Congressional Republicans released a draft bill Tuesday that would avert a funding cutoff for the Children’s Health Insurance Program (CHIP) and the loss of coverage for some two million children.

What House and Senate Republicans called a “discussion draft” would extend funding past September but for an undecided period of time and with a number of changes that diverge from Democratic priorities and concern advocates for low-income children. It sets the stage for negotiations between the two parties, neither of which want to face the political ramifications of letting children go uninsured and throwing state budgets into turmoil.

The bill is sponsored by Rep. Fred Upton of Michigan, Health subcommittee Chairman Joe Pitts of Pennsylvania and Sen. Orrin Hatch of Utah, who played a major role in the original passage of CHIP in 1997. Since then, the program has cut the uninsured rate among children in half while continuing to carry bipartisan support. Today, it covers about 8 million children from low- to moderate-income families.

“Our governors have provided important feedback for how to strengthen this program, and we will continue to work in a thoughtful and transparent manner to provide states the certainty they need as they craft their budgets this spring," the three lawmakers wrote. "We can all come together to ensure kids have access to quality care.”

According to a recent survey, 33 governors are planning their budgets with the assumption that Congress will renew CHIP funding, and only three states have began preparing contingency plans in case it doesn't.

The program serves children from families that earn too much to qualify for Medicaid. Unlike Medicaid, it’s not an open-ended entitlement program, so states have more flexibility to limit eligibility, which ranges from 100 percent of the federal poverty line to about 400 percent. Supporters argue the program is still needed despite the availability of subsidized private insurance through the ACA marketplaces because costs for patients with CHIP plans are generally far less than ACA plans.

Exactly how states structure their programs determines the scale of their budget losses if Congress fails to renew funding after Sept. 30. Fourteen states keep their CHIP programs separate from Medicaid and could collectively lose upwards of $5 billion in funding; eight states have expanded Medicaid to encompass CHIP and could collectively lose $1 billion; others operate a combination of the two depending on income levels.

On average, the federal government pays 70 percent of state CHIP costs. The Affordable Care Act increased the federal match by 23 percent starting in October but doesn’t provide more funding, which means what funding remains would run out faster. The draft bill calls for dropping the 23-percent increase, which some CHIP advocates are willing to accept in exchange for an extension.

 The federal health law also requires states to maintain current eligibility rules through 2019 -- another provision Republican lawmakers and Republican governors want axed.

Notably, the bill also prohibits coverage for children above 300 percent of the federal poverty line and scales it back for those at or above 250 percent. Seventeen states cover children with family incomes of at least 300 percent of the federal poverty line, while 24 states cover them at 250 percent, according to the Georgetown Center for Children and Families. But according to the bill's summary, “When [CHIP] was created with bipartisan support in the Balanced Budget Act of 1997, [it] was intended to provide health insurance coverage for low-income children in families with incomes at or below 200 percent of the federal poverty level."

“We believe an overriding principle in this conversation should be no child is left worst off,” said Bruce Lesley, president of First Focus, an advocacy group. “That provision clearly violates that principle.”

Still, Lesley praised Republicans for presenting a bill that will start negotiations and for agreeing to listen to feedback over the coming months. Democratic Sen. Sherrod Brown of Ohio -- who filed a straightforward, four-year extension bill two weeks ago -- struck a similar tone.

His press secretary, Rachel Petri, said that while he’s “encouraged to see Republican committee leadership join Democrats in the ongoing [debate], ... Sen. Brown believes that any proposal that reduces coverage for our nation’s children is a nonstarter and remains committed to finding a way forward on CHIP that maintains the funding levels outlined by the health law, gives our states the time they need to plan their budgets, and prevents millions from losing this critical health coverage."

Other significant changes Republicans are seeking include:

  • An extension of special funding for 11 states that expanded Medicaid to cover more children before CHIP passed in 1997. They're currently allowed to use federal funding to pay for children in Medicaid with family income above 133 percent of the poverty line with no limitations, according to a bill summary. The Republican bill would extend this option but limit it to between 133 percent of the poverty line and 250 percent. 
  • Flexibility to expand waiting periods for people who previously had private coverage from a maximum of 90 days to up to 12 months. Republicans argue this also helps the program maintain its focus on lower-income children, because people with private insurance "crowd out" those without any coverage and often have higher incomes. Opponents argue waiting periods accomplish little, and extending them to a year is overly harsh. 
  • End an ACA provision that required states to move children between 100 percent of the federal poverty line and 133 percent from CHIP to Medicaid with the idea that children would then have the same coverage as their low-income parents, assuming full Medicaid expansion. Republicans want to allow states to place those children back in CHIP, where states have more flexibility to limit coverage because the program is a block grant, not an open-ended entitlement.