July 9, 2007
By Nicola Moore and J.D. Foster, Ph.D.
This year's expected reauthorization of the State Children's
Health Insurance Program (SCHIP) has sparked congressional interest
in expanding the program. On this issue, Members of Congress should
follow some simple advice: When in a hole, put down the shovel and
The federal government already spends one-fifth of all tax
revenues on healthcare entitlements, namely Medicare and Medicaid.
Spending on these programs will consume more than half of revenues
by 2050, according to the baseline projections by the Congressional
Budget Office (CBO). Also by that year, total federal revenues will
have risen to 23.7 percent of GDP, nearly 3 percentage points
higher than the record set in 2000. As taxes rise to the highest
level in the nation's history, fewer and fewer dollars will be
available for spending on other national priorities.
In fiscal year 2007, SCHIP will cost taxpayers more than $11.5
billion; those costs could increase fivefold if the program is
expanded as some have suggested. Although SCHIP is not yet a
full-fledged healthcare entitlement, expanding the program would
move it significantly in that direction. Congress ought to focus on
addressing the entitlement spending problem it has already created.
Expanding yet another federal healthcare program would be reckless,
risky, and irresponsible.
SCHIP's Original Design
SCHIP was created in 1997 to provide health insurance for
children in low-income families. Medicaid provided coverage for
children and adults with incomes below the poverty line; SCHIP
targeted children in families whose earnings were too high to
qualify for Medicaid but less than 200 percent of the federal
poverty level (FPL), or approximately $40,000 for a family of four.
In 2006, 31 million children were enrolled in Medicaid, and 6.7
million children were enrolled in SCHIP.
Like Medicaid, SCHIP is jointly funded by the federal and state
governments. Each state's federal allotment depends on a formula
including, among other factors, the number of low-income children
and healthcare costs in the state. States have wide discretion in
designing their SCHIP programs: They can make SCHIP an extension of
Medicaid, design a stand-alone program, or use some combination of
the two. Eleven states chose the first option and typically model
their benefits plans directly after their Medicaid plans, while
states that elect to create separate programs frequently model
their plans after state government employees' healthcare plans.
One problem with SCHIP's design is that it crowds out private
insurance by offering coverage to children who would otherwise be
covered by private insurance. Some estimates find that for every
100 SCHIP enrollees, private coverage is reduced for 60 children. This
means the program has difficulty targeting the truly uninsured as
resources are directed to those who would otherwise have private
insurance. By crowding out private insurance, SCHIP represents one
big step toward government-run national health insurance. For these
reasons, further SCHIP expansion should be viewed with great
As occurred with many other federal programs, SCHIP has already
grown far beyond its original scope. Even though Congress first
targeted SCHIP to cover near-poor children, some states now cover
adults, and many states have obtained waivers to cover children in
families above 200 percent of the FPL. With expanding scope comes
huge cost increases. While federal funding for SCHIP was originally
capped at $40 billion over a 10-year period, Congress has granted
an additional $676 million in new federal spending for state
bailouts through 2026. Several states began to demand bailouts
after overextending their programs beyond the federal statute's
original intent. Fourteen states experienced SCHIP shortfalls
totaling $720 million in 2007. The CBO projects that 43
states will experience shortfalls totaling $8.9 billion by 2017.
Congress is considering several proposals to expand the federal
scope of SCHIP along the line of states that have utilized waivers
to vastly expand their coverage. However, states that would
like to expand their programs ought to do so on their own dime.
There is no justification for federalizing the existing state SCHIP
expansions and no reason to ask the taxpayers in states with more
restrained SCHIP programs to bear additional costs.
Some proposals would increase eligibility by covering children
in families with incomes up to 300 percent or even 400 percent of
the FPL. In 2007, that would mean income of $61,940 or $82,600,
respectively, for a family of four. Such eligibility expansion
would encroach solidly into middle income territory. Raising the
threshold to 300 percent of the FPL would result in 14 states
extending coverage to families with median incomes; a 400 percent
threshold would result in 42 states covering families with median
incomes. As families with earnings at the exact
middle of the income distribution of the state, median-income
earners are by definition not poor. Covering them under SCHIP would
go well beyond the original objective of helping truly low-income
families, effectively creating a new middle-class entitlement of
A second proposed change would expand SCHIP access by
streamlining the enrollment process. This entails creating a
one-stop shop for families who are eligible for other government
aid (such as free school lunches or the Women, Infants and Children
Program) to enroll in SCHIP automatically. Currently, many states
budget their federal SCHIP allotments by capping enrollment. Forced
expansion of enrollment would undermine a state's ability to
control costs and would further burden state and federal taxpayers.
According to the Center on Budget and Policy Priorities, the cost
of covering all eligible uninsured children under SCHIP would
exceed $55 billion over five years.
In reality, these expansion efforts are a thinly veiled attempt
to turn SCHIP into an open-ended entitlement. SCHIP already
resembles traditional entitlements like Medicaid and Medicare in
that the program provides a specified set of benefits (health
insurance) to qualifying beneficiaries (children in low-income
families). Raising the eligibility threshold or expanding
enrollment would broaden the scope of the program and increase the
amount of committed federal dollars. Having established the
precedent of federal bailouts for state programs, the last clear
distinction between SCHIP and common entitlement programs would
fade away. Major expansion of eligibility up the income scale would
require more coverage that would likely force the elimination of
the current block grant structure of SCHIP, requiring an open-ended
commitment from the federal government.
It would be irresponsible of Congress to transform SCHIP into an
entitlement program. Taxpayers are already confronting huge costs
for existing healthcare entitlements. According to the CBO,
Medicaid spending is projected to grow from $200 billion this year
to more than $3 trillion by 2050 -- a 1,400 percent increase.
Although Medicare does not target the same population as SCHIP, it,
too, is placing a huge strain on government finances. The Medicare
Trustees report that spending on the program will increase from
$440 billion today to $8.5 trillion by 2050.
Ironically, the very children that many in Congress want to
insure through SCHIP expansion will also be the ones footing the
bill for federal entitlement programs. The total value of unfunded
debts and entitlement obligations that must be paid down the road
is equivalent to giving a $170,000 mortgage to every child in
America but without the house. Rather than increase costs
through program expansion, Congress should work to reduce this
onerous debt for the millions of children who stand to inherit
Since its inception, SCHIP has grown in cost and scope,
gradually crowding out part of the private insurance market.
Efforts to expand the program would further drive up costs and move
it in the direction of an entitlement program with an open-ended
commitment from American taxpayers. If state officials wish to
expand SCHIP, they ought to do so on their own state's dime rather
than asking Congress to collect and redistribute taxes from the
rest of the country. Congress must take steps to get its existing
healthcare obligations under control rather than make the problem
worse through an unwise SCHIP expansion.
Nicola Moore is Research Coordinator
for the Thomas A. Roe Institute for Economic Policy Studies at The
Heritage Foundation. J.D.
Foster, Ph.D., is Norman Ture Senior Fellow in Tax and
Entitlements for the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.
Estimates are based on Congressional Budget Office, "Long-Term
Budget Outlook" Scenario 2 data, December 2005, at
federal estimates, see Chris Peterson, "SCHIP Financing:
Projections and State Redistribution Issues," CRS Report for
Congress, July 6, 2005, at
www.ahipresearch.org/pdfs/RL32807.pdf (June 2,
For state estimates, see Elicia J. Herz et al., "State
Children's Health Insurance Program (SCHIP): A Brief Overview," CRS
Report for Congress, March 23, 3005, at
(June 21, 2007).
Congressional Budget Office, "The State Children's Health Insurance
Program," Pub. No. 2970, May 2007, p. 2, at /static/reportimages/4B5CD8722923EC265D69888ABE4976A2.pdf
(June 13, 2007).
Andrew Grossman and Greg D'Angelo, "SCHIP and 'Crowd-Out': How
Public Program Expansion Reduces Private Coverage," Heritage
Foundation WebMemo No. 1518, June 27, 2007, at www.heritage.org/Research/HealthCare/wm1518.cfm.
$283 million in new spending was included in the Deficit Reduction
Act of 2006, and $650 million in additional bailout funding was
included in the Iraq war supplemental passed in May 2007, $393
million of which was new spending, with the rest coming from
Nina Owcharenko, "The Truth About SCHIP Shortfalls," Heritage
Foundation WebMemo No. 1381, March 25, 2007, at www.heritage.org/Research/HealthCare/wm1381.cfm.
Congressional Budget Office, p. 13.
bill, HR 1535, has been introduced in the House by John Dingell
(D-MI), and two bills, S. 895 and S.1224, have been introduced in
the Senate. S.895, sponsored by Hillary Clinton (D-NY), is a
companion to HR 1535, and S.1224 is co-sponsored by John
Rockefeller (D-WV) and Olympia Snowe (R-ME).
Calculations are based on data from 2005 due to the fact that state
level median income data is not yet available for 2007. In 2005,
300% of the FPL was $58,050, and 400% of the FPL was $77,400, so
the exact number of states that would extend coverage to median
income earners may vary slightly for 2007.
Edwin Park, et al. "Clearing Up Confusion on the Costs of Covering
Uninsured Children Eligible for Medicaid or SCHIP," Center on
Budget and Policy Priorities, March 13, 2007, at www.cbpp.org/3-13-07health2.htm (June 12,
 Nina Owcharenko, "Children's Health:
SCHIP Should Not Become a Welfare Entitlement," Heritage Foundation
WebMemo No. 1473, May 23, 2007, at www.heritage.org/Research/HealthCare/wm1473.cfm.
 Congressional Budget Office, "The
Long-Term Budget Outlook," December 2005, p. 31, at
2007 Annual Report of the Boards of Trustees of the Federal
Hospital Insurance and Federal Supplementary Medical Insurance
Trust Funds, April 23, 2007, at
(April 23, 2007).
Stuart M. Butler, "Solutions to Our Long-Term Fiscal Challenges,"
testimony before the Committee on the Budget, United States Senate,
January 31, 2007, at www.heritage.org/Research/Budget/tst013107a.cfm.
Note: This figure includes unfunded obligations for Social
Security as well as Medicare and Medicaid.
Congress ought to focus on addressing the entitlement spendingproblem it has already created. Expanding yet another federalhealthcare program would be reckless, risky, and irresponsible.
Assistant Director of the Thomas A. Roe Institute for Economic Policy Studies
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J.D. Foster, Ph.D.
Norman B. Ture Senior Fellow in the Economics of Fiscal Policy
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