Hawaii's Hard Health Care Lesson

Published in The New York Post October 27, 2008

Hawaii just had a vivid lesson in health-care economics, learning that if you offer people insurance for free - surprise, surprise - they'll quickly drop other coverage to enroll.

As a result, Hawaii is ending the only state universal child health-care program in the country after just seven months.

The program, called the Keiki (Child) Care Plan, was designed to provide coverage to children whose parents can't afford private insurance but who make too much to qualify for other public programs (such as Medicaid and Hawaii's State Children's Health Insurance Program). Keiki Care was free for these gap kids, except for a $7 office-visit fee.

But then state officials found that families were dropping private coverage to enroll their children in the plan. "People who were already able to afford health care began to stop paying for it so they could get it for free," said Dr. Kenny Fink of Hawaii's Department of Human Services.

In fact, 85 percent of the children in Keiki Care previously had been covered under a private, nonprofit plan that costs $55 a month.

When Gov. Linda Lingle saw the data, she pulled the plug on funding. With Hawaii facing budget shortfalls, she realized it was unwise to spend public money to replace private coverage that children already had.

Yet Lingle is facing a political firestorm in the state from critics who say that she's denying children health insurance - notwithstanding the fact that children in Hawaiian families earning up to $73,000 a year are eligible for Medicaid.

All this is a lesson for political leaders in Washington who are drafting plans now to expand SCHIP to children in families earning up to $82,000 a year or more. That expansion would wind up doing what Keiki Care did: mainly crowd out the private coverage that millions of middle-income kids already have.

During last year's Washington debate over expanding SCHIP, many politicians took a principled stand against expansion of the program into these middle-income families. They supported President Bush's veto because they feared that expanding coverage to children in higher-income families would largely just crowd out existing private insurance.

Plus, two-thirds of kids who lack health insurance are already eligible for government help through either SCHIP or Medicaid. The opponents of expansion said Congress' first priority should be to make sure these poorer, uninsured children are taken care of.

States have struggled to get these children enrolled. If there is a stampede to cover higher-income kids, the poorer kids will likely continue to get left behind.

The Hawaiian debacle should also be a caution to Barack Obama, who wants to mandate that all children have health insurance. This would plainly not only require penalties for those who didn't comply but also new programs to help parents get their children covered. The risk of crowd-out will be great.

MIT economist Jonathan Gruber says his studies "clearly show that crowd-out is significant" - on the order of 60 percent. In other words, SCHIP coverage replaces private health insurance 60 percent of the time, and the rate will be greater if we extend eligibility to higher-income families.

Universal coverage in any form is an increasingly elusive goal. Several states (including California, Pennsylvania, Illinois and Wisconsin) have attempted major efforts to advance toward health coverage for all citizens. All have had to turn back because the costs were prohibitive.

Massachusetts enacted a universal-coverage law in 2006 - but state officials no longer claim that achieving that goal is even possible. The law's backers had insisted that universal coverage was imperative to get costs under control - yet the state faces serious budget shortfalls even after imposing new fees and taxes and getting an extra $21 billion from the federal government to try to balance the program's books.

Health reform is a tricky business; any change can bring unintended consequences - especially if lawmakers don't get the incentives right.

That's why Hawaii had to say, "Aloha," to its Keiki Care program twice in just seven months.

Grace-Marie Turner is president of the Galen Institute, a research nonprofit focusing on free-market health reform.