Reforming the State Children's Health Insurance Program

by Grace-Marie Turner

Highlights: Congress should make sure that poorer children already eligible for SCHIP and Medicaid are covered first. Expanding SCHIP to cover children in higher-income families will crowd-out the private coverage many already have. Putting more children on public programs will lead to greater problems in access to care. Expanding SCHIP means that politicians and regulators will have more say over the health care of children than parents.

Few issues generate more political emotion than the need to provide health insurance for children.  It is much less expensive to cover children than adults, and healthy children have the best chance of becoming healthy adults.

But that does not mean the government must provide the insurance.

Nonetheless, the new Congress is poised to act on President-elect Obama’s campaign promise to provide universal coverage for children.  With the State Children’s Health Insurance Program (SCHIP) due to expire on March 31, Congress is expected to use renewal of the program as a vehicle to require that all children have health insurance.

But expanding SCHIP to cover all children would be a mistake, for four reasons:  

First, Congress should make sure poorer, uninsured children are covered first.

At least two-thirds of uninsured children already are eligible for SCHIP or Medicaid but aren’t enrolled.  If SCHIP were expanded to cover children in higher-income families, their parents would rush to the head of the line to get the taxpayer-subsidized coverage.  When a “free” government plan is offered, it’s nearly impossible to resist.  Poorer children would be left behind as states focus on enrolling higher-income kids.  

Second, expanding the program would “crowd out” the private insurance many higher-income kids already have.  

Hawaii offers proof.  Earlier this year, the state created a new taxpayer-financed program to fill the gap between private and public insurance in an effort to provide universal coverage for children.  

But state officials found families were dropping private coverage to enroll their children in the government plan.  When Gov. Linda Lingle saw the data, she pulled the plug on funding the program. With Hawaii facing budget shortfalls, she said it was unwise to spend public money to replace private coverage children already had.  

Third, putting many millions of children on a government program will quickly lead to restrictions on access to care.  

A young boy died in Baltimore not long ago from an untreated tooth infection, even though he was enrolled in SCHIP.  Few dentists can afford to take SCHIP patients because the program’s reimbursement rates are so low.  The boy’s mother couldn’t find a dentist to see him even though he was on SCHIP.  
In Massachusetts’ move toward universal health coverage, more people have insurance, but they are finding that physicians’ practices are often filled, with waiting lists for a new patient appointment at 100 days and counting.  

Putting more children on SCHIP will add to the program’s financial pressures, making it harder for poorer kids to get care.

Finally, government insurance means that politicians and bureaucrats, not parents, make decisions about the care children receive and about what services will or will not be covered.


There is a better way:  

Lower- and moderate-income uninsured families, not just children, need help to afford health insurance.  But right now, the public policy deck is stacked against them.  They make too much to qualify for public programs, such as Medicaid, but don’t have good, higher-paying jobs that come with health insurance.  

They need help in purchasing policies, and that help could be provided through tax credits that are refundable so people get the money even if they owe little or nothing in taxes. And 12 million more people would be able to buy affordable health insurance if Congress were to allow people to buy insurance across state lines.  Finally, market fixes could help people with pre-existing conditions to get private insurance.

None of these reforms requires turning our health care upside down or turning it over to the government, but they would provide powerful incentives for families, and children, to get health insurance that they can own and keep with them.

So when the debate over universal coverage for children begins tugging at the nation’s heart strings next year, it would be wise to consider the costs and consequences and look at alternatives that put parents, not politicians, in charge of health care for children.

THE FACTS ABOUT SCHIP:

What is SCHIP:  Launched in 1997, the State Children’s Health Insurance Program provides health insurance to more than six million enrollees, primarily children in lower-income families.

SCHIP was created for children whose parents earn too much for them to qualify for Medicaid but not enough to afford private insurance.  Most states target children in families earning $41,000 a year or less for a family of four (200% of the federal poverty level). But many states have increased the income eligibility in an attempt to use federal funds to cover more of their citizens. In New Jersey, for example, SCHIP covers children whose parents earn up to three-and-a-half times the poverty rate – an amount that exceeds $72,000 a year.  New York has voted to increase eligibility to 400% of poverty, or $84,000 a year, but Washington has not approved this expansion.

SCHIP is set to expire on March 31, 2009, unless Congress approves new funding.  The incoming Congress and president see reauthorization of SCHIP as a vehicle to provide universal access to health care for children, expanding public funding of health insurance for millions more children. 

What’s wrong with this? States and Congress have taken this program far beyond its original purpose – and in the process have kept it from fulfilling that purpose.  Further, it puts government, and not parents, in charge of decisions about the health benefits their children receive.

Overruling parental authority:   Virtually all states provide funding for contraception through their Medicaid and SCHIP programs, and many states provide state funding for abortion.  Expanding these programs means these services will be available to millions more children. Legislation will be proposed in the incoming Congress that would require that contraceptive services be funded.  Further, many states have provisions in their programs that make it illegal to notify parents when their children request contraceptive services.  Expansion of these public programs would undermine parental authority over decisions involving the health and well-being of their children.

Eligible children not covered: A recent study by Families USA said that one in nine children is uninsured.  But it failed to report that the great majority of them are currently eligible for government assistance programs yet not enrolled.  At least two-thirds of children who do not have health insurance already are eligible for federal help through either SCHIP or Medicaid.  Before expanding SCHIP, Congress's first priority should be to make sure these poorer, uninsured children are covered first.  Most states have struggled to get these children enrolled, and these poorer kids are likely to continue to get left behind as more affluent families, whose children most likely already have private insurance, rush to the front of the line for taxpayer-subsidized SCHIP coverage.

Expansion of income level hurts poor children: When government-subsidized coverage is offered to higher-income families, they often will sign up. That means SCHIP crowds out the private coverage that children in more affluent families have, while children in poorer families remain without coverage.  MIT economist Jonathan Gruber found that SCHIP coverage replaces private health insurance 60% of the time, and the rate can be much higher depending on how a state's plan is structured.

Hawaii most recently learned this painful lesson when it created Keiki (Child) Care in an effort to achieve universal coverage for children.  The plan was ended after just seven months when the government found that 85% of kids on Keiki Care previously had been covered by private insurance – insurance their parents dropped in order to enroll them in the “free,” taxpayer-supported program.  

Quality of care could suffer if SCHIP rolls grow:  Many states have simply expanded Medicaid to cover SCHIP populations, while others contract with private insurance companies to administer SCHIP.  In either case, parents and families have little choice over the coverage provided to their children, and, in many cases, don't have the same access to physicians as those with traditional private coverage.

Further, both SCHIP and Medicaid have low payment rates for doctors and hospitals, which often limit access to physicians. Parents who drop private coverage to put their children in SCHIP should ask if the public program would provide them with the same access to their physicians as their private plans.

SCHIP covers adults: Despite the program's name, a number of states use SCHIP dollars to cover adults at the expense of poor children. Six states cover more adults than children in their programs. In 2005, for example, 87% of Minnesota's SCHIP enrollees were adults, as were 66% of those enrolled in Wisconsin's program. In Arizona – which has one of the highest rates of uninsured children in the nation – 56% of those enrolled in SCHIP were adults. Covering adults was never the intent of the program, and states that extend coverage to adults are diverting funds from the needs of low-income children.

Federal incentives all wrong: States misuse their SCHIP dollars because the program is structurally flawed. The federal government gives states more money for those enrolled in SCHIP than for those covered by Medicaid, which is designed to provide health coverage for the lowest-income Americans. A simple expansion of SCHIP does not address this flaw.

A better solution:  SCHIP dollars should be made available to parents so they can enroll their children in private plans that they purchase on their own or get through work.  Many employer-provided health insurance plans allow parents to pay extra to put their kids on their own policies. But many parents – especially those with lower incomes – often can't afford it.

SCHIP dollars could be made available to provide subsidies to parents so they can put their children on employer policies. While this is technically possible now, the administrative process is so cumbersome that only a few states have been able to succeed in implementing this option.

Congress must make it easier for states to offer SCHIP as a premium-support program.  That would allow families to stay together on the same health insurance policy and give parents control over the benefits that are available to them and their children.

Prescription for success:

When the program was created, congressional leaders explicitly stated that the program should assist only families who earn up to twice the poverty line.  States need to meet the law's intent and cover poor children first.

1.    SCHIP should focus on the children who most need help in obtaining coverage.

2.    SCHIP should cover children, not adults.

3.    SCHIP should be converted into a stipend to allow families to purchase the health insurance that best suits their children’s needs.

Communications Director Amy Menefee and Research Director Tara Persico assisted in producing this paper.