Senate Finance Committee Reaches Bipartisan Agreement to Fund S-CHIP Expansion With a Tobacco Tax--No Cuts to Medicare Advantage

The Senate Finance Committee has reached a tentative agreement to expand the State Children’s Health Insurance Program (S-CHIP) by increasing the tobacco tax by another 61 cents—for a total per pack federal tax of $1. With state taxes, the average per pack tax would rise to about $1.68.

Under the agreement, the Senate would not go forward with any Medicare Advantage cuts to fund S-CHIP.

While 2 million kids would be added to the 6 million already covered, the program would be tightened up in other places. The tentative deal reportedly includes excluding all adults except pregnant women and moving any adults currently covered to Medicaid.

Democrats have called for an increase to S-CHIP spending of as much as $50 billion over five years. This compromise would increase the program’s spending by about $35 billion over five years.

It appears the House is still interested in putting Medicare Advantage cuts on the table as part of their parallel legislation that would increase S-CHIP spending by $50 billion. However, without Senate support it will be very hard for the House to get more than the Senate compromise. It is particularly important that there are plenty of Senate Republicans onside with the Senate Finance compromise.

President Bush has called for an increase in S-CHIP spending of only $5 billion over five years arguing that the program has been too often expanded in the states beyond its original low-income objectives. The President would like to limit eligibility to children in households below 200% of the poverty level and provide access assistance to private plans for the uninsured above the 200% level.

The President has relatively few allies in this opinion.

When a final House/Senate bill is worked out later this summer—most likely looking like this Senate compromise, it will set up a major showdown with the President who could well veto it. Just what action the President will take will have a lot to do with exactly how many Senate Republicans come onside. The final compromise could easily get 60-votes in the Senate but it would take two-thirds in both houses to override a Bush veto.

So steep a tobacco tax is not a slam-dunk.

Would this tentative deal mean the threat to Medicare Advantage cuts is past?

Not at all.

The Congress still needs plenty of money to offset pending physician and hospital Medicare cuts. It makes more sense for Democrats to deal with potential Medicare Advantage cuts in the final omnibus budget work at year-end where a simple Senate majority is necessary and a Bush veto of a comprehensive budget bill it a lot harder.

There is also a sense of inevitability here in Washington that private Medicare Advantage plans are going to sustain cuts--particularly the Private Fee For Service product.

What this agreement would do is make it virtually impossible for the Congress to impact 2008 Medicare Advantage funding—the earliest a year-end agreement would impact private Medicare Advantage payments would be January 1, 2009.

But, none of this is final and it will be important to follow the Senate’s final negotiations and the reconciliation that will have to occur with the House during the summer.

This compromise could also set up a remarkable show-down between the Congress, which looks like it will come to a bipartisan agreement, and a "lame-duck" President opposed to it on ideological grounds who has been severely weakened politically.

If the President is able to block the deal, then everything shunts forward to the year-end budget negotiations and Medicare Advantage cuts as a means to fund S-CHIP come back on the table.

This will be a fascinating process to watch!