The Trump Administration’s fiscal year 2021 budget, released on February 10, again proposes to make a legislative change to the financing system for the Children’s Health Insurance Program (CHIP) (described here).  Entitled “Strengthen the CHIP Safety Net for States,” the proposal is identical to one included in the 2020 budget.  It would eliminate the CHIP’s Child Enrollment Contingency Fund in fiscal year 2022 and replace it with a new Shortfall Fund.  Last year’s proposal was exceedingly vague and left far more questions than answers.  The Administration has not provided any further clarification in this year’s budget so the same critical questions raised by the Shortfall Fund proposal remain unanswered.

The Contingency Fund essentially provides additional federal CHIP funding to states if they face federal CHIP funding shortfalls resulting from higher-than-expected enrollment.  The Contingency Fund has rarely been needed — only three states (Iowa, Michigan and Tennessee) have tapped the Fund in the past — in large part because the CHIP financing formula aims to ensure that states always have sufficient annual CHIP allotments to sustain their programs but also because there has not been a recession since the Contingency Fund was established in 2009.  (States can also receive redistributed funds from other states that have not fully spent their annual CHIP allotments after two years.)  As we have written, the Administration has previously tried to rescind funding for the CHIP Contingency Fund, including current-year funding that could be used by states if they faced higher enrollment due to an economic downturn or natural disaster  Fortunately, Congress rejected that effort.  (Congress, however, has rescinded Contingency Fund amounts in the past, including in recent appropriations bills but those were funds from previous fiscal years that can never be accessed or spent by states even if they otherwise qualify for additional CHIP funding from the Contingency Fund, as I have previously explained here.)

While the effectiveness of the Contingency Fund in responding to greater state demands for federal CHIP funding has never been tested, it does have some shortcomings.  The Contingency Fund only addresses shortfalls related to higher enrollment.  It would not help states facing federal funding shortfalls that result from unexpected growth in per-beneficiary costs, such as higher spending due to a new breakthrough pediatric drug or treatment, greater mental health needs for children following a natural disaster, higher costs associated with responding to a new disease or the overall impact of higher health care cost growth throughout the U.S. health care system.

According to the Administration’s budget, in establishing the new Shortfall Fund, the Centers for Medicare and Medicaid Services (CMS) “is making it easier for states and territories to access needed funding when facing CHIP funding shortfalls, and ensuring that shortfall funding is available to states and territories in the future.”  But it still has not provided any additional details needed to assess whether this new Shortfall Fund would actually better protect states from unexpected federal funding gaps than the existing Contingency Fund would.  Here are some of the critical questions that remain unanswered:

• How will the Shortfall Fund be financed? Each year, an amount equal to 20 percent of the total national CHIP allotment for that fiscal year is made available to the Contingency Fund.  The budget merely states that unused annual CHIP appropriations could be made available to the Shortfall Fund.  That presumably entails the portion of the national CHIP allotment (if any) that is not allocated to states.  (Under CHIP, there is a spending-based formula that sets state-specific CHIP allotments and those state allotments are funded out of the national CHIP allotment set under federal law.)  Would all of the excess allotment be transferred to the Shortfall Fund each year?  What happens for the period 2024-2026 when the national allotment is no longer a fixed dollar amount but only an amount equal to “such sums as necessary” for fully funding state allotments (so by definition, there would not be any excess national allotment to transfer)?
• Do states automatically qualify for funds? The budget includes a troubling sentence that CMS “may redistribute to states experiencing a shortfall” funds from the new Shortfall Fund.  Because it does not state that the proposal “shall transfer” such funds to the new Shortfall Fund, does that imply that funds would be made available to states at the discretion of the Administration, even if states otherwise meet whatever qualifying criteria the Shortfall Fund sets?  In contrast, states that meet the requirements of the Contingency Fund automatically receive additional federal CHIP funds (subject to overall funding availability).
• What federal funding shortfalls qualify? The budget does not explain what the qualifying criteria would be for receiving funds from the Shortfall Fund.  Would any federal funding shortfall qualify?  Would it be limited to shortfalls resulting from higher enrollment (relative to an enrollment target level) as is the case today under the Contingency Fund or could it include shortfalls related to higher-than-expected spending per child on CHIP?  What other criteria would apply?
• How much additional federal funding would states receive? Under the Contingency Fund, states facing shortfalls would receive an amount equal to the product of monthly child enrollment above certain target enrollment levels and expected per-beneficiary costs (after applying the applicable CHIP matching rate for the state).  What would be the formula under the Shortfall Fund for providing additional funding?
• Are unspent funds in the Shortfall Fund available in subsequent years? What are the rules for carryover if funds transferred to the Shortfall Fund are not used in any given year?  Or do any unused funds in the Shortfall Fund expire at the end of the current fiscal year?

There was little or no interest in the Administration budget’s CHIP proposal last year.  But if federal policymakers are to consider it now, it is critical that the Administration finally provide further information about the design of its new Shortfall Fund.  Without these details, it is still impossible to determine whether the Shortfall Fund proposal could strengthen the CHIP program by improving on the existing Contingency Fund or could weaken CHIP and make it less likely that states have sufficient federal CHIP funding to sustain their programs and ensure that low-income children retain their health coverage.