,
as we have repeatedly voiced to the Department, we are committed to guaranteeing an open and
inclusive public process in the development and consideration of waiver applications. It is our belief
that the Department has not done as much as it promised to do to ensure public access to waiver
information. Finally, if the waiver process is to promote both flexibility and accountability, we
believe that the determination of budget neutrality must be based on reasonable and accurate
baselines, appropriate assumptions, and enforcement mechanisms that do not put vulnerable
populations at substantial risk of unplanned benefit and eligibility reductions.

Covering Childless Adults with SCHIP Funds

In 1997, when SCHIP was created, Congress specified that SCHIP allocations could only be
used “to enable [States] to initiate and expand the provision of child health assistance to uninsured,
low-income children in an effective and efficient manner,” Social Security Act Section 2101(a).
This focus on children is not a “technicality” of the law, as your July 12 letter suggested, but rather
the explicit purpose of SCHIP. We agree that covering uninsured adults is also an important public
policy objective, but that does not justify the defiance of Congressional intent. The use of funds
dedicated by Congress to low-income uninsured children on childless adults is an inappropriate
implementation of the SCHIP statute.

We have reviewed the Department’s various statements concerning the use of SCHIP funds
on childless adults, and we conclude that none presents a convincing position. On page 16 of the
GAO report, a letter from HHS’ Office of General Counsel states, “[i]n approving a Medicaid or
SCHIP demonstration, the Secretary may consider the likelihood of promoting the objectives of the
programs authorized under any of the titles of the Social Security Act listed in section 1115.” This
extraordinary interpretation would seem to authorize the use of funds from any program subject to
Section 1115 – for example, Medicaid – to advance the purposes of any other such program – for
example, SSI or TANF. We disagree that the Secretary’s waiver authority is that broad, or, with
regard to this particular issue, that it takes precedence over the clear intent of Congress to insure that
SCHIP funds are used to improve coverage of uninsured children.

The Department’s other justifications – that insuring childless adults may benefit future
parents and those who have aged out of SCHIP – make a weak case for why childless adults should
be covered using SCHIP funds. Finally, your insistence that “no child ... will lose coverage” as a
result of any particular waiver authorizing the use of SCHIP funds on childless adults does not
satisfy our concerns. We are concerned not only that presently-covered children do not lose
coverage, but that eligible children who are not yet enrolled have an opportunity to do so using funds
set aside for them by Congress.

In 1999, Congress approved legislation to redistribute unspent SCHIP funds to states that are
eager and able to cover children through this program. As you know, the redistribution process
allows states who have spent their allotments to continue to enroll more eligible children in their
programs. If SCHIP funds are spent on childless adults, there will be less money to redistribute to
states with robust programs for children. Our concern with limiting the availability of funds for
redistribution is underscored by recent findings that nearly five million children who are fully
eligible for low-income health programs are not yet enrolled and remain uninsured. These children
should never have to compete with childless adults for the use of remaining SCHIP funds.

For these reasons, we strongly disagree with the Department’s view that SCHIP funds can
be used to insure adults without children at the cost of the health of low-income children. It is our
belief that you should not continue to approve waivers that divert funds set aside by Congress for
children to insure childless adults. Please inform us as to whether you plan to continue this policy.
If you do plan to continue approving coverage of childless adults with SCHIP funds, we intend to
take legislative action to end this violation of Congressional intent.

Public Participation in the Waiver Process

In previous correspondence, we have made it clear that an open and inclusive public process
similar to that described in the 1994 Federal Register guidelines should be an essential part of a
state’s waiver application preparation. We were pleased to see the May 3, 2002, letter to State
Medicaid Directors from Dennis Smith, Director of Medicaid and State Operations, urging states to
follow the 1994 federal guidelines describing this process. We have also been encouraged by the
Department’s efforts to improve public access to comprehensive Section 1115 waiver applications,
approvals, and terms and conditions via the Department’s website.

However, we believe that the Department can and should do more to ensure that the public
has meaningful access to information about Section 1115 waivers. We have noted that the
Department has posted waiver applications under the Health Insurance Flexibility and Accountability
(HIFA) initiative on its website. We have also noted that in recent days the Department has finally
begun to post non-HIFA waiver applications on its website, but we are disappointed both that the
particular site is difficult to find from the CMS homepage and that key documents and updates are
missing from the postings. For instance, there is no information on the website – not even an initial
application or indication that an application was pending – relating to one of the Pharmacy Plus
waivers that was formally approved last week.

It is our strong belief that all Section 1115 waiver applications and official documentation
should be posted on the internet. Further, we must remember in this digital age that not everyone
has regular access to the internet. For this reason, we urge you to implement the GAO
recommendation calling on HHS to publish regular waiver updates through the Federal Register
notice process laid out in the 1994 guidelines. In addition, we urge you to enforce the 1994
guidelines when states apply for waivers, and we note with disappointment the GAO’s finding that
you approved one state’s waiver application and only subsequently required the state to comply with
notice requirements and confer with tribal leaders about the waiver’s content.

Your promise to improve openness and inclusiveness in the governance of these programs
is commendable. We firmly believe that the public should be assured a voice in the waiver process.
You should know that we plan to introduce legislation to solidify the role of public process in
Section 1115 waivers. We will look forward to sharing our ideas with you in the near future.

Ensuring Budget Neutrality and the Fiscal Integrity of Public Programs

When states apply for Section 1115 waivers, their proposals are subject to budget neutrality
requirements. It is our understanding that these requirements are intended to ensure that the federal
cost of a state's newly approved demonstration project (so-called “with-waiver costs”) will not
exceed the federal cost of the state's program in the absence of the waiver (so-called “without-waiver
costs”). While this is not a statutory requirement, we understand that it has been an administrative
requirement for more than 20 years. Further, it features prominently in the HIFA guidance and
application template, and it is designed to protect the federal budget. Therefore, the integrity of the
budget neutrality methodology is of great interest to us.

The GAO report raises several questions with respect to the process used to assure budget
neutrality. First, it raises concerns about the inclusion of "hypothetical populations" in the
calculation of without-waiver costs. We understand that the use of hypothetical populations in
budget neutrality calculations is longstanding, and that it has long been subject to criticism by GAO.

The GAO questions why a state should be allowed to include the hypothetical costs of this
population in its baseline, without-waiver costs, when the state had clearly chosen as a matter of
policy not to commit its share of Medicaid expenditures to previously cover that population.
Accordingly, we would like the Department to provide us with its rationale for including
hypothetical costs for hypothetical populations in its without-waiver cost estimates.

In addition, we are interested in understanding the Department’s rationale for including in
its without-waiver cost estimates the costs of providing a limited benefit package to a hypothetical
population, when coverage of that population with the limited benefit package would not have been
permissible without a waiver. GAO reported, on page 20, that “some officials within HHS voiced
concerns about allowing the use of this methodology; however, the waiver was still approved by
HHS as a matter of policy.” We would like to know what policy justified that particular budget
neutrality calculation, and whether that methodology will be used in the future.

We also have apprehensions regarding the budget neutrality calculations in “Pharmacy Plus”
waivers. As the GAO report explained, HHS has limited total federal risk for Pharmacy Plus waivers
by establishing an aggregate, or “global,” cap for payments to the state for all services to the elderly,
including the drug benefit. While imposing a global cap of that kind may ensure budget neutrality
to the federal government, it also shifts the risk of the demonstration financing assumptions – which
“offer little margin for error,” according to the GAO – entirely to the state and to the elderly
Medicaid population. GAO notes that, should the state be unable to achieve the ambitious savings
targets set up in the waiver, it might have to choose between cutting the drug program, rolling back
eligibility for elderly beneficiaries, increasing cost sharing, or other measures. What is the policy
rationale and legal authority for imposing a global cap of this sort? Is the provision of federal
matching payments under Section 1903(a) of the Social Security Act one of the provisions that the
Department believes can be waived under Section 1115?

Finally, we thank you for your continuing attention to this very important matter. Given the
number of waivers that are currently pending your approval, we would appreciate a response to our
questions regarding coverage of childless adults and budget neutrality requirements in
comprehensive Section 1115 waivers by August 20, 2002. If you have any questions concerning this
correspondence, please do not hesitate to contact us or have your staff contact Andrea Cohen (224-
4515) or Leah Kegler (224-5315).

Sincerely,

Charles E. Grassley
Ranking Member

Max Baucus
Chairman

Enclosure

cc: The Honorable Thomas R. Scully
Administrator
Centers for Medicare & Medicaid Services
200 Independence Avenue, S.W.
Washington, DC 20201

The Honorable Mitchell E. Daniels, Jr.
Director
The Office of Management and Budget
725 17th Street, N.W.
Washington, DC 20503

Ms. Kathryn Allen
Director, Health Care–Medicaid and Private Health Insurance Issues
U.S. General Accounting Office
441 G Street, N.W.
Washington, DC 20548

Questions for the Department of Health and Human Services

1. Do you plan to continue to approve waivers that allow states to use their SCHIP allotments
to cover childless adults?

2. What is the Department’s rationale for including hypothetical costs for hypothetical
populations in without-waiver cost estimates?

3. What is the policy justification and rationale for including hypothetical costs for benefit
packages that would not be permissible absent a waiver in without-waiver cost estimates?

4. What is the policy rationale and legal authority for imposing an aggregate, or “global” cap?

5. Is the provision of federal matching payments under Section 1903(a) of the Social Security
Act one of the provisions that the Department believes can be waived under Section 1115?

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