The number of children enrolled in a state-federal health insurance program for youth on the brink of poverty has plummeted from a peak of 66,317 in May 2008 to 16,662 in August, the lowest level since 1999.

The drop comes as demand for the program is going strong: In July, more than 100,000 children were on the waiting list for KidsCare, the state's version of the federally sponsored Children's Health Insurance Program.

More than half of the decline has come since Jan. 1, 2010, when the Arizona Health Care Cost Containment System froze enrollment in KidsCare in response to a lack of funding, according to its website.

State lawmakers have repeatedly cut funding for KidsCare in recent years, from more than $100 million in fiscal 2009 to $36 million this year, fiscal 2012.

Because of the enrollment freeze, a state official said there are "sufficient appropriations to meet the needs of the current enrollees." But advocates have called the reduced levels of coverage an "unwise decision" that will have both short- and long-term health consequences.

KidsCare is a premium-based health-care program that covers children whose family income is between one and two times the poverty level, currently $22,350 per year for a family of four. Below that level, a family qualifies for Medicaid, another state-federal health insurance program.

The Legislature tried to eliminate Kids-Care altogether in March 2010 but was blocked by a provision in the federal Patient Protection and Affordable Care Act that required all states to maintain their child health-care services. But the enrollment freeze was already in place in Arizona, the only state that has such a limit.

The freeze raised concerns at the federal Centers for Medicare and Medicaid Services about Arizona's ability to retain children in the program. Since the freeze was enacted, nearly 30,000 children have been dropped.

State officials attribute most of the decline to long-standing factors that would have occurred with or without an enrollment freeze, including some families qualifying for Medicaid and others failing to renew their eligibility or pay their premiums.

The federal government requires that states coordinate Medicaid and children's health-care programs to account for families whose incomes may change, pushing them out of one program or the other - after being laid off or after finding a job, for example.

A family that falls below the poverty line will still be eligible for Medicaid in Arizona. But because of the enrollment freeze, children would be denied coverage in KidsCare if their families' incomes rose above the poverty level or fell below two times that level.

On Dec. 7, the Centers for Medicare and Medicaid Services asked that children in such situations be granted exceptions to the freeze. But AHCCCS refused two weeks later, writing that "any exception to the enrollment freeze for cases such as these would result in a significant increase in enrollment in the KidsCare program."

The letter acknowledged "unfortunate examples" of children who lose coverage because their families transition between programs. But the extent to which these situations affect coverage is unknown because the agency does not maintain such data, said Monica Coury, assistant director of the Office of Intergovernmental Relations at AHCCCS.

When KidsCare was introduced in 1998, about one-third of children whose families earned one to two times the poverty level were without insurance. That level had fallen to 22 percent by 2008, when KidsCare enrollment was at its peak.

"We expect that'll probably start turning the other direction as we get more recent data," said Matt Jewett, director of health policy at the Children's Action Alliance, an advocacy group for Arizona children.

The freeze will have long-term consequences as children without health care grow into contributing members of society, he said.

"When you have kids who have hearing problems or vision problems and can't get those addressed, it's a lot harder for us to get those kids prepared to grow and thrive as adults," Jewett said.

"When you have kids who have hearing problems or vision problems and can't get those addressed, it's a lot harder for us to get those kids prepared to grow and thrive as adults."

Matt Jewett, director of health policy at the Children's Action Alliance