if greater, (B) the average annual percentage in-
crease in the gross domestic product (in current dol-
lars) during the 3-year period beginning with the 
first quarter of the fourth previous year to the first 
quarter of the previous year minus the percentage 
increase (if any) in the number of eligible individuals 
residing in any State the United States from the 
first quarter of the second previous year to the first 
quarter of the previous year. 
(c) DEFINITIONS.—In this title: 
(1) CAPITAL EXPENDITURES.—The term ‘‘cap-
ital expenditures’’ means expenses for the purchase, 
lease, construction, or renovation of capital facilities 
and for equipment and includes return on equity 
capital. 
(2) HEALTH
PROFESSIONAL
EDUCATION
EX-
PENDITURES.—The term ‘‘health professional edu-
cation expenditures’’ means expenditures in hospitals 
and other health care facilities to cover costs associ-
ated with teaching and related research activities. 
SEC. 602. COMPUTATION OF INDIVIDUAL AND STATE CAPI-
TATION AMOUNTS. 
(a) CAPITATION AMOUNTS.— 
(1) INDIVIDUAL CAPITATION AMOUNTS.—In es-
tablishing the national health security budget under
section 601(a) and in computing the national aver-
age per capita cost under subsection (b) for each 
year, the Board shall establish a method for com-
puting the capitation amount for each eligible indi-
vidual residing in each State. The capitation amount 
for an eligible individual in a State classified within 
a risk group (established under subsection (d)(2)) is 
the product of— 
(A) a national average per capita cost for 
all covered health care services (computed 
under subsection (b)); 
(B) the State adjustment factor (estab-
lished under subsection (c)) for the State; and 
(C) the risk adjustment factor (established 
under subsection (d)) for the risk group. 
(2) STATE CAPITATION AMOUNT.— 
(A) IN GENERAL.—For purposes of this 
title, the term ‘‘State capitation amount’’ 
means, for a State for a year, the sum of the 
capitation amounts computed under paragraph 
(1) for all the residents of the State in the year, 
as estimated by the Board before the beginning 
of the year involved. 
(B) USE
OF
STATISTICAL
MODEL.—The 
Board may provide for the computation of
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 2006.—For 2006, 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 2004 (as es-
timated by the Board); 
(B) increased to 2005 by the Board’s esti-
mate of the actual amount of such per capita 
expenditures during 2005; and 
(C) updated to 2006 by the national health 
security spending growth limit specified in sec-
tion 601(b)(2) for 2006. 
(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
100 
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.
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 2006, the Board shall phase-in,