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By Robert Pear and Raymond Hernandez
Feb. 12, 2007

Washington, D.C. - In the absence of federal action, governors and state legislators around the country are transforming the nation's health care system, putting affordable health insurance within reach of millions of Americans in hopes of reversing the steady rise in the number of uninsured, now close to 47 million.

But the states appear to be on a collision course with the Bush administration, whose latest budget proposals create a huge potential obstacle to their efforts to expand coverage. While offering to work with states by waiving requirements of federal law, the Bush administration has balked at state initiatives that increase costs to the federal government.

State efforts have almost invariably begun with children, building on the Children's Health Insurance Program, which is jointly financed by the federal and state governments. Many states are eager to expand eligibility for that program, and some are going far beyond the income levels deemed appropriate by the White House. In his budget last week, President Bush said he wanted to return the program to its "original objective" of covering children with family incomes less than twice the poverty level.

Sixteen states already cover children in families with incomes above 200 percent of the poverty level, and some want to go higher, even as the president seeks to reduce federal payments for children in families with higher incomes.

In New York, Gov. Eliot Spitzer, a Democrat, has proposed raising the state's income limit to 400 percent of the poverty level, from 250 percent. A family of four is considered poor if its annual income is less than $20,650. Arizona and Wisconsin are also proposing raising income ceilings.

In California, as part of a plan to cover all state residents, Gov. Arnold Schwarzenegger, a Republican, proposed increasing the income limit for the children's insurance program to 300 percent of the poverty level, from 250 percent.

Gov. Rod R. Blagojevich of Illinois, a Democrat, said Mr. Bush's proposal "would seriously hamper the efforts of Illinois and other states" to ensure that all children had coverage — the goal of a state law he signed in November 2005.

The movement to expand coverage is by no means limited to children any more.

The National Conference of State Legislatures has reported: "Health care reform was hot in legislatures across the nation in 2006, and the forecast for this session may be even hotter. Fueled by the increasing number of uninsured Americans, the declining number of employers offering insurance to their employees, the improved fiscal conditions in the states and the lack of federal action, states are leading the way in health care reform."

Officials cite a groundswell of state activity:

Arkansas, Kentucky, Montana, Oklahoma, Rhode Island and Tennessee have new laws and programs to reduce the cost of insurance for small employers.

Massachusetts and Vermont passed laws in 2006 to achieve universal or nearly universal coverage, while addressing the cost and quality of care.

Several states, including Colorado and Delaware, are requiring insurers to cover young adults, the fastest-growing segment of the uninsured population.

"We have a goal that all Minnesotans should be covered by health insurance," Gov. Tim Pawlenty, a Republican, said in an address to the State Legislature last month.

In New York State, the Children's Health Insurance Program covers 385,000 children, of whom 55,000 have family incomes above 200 percent of the poverty level. Another 50,000 children would be eligible under Governor Spitzer's proposal to increase the income ceiling.

The federal government now pays 65 percent of the cost of coverage for each child in New York's program, or $1,154 a year out of a cost of $1,776. Judith Arnold, the program's director, said Monday that under the president's proposal, the federal contribution would be reduced by $266 a child. So, she said, New York would lose $14.6 million a year.

Knowing they cannot count on a major infusion of federal money, some states are looking to their own revenue sources, including tobacco taxes, pools of money set aside for charity care and uncompensated care, and assessments levied on employers who do not provide health benefits to their workers.

Gov. Edward G. Rendell of Pennsylvania, a Democrat, has proposed paying for coverage of the uninsured through a variety of new taxes, including an increase in the state's tobacco tax.

Mr. Rendell also wants to levy a 3 percent assessment on the payrolls of businesses that do not offer coverage to their employees.

Similarly, under Governor Schwarzenegger's proposal, businesses with 10 or more employees would have to offer insurance to their workers or pay 4 percent of their payroll into a state fund to be used for coverage.

State efforts face several potential pitfalls. The cost of coverage could spin out of control. An economic downturn could reduce states' fiscal capacity. Moreover, a federal law, the Employee Retirement Income Security Act of 1974, could block any state program that requires employers to alter their health plans.

In Washington, health policy debates highlight the ideological divide between Republicans and Democrats over the proper role of government in helping the uninsured. Governors and state legislators tend to be more pragmatic.

"There is such a political divide in Washington that many people believe that the only reasonable chance to succeed is at the state level," said Jeffrey S. Crowley, a senior research scholar at the Health Policy Institute of Georgetown University.

Soaring health costs are placing pressures on employers and employees alike. In recent weeks, companies like Wal-Mart have joined labor unions and consumer groups in coalitions espousing universal coverage.

In his State of the Union address on Jan. 23, Mr. Bush proposed a new tax deduction to help people buy health insurance outside the workplace, and he said he wanted to help "states that are coming up with innovative ways to cover the uninsured."

In his budget, Mr. Bush said the way to transform the health care system was by "subsidizing the purchase of private insurance," not by expanding public programs in a way that would increase costs to the federal government.

To slow the growth of Medicare and Medicaid, Mr. Bush asked Congress to squeeze tens of billions of dollars from the programs.

Mr. Bush's efforts, combined with the flurry of state activity, have forced Congress to face fundamental questions about the Children's Health Insurance Program: If states run out of money, should the federal government bail them out? Should states be allowed to use the money to cover adults?

More than a dozen states expect to exhaust their allotments of federal money in the next few months, raising the possibility that children will be removed from the rolls. Georgia and New Jersey, for example, said they would run out of money by May.

White House officials said that some states had strayed from the purpose of the program in another way, by covering adults. Mr. Bush wants to prohibit states from adding childless adults to the rolls. And he would restrict eligibility for parents.

Jason A. Helgerson, policy director for the Wisconsin Department of Health and Family Services, said, "There is strong empirical evidence that when you cover adults and children, you get more kids covered." In Wisconsin, the Children's Health Insurance Program covers 36,900 parents and 29,800 children, Mr. Helgerson said.

Senator Orrin G. Hatch, Republican of Utah, asked: "What is going on here? When we created the program, its purpose was to provide coverage for low-income children."