Recommendations for Reauthorization of the SCHIP program: Cover Kids First

In this paper, we offer six recommendations for Congress as it considers reauthorization of the State Children's Health Insurance Program: 1) cover kids first; 2) cover low-income kids first; 3) don't crowd out private coverage; 4) keep families together; 5) create new purchasing pool options for families; and 6) get the subsidies right. See below for the full paper or click here for the pdf.

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The debate over funding the State Children's Health Insurance Program provides opportunities for Congress to use ten years of experience with the program to correct flaws and reshape it to be more responsive to the emerging 21st century health sector.

SCHIP was created in 1997 as a component of the Balanced Budget Act. It was designed to provide federal matching funds to states so they could provide health coverage to uninsured children whose families make too much to qualify for Medicaid but not enough to afford private coverage.

Congress structured the SCHIP program in a new way. Rather than making it an open-ended entitlement to benefits for recipients, as Medicare and Medicaid are, Congress created block grants or allotments to the states and gave them flexibility over how to structure the program and whom to cover. It capped expenditures at $40 billion over 10 years.

States had the option of enrolling targeted children in Medicaid, creating separate new state programs, or a combination. Seventeen states expanded Medicaid to the new category of children, 18 created separate SCHIP programs, and 21 use a combination of both.¹ The programs covered about 6.1 million enrollees in 2005, the most recent year for which data are available.²

Because SCHIP is a block-grant program, it must be reauthorized this year or it will expire.

But rather than simply reauthorizing the program, the congressional leadership wants to further expand SCHIP to cover millions of children who are eligible but not enrolled in the program. However, the estimated price tag of $60 billion over the next five years presents a challenge.³ With the new pay-as-you-go rules in Congress, that means finding $60 billion in savings from other programs or new taxes to fund the expansion. In addition, 14 states have over-spent their allotments and face shortfalls of a total of $745 million this year. Senate Finance Committee Chairman Max Baucus has said the supplementary money will be appropriated, likely attached to another bill this spring.

Efforts to expand the program while a number of states are facing spending over-runs signal trouble ahead for SCHIP unless corrective actions are taken. Congress should be guided by six principles, grounded in 10 years of experience with the program, as it moves forward with reauthorization:

COVER KIDS FIRST

More than 10 percent of those enrolled in SCHIP are adults -- 639,000 people, according to the Government Accountability Office.⁴ These 639,000 adults are from just nine states where the GAO could get data. (However, a total of 15 states have used waivers to get permission from Washington to add adults to their SCHIP programs.)

The GAO says that in Minnesota, 87% of total SCHIP enrollees in 2005 were adults, and 66% in Wisconsin. In Arizona, 56% of those enrolled in SCHIP were adults, even though the state has one of the highest rates of uninsured children in the nation at 16%.

The GAO stresses that covering adults is not the point of SCHIP, and these state coverage expansions mean that funds are being "diverted from the needs of low-income children."

The GAO also found that states that have a large percentage of adults in their SCHIP programs are much more likely to be shortfall states. In all, the GAO found that six of the nine states it surveyed that have over-spent their allotments were states that cover adults through their SCHIP programs. "Adults accounted for an average of 55 percent of enrollees in the shortfall states, compared with 24 percent in the nonshortfall states," the GAO reports.

Congress tried last year to put the brakes on more states adding adults to the program. Through the Deficit Reduction Act, the Congress prohibited the Secretary of Health and Human Services from approving any new section 1115 waivers to cover non-pregnant, childless adults through SCHIP, but waivers approved before that time can continue.

Congress needs to make a firm statement that SCHIP is for children. If the states had focused on covering kids, it would have been much easier for them to have stayed within their allotments.

COVER LOW-INCOME KIDS FIRST

Fourteen states use SCHIP funds to cover kids who live in families with incomes above 200% of poverty, or annual incomes of $41,300. New Jersey covers kids up to 350% of poverty -- which means taxpayers are subsidizing health care for children whose parents make more than $72,000 a year. Not surprisingly, New Jersey is a shortfall state after expanding SCHIP beyond the original congressional intent - both to adults and to higher-income children.

Congress should limit SCHIP coverage to kids whose families earn no more than 200% of poverty. It should not allocate any shortfall funds to any state that adds children above 200% of poverty to its SCHIP program or that covers adults.

DON'T CROWD OUT PRIVATE COVERAGE

The debate continues about whether or not the SCHIP program crowds out private coverage. In 2005, the uninsured rate among children was 11%.⁵ Before SCHIP was enacted, the uninsured rate for children was 15%.⁶

A National Bureau of Economic Research Study looked at the first five years of experience with SCHIP in 2002 and found that "perhaps as much as half of the new SCHIP enrollment was offset by declining private coverage."⁷ Researchers at the Center for Studying Health System Change analyzed the early stages of SCHIP implementation using the 1996-1997 and 1998-1999 Community Tracking Study (CTS) and found that while the proportion of low-income children with public coverage had increased, the percentage with private coverage has decreased sharply, resulting in no net change in the percentage who are uninsured.⁸

But in a new paper, Jonathan Gruber and Kosali Simon have revisited the issue and their results ?clearly show that crowd-out is significant? -- on the order of 60 percent. That means that when public programs are expanded, coverage by private health insurance falls by 60 percent as much as coverage by public insurance rises. Gruber and Simon say that ?crowd-out remains a pervasive phenomenon? and find that it is exacerbated when a whole family is eligible for public programs. While they estimate that crowd-out is 60 percent for SCHIP if programs do not impose a waiting period for eligibility, they find that crowd-out is 110 percent if states impose a two-month waiting period.⁹

Clearly, any considerations of expansion of the SCHIP program must take into account the likelihood that publicly-subsidized coverage will replace privately-paid insurance. With a scarcity of new money, Congress should be careful not to have taxpayer-funded SCHIP coverage crowd-out existing private coverage.

KEEP FAMILIES TOGETHER

Many employer plans allow parents to pay extra to put their kids on their policy at work. But parents, especially those with lower incomes, often can't afford it. That leaves the employer money on the table and means more kids than need to receive taxpayer-subsidized coverage.

It would be best to turn SCHIP into a premium support program primarily designed to provide subsidies that encourage parents to put their children on family policies. This would keep families together and would be less likely to crowd out private coverage.

SCHIP allows states to cover children whose parents have access to employer-based or private health insurance coverage by using SCHIP funds to subsidize the costs.¹⁰ But while the original legislation made it an option to turn the SCHIP benefit into a premium assistance stipend, the administrative process is so cumbersome that only a few states have been able to succeed.

Nine states have "premium assistance programs" that allow SCHIP funds to be used to help pay private health insurance premiums. But the process is extraordinarily cumbersome for states that have tried it. Officials from Louisiana, Massachusetts, New Jersey, and Virginia told the GAO that the process was very "labor intensive" in tracking employee income, work status, and certifying employer policies for whether they meet state SCHIP insurance standards.

Several states that have succeeded with a premium assistance model for SCHIP say it saves money. Rhode Island, for example, reports that it saves and average of $222 per family per month, and New Jersey is saving $204 per month per family. Enrollment, however, is small, with only 6,012 participating in Rhode Island and 729 in New Jersey in 2005.¹¹

Lightening the administrative burden to allow other states to use a premium assistance model for SCHIP is essential. It is relatively inexpensive to add children to family policies, but by making the process too difficult, employer plans are left on the table while taxpayers pick up the tab. In addition, families are split into private and public coverage plans.

States should be allowed to offer parents the option of putting their children on their health plan without having to meet an impossible number of hurdles. Congress should also provide states with more flexibility in defining what qualifies as eligible insurance so more employer plans could meet the test.

CREATE NEW PURCHASING POOL OPTIONS FOR FAMILIES

Congress could take President Bush up on his offer to use some of the money that is currently being sent to the states for uncompensated care to create new state purchasing pools.¹² This could make it much simpler for states to administer a premium assistance program and could allow working families without other sources of coverage to buy in as well.

Private plans that meet the (relaxed) SCHIP benefits test could compete to offer coverage to families, paid for by SCHIP's premium assistance, employer contributions, and worker payments. The structure of the Federal Employees Health Benefits Program (and the vision, but not the reality, of the Massachusetts Connector) could be a model.

If states were to use some of the SCHIP or Disproportionate Share money to create new purchasing pool options, it could be much simpler for states to make private coverage an option, and not just for uninsured children but for working families as well.

GET THE SUBSIDIES RIGHT

When Congress created the federal-state funding split for SCHIP, it got the incentives backwards.

SCHIP was designed to cover kids whose families make too much to qualify for Medicaid but not enough to afford private coverage. But Congress decided to have the federal government match state spending at a higher percentage for higher-income SCHIP kids than for lower-income Medicaid children. This is bad policy. The federal government pays an average of 72% of SCHIP costs but only about 60% of Medicaid costs.¹³

Because of SCHIP's upside-down funding, states have an incentive to add more of their citizens to SCHIP because they are paid more by the federal government for doing so.

It makes no sense, for example, for New Jersey to get an SCHIP match rate of 65 percent for adding adults to SCHIP but only 50 percent for adding kids into Medicaid. The SCHIP match rate varies by state, ranging from a low of 65% (14 states) to a high of 83% in Mississippi.

With the incentives structured the way they are, it is not surprising that New Jersey and other states are more intent on expanding their SCHIP programs than Medicaid because they get a higher match rate from Washington for doing so.

SCHIP's higher match rate also creates an incentive for states to raise the income levels for SCHIP eligibility well into middle-income categories. Twenty-seven states cover children in families with incomes up to 200% of poverty and another 14 states cover children in families with incomes above 200% of poverty, including New Jersey at 350%. Only nine states limit SCHIP availability to families with incomes below 200% of poverty.¹⁴

In some ways, the behavior of the states is not surprising. States have an incentive to add more of their citizens to SCHIP because they are paid more by the federal government for doing so.

Congress said when it created the program that 200% of poverty should be the limit for SCHIP. States need to assure that they meet that goal first.

The federal government should provide a higher match rate for covering kids in the poorest families, and the match should scale back as a family's income rises. (And adults should not be on the children's program.) This suggests that Congress should consider larger reforms that better integrate SCHIP and Medicaid funding. As a first step, Congress should follow President Bush's recommendation to provide the lower Medicaid match rate to states that expand SCHIP to children in families earning more than 200% of poverty.¹⁵

With these six principles in mind, Congress can begin to bring some needed discipline to the SCHIP program and bring it back to its core purpose of covering kids first.

Grace-Marie Turner is president of the Galen Institute, a non-profit research organization that advances ideas for market-based health reform.

¹ Elicia J. Herz and Chris L. Peterson, "State Children's Health Insurance Program (SCHIP): A brief overview," Congressional Research Service Report to Congress, January 30, 2007, www.galen.org/fileuploads/CRSRL30473.pdf.

² Kathryn G. Allen, "Children's Health Insurance. State experiences in implementing SCHIP and considerations for reauthorization," testimony before the US Senate Committee on Finance, February 1, 2007, www.senate.gov/~finance/hearings/testimony/2007test/020107katest.pdf.

³ John Reichard, "Cover More Kids? Let's Talk Later," CQ HealthBeat, January 5, 2007, www.cmwf.org/healthpolicyweek/healthpolicyweek_show.htm?doc_id=459300#doc459311 and Johnson/Cohn, CongressDaily, February 15, 2007.

⁴ Allen, p. 8.

⁵ "Current Population Survey, 2006 Annual Social and Economic Supplement, Table HI01, Health Insurance Coverage Status and Type of Coverage by Selected Characteristics: 2005 All Races," U.S. Census Bureau, pubdb3.census.gov/macro/032006/health/h01_001.htm.

⁶ "Health Insurance Coverage Status and Type of Coverage-Children Under 18 by Age: 1987 to 2005, Table HI-3," U.S. Census Bureau, www.census.gov/hhes/www/hlthins/historic/hihistt3.html.

⁷ Anthony T. LoSasso and Thomas C. Buchmueller, "The Effect of the State Children's Health Insurance Program on Health Insurance Coverage," National Bureau of Economic Research, December 2002, web.gsm.uci.edu/~tbuchmu/Papers/jhe.pdf

⁸ Peter J. Cunningham and Michael H. Park, "Recent Trends in Children's Health Insurance Coverage: No Gains for Low-Income Children," Center for Studying Health System Change, April 2000, www.hschange.com/CONTENT/42/?topic=topic01.

⁹ Jonathan Gruber and Kosali Simon, ?Crowd-out ten years later: Have recent public insurance expansions crowded out private health insurance?? National Bureau of Economic Research Working Paper 12858. January 2007. http://www.nber.org/papers/w12858.  

¹⁰ Joan Alker, "Premium assistance programs: How are they financed and do states save money?," Kaiser Commission on Medicaid and the Uninsured, October 2005. www.kff.org/medicaid/upload/Premium-Assistance-Programs-How-are-they-Financed-and-do-States-Save-Money-Issue-Brief.pdf.

¹¹ Ibid., p. 2.

¹² "Fact Sheet: Making Private Health Insurance More Affordable for Low-Income Americans," White House, February 23, 2007, www.whitehouse.gov/news/releases/2007/02/20070223-4.html.

¹³ "Medicaid and State Children's Health Insurance Program Federal Match Rates (FMAP), FY 2006," Georgetown University Health Policy Institute Center for Children and Families, ccf.georgetown.edu/pdfs/2006fmaprates.pdf.

¹⁴ Allen, p. 14.

¹⁵ "Just the Facts: State Children's Health Insurance Program (SCHIP)," The Office of Management and Budget, February 2007, www.whitehouse.gov/omb/pubpress/2007/factsheet_schip.pdf.