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Premium Assistance Programs under SCHIP

Not for the Faint of Heart?

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Document date: May 16, 2003
Released online: May 16, 2003

Assessing the New Federalism Occasional Paper No. 65

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

This report is available in its entirety in the Portable Document Format (PDF).

About the Series

Assessing the New Federalism is a multiyear Urban Institute project designed to analyze the devolution of responsibility for social programs from the federal government to the states, focusing primarily on health care, income security, employment and training programs, and social services. Researchers monitor program changes and fiscal developments. In collaboration with Child Trends, the project studies changes in family well-being. The project aims to provide timely, nonpartisan information to inform public debate and to help state and local decisionmakers carry out their new responsibilities more effectively.

Key components of the project include a household survey, studies of policies in 13 states, and a database with information on all states and the District of Columbia, available at the Urban Institute's web site. This paper is one in a series of occasional papers analyzing information from these and other sources.



Executive Summary


Study Methods

Federal Requirements for Subsidizing ESI under SCHIP
Proposed Federal Rules
Final Rules

Implementation Experiences




About the Authors


This is one of a series of reports exploring policy issues that have emerged during states' early implementation of the State Children's Health Insurance Program, or SCHIP. These reports seek to identify important challenges states have faced, explore the availability of data to analyze these issues, provide initial analysis of the effects of alternative policies and implementation strategies, and raise questions for further study. Because of the limited scope of these analyses, it is important to exercise restraint in drawing conclusions from study results; these reports are intended to provide preliminary analyses of complex issues, and early insights into their nature and possible resolution.

The authors would like to extend sincere thanks to the many people who assisted with the completion of this project. Caroline Taplin, our project officer at the Office of the Assistant Secretary for Planning and Evaluation (ASPE), DHHS, provided strong guidance and support through the paper's development. In addition, we would like to thank the other ASPE officials involved in the paper's development (Tanya Alteras, Steven Finan, Julia Paradise, Barbara Richards, Adelle Simmons, and Jennifer Tolbert) for their helpful feedback.

At the Urban Institute, we would like to thank John Holahan, Embry Howell, Genevieve Kenney, Lisa Dubay, and Linda Blumberg for their helpful comments and feedback on our drafts. In addition, we would like to thank Rafiq Hijazi for the Current Population Survey (CPS) estimates.

Most importantly, we would like to thank the many state officials who gave generously of their time and provided us with critical information regarding their premium assistance programs. In particular, we would like to thank Therese Hanna, Geneva Cannon, Beth Waldman, Stephanie Anthony, and Gregory DiMiceli. We would also like to thank Terese Klitenic, Christina Moylan, Angela Corbin, and Johanna Barraza-Cannon from the Centers for Medicare and Medicaid Services (CMS) for their invaluable assistance in clarifying the federal regulations regarding premium assistance programs.

Executive Summary

Under the State Children's Health Insurance Program (SCHIP), passed in 1997, states have the option to subsidize employer premiums for low-income children, and in some cases, their parents.1 Providing families with premium assistance may be a viable means of covering more uninsured children because this country's health insurance system is dominated by employer-based coverage. In addition, the majority (over 80 percent) of uninsured Americans are either workers or live with workers—although many do not have access to employer-sponsored insurance (Garrett, Nichols and Greenman 2001). Nevertheless, given the potential for subsidized employer-sponsored insurance (ESI) programs to reduce the number of uninsured children, the U.S. Department of Health and Human Services' Office of the Assistant Secretary for Planning and Evaluation (ASPE) asked the Urban Institute to conduct a study examining SCHIP's regulations and state experiences with premium assistance programs.

For this study, three states—Massachusetts, Mississippi, and Wisconsin—were selected for in-depth examination because, until recently, they were the only states with federally approved programs.2 Our study included a literature review, an examination of relevant SCHIP regulations, and a review and analysis of relevant information collected from the Urban Institute's SCHIP evaluation—conducted as part of the Assessing the New Federalism project. However, the majority of information for this study was collected during telephone interviews with program officials from the three states and an official from CMS, using a standardized protocol to ensure consistency. The protocol primarily focused on the impact of SCHIP regulations, state implementation experiences, and lessons learned. It was anticipated that this study would contribute to a better understanding of the opportunities and limitations of premium subsidy programs and assist other states in assessing the feasibility of adopting premium assistance programs under SCHIP.

While states were afforded considerable flexibility in the overall design of their SCHIP programs, proposed federal requirements for designing premium assistance programs were very specific because of concern about crowd out—the potential that SCHIP might displace private coverage. Consequently, proposed federal requirements, published in November 1999, specific to premium assistance programs were established to limit the potential for crowd out and assure children a comprehensive benefit package. These requirements included

  • a six-month waiting period,
  • a requirement that employers contribute at least 60 percent of the premium cost,3
  • a test to determine whether it is cost-effective to cover an uninsured child (and potentially parents) under ESI rather than directly enrolling him or her in SCHIP, and
  • a requirement that states continue to extend the minimum benefits and cost-sharing protections established under SCHIP statute for direct coverage programs to persons enrolled in premium assistance programs.4

The proposed requirements were viewed as administrative burdens by many states and, consequently, few states implemented premium assistance programs under SCHIP. In response to numerous comments regarding the November 1999 proposed rules, CMS issued proposed final rules in January 2001.5 These proposed final rules largely maintained existing policy, although in some areas the new rules afforded states additional flexibility with respect to premium assistance programs. Of note, federal officials dropped the 60 percent contribution rule, deciding that it was unnecessary given that a substantial employer contribution must be made in order for a state-subsidized plan to be found cost-effective. Instead, CMS instructed states to identify a reasonable minimum employer contribution level representative of the state's ESI market and to monitor ESI contribution levels over time to determine whether crowd out is occurring.

Even with constraining federal requirements, there are a number of reasons why states might want to consider expanding children's health insurance through premium assistance programs. Among the three states examined in this study, the primary reasons identified by state officials for subsidizing employer-sponsored insurance were similar and included

  • interest in expanding health coverage to working families who could not afford to take up offers of employer-sponsored insurance;
  • the opportunity to leverage private funding "already in the system" to better maximize the use of financial resources available for health coverage; and
  • deterring the likelihood that SCHIP would crowd out private health insurance coverage.

This last rationale is particularly interesting in light of the federal concern that premium assistance programs pose a greater potential for crowd out than direct coverage public programs (HCFA 1998). All three states we studied viewed such programs as a means of encouraging families to take up or maintain ESI, and as a vehicle for supporting an employer commitment to ESI.

Although the states in our study believed in premium assistance as a worthwhile means of expanding health coverage, the experiences of the two states with implementation experiences—Massachusetts and Wisconsin—suggest that subsidizing ESI programs is administratively complex, and according to one official, "not for the faint of heart." The premium assistance programs examined in this study suggest several findings that may be useful to other states considering such programs.

  • Outreach. Although states have recently gained considerable experience in targeting public program outreach efforts to families and community-based organizations, premium assistance programs pose a new outreach challenge to states as they directly involve and require the cooperation of employers. To succeed in implementing premium assistance programs, state officials noted the importance of augmenting broader SCHIP outreach campaigns with specific efforts to target employers, and involving employers in the design phase to address their concerns and ensure their participation.
  • Enrollment. Wisconsin and Massachusetts have learned they must engage in complex, time-consuming, and challenging processes for enrolling children (and often their parents) into premium assistance programs. Typically these processes involve determining access to ESI, reviewing and comparing the benefit packages offered by employers to the health benefit coverage the state has chosen as its benchmark,6 determining employer contributions to the overall cost of coverage, and calculating whether it is cost-effective to subsidize ESI or enroll the child into a direct coverage SCHIP program. In particular, state officials noted that the complexity of investigating employer benefit packages and comparing them to the state-selected SCHIP benchmark has resulted in families not qualifying for premium assistance largely due to plans not covering benefits such as dental and vision.
  • Outcomes. Massachusetts and Wisconsin believe their premium assistance programs are worthwhile endeavors, but caution other states considering such programs from being overly optimistic about initial enrollment. As of October 31, 2001, enrollment in Wisconsin's Health Insurance Premium Payment (HIPP) program consisted of 47 families, a very small number given Wisconsin's overall SCHIP enrollment. As of September 30, 2001, the number of children receiving premium assistance in Massachusetts totaled 4,433, but only 16 percent were funded through SCHIP because of the stringency of their SCHIP benefit benchmark (with the remainder funded through Medicaid). Massachusetts is hoping that recent federal approval, granted in March 2002, of a plan amendment to change its current SCHIP benchmark benefit plan to the "Secretary-approved" coverage that was approved in its Medicaid 1115 demonstration waiver, will allow greater numbers of children to qualify for SCHIP-funded premium assistance.

Despite relatively small numbers of enrolled families, Massachusetts and Wisconsin officials are comfortable with the progress their programs have made thus far, even given the administrative difficulties and additional outreach efforts required. They have placed these programs in the broader context of expanding health coverage and believe that partnering with the private sector "is the right thing to do" and will have long-term benefits. Moreover, Massachusetts points to the number of children receiving Medicaid-funded premium assistance (3,733 children) as evidence that federal requirements hinder the enrollment of SCHIP-funded participants (700 children). Although Mississippi has yet to implement its program, state officials are optimistic that it is still a strategy worth pursuing as a means of expanding coverage and stemming crowd out.

Considering the administrative complexity associated with premium assistance and small overall effect witnessed in Massachusetts and Wisconsin, it seems reasonable for states to question whether this is an efficient strategy for reducing rates of uninsurance among low-income children. At this time, it appears unlikely that federal regulations for premium assistance under SCHIP will be further relaxed given the uncertainty and lack of data on crowd out, although states may have more flexibility in designing premium assistance programs under the new Health Insurance Flexibility and Accountability (HIFA) demonstration initiative. Nevertheless, the complexity of coordinating coverage with employers, the shifting nature of low-income families' employment status, and the dynamic nature of employer-sponsored insurance, remain potential barriers to enacting such programs (Polzer 2000). In addition, it is important to keep in mind that these programs have a limited target population—uninsured, low-income families that have not taken up offers of employer-sponsored coverage; premium assistance programs do not help uninsured families that have not received offers of health insurance from their employers. States will need to weigh these negatives against the positive impact premium assistance programs may have on expanding or maintaining health insurance coverage within the employer-based market. Unfortunately, these complex considerations must occur within the current recessionary environment—when increased demands for subsidies are coupled with declining state revenues and rising Medicaid costs.

This report is available in its entirety in the Portable Document Format (PDF).

1. Before the rules published on January 11, 2001, states wishing to provide family coverage needed to request to do so in their state plan under the authority at section 2105(c)(3) of the Act as a "family coverage waiver." The interim final rule published June 25, 2001 removed the word "waiver" from the section heading in the regulations regarding family coverage. The final rules published on January 11, 2001, clarified that states no longer needed to request this authority if the employee's premium is not subsidized and there is no intention on the state's part to cover family members other than targeted low-income children. In such cases, CMS also clarified that the regulatory requirements in the final rules apply to only the targeted low-income children. Essentially, states are now permitted to incidentally cover parents in premium assistance programs without submitting an amendment—meaning that while there is no explicit intent to cover parents, they are incidentally covered because the premium subsidy for the child(ren) is for family coverage.

2. Other states that received federal approval in 2001 include Maryland, New Jersey, Virginia, and Wyoming.

3. The final regulations eliminated the 60 percent requirement and allowed states to suggest a minimum employer contribution requirement reflective of their insurance market, as long as cost-effectiveness is proven.

4. The federal interim final rules, published June 25, 2001, noted that states need not count adult family members' cost-sharing toward the cumulative cost-sharing cap when providing family coverage.

5. CMS made revisions to the proposed final rules and issued an interim final rule for SCHIP on June 25, 2001. No revisions were made to the proposed final rules on subsidizing ESI. The revised provisions, as well as the unchanged provisions in the January 2001 rule, became effective on August 25, 2001.

6. The process of comparing employers' health plans involves comparing those plans to the type of health benefits coverage permitted under section 2103 of the Act that the state has chosen, whether it be one of the statutory benchmark plans, a benchmark equivalent plan, existing comprehensive state-based coverage, or secretary-approved coverage.


This report is part of the Urban Institute's Assessing the New Federalism project, a multiyear effort to monitor and assess the devolution of social programs from the federal to the state and local levels. Alan Weil is the project director. The project analyzes changes in income support, social services, and health programs. In collaboration with Child Trends, the project studies child and family well-being.

This study was primarily funded through a contract with the Office of the Assistant Secretary for Planning and Evaluation at the U.S. Department of Health and Human Services. Additional support was provided by the Robert Wood Johnson Foundation under the Urban Institute's Assessing the New Federalism project.

The Assessing the New Federalism project is currently supported by The Annie E. Casey Foundation, The Robert Wood Johnson Foundation, the W. K. Kellogg Foundation, The John D. and Catherine T. MacArthur Foundation, and The Ford Foundation.

Topics/Tags: | Children and Youth | Governing | Health/Healthcare

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