The upcoming debate over health insurance for children will send a strong signal about the direction that the health policy debate will take in the new Congress.

The State Children's Health Insurance Program must be reauthorized this year or it will expire. And some states are running out of money and have their hands out to Washington for more.

When Congress created SCHIP 10 years ago, it set up the program in a new way. Instead of making it an open-ended entitlement to benefits for recipients, like Medicare and Medicaid, it created block grants to the states, capping expenditures at $40 billion over the last decade.

The states are not accustomed to this discipline. Several of them ran over their allotments last year, and the Republican Congress appropriated another $283 million. So far this year, 14 states have over-committed and face shortfalls of a total of $745 million. The Democratic Congress is ready to appropriate the money.

(You have to wonder what kind of parents they would be: "I've run out of allowance money, Dad." "Oh that's okay, son. Here's some more.")

The new congressional leadership signaled early on that they would like to expand SCHIP to cover every eligible child, but the price tag is a whopping $60 billion over the next five years.

Senate Finance Committee Chairman Max Baucus must figure out where to get the extra money, and in the meantime will try to tack the shortfall appropriation onto another bill this spring.

Would it surprise you that six of the nine states that GAO surveyed which have over-spent their allotments were states that cover adults through their State Children's Health Insurance programs? In Minnesota, 87% of total SCHIP enrollees in 2005 were adults, and 66% in Wisconsin. In Arizona, 56% of those enrolled in SCHIP were adults, yet the state has one of the highest rates of uninsured children in the nation at 16%. Where is the outrage?

Of the 6.1 million people enrolled in SCHIP in 2005, more than 10 percent (639,000) were adults, according to the Government Accountability Office. And those 639,000 were from just nine states where GAO could get data.

"Adults accounted for an average of 55 percent of enrollees in the shortfall states, compared with 24 percent in the nonshortfall states," according to GAO.

It seems that Congress could benefit from a few guidelines before moving forward:

    * Cover Kids First. As the GAO points out, covering adults is not the point of SCHIP, and it means that funds are being "diverted from the needs of low-income children." The Congress tried last year to put the brakes on more states adding adults to the program, but it needs to make a firm statement that the program is for kids.

    * Cover low-income kids first. Fourteen states use SCHIP to cover kids who live in families with incomes above 200% of poverty, or annual incomes of $41,300. New Jersey covers kids up to 350% of poverty - which means taxpayer subsidized health care for kids whose parents make more than $72,000 a year!

      New Jersey is a shortfall state.

    * Don't crowd out private coverage: A National Bureau of Economic Research Study looked at the first five years of experience with SCHIP in 2002 and found that "perhaps as much as half of the new SCHIP enrollment was offset by declining private coverage." In other words, a free or mostly-free government program was taking the place of private coverage. And that leads to . . .

    * Give parents the option to put their kids on their own policies. If a parent has the option of a policy at work that could cover dependents for relatively little, why leave this money on the table? The original SCHIP legislation made it an option to turn the SCHIP benefit into a premium assistance stipend, but the administrative process is so cumbersome that only a few states have been able to succeed in doing this. Lightening the administrative burden is essential. It's inexpensive to add children to family policies, but by making the process too difficult, private money is left on the table, and the taxpayer picks up the full tab.

    * Create new purchasing pool options for families. Congress could take President Bush up on his offer to use some of the money that is currently being sent to the states for uncompensated care to create new state purchasing pools. This could make it much simpler for states to administer a premium assistance program, and could allow working families without other sources of coverage to buy in as well.

      Private competing plans that meet the benefits test could compete to offer coverage to families, paid for by SCHIP's premium assistance, employer contributions, and worker payments. The structure of the Federal Employees Health Benefits Program (and the vision, but not the reality, of the Massachusetts Connector) could be a model.

    * Get the subsidies right: States have an incentive to add more of their citizens to SCHIP because they are paid more by the federal government for doing so. That's because the funding formulas for SCHIP are upside down. SCHIP was designed to cover kids whose families make too much to qualify for Medicaid but not enough to afford private coverage. But the federal government matches state spending at a higher percentage for higher-income SCHIP kids than for lower-income Medicaid children. What is wrong with this picture?

      The federal government pays an average of 70% of SCHIP costs but only 59% of Medicaid costs. This is bad policy. The federal government should provide a higher match rate for covering kids in the poorest families, and the match should scale back as their family's income rises.

      It makes no sense, for example, for New Jersey to get an SCHIP match rate of 65% for adding adults to SCHIP but only 50% for adding kids into Medicaid. Is it any wonder that New Jersey is expanding its SCHIP program? It's all about incentives.

      To protect the ability of SCHIP to serve needy low-income children and to preserve the program's core purpose of covering children, states should receive a Federal match rate that reimburses them at a higher rate for adding lower-income children to the program, with the match scaling back as they expand the program to higher-income children. And adults should not be on the children's program.

It's up to Congress now to decide whether this program will run out of control or inject real discipline and bring it back to its core purpose.