A major funding hike, supported by influential Democrats, that would benefit a key federal children’s health insurance program, is at risk because of the new majority’s efforts to cut the deficit.

Congressional proponents of the State Children’s Health Insurance Program want to add billions of dollars to the program but they are running into a major obstacle: the “pay-as-you-go” rule enacted by the new Democratic majority, Congressional sources say.

SCHIP — a decade-old federal-state effort that provides health insurance for children of low-income families — was the source of coverage for 6 million low-income children during 2005. But there are as many as 9 million uninsured children eligible for coverage — and a bipartisan coalition of lawmakers, including Sens. Edward Kennedy (D-Mass.) and Orrin Hatch (R-Utah) and Reps. Henry Waxman (D-Calif.) and John Dingell (D-Mich.), have been floating the possibility of doubling the program’s funding, arguing that current funding levels are inadequate.

The federal government currently provides $5 billion a year for the program.

The Bush administration’s fiscal 2008 budget proposes flat funding for SCHIP. Kennedy and others are looking for funding of $10 billion to $12 billion per year, with a plan for $50 billion to $60 billion over a five-year span.

But first they must find a way to offset those increases to comply with the PAYGO rule, which require the Congressional Budget Office certify that new spending not increase the federal deficit.

Kennedy, chairman of the Senate Health, Education, Labor and Pensions Committee, is working with the Senate Budget Committee to find offsets for a SCHIP increase, an aide to the Massachusetts legislator said.

Sen. Max Baucus (D-Mont.), the chairman of the Senate Finance Committee, also is looking for ways to increase SCHIP spending, an aide said. The Finance Committee has jurisdiction over SCHIP.

Among the proposals being considered to offset the SCHIP increases are using savings from increased federal access to generic biologic products in the marketplace, industry consultants told CongressNow. But it will be “extremely tough” to offset that amount, said Stephen Northrup, a senior government relations manager for the law and lobbying firm Arent Fox who is a former health policy staff director for Health, Education, Labor and Pensions Committee.

Waxman and other lawmakers want to give the Food and Drug Administration the authority to review generic versions of biologics in order to drive down prices for the government and the private sector. Biologics are products, such as vaccines and antitoxins, made from living organisms and used to treat or prevent diseases.

Express Scripts, a leading pharmacy benefit manager, recently issued a report that determined the health care system could save up to $71 billion over 10 years from these generics.

But Northrup and others are skeptical of that figure. The $71 billion estimate is “pie in the sky,” he said. CBO has yet to score any of the generic biologics bills, Northrup added.

Other proposals include tax increases and a Medicare rebate, said Northrup and Alexander Vachon, an industry consultant and former Republican aide on the Senate Finance Committee. Under the proposed rebate, the government would calculate where it had overpaid for drugs under Medicare and require companies to pay that amount back. The funds would then be used to support SCHIP.

But Northrup is among those skeptical about finding large offsets. “I don’t know if there’s this gigantic pot of money” from overpayment or fraud and abuse, he said.

Kennedy countered in a Feb. 26 speech that nine million uninsured children “isn’t just wrong — it’s outrageous, and we need to change it as soon as possible.” Without dramatic funding increases, he added, states will have to cut back their programs.