Balanced Budget Act of 1997

Public Law 105-33

Significant Changes Made in Children's Health, Welfare, Medicaid and Medicare

August 1997

Signed into law by President Clinton on August 5, the Balanced Budget Act of 1997 (H.R. 2015) was heralded for its bipartisan commitment to balance the federal budget by the year 2002. However, equally momentous are the broad policy changes made to the federal entitlement programs that are affected by the new law. For the first time in decades, new federal dollars will be devoted to provide health insurance coverage for an uninsured population group, children. Nearly $13 billion in federal spending will be used to restore some coverage for special populations that was eliminated through last year’s welfare reform legislation. States will be granted unprecedented flexibility in administering their Medicaid programs, and an unparalleled opening now exists for increased privatization of Medicare through new coverage options for beneficiaries. Parity in insurance coverage for mental health care services takes another step forward as equal limits on annual payment and lifetime caps for mental and physical health care are applied to Medicaid and the new children’s health initiative. A new $600 million grant program for pediatric diabetes also is authorized through the legislation.

P.L. 105-33 promises many new opportunities and challenges for social workers in their roles as consumers, providers, case managers, and advocates for reform. Highlights of major provisions in the new law follow.


The law commits new federal spending of $24 billion over five years for children’s health, with a total commitment to expend over $40 billion for the initiative over the next ten years. A new funding entitlement is created for the states to expand coverage under Medicaid, to provide health insurance under a state children’s health insurance program through a newly created Title XXI of the Social Security Act, or a combination of both. A portion of the funds will come from a new tobacco tax.


States must have an approved plan, which is submitted to the Department of Health and Human Services (HHS). Funding is available beginning October 1, 1997. Ninety percent of a state’s allocation must be spent on health insurance, either through Medicaid or a new state program. Up to 10 percent can be spent on a combination of administrative costs, outreach programs, direct health services for children, and other children’s health initiatives.


States must maintain Medicaid eligibility for children that was in effect on June 1, 1997 and private insurers may not exclude coverage of otherwise insured children who might be eligible for the new state program.


Low-income children who are under 19 years of age and whose family income is below 200 percent of the federal poverty line and who are ineligible for Medicaid are eligible for the new state children’s health program. The bill provides for an exception where if a state by June 1, 1997 extended Medicaid to children of a particular age with family incomes above 150 percent of poverty, the new children’s state plan can cover children up to that age over 200 percent of poverty, but not more than 50 percent above the state’s Medicaid eligibility level in effect on June 1, 1997. Eligibility for assistance may not be denied based on pre-existing conditions or diagnosis, although group health plans may limit services, as under current law. States must screen applicants for Medicaid eligibility and ensure that Medicaid-eligible children are enrolled in Medicaid.


Under the new Title XXI program, states may provide benefits under one of the following options: coverage of benefits equivalent to those provided in a benchmark plan (standard Blue Cross/Blue Shield plan for federal employees, largest commercial HMO in the state, or a state employee health plan), coverage of benefits that have the same actuarial value as one of the benchmark packages, or another benefit plan approved by HHS. Comprehensive children’s health plans in NY, FL, and PA may continue to offer benefits. Benchmark-equivalent coverage must include hospital services, physicians’ services, laboratory and x-ray services, well-baby and well-child care, and immunizations. Some coverage of prescription drugs, mental health services, and vision and hearing care is required if covered under the benchmark plan the state uses as a reference point.


Under a state children’s health insurance plan, children with family incomes at or below 150 percent of poverty cannot be required to pay more than the premiums, deductibles, coinsurance, copayments, and out-of-pocket institutional costs permitted for adults under Medicaid. Children with family incomes above 150 percent of poverty may be charged on a sliding scale developed by the state, but total charges may not exceed five percent of family income. For all children, well-child and well-baby care, as well as immunizations, are exempt from all cost-sharing.


States implementing the new Title XXI program must contribute payments equal to 70 percent of its matching rate under Medicaid, although a state must pay at least 15 percent of child health costs. Family contributions to premiums and other cost-sharing are not part of a state’s match. States may receive the same enhanced federal matching rate for covering uninsured children through Medicaid.


The Balanced Budget Act of 1997 advances mental health coverage through the new children’s health initiative and Medicaid. No state is required to provide a mental health benefit in the new children’s health insurance program. However, if the state opts to offer a children’s benefit plan that is designed on the actuarial value of the three benchmark plans, the state must use 75 percent of any actuarial value based on mental health coverage for mental health coverage in its new children’s health program. (Reportedly, the majority of the benchmark plans currently provide a mental health benefit.) Additionally, the new law extends last year’s limited mental health parity provision (Title VII, P.L. 104-204) to the new children’s program and Medicaid. The parity provision does not require a plan to offer a mental health benefit. However, if the plan does provide a mental health benefit, equal annual payment limits and lifetime caps must be established for coverage of mental and physical illnesses.



Supplemental Security Income (SSI) Benefits. The new law restores SSI benefits and accompanying Medicaid for all "legal" immigrants receiving benefits as of August 22, 1996 (the day the Personal Responsibility and Work Opportunity Reconciliation Act was signed into law) and for those residing in the country as of that date who become disabled in the future. Estimated cost is $12 billion over five years for 350,000 immigrants. There is no change in eligibility for other federal benefits. "Legal" immigrants who enter(ed) the country after August 22, 1996 remain ineligible for most federal means-tested programs for five years and until obtaining U.S. citizenship for SSI and Food Stamps.

Refugees and Asylees. The new law extends the SSI and Medicaid eligibility period for refugees and asylees from five to seven years after entry and confers refugee status on Cuban and Haitian entrants and Amerasian immigrants.


Single, Childless Adults Between the Ages of 18 and 50. The new law restores approximately $1 billion over five years to the Food Stamp program. The funding will be used to create an estimated 235,000 new work slots for single, childless adults between the ages of 18 and 50 and to cover the cost of Food Stamp benefits for those individuals who are willing to work, but unable to find a job.

States may exempt up to 15 percent of Food Stamp recipients (approximately 70,000 individuals a month) from the three months out of 36 month time limit. This exemption is in addition to waivers granted by the Department of Agriculture.


The new law calls for the General Accounting Office to conduct a study on the impact of domestic violence on welfare. The study was agreed to after the conference committee rejected a Senate-passed provision clarifying that exemptions for victims of domestic violence from Temporary Assistance for Needy Families (TANF) rules should be in addition to the 20 percent hardship exemption.


The new law reduces the number of TANF recipients eligible to participate in vocational education and training by limiting the percentage of participants to 30 percent of those recipients required to work (30 percent of caseload in 1998, increasing to 50 percent in 2002) rather than 20 percent of the entire caseload. In addition, teenagers required to attend high school will be counted as part of the 30 percent beginning in the year 2000.


The new law allows states to transfer up to 10 percent of their TANF funds to the Title XX Social Services Block Grant without transferring any funds to the Child Care and Development Block Grant.


Provisions to deny workfare recipients the minimum wage and other worker protections were stripped from the bill in conference. As a result, an earlier ruling by the Clinton Administration requiring workfare participants to be paid at least the minimum wage and be covered by other worker protections, such as civil rights and health and safety requirements contained in the Fair Labor Standards Act, will stand. Under the ruling, states may combine the amount of TANF and Food Stamp benefits that a client receives in calculating the minimum wage.

The new tax bill (Taxpayer Relief Act of 1997, P.L. 105-34) makes TANF recipients participating in "work experience" or "community service programs" ineligible for the Earned Income Tax Credit (EITC).


Provisions allowing states to privatize the enrollment administration for Food Stamps and Medicaid were deleted in conference.


The new law provides $3 billion for new welfare to work initiatives. The Department of Labor will distribute the funding in FY 1998 and FY 1999, but it can be used through FY 2001. Seventy-five percent of the funds will be distributed by formula to the states and 25 percent will go to localities on a competitive basis. States will be allocated funds based on the number of TANF recipients and poverty rates. Private Industry Councils (PICs) will have the authority to distribute formula funds in coordination with the governor. The funds generally are to be targeted to individuals who are long-term welfare recipients or are close to reaching their time limit and are in need of remedial education and training, require substance abuse treatment for employment or have a poor work history. Funds can be used for job creation, job placement, job retention, wage subsidies to private employers, employment support services, and Individual Development Accounts (IDAs).

On the tax side, there is a new tax credit for employers aimed at hiring and retaining long-term welfare recipients in the private sector. The tax credit is equivalent to 35 percent of the first $10,000 in wages for the first year of employment, and 50 percent of the first $10,000 in wages for the second year. The credit is for two years, but only for new hires of long-term welfare recipients.


The best news for Medicaid is that the President and the leadership of the 105th Congress rejected the more egregious provisions considered for the program during the 1995 budget negotiations. Accordingly, the Medicaid entitlement remains intact, and a defined benefit continues to exist, including maintenance of the Early Periodic Screening, Diagnostic, and Treatment (EPSDT) Program. (The legislation does, however, require a study of EPSDT, including the establishment of the actuarial value of EPSDT services provided by the states.) Advocates also are pleased that the Administration’s early per-capita cap funding proposal was not imposed on the program.


Medicaid funding was reduced by approximately $13 billion over a five year period. The majority of cuts are derived from reduced payments for disproportionate share hospitals (DSH), including DSH payments to state psychiatric facilities; repeal of the Boren amendment, requiring states to reimburse hospitals and nursing homes at "reasonable and adequate rates;" and allowing states to reimburse providers at Medicaid rates for beneficiaries who are covered by both Medicare and Medicaid and for low-income beneficiaries for whom the state pays Medicare premiums and cost-sharing.


The new law allows states the option to provide 12 months continuous Medicaid coverage for children and to presume eligibility for low-income children, allowing the states to provide services during the time that eligibility is determined.


A block grant, capped at $1.5 billion, will be directed to the states to subsidize Medicare premiums for low-income seniors. States also are given the option to allow disabled workers to buy into Medicaid.


The new law provides states with unprecedented flexibility to administer Medicaid. The current section 1915(b) federal waiver process to enroll beneficiaries in managed care has been eliminated, with an exception for children with special needs (children who meet the SSI definition of disability and children receiving foster care or adoption assistance), beneficiaries of both Medicare and Medicaid, and American Indians. Also, the current 75-25 rule, which establishes a ceiling of 75 percent Medicaid enrollees in a managed care plan, is repealed. In place of the 75-25 rule, states are directed to establish managed care quality standards.

Few managed care protections are established in the federal statute for Medicaid beneficiaries. However, the new law does contain provisions requiring states to provide beneficiaries with a choice of two managed care plans; allow enrollees to change plans at any time for cause; disclose information on the plans in a form that can be easily understood; and prohibit door-to-door and telephone marketing of plans to beneficiaries. Additionally, the federal law includes the prudent layperson standard for determining emergency care, including severe pain as a measure for emergency care, and prohibits the use of gag clauses that restrict health care professionals’ ability to inform patients of treatment options.


The new law repeals a provision of last year’s Health Insurance Portability and Accountability Act (P.L. 104-191) that would have subjected seniors to criminal and civil penalties for disposing of their assets to qualify for Medicaid. Last year’s "send granny to jail" provision was replaced by "send granny’s lawyer to jail." The new law imposes the criminal and civil penalties on individuals who counsel or assist seniors for a fee to dispose of their assets to qualify for Medicaid.


The Balanced Budget Act restores Medicaid eligibility and SSI coverage for legal immigrants who entered the country prior to August 22, 1996 and later become disabled; guarantees continued Medicaid eligibility for children with disabilities who are expected to lose their SSI eligibility as the result of restrictions enacted in 1996; and extends the exemption from the ban on Medicaid and other forms of public assistance for refugees and individuals seeking asylum from five to seven years.


The budget reconciliation law contains language that prohibits the use of funds for abortions, except in the case of rape or incest or when the mother’s life is in danger. Although this language has been included in federal appropriations law for some time, choice advocates are very concerned with its presence in this statute. It represents the first time that the language has been codified in an entitlement program.


The new law targets Medicare savings of $115 billion over the next five years, $100 billion of which will be saved through reductions in provider payments. The agreement extends the solvency of the Medicare Part A trust fund through 2007 and establishes a 17-member Bipartisan Commission on the Future of Medicare to recommend long-term solutions for the program. The law grants broad new discretion to the Health Care Financing Administration and the Department of Health and Human Services in administering the program.


Senate provisions to raise the age of Medicare eligibility from 65 years to 67 years, to means-test the program, and to impose a $5.00 copayment for home health care visits were excluded from the final budget law. However, the new law includes many opportunities for increased contributions by beneficiaries, including increased provider costs through the new private fee-for-service option, new provisions for balance billing in negotiated contracts with Medicare providers, and potentially considerable out-of-pocket costs for beneficiaries who elect to purchase the new Medicare medical savings accounts (MSAs). Additionally, Part B premium costs will increase for all Medicare beneficiaries from the current contribution of $43.80/month to a contribution of $67/month in the year 2002.


The new law prescribes new Medicare benefits for mammography, pap smears, prostate and colorectal cancer screening, diagnosis for osteoporosis, and self-management of diabetes, at a projected cost of $4 billion.


P.L. 105-33 opens the door for increased privatization of Medicare under the guise of beneficiary choice in the new Part C program. Beneficiaries still may elect to participate in the traditional fee-for-service Medicare program. However, the new Medicare Part C offers non-traditional choices that rely on the private insurance market and likely will increase beneficiary exposure to risk. The new Part C program continues to offer managed care options, but with fewer opportunities for beneficiaries to disenroll from a managed care plan and return to traditional Medicare. The new law also allows health care providers, including clinical social workers if they choose, to offer coverage through a provider-sponsored organization (PSO). (Although CSWs could form or participate in PSOs, it is expected that hospitals will form the nexus of the majority of PSOs operating through Medicare.) A limit of 390,000 Medicare beneficiaries will be given the option to purchase MSAs for use with catastrophic health insurance plans and maximum yearly deductibles of $6,000. Beneficiaries also may agree to opt-out of Medicare through the new private fee-for-service option or may enter into private agreements with providers who agree not to bill Medicare for a two-year period. Unfortunately, the new Part C may prove to be an experiment regarding the role of private insurance in the Medicare program and its effects on the Medicare risk pool and pocketbooks of Medicare beneficiaries.


The new Medicare provisions include a lifetime exclusion for any provider convicted of defrauding the program five times and requires a new $50,000 surety bond for new providers.


P.L. 105-33 excludes the House-passed provision on MEWAs. The House-passed balanced budget bill incorporated H.R. 1515, introduced by Representative Harris Fawell (R-IL) that would have allowed an entire new group of health plans, multiple employer welfare arrangements (MEWAs), to become exempt from state regulation of health insurance through the Employee Retirement Income Security Act (ERISA). If H.R. 1515 were to have passed, almost all employer-sponsored plans could have become exempt from the state laws that mandate mental health and substance abuse coverage and the thirty-one state laws that allow consumers the right to select clinical social workers to provide mental health care services. Although H.R. 1515 was stripped from the Balanced Budget Act, it was excluded with the promise that fall hearings would be held on H.R. 1515 by the Senate Committee on Labor and Human Resources. Consequently, the MEWA threat of H.R. 1515 is not over.


P.L. 105-33, the Balanced Budget Act of 1997, is a complex law affecting many programs that are of great interest to social workers.

NASW staff may be contacted locally by dialing (202) 408-8600.