The New SCHIP Bill: The Senate Must Protect Private Coverage

The United States Senate will soon consider legislation to reauthorize the State Children's Health Insurance Program (SCHIP). Its decisions on that legislation will have a major impact on the private health insurance coverage of millions of American children.

The House of Representatives recently passed a major SCHIP expansion and removed any provision to protect private coverage. Among many other provisions, the House bill would extend the program to target children in families with annual incomes of $66,150, and in some cases even higher.[1] In other words, the House version of the bill would expand the program beyond low-income working families far into the middle class.

When the Senate considers the House legislation or a companion proposal to expand SCHIP to children in families with higher incomes, it should recognize that public program expansions would result in "crowd-out," or displacement, of both private health insurance coverage and funding. Expansions would impose higher and unnecessary costs as the program enrolls children who would have otherwise had private coverage. In particular, expanding eligibility beyond the current target population becomes a one-for-the-price-of-two proposition akin to taxpayers spending $1.00 to get 50 cents worth of new coverage.

The Purpose of SCHIP

As part of the Balanced Budget Act of 1997, SCHIP was enacted to provide assistance to uninsured children in low-income families. The idea was to help working families that earned too much to qualify for Medicaid but presumably not enough to afford private coverage.[2] Originally, the purpose of the law was "to initiate and expand the provision of child health assistance to uninsured, low-income children in an effective and efficient manner that is coordinated with other sources of health benefits coverage."[3] With an initial appropriation of $4 billion a year, Congress offered states a higher federal matching-rate percentage than under Medicaid to encourage them to participate in the new federal-state program.

Although it expanded public assistance beyond the traditional scope of Medicaid, SCHIP was clearly intended to target low-income uninsured children in families at or below 200 percent of the federal poverty level (FPL): $44,100 for a family of four in 2009.[4] State officials, however, have used their broad authority to expand eligibility to children in families with higher incomes.[5] By 2009, only seven states had eligibility below 200 percent FPL. Thirty-three states set eligibility between 200 and 250 percent FPL. Eleven states expanded eligibility above 250 percent FPL.[6]

SCHIP and Previous Research on "Crowd-Out"

With the creation of SCHIP and subsequent state expansions in eligibility beyond the initial target population, concern has been raised about the unintended consequence of public programs crowding out private coverage and funding. There is a robust body of research on crowd-out. In 1996, economists David Cutler of Harvard University and Jonathan Gruber of MIT were the first to provide quantitative support for the notion that expansions in public program eligibility can reduce a program's "bang for the buck" in reducing the ranks of the uninsured.[7] Looking at Medicaid eligibility expansions between 1987 and 1992-mostly expansions to cover children from families with higher incomes-Cutler and Gruber found that approximately 31-40 percent of the increase in Medicaid coverage of children was offset by reductions in private coverage. In other words, for every 100 children who became newly eligible for Medicaid, 31-40 would have otherwise had private insurance.

More recent research has for the most part corroborated Cutler and Gruber's findings. In one widely cited study, Gruber and Kosali Simon of Cornell University focused on public program expansions between 1996 and 2002-the time during which SCHIP was enacted and implemented-and concluded that crowd-out was "significant."[8]

The Congressional Budget Office (CBO) initially assumed that the creation of SCHIP would lead to sizeable crowd-out, around the level of 40 percent.[9]Later, in 2007, the CBO concluded that reliable estimates of crowd-out as a result of SCHIP expansions to date were probably somewhere between 25 and 50 percent.[10] Likewise, a report commissioned by the Centers for Medicare and Medicaid Services states that estimates of crowd-out in SCHIP have ranged between 10 and 56 percent.[11]

However, crowd-out would likely be larger if income eligibility were further expanded since children in families with higher incomes are more likely to have private insurance to lose if they were to become newly eligible for public coverage. Crowd-out thus has major implications for the sources of health insurance coverage for millions of children and the most prudent use of taxpayer dollars.

If Congress expands SCHIP eligibility to children with higher incomes without real protections against crowd-out, taxpayers would be required to fund coverage for both the targeted uninsured population as well as many children who would have otherwise had private health insurance. Congress should therefore be concerned about the inefficiencies inherent in pursuing public program expansions as a blunt instrument for covering the uninsured.

Heritage Research: Higher Income, Bigger Crowd-Out

A Heritage Foundation econometric analysis of crowd-out, using data from 1996 to 2003, supports several important conclusions. First, as SCHIP eligibility levels were extended to include children with higher incomes, roughly one-third of the children who became publicly insured had private insurance before the expansion.

A second important finding is that crowd-out of private health coverage grows as coverage under SCHIP becomes available to children with higher incomes. Such a result is expected, since the families of these children are more likely to be able to afford their own insurance or have a parent with access to employer-provided insurance before an expansion in program eligibility.[12] In fact, the Heritage study found that as eligibility for public coverage was extended to children in families with incomes between 200 and 300 percent of FPL, as many as half of those children who had been transitioned into public coverage would have otherwise had private insurance.

A third important finding of the Heritage analysis is that the magnitude of the crowd-out effect depends on the measurement of the group that has become publicly insured. If it includes children who were privately insured before the expansion and then have both public and private coverage-that is, those with overlapping coverage-the magnitude of crowd-out is slightly higher than those identified as transitioning from private-only to public-only coverage. In measuring the movements of children in families that initially have only private insurance and have only public coverage after the expansion, it is possible to miss a significant number of the transitions from private insurance and to public programs.[13]

Imposing Higher and Unnecessary Costs

Congress's proposal to expand public programs as a means of covering uninsured children up to 300 FPL would come at a cost to both the federal government and the states who share in both the financing of SCHIP and Medicaid.

Static estimates for covering uninsured children below 300 percent of the FPL-through public programs, in the absence of crowd-out-would produce an additional cost of $15.3 billion in year one (the federal government would contribute $9.6 billion and the states would contribute $5.7 billion). Without accounting for crowd-out, however, cost estimates are likely to significantly underestimate the true cost of a program expansion.

Heritage estimates that the total cost of covering uninsured children below 300 percent of the FPL is likely between $21.9 and $24.7 billion in the first year-the federal government contributing between $13.8 and $15.7 billion and states contributing between $8 and $9 billion. Under the Heritage estimate, crowd-out itself could add an additional $6.6 billion to $9.4 billion per year.

The cost of crowd-out alone under Congress's expansion could, therefore, be larger than the total current federal allotment for SCHIP ($5 billion) and possibly even larger than the entire total-federal and state-cost ($7.1 billion) of the SCHIP program today. The Senate must reverse these dynamics by including policies that restrict the crowding out of private coverage and funding while enabling children in families with existing private health insurance to keep it.

Protecting Private Coverage

The Senate should address the problem of crowd-out by focusing SCHIP on children in low-income families while adding further measures to protect the private coverage of millions of American children. That way, more families would be able to keep private coverage and taxpayers would not be billed for higher and unnecessary costs while low-income uninsured children gain access to the coverage they need.

Paul L. Winfree is a Policy Analyst in the Center for Data Analysis and Greg D'Angelo is a Policy Analyst in the Center for Health Policy Studies at The Heritage Foundation.