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In the months leading up to the enactment of the State Children's Health Insurance Program (SCHIP), policymakers, government officials, researchers, and advocates debated policy options for extending health insurance to the estimated 10.7 million children who had none (Current Population Survey 1997). Given that a significant expansion in publicly sponsored children's health insurance would require considerable federal, state, and local resource commitments, policymakers weighed concerns regarding the efficiency of public funding and the need to safeguard the private market from "crowd out"broadly defined as the substitution of public health insurance coverage for private health insurance coverage.
Crowd out emerged as one of the most contentiously debated issues during the development of the SCHIP legislation. Based on research suggesting that Medicaid expansions for pregnant women and children in the late 1980s and early 1990s may have crowded out some private health insurance coverage, policymakers theorized that further expansions might create additional opportunities for employers and employees to pass on their health insurance costs to the government. These concerns persuaded the Title XXI drafters to include provisions in the law requiring that states implement strategies to prevent SCHIP from substituting for private insurance. States were instructed, via a letter from the Health Care Financing Administration (HCFA), "to describe procedures in their State SCHIP plans that reduce the potential for substitution," and were told that greater scrutiny would be applied to programs that expanded to higher levels of income eligibility. In response, but without specific federal regulations or guidelines from the research community on effective crowd-out prevention policies, states adopted a range of strategies.
This qualitative study examines how 18 states are addressing crowd out, the degree to which state officials perceive crowd out to be occurring, and the implications of crowd-out prevention strategies on enrollment.* The study is based on site visit and in-depth telephone interviews with a broad range of key informants in the 18 states.
Mirroring deliberations at the federal level, state-level debates over the potential for SCHIP to crowd out private insurance were often contentious. Policymakers were commonly divided between the belief that aggressive policies (such as waiting periods) were needed to prevent crowd out, and the belief that such policies were unnecessary and could potentially deter enrollment. For some states, a hard-line approach to crowd out was a critical means of building broad-based political support for a children's health insurance program. In contrast, other states were reluctant to address crowd out at all. For example, the three states that were grandfathered into SCHIP because of their prior experience administering children's health insurance programs were required to meet new federal crowd-out requirements despite their belief that crowd out had not occurred in their pre-SCHIP initiatives. Nevertheless, 17 of the 18 states in our study adopted policies to address crowd out. Although specific approaches varied considerably, seven types of crowd-out strategies were identified:
Waiting periods: Imposing waiting periods, whereby families must be uninsured for a specified period of time before being permitted to enroll in SCHIP, emerged as the most common strategy used by the study states for controlling crowd out. Although waiting periods were often criticized for excluding from SCHIP children whose private coverage might be limited or unaffordable, they were still widely viewed as the most direct approach to preventing crowd out. Most states include exceptions to their waiting period policies, however. Each of the 11 states in our study with waiting periods has exception policies relating to families losing insurance through no fault of their own6 of these 11 states have additional exceptions for families with access to health coverage deemed unaffordable. Of special note, one state in our study extends an exception to children with special health care needs (CSHCN)a subgroup of children who are often described as being underinsured for the treatment of their chronic illnesses and disabilitiesso that they may enroll in SCHIP if the program offers a more comprehensive and affordable alternative to current private insurance.
Monitoring/application questions regarding children's health insurance status: Monitoring crowd out and using application questions about health insurance status was another approach commonly used by the study states to address crowd out concerns. In contrast to waiting periods, monitoring crowd out occurrence was described as the least stringent approach available to states, a strategy that essentially accepts that some degree of crowd out will occur. Typically, monitoring is accomplished through application form questions regarding applicants' insurance status. However, some state officials believe that including insurance status questions on the SCHIP application can, in itself, serve to deter families from dropping private coverage or as an avenue for following up with families to determine if their existing coverage is adequate.
Verifying insurance status against databases of private coverage: Rather than relying on self-declaration of insurance status, some states are verifying whether an applicant is without insurance before granting eligibility. Of the study states, Alabama, Michigan, Mississippi, Missouri, and Wisconsin indicated in their state plans that they are verifying the insurance status of applicants as a means to prevent crowd out.
Cost sharing: Cost sharing, in the form of premiums, enrollment fees, and copayments, may allow SCHIP programs to more closely resemble private insurance and, consequently, create the appropriate economic incentives to deter families from substituting SCHIP for private insurance. Although cost-sharing policies can be implemented to accomplish numerous goals, and all the non-Medicaid SCHIP programs in our study require some form of cost sharing, only three statesAlabama, New York, and Washingtonexplicitly identified in their state plans that cost sharing was one of their strategies to deter crowd out. Since state plan submission, California and North Carolina have come to consider their cost-sharing provisions as part of their overall crowd-out prevention strategy.
Subsidizing employer-based coverage: States have also shown considerable interest in designing policies to subsidize employer-sponsored insurance (ESI), in order to achieve the broader goals of capitalizing on private sector resources already supporting the provision of health insurance and strengthening the foundation of employer-sponsored insurance in the states. State officials also believe the initiatives can effectively deter crowd out by helping employers maintain employee health benefits and by helping employees afford those benefits. Interestingly, federal officials fear that subsidizing ESI actually holds significant potential to promote crowd outthat families who might otherwise contribute to their health care costs without a subsidy will be likely to seek premium assistance, and that employers with low-wage workers might be inclined to reduce or eliminate their dependent coverage if SCHIP was subsidizing premium costs. As a result of this concern, HCFA has issued detailed guidelines for how an employer-subsidy program under Title XXI must be structuredguidelines that many state officials described as overly rigid and burdensome. Indeed, four states in our study designed employer subsidy programs, but only two have been able to implement them.
Imposing obligations on employers or insurers: A final strategy to limit crowd out was identified by one of our study states: California has imposed legal obligations on employers and insurers to not alter their coverage policies in response to SCHIP.
As the debate continues over whether SCHIP poses a threat to private market insurance, crowd-out concerns appear to be diminishing at the state and local levels. Among the 18 study states, SCHIP and Medicaid officials, as well as other key informants, consistently reported little to no concern over crowd out; many believed it was a non-issue. Shedding further light on the issue, a handful of states have conducted preliminary quantitative assessments of crowd out as part of their annual evaluations for HCFA. Studies in California, Colorado, and Texas have found that a small proportion of program applicants have been denied eligibility because they possessed private insurance at the time of application (or within the state's waiting period). Specifically, California found that only 3.7 percent of applicants had coverage through an employer within 90 days prior to their application; Colorado found that 3 percent of applicants were denied for having private insurance coverage; and Texas found that 3.4 percent of applicants were denied coverage because of current insurance. Other states have monitored the percentage of enrollees that dropped employer-sponsored insurance to enroll in SCHIP, which may provide a better estimate of actual crowd out: Missouri estimated that the rate of crowd out is between 1.6 and 3.2 percent of the population of its SCHIP expansion members; New York found 4.87 percent crowd out based on application questions about health insurance status; and North Carolina reported an 8.3 percent crowd-out rate of enrollees based on data from a survey of a sample of SCHIP enrollees.
Combined, these assessments neither refute nor support the belief that SCHIP will lead to significant levels of crowd out. However, based on information gathered from the 18 study states, it is apparent that pressures to increase enrollment have begun to outweigh concerns about crowd out at the state and local levels. As energy has shifted to enrolling every last eligible child in SCHIP, some states have reordered their priorities and considered or enacted policies aimed at boosting enrollment even at the expense of potentially more crowd out. For example, New Jersey lawmakers actually reduced their 12-month waiting period to 6 months for children enrolled in employer-sponsored plans, and entirely eliminated the waiting period for families earning less than 200 percent of the federal poverty level (FPL) with individual plans or Consolidated Omnibus Reconciliation Act (COBRA) coverage. In 2000, the Mississippi legislature passed a bill eliminating the state's six-month waiting period altogether. Furthermore, an increasing number of states have initiated outreach efforts directly targeted at employers and small businesses.
As with many public policy issues, crowd out is ultimately about trade-offs. Although some degree of crowd out seems inevitable under a large expansion of public coverage, policymakers need to determine which is the greater prioritylimiting the displacement of private health insurance coverage, or making significant strides in reducing uninsurance. A number of individuals interviewed for this study believe that it is still too early to modify federal or state policies relating to crowd out and that more needs to be learned about whether substitution occurs as public coverage is extended to higher income families. Many others maintain, however, that the disadvantages of crowd-out prevention mechanisms tip the scale in favor of less stringent approaches, noting SCHIP's horizontal inequity of treating children in the same economic circumstances differently from one another. Child advocates believe that SCHIP's crowd-out policies are particularly unfair to low-income families that had valued insurance in the past, purchased it, and that may now find themselves struggling to make premium contributions for coverage that is possibly both more expensive and more limited in scope than that offered by SCHIP. This issue becomes particularly striking for some families with children with special health care needs who may qualify for SCHIP based on income, but who are locked into costly and perhaps substandard private insurance plans. These views may prompt more states to include children with special health care needs in their waiting period exception policies, or cause federal policymakers to consider allowing SCHIP coverage to wrap around less comprehensive private coverageas Medicaid has wrapped around private coverage throughout its history. Moreover, despite widely divergent views as to whether ESI subsidies fuel or restrict crowd out, many states believe that the related federal rules should be loosened to permit more state experimentation. Although it is difficult to predict the direction that SCHIP will take, it is clear that issues surrounding crowd out will continue to influence the discussion, particularly as the program reaches higher income families.
Note: This report is available in its entirety in the Portable Document Format (PDF).