At this particular moment, when the future of Medicaid—the nation’s largest public insurer of low-income children—is once again under threat, it might strike some as paradoxical to be reviewing a bill whose title is “Keep Kids’ Insurance Dependable and Secure Act of 2017.” Introduced on September 18 by Senators Orrin Hatch and Ron Wyden, the Chair and Ranking Member of the Senate Finance Committee, respectively, the KIDS Act (S. 1827) would extend funding for the Children’s Health Insurance Program through Fiscal Year 2022. Exactly when, and in what fashion, a CHIP funding extension might advance is unclear, although without question the emergence of a bipartisan proposal from the leading members of the Senate committee of jurisdiction comes as a welcome sign.

The Need For Extended CHIP Funding

Funding for CHIP officially runs out on September 30, in less than two weeks. The Medicaid and CHIP Payment and Access Commission (MACPAC), which advises Congress on federal Medicaid and CHIP policy, previously has estimated that by summer 2018, all states will have exhausted their federal allotments. But programs providing essential public benefits to people cannot simply close down overnight; either as a practical or operational matter; in states that run CHIP separately rather than as an extension of Medicaid, the funds technically might still be there, but the steps needed to start closing the program would need to begin much sooner unless the state is willing to entirely replace lost federal funding with its own money.

CHIP’s Structure, Size, Program Design, And Impact

Enacted in 1997, CHIP was intended to function as a companion to Medicaid. Participating states have the option of using their federal CHIP allotments either to establish programs that operate entirely separately from Medicaid or to expand their Medicaid coverage beyond the federal minimum for children up to 18 (138 percent of the federal poverty level). Most states use a combined approach, expanding Medicaid to some extent while offering a separate companion program for families with modest incomes that nonetheless exceed their state’s upper Medicaid eligibility threshold.

Compared to Medicaid, federal CHIP allotment accounts for a relatively modest number of the children who depend on public insurance. In FY 2016, out of the nearly 46 million children enrolled in either Medicaid or CHIP, 8.9 million relied on CHIP to meet the cost of coverage, while Medicaid insured 37 million that year. In other words, for every child whose coverage is financed through the federal CHIP allotment, 4 children depend for their coverage on federal Medicaid funding.

And even within CHIP, most of the actual coverage is derived from a Medicaid expansion. Of the 8.9 million children insured through CHIP, the majority (about 5.2 million compared to nearly 3.7 million) receive their coverage as part of Medicaid rather than through a separate program.

Despite its modest size and scope, CHIP has been widely credited with helping reduce the percentage of U.S. children without health insurance, from nearly 14 percent in 1997 to fewer than 5 percent by 2015. Overwhelmingly, the children assisted by CHIP are the lowest-income children in the US; nearly all states target CHIP to children with family incomes twice poverty or lower.

What Happens If CHIP Funding Is Not Extended?

Should Congress fail to extend federal CHIP funding, CHIP children covered through a Medicaid expansion would be protected, at least through the end of Fiscal Year 2019, by the Affordable Care Act’s Medicaid maintenance of effort requirement for children. At the same time, the loss of CHIP funds would mean that CHIP’s enhanced allotment formula would be replaced by a state’s normal Medicaid federal funding formula (between 50 percent and 75 percent of total state expenditures). Put another way, CHIP Medicaid expansion children would remain insured at least through the end of Fiscal Year 2019, but states would experience a federal funding hole.

By contrast, in the case of children covered through a separate CHIP plan, the ACA maintenance of effort provision technically applies, but obviously the federal government cannot force a state to continue operating a federally funded program for which all federal funding has ended. Indeed, no federal enforcement action followed Arizona’s 2010 decision to freeze enrollment in its CHIP program (a decision the state later reversed when faced with evidence of a substantial loss of coverage among children, despite the advent in 2014 of an alternative source of subsidized coverage through the health insurance Marketplace).

Key CHIP Funding Reauthorization Questions: The Choices Made By Hatch/Wyden

A CHIP funding extension raises a number of questions, which were tackled by MACPAC in its March 2017 Report to Congress. In extending CHIP funding through 2022, Senators Hatch and Wyden effectively have expressed their view that CHIP, which historically has enjoyed bipartisan support, continues to offer an important opportunity for bipartisanship around at least some aspect of health policy for low income children.

Is Continued CHIP Funding Necessary? If So, For How Long?

At one time, when the ACA system of refundable tax credits and cost-sharing assistance appeared relatively stable, this was a logical question, since there appeared to be an obvious overlap between the targeted low-income children aided by CHIP (too much income for Medicaid but lacking employer coverage) and the families that would qualify for the ACA subsidy system. MACPAC concluded that, in fact, the level of public assistance available to CHIP families for their children’s coverage was far more generous in terms of both subsidy size and plan actuarial value.

Moreover, MACPAC determined, CHIP mitigated the effect of the so-called “family glitch”, built into the ACA implementation process. Under the family glitch, parents are barred from receiving premium subsidies for their otherwise-eligible children if their employer’s self-only coverage is considered affordable under the ACA formula, regardless of how unaffordable their employer’s family coverage might be. (The Kaiser Family Foundation reports that family coverage now exceeds $18,700, with the average family exposure of more than $5700, a one-third increase in 10 years, in the face of stagnant wages).

With the entire ACA Marketplace subsidy system now operating under a cloud—attempt after attempt by opponents of the ACA to roll back the size and structure of the premium tax credits coupled with ongoing uncertainty surrounding the continued availability of cost-sharing assistance—it should come as no surprise that Senators Hatch and Wyden would have concluded that continued CHIP funding remains essential. And like MACPAC, Hatch/Wyden would provide a long funding period: 5 years rather than the two-year extension agreed to by Congress and the White House in 2015 as part of the Medicare Access and CHIP Reauthorization Act of 2015 (P.L. 114-10).

What Level Of Federal CHIP Contribution Should Be Provided?

To encourage state participation, the federal CHIP formula historically has been set at an enhanced rate compared to a state’s federal Medicaid matching rate, enough to reduce the cost to states of insuring children through CHIP by 30 percent. In an effort to further induce states to maintain robust CHIP standards even following implementation of the ACA subsidy system, the ACA included an additional federal enhancement to the federal CHIP allotment rate, beginning in Fiscal Year 2016. Under this additional enhancement, the federal CHIP contribution rate would be set 23 percentage points higher than the Medicaid rate, and this special rate would continue through the end of Fiscal Year 2019. This additional enhancement has meant that in a number of states, CHIP is entirely federally funded.

In its March 2017 report, MACPAC recommended retaining this heightened level of enhancement to address the general uncertainty surrounding the future of subsidized insurance coverage. By contrast, Hatch/Wyden chooses a more conservative path, maintaining the 23-percentage-point enhancement through Fiscal Year 2019 and then beginning a glide path toward CHIP’s traditional enhancement rate. Under the bill, the special ACA-linked enhancement rate would drop to 11.5 percent in FY 2020 and then return to the standard CHIP enhancement rate in the final two years of authorized funding, FY 2021 and 2022. In its choice, Hatch/Wyden would steer a middle ground between the MACPAC recommendation and that made by the Trump Administration as part of its FY 2018 budget to extend funding only for 2 years and to immediately eliminate the ACA special enhancement fund.

How Should The ACA Maintenance Of Effort Requirement Be Addressed?

Notably, Hatch/Wyden bill continues the ACA’s maintenance of effort provision for CHIP children through FY 2022. At the same time, it would limit this requirement to children with family incomes that do not exceed 300 percent of the federal poverty level; as state CHIP eligibility standards indicated, very few CHIP children nationally have family incomes over this revised maintenance of effort standard.

Other Changes

Hatch/Wyden also would continue certain initiatives and demonstration projects authorized under CHIP related to childhood obesity, pediatric quality, and outreach and enrollment. The bill also would continue support for a state contingency fund, essential in the event that enrollment exceeds expectations given the aggregate federal funding cap that applies to federal CHIP spending. Finally, the bill maintains the law’s current authority for states to implement “express lane” eligibility, a simplified enrollment process that enables states to rely on eligibility for other programs such as SNAP or school lunch, as the basis for CHIP enrollment.

Presumably the House of Representatives, which has yet to act on the CHIP extension, will take a similar low-key approach to this popular program.