A path-breaking 1996 paper by economists David Cutler and
Jonathan Gruber provided quantitative support for the idea that
expansions of public health care programs often have little "bang
for the buck" in terms of reducing the ranks of the uninsured. While
some benefits will flow to those who are uninsured, program
expansions also cause many individuals and families to lose their
private coverage, often in favor of public coverage. The result is
that many individuals are transitioned out of private coverage, a
large portion of increased spending on public health flows to those
who do not need it, and the ranks of the uninsured shrink by less
than expected. Looking at Medicaid eligibility expansions in the
1980s and 1990s--mostly expansions to cover children from families
with higher incomes--Cutler and Gruber found that nearly
half of program expansions were offset by decreased private
coverage. Recent research confirms this effect and
its magnitude. As Congress considers expanding SCHIP up
the income ladder, it should recognize that throwing more money
into the program will increasingly "crowd out" private funding and
coverage while doing less to expand overall coverage.
Cutler and Gruber describe three mechanisms by which crowd-out
might occur: employers cutting back on private coverage, workers
declining coverage for themselves and their families, and workers
declining coverage for dependents eligible for public programs. They
found that program expansions had no impact on employers' decisions
to offer coverage but "a large and statistically significant
effect" on workers' decisions to enroll in employer-based
coverage. Cutler and Gruber also found that Medicaid
expansions targeting women and children led many workers to drop
coverage for their dependents while maintaining individual
Altogether, the crowd-out effect is especially strong in the
expansion of public health programs that cover children. When
programs targeting children are expanded, Cutler and Gruber
conclude, "On net, the rate of uninsurance for children falls, but
by only one-half as much as the increase in Medicaid coverage."
Cutler and Gruber conclude that, though a popular policy option,
"expanding public insurance . . . may be quite expensive, due
partially to private crowd-out." Among other alternatives to
lessen the impact of crowd-out, they suggest "a sliding scale" of
subsidies for lower-income people to purchase private coverage--in
other words, premium support.
The Recent Research
Ten years after the publication of his initial crowd-out study,
Gruber, along with economist Kosali Simon, revisited the issue with
"improved methods and data."
An interesting statistic, based on data from 1984 through 2004,
prompted the reevaluation: "[D]espite an enormous expansion in the
public health insurance safety net in the U.S., the number of
uninsured continues to grow." Could the culprit be, once
The new study's findings are even clearer, and more relevant to
current policy debates, than those of the 1996 paper. First, the
crowd-out effect is larger than previously estimated: "[T]he number
of privately insured falls by about 60% as much as the number of
publicly insured rises." Second, anti-crowd-out mechanisms such as
waiting periods, which many states inserted into their SCHIP
programs, failed to work--indeed, "if anything these provisions
cause crowd-out to rise, not fall."
While Gruber has noted that his and Simon's model of the
crowd-out effect of public insurance expansions may not be directly
applicable to SCHIP and that their SCHIP estimates are
unreliable, the paper is significant because it
confirms the magnitude of crowd-out generally and suggests that
anti-crowd-out mechanisms are, at best, ineffective. Gruber's two
papers (with Cutler and with Simon), consistent with most studies
on the subject published since Cutler and Gruber's initial study,
demonstrate that crowd-out is a major drawback of expanding public
insurance programs and present no evidence to suggest that this
conclusion does not apply to SCHIP. In fact, Cutler and
Gruber's study confirms an insight that applies directly to SCHIP
Since most of the people made eligible by the
expansions are dependents, a natural reaction for workers may be to
drop coverage of eligible dependents only, while maintaining
insurance for themselves.
While Gruber and Simon, using different data and methodology, do
not attempt to address this hypothesis directly, they do, as
described above, confirm the general results on crowd-out of Cutler
To a large extent, a new report by the Congressional Budget
Office draws on a wide body of recent research to fill in what
Gruber has acknowledged to be the shortcomings in his and Simon's
paper with respect to SCHIP. In addition to those
suggested by Cutler and Gruber, the CBO paper describes two
especially interesting mechanisms by which crowd-out might
[P]reviously unemployed parents might be more likely to
decline coverage at a new job if their children are enrolled in
SCHIP. To the extent that SCHIP makes private coverage less
important for some families, the program might also increase the
likelihood that low-income parents take jobs that offer higher cash
wages rather than health insurance.
In this latter way, SCHIP expansions to cover more children
could actually further erode private coverage among adults. States'
outreach efforts to boost SCHIP enrollments have also led to
increased Medicaid enrollment, reducing private coverage still
further. Studies cited in the CBO report also make
the point that crowd-out encompasses more than just transitions
from private to public coverage; rather, it represents a shift away
from private coverage. For example, some individuals and families
with public coverage may opt to stick with it rather than
transition to private coverage when it becomes financially
The CBO concludes that reliable estimates of crowd-out in SCHIP
range from 25 to 50 percent. As the report notes,
however, the studies from which these numbers are drawn estimate
the reduction only among children and so "probably understate the
total extent to which SCHIP has reduced private coverage"
because SCHIP crowds out adults as well. Another reason that
crowd-out in SCHIP expansions is likely to be greater than the
current literature's estimates is "because the children eligible
for SCHIP are from families with higher income and greater access
to private coverage." Thus, as SCHIP expands up the income
ladder, more of the children enrolled in it will be transitioning
from private coverage and fewer will come from the ranks of the
This risk is real. Fully 61 percent of children who became
eligible for public insurance due to the creation of SCHIP already
had private coverage. As SCHIP grows to allow children from
wealthier families, this figure will rise. According to a CBO
analysis of Census data, current proposals in Congress to expand
SCHIP eligibility would reach children in income groups in which
89 percent or more of children currently have private
coverage. (See Chart 1.) Raising income eligibility
limits for SCHIP will inevitably draw in more children who today
have private coverage, increasing the problem of crowd-out. In this
way, expanding SCHIP actually diverts the program from its original
purpose--providing health coverage to uninsured children from needy
While precise estimates vary, study after study consistently
shows that expansions of public insurance programs come at the
expense of private coverage, especially when those expansions begin
to encompass families with higher incomes. As more money is poured
into expanding SCHIP, less of the new funds will go to providing
coverage to children who currently go without. Rather, expansion
will increasingly serve to coax individuals and families out of the
private insurance market and into government coverage. Undermining
private coverage, which is the linchpin of most approaches to
improving coverage and care, with government dependence is not an
effective way to address shortfalls in coverage.
Andrew M. Grossman is
Senior Writer, and Greg D'Angelo is a Research Assistant in the
Center for Health Policy Studies, at The Heritage Foundation.
David M. Cutler and Jonathan Gruber, "Does Public Insurance Crowd
Out Private Insurance?" The Quarterly Journal of Economics, Vol.
111, No. 2 (May 1996), pp. 391-430.
Their "final estimate" is 49 percent. Ibid., p. 426.
See, e.g., Jonathan Gruber and Kosali Simon, "Crowd-Out Ten Years
Later: Have Recent Public Insurance Expansions Crowded Out Private
Health Insurance?" NBER Working Paper No. w12858, January 2007, and
Noelia Duchovny and Lyle Nelson, "The State Children's Health
Insurance Program," Congressional Budget Office, May 2007.
Cutler and Gruber, p. 411.
Again, Cutler and Gruber are especially clear: "There is no effect
of Medicaid eligibility on the decision to offer insurance….
Thus, the estimates suggest that all of the reduction in worker
coverage is coming through lower take-up rates, not reduced
employer offering of insurance." Cutler and Gruber, p. 417. Only
one study has directly examined employers' responses to SCHIP. That
study found "no evidence that employers responded to SCHIP by
either dropping health insurance altogether or by dropping coverage
for the dependents of employees." It did find, however, that
"employers whose workers were likely to have been affected by the
introduction of SCHIP did respond to the new program by raising
family employee contributions relative to those for single
coverage." It is not clear, however, the extent to which these
increases independently affected employee take-up. The authors
helpfully explain one point that policymakers should take from
their research: SCHIP expansions mean that "some non-eligible
families working in these firms also might face higher health
insurance premiums for family coverage, as would families who were
eligible for SCHIP based on income but who would not qualify
because they had not been without insurance for a certain period of
time." In other words, expanding SCHIP eligibility may actually
increase the cost of private coverage for families that are not
eligible for SCHIP coverage, including some families that fall
within the SCHIP target population.
They are particularly clear on this point, as concerns children:
"For children, each ten-percentage-point increase in Medicaid
eligibility results in a 0.74 percentage point decline in private
insurance coverage. On net, the rate of uninsurance for children
falls, but only by half as much as the increase in Medicaid
eligibility." Cutler and Gruber, p. 410.
Gruber and Simon, p. 27.
Letter from Jonathan Gruber to Representative John Dingell, March
1, 2007 (on file with authors).
For reviews of other literature, see Duchovny and Nelson, pp. 9-13,
and Gruber and Simon, Table 1. Gruber and Simon find fault in the
studies that they review finding low levels of crowd-out and seem
to intend their study to grapple with the criticisms raised in
those studies while not succumbing to the faults they have
identified. See Gruber and Simon, pp. 9-13.
Cutler and Gruber, p. 418.
Again, they are especially clear on this point: "[C]rowd-out
remains a pervasive phenomenon for recent public insurance
expansions." Gruber and Simon, p. 2.
See Letter from Jonathan Gruber to Representative John Dingell
(D-MI) ("The estimates of crowd-out that are being cited from our
paper are estimates of the total impact of expanding public
insurance to families. The relevant estimate for interpreting the
crowd-out effects of SCHIP differ…."), and Duchovny and
Nelson, pp. 9-13.
Duchovny and Nelson, p. 9.
A Robert Wood Johnson Foundation issue brief calls this "'within
enrollment' crowd-out." See Claudia Williams, Gestur Davidson,
Ph.D., Lynn A. Blewitt, Ph.D., and Kathleen Thiede Call, Ph.D.,
"Public Program Crowd-Out of Private Coverage: What Are the
Issues?" Robert Wood Johnson Foundation, Policy Brief no. 5, June
Duchovny and Nelson, p. 11.
Julie L. Hudson, Thomas M. Selden, and Jessica S. Banthin, "The
Impact of SCHIP on Insurance Coverage for Children," Inquiry, vol.
42, no. 3 (Fall 2005), Table 1.
Duchovny and Nelson, p. 12, n. 39.