Scare Talk About 'Crowd-Outs'

The ink wasn't even dry on the Balanced Budget Act of 1997 when its $48 billion program to provide health insurance coverage to children-the State Children's Health Insurance Program (SCHIP)-came under attack. The program would not simply extend coverage to children now without insurance, the critics warned; it would also act as a magnet for families whose children were already covered, enticing them to substitute the public program for their costly private coverage. Much of the program thus would not achieve its stated purpose and would be a waste of scarce resources, they said.

Such arguments are made almost any time a new public program is proposed. But while it is an important concern, its likelihood has been exagerated. Indeed, a careful review of the evidence indicates that fewer families than the critics predict will substitute SCHIP for private insurance coverage, a phenomenon known in the policy debate as the "crowd-out" effect. Even when such substitution of public for private coverage occurs, it may provide more comprehensive and continuous coverage for these children, as well as needed financial relief for their families. Moreover, some crowd-out is inevitable in any attempt to ensure that a majority of uninsured children are eligible for health insurance coverage under SCHIP.

Critics of the new program base their predictions about what will happen under SCHIP on a study of what happened when the Medicaid program was expanded in the late 1980's to cover more children and pregnant women. The study found that for every two people who enrolled in Medicaid, one person dropped private health insurance. Despite its prominence in the policy debate, the study has been widely criticized, and its results stand in sharp contrast to those of subsequent studies on the topic. Four other studies, including two of our own, have shown that either there was no crowd-out over the expansion period or that, at most, for every five people who enrolled in Medicaid, only one person dropped private insurance coverage.

The experience of the Medicaid expansions aside, states face a conundrum: how to cover a substantial number of uninsured children without also covering children who would otherwise be insured privately. As income eligibility levels under SCHIP increase to capture a larger percentage of uninsured children, there is more room to substitute program benefits for private insurance coverage and, as our research indicates, at higher income levels there is more "crowding out."

The crux of the issue is where to set eligibility levels. States could choose to cover children in families with incomes up to 133 percent of poverty ($21,300 for a family of four). This approach would minimize crowd-out, but only one-third of all uninsured children would be eligible for the program. Or states could set eligibility at 200 percent of poverty ($32,100 for a family of four), the highest that most states can go under SCHIP. If the ceiling were set here, more private coverage would be dropped, but 60 percent of all uninsured children would be made eligible for coverage. In short, to reduce the number of uninsured children substantially, states may have no choice but to accept the trade-offs associated with higher eligibility levels. The critics fail to acknowledge this dilemma.

Critics of SCHIP also ignore important differences between the new program and the earlier Medicaid expansions on which their dire predictions are based. Under SCHIP, states are required to adopt procedures designed to prevent crowd-out and are allowed to impose premiums and other types of cost sharing for families with higher incomes, where the risk of dropping private health insurance is greatest. These mechanisms should decrease the crowd-out effect of SCHIP. In fact, the handful of states that set up such fire walls when they expanded their Medicaid programs up to the income levels allowed under SCHIP report that crowd-out has not been widespread. But states will have to watch whether these fire walls have the unintended effect of also discouraging participation among the uninsured.

Unfortunately, any equitable and administratively workable program to cover uninsured children will crowd out some private coverage. But even if some low-income working families drop their children's private coverage to enroll their children in SCHIP, the children will come out ahead with greater insurance security and coverage that always included preventive care. There also will be benefits of financial relief to families ( and the children in them) who previously had purchased health insurance and to businesses that have provided coverage to these low-wage workers. Indeed, crowding out could be viewed as another way in which government programs support low-wage workers.

Finally, the focus on crowd-out, while important from a budget perspective, draws attention away from other challenges states face under both their Medicaid and SCHIP programs. Offering health insurance coverage alone is not sufficient. These state programs must get uninsured children to participate and provide access to high-quality medical care in order to realize improvements in child health.

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