Last week the Government Accountability Office released a formal legal opinion that the CMS policy announced last year that tightened SCHIP eligibility is illegal.

...the accountability office said the new policy “amounts to a marked departure” from a longstanding, settled interpretation of federal law. It is therefore a rule and, under a 1996 law, must be submitted to Congress for review before it can take effect, the opinion said....

Under the Aug. 17 directive, states cannot expand the Children’s Health Insurance Program to cover youngsters with family incomes over 250 percent of the federal poverty level ($53,000 for a family of four) unless they can prove that they already cover 95 percent of eligible children below twice the poverty level ($42,400).

Moreover, in such states, children who lose or drop private coverage must be uninsured for 12 months before they can enroll in the Children’s Health Insurance Program, and co-payments in the public program must be similar to those in private plans.

CMS said that notwithstanding GAO's opinion, the policy will remain in effect. Of course, 22 states are suing the Administration to overturn the policy, so ultimately the courts will decide.

The rules are sensible; after all, why should a government health care program be extended to the middle class when poor kids are going uncovered? But governors (and their allies in Congress) want the "free" federal money, so it's unlikely that rules to this effect would ever pass Congress.