Who’s Afraid of SCHIP Crowd-Out?

The Bush administration is threatening to veto a bill that would extend health insurance to poor and near-poor children. The expansion of the State Children’s Health Insurance Program (SCHIP) would subsidize “health insurance for children and some adults with incomes too high to qualify for Medicaid but not enough to afford insurance on their own” by imposing a 61 cent per pack tax on cigarettes. The administration has shown great concern for the tobacco industry before, but I was puzzled by its stated worries about the bill:

“It’s clear that it will have the effect of encouraging many to drop private coverage – purchased either through their employer or with their own resources – to go on the government-subsidized program,” [a spokesman] said. “Tax increases are neither necessary nor advisable to appropriately fund SCHIP.”

This problem is known as “crowd-out,” and has been documented in Medicaid expansions (where about 20% of new enrollees switched out of prior private coverage). One initial question for the Administration: exactly how bad does the crowd-out problem have to get for a veto to be warranted? If, out of every 100 signed up, 80 had no insurance, and 20 switched from private to public plans, is that a dealbreaker? Would we really want to deny insurance to the 80 so that the 20 keep supporting the private insurance system?

I am beginning to think the “crowd out” worries a bit of a canard, given the story of Rhode Island’s experience with the issue related in my colleague John Jacobi’s piece on crowd-out (45 St. Louis U. L. J. 79 (2001)). When Rhode Island’s efforts to expand coverage via CHIP-like programs (known as RIte Care) sparked a crowd-out rate of about 20%, the state legislature had a relatively straightforward solution to the “problem.”

First, it condition[ed] families’ participation in RIte Care on their enrollment in any offered employer-based insurance plans, but create[d] a premium support program which [would] pay some or all of the employee share of such employment-based coverage. The second change was to permit the Department of Human Services to adopt regulations subjecting to cost-sharing, for the first time, a group of public program participants: those with family income between 150% and 185% of poverty. The latter provision, however, limit[ed] the contribution of the low-income family to three percent of income, less than the five percent discussed in a draft version of the statute.

In other words, if the Administration is very worried about crowd-out, there are ways of responding to the problem other than a flat veto threat. RIte Care’s solution sounds like the ideas Republican governors Romney and Schwarzenegger accommodated, and perhaps that’s why Republican senators like Grassley and Hatch signed onto the bill the White House says it will veto.

I’m sure there are some economists out there who think that the proper way to deal with the problem would be to redistribute income to the poor & near-poor, not to regulate in this way. All I can say is: here’s how fantastically well income redistribution programs have worked over the past quarter century:

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