State capitation amounts based on statistical 
models that fairly reflect the elements that com-
prise the State capitation amount described in 
subparagraph (A). 
(C) POPULATION INFORMATION.—The Bu-
reau of the Census shall assist the Board in de-
termining the number, place of residence, and 
risk group classification of eligible individuals. 
(b) COMPUTATION OF NATIONAL AVERAGE PER CAP-
ITA COST.— 
(1) FOR 2008.—For 2008, the national average 
per capita cost under this paragraph is equal to— 
(A) the average per capita health care ex-
penditures in the United States in 200 (as esti-
mated by the Board); 
(B) increased to 2007 by the Board’s esti-
mate of the actual amount of such per capita 
expenditures during 2007; and 
(C) updated to 2008 by the national health 
security spending growth limit specified in sec-
tion 601(b)(2) for 2008. 
(2) FOR SUCCEEDING YEARS.—For each suc-
ceeding year, the national average per capita cost 
under this subsection is equal to the national aver-
age per capita cost computed under this subsection 
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for the previous year increased by the national 
health security spending growth limit (specified in 
section 601(b)(2)) for the year involved. 
(c) STATE ADJUSTMENT FACTORS.— 
(1) IN
GENERAL.—Subject to the succeeding 
paragraphs of this subsection, the Board shall de-
velop for each State a factor to adjust the national 
average per capita costs to reflect differences be-
tween the State and the United States in— 
(A) average labor and nonlabor costs that 
are necessary to provide covered health services; 
(B) any social, environmental, or geo-
graphic condition affecting health status or the 
need for health care services, to the extent such 
a condition is not taken into account in the es-
tablishment of risk groups under subsection (d); 
(C) the geographic distribution of the 
State’s population, particularly the proportion 
of the population residing in medically under-
served areas, to the extent such a condition is 
not taken into account in the establishment of 
risk groups under subsection (d); and 
(D) any other factor relating to operating 
costs required to assure equitable distribution 
of funds among the States. 
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101 
(2) MODIFICATION OF HEALTH PROFESSIONAL 
EDUCATION COMPONENT.—With respect to the por-
tion of the national health security budget allocated 
to expenditures for health professional education, the 
Board shall modify the State adjustment factors so 
as to take into account— 
(A) differences among States in health 
professional education programs in operation as 
of the date of the enactment of this Act; and 
(B) differences among States in their rel-
ative need for expenditures for health profes-
sional education, taking into account the health 
professional education expenditures proposed in 
State health security budgets under section 
603(a). 
(3) BUDGET NEUTRALITY.—The State adjust-
ment factors, as modified under paragraph (2), shall 
be applied under this subsection in a manner that 
results in neither an increase nor a decrease in the 
total amount of the Federal contributions to all 
State health security programs under subsection (b) 
as a result of the application of such factors. 
(4) PHASE-IN.—In applying State adjustment 
factors under this subsection during the 5-year pe-
riod beginning with 2008, the Board shall phase-in, 
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102 
over such period, the use of factors described in 
paragraph (1) in a manner so that the adjustment 
factor for a State is based on a blend of such factors 
and a factor that reflects the relative actual average 
per capita costs of health services of the different 
States as of the time of enactment of this Act. 
(5) PERIODIC
ADJUSTMENT.—In establishing 
the national health security budget before the begin-
ning of each year, the Board shall provide for appro-
priate adjustments in the State adjustment factors 
under this subsection. 
(d) ADJUSTMENTS FOR RISK GROUP CLASSIFICA-
TION.— 
(1) IN GENERAL.—The Board shall develop an 
adjustment factor to the national average per capita 
costs computed under subsection (b) for individuals 
classified in each risk group (as designated under 
paragraph (2)) to reflect the difference between the 
average national average per capita costs and the 
national average per capita cost for individuals clas-
sified in the risk group. 
(2) RISK GROUPS.—The Board shall designate 
a series of risk groups, determined by age, health in-
dicators, and other factors that represent distinct 
patterns of health care services utilization and costs. 
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103 
(3) PERIODIC
ADJUSTMENT.—In establishing 
the national health security budget before the begin-
ning of each year, the Board shall provide for appro-
priate adjustments in the risk adjustment factors 
under this subsection. 
SEC. 603. STATE HEALTH SECURITY BUDGETS. 
(a) ESTABLISHMENT AND SUBMISSION OF BUDG-
ETS.— 
(1) IN GENERAL.—Each State health security 
program shall establish and submit to the Board for 
each year a proposed and a final State health secu-
rity budget, which specifies the following: 
(A) The total expenditures (including ex-
penditures for administrative costs) to be made 
under the program in the State for covered 
health care services under this Act, consistent 
with subsection (b), broken down as follows: 
(i) By the 4 components (described in 
section 601(a)(2)), consistent with sub-
section (b). 
(ii) Within the operating component— 
(I) expenditures for operating 
costs of hospitals and other facility- 
based services in the State; 
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104 
(II) expenditures for payment to 
comprehensive health service organiza-
tions; 
(III) expenditures for payment of 
services provided by health care prac-
titioners; and 
(IV) expenditures for other cov-
ered items and services. 
Amounts included in the operating compo-
nent include amounts that may be used by 
providers for capital expenditures. 
(B) The total revenues required to meet 
the State health security expenditures. 
(2) PROPOSED BUDGET DEADLINE.—The pro-
posed budget for a year shall be submitted under 
paragraph (1) not later than June 1 before the year. 
(3) FINAL BUDGET.—The final budget for a 
year shall— 
(A) be established and submitted under 
paragraph (1) not later than October 1 before 
the year, and 
(B) take into account the amounts estab-
lished under the national health security budget 
under section 601 for the year. 
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(4) 
ADJUSTMENT
IN
ALLOCATIONS
PER-
MITTED.— 
(A) IN
GENERAL.—Subject to subpara-
graphs (B) and (C), in the case of a final budg-
et, a State may change the allocation of 
amounts among components. 
(B) NOTICE.—No such change may be 
made unless the State has provided prior notice 
of the change to the Board. 
(C) DENIAL.—Such a change may not be 
made if the Board, within such time period as 
the Board specifies, disapproves such change. 
(b) EXPENDITURE LIMITS.— 
(1) IN GENERAL.—The total expenditures speci-
fied in each State health security budget under sub-
section (a)(1) shall take into account Federal con-
tributions made under section 604. 
(2) LIMIT ON CLAIMS PROCESSING AND BILL-
ING
EXPENDITURES.—Each State health security 
budget shall provide that State administrative ex-
penditures, including expenditures for claims proc-
essing and billing, shall not exceed 3 percent of the 
total expenditures under the State health security 
program, unless the Board determines, on a case-by- 
case basis, that additional administrative expendi-
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