Incremental Approaches To Covering Uninsured Children: Design And Policy Issues

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1 NET Incremental Approaches To Covering Uninsured Children: Design And Policy Issues An examination of the design issues, projected costs, and number of children that would be covered under various insurance proposals. by Kenneth E. Thorpe 64 CHILDREN PROLOGUE: Although global approaches to covering the uninsured have been rejected in recent years, policy interest in incremental approaches, such as health insurance initiatives for children, has been building. However, as Kenneth Thorpe, an authority in the areas of health care financing, insurance, and reform, explains here, there are many complex, politically sensitive issues that must be addressed in designing and implementing such a plan. The political context within which such a plan is presented also is essential. For example, the Senate recently rejected a proposal by Sens. Edward Kennedy (D-MA) and Orrin Hatch (R-UT) to raise cigarette taxes to fund an expansion of health care coverage for low-income children, not so much because of a lack of support, but rather because of warnings from Republican leaders and President Clinton that passage of the legislation would derail the bipartisan balanced budget plan. As an amendment to the budget plan, the Kennedy-Hatch proposal would effectively have decreased the size of the agreed-upon tax cut and increased the level of domestic spending. Thorpe is a professor in the Department of Health Systems Management and director of the Institute for Health Services Research at Tulane University's School of Public Health and Tropical Medicine, in New Orleans. He also has taught at the University of North Carolina, in Chapel Hill, and at the Harvard University School of Public Health. Most recently, Thorpe served as deputy assistant secretary for health policy in the U.S. Department of Health and Human Services. He holds a doctorate in policy analysis from the RAND Graduate School in Santa Monica, California. H E A L T H A F F A I R S - V o l u m e 16, N u m b e r The Peopk'to-Peopk Health Foundation, Inc.

2 CHILDREN'S HEALTH INSURANCE ABSTRACT: More than 10.5 million children were uninsured throughout The number of uninsured children remains high, even in the face of continued expansions of Medicaid designed to cover low-income children. As a result, interest persists in developing additional approaches for covering uninsured children. Efforts to attract more uninsured children will entail important tradeoffs between the federal costs of the program (and its political viability) and the number of uninsured children who enroll. THE RECENT PASSAGE OF the Health Insurance Portability and Accountability Act of 1996 (H.R. 3103) appears likely to improve portability and continuity of coverage in the individual and group health insurance markets. With this legislation in place, attention has refocused on policy options to reduce the number of uninsured. In this paper I examine the design and policy issues surrounding one of these approaches, a proposed children's health insurance initiative. 1 Such initiatives raise several issues, including the federal costs of such a proposal; the number of uninsured children who would be covered; and the impact on currently insured children. Several key design decisions will affect these concerns. For example, who would administer the program, and what types of health benefits would be provided? Which populations would be eligible? How much would prospective enrollees pay for coverage? Would the coverage expansion flow through the Medicaid program or would there be a new, separate, federally funded initiative? I explore each of these issues in this paper and present an illustrative analysis that relates these program design issues to policy outcomes. Children's Health Insurance Status Of the estimated 40.6 million Americans who were uninsured throughout 1995, more than 10.5 million were under age nineteen (Exhibit 1). More than half of all children without health insurance live in families whose annual income is less than 150 percent of the federal poverty line. Of all children living in families with annual incomes of less than 150 percent of poverty, nearly 25 percent were uninsured in In contrast, only 5 percent of children in families with annual incomes above 300 percent of poverty were uninsured. The large number of uninsured children has persisted despite several recent Medicaid expansions. The most recent of these, the Omnibus Budget Reconciliation Act of 1990 (OBRA1990), requires all states to provide Medicaid coverage to children under age nineteen (phased in by the year 2002) who are living in families with annual incomes under 100 percent of the federal poverty line. In addition, as part of OBRA 1989, states are required to cover all children (and pregnant women for pregnancy-related expenses) SAFETY NET 65 H E A L T H A F F A I R S - ] u I y I A u g u s t

3 N E T EXHIBIT 1 Health Insurance Status Of Children Under Age Nineteen, By Family Income As Percentage Of Federal Poverty, 1995 (In Millions) Health insurance status Family Income as percentage of federal poverty Employersponsored insurance Medicaid Other Uninsured Total 0-100% % % % % % % More than 300% Total SOURCE: Author's tabulations based on the March 1996 Current Population Survey. NOTE: Total may not add because of rounding. 66 CHILDREN through age five who are living in families with annual incomes below 133 percent of poverty. Despite these significant expansions of Medicaid, large numbers of children remain uninsured, which is increasing policy interest in further coverage expansions. Policy Options And Design Issues The design of a children's health insurance initiative involves several key strategic policy decisions, most of which have been addressed by several congressional proposals (Exhibit 2). Two general approaches have been advanced. The first would expand coverage largely within the existing Medicaid program; the second would provide federal funding to states to complement the Medicaid program. Both of these approaches require several critical policy choices that will influence the federal costs of the proposal as well as its effectiveness in enrolling uninsured children. The first proposal, the Children's Health Coverage Act (S. 13), was introduced by Sen. Thomas A. Daschle (D-SD). The second proposal, the Healthy Children Family Assistance Health Insurance Program Act of 1996 (S. 2186), was introduced originally during the 104th Congress by Sens. John F. Kerry (D-MA) and Edward M. Kennedy (D-MA). Most recently, Sen. Arlen Specter (R-PA) introduced a broader health care initiative, the Health Care Assurance Act of 1997 (S. 24). In addition to these proposals, President Bill Clinton proposed to provide states additional flexibility in Medicaid program design (that is, managed care). The administration also has proposed full-year coverage for children who are eligible for HEALTH AFFAIRS - Volume 16, Number 4

4 CHILDREN'S HEALTH INSURANCE EXHIBIT 2 Policy Options And Design Issues In Current Children's Health Insurance Proposals Design feature Who provides coverage Benefit package Eligibility for premium subsidy Generosity of subsidies Provision of subsidies Who provides child's plan State's role Interactions with current Medicaid program Proposal S.13 (Daschle) Private plans Comprehensive coverage similar to existing state initiatives Children under age nineteen and: not eligible for Medicaid; family adjusted gross income less than $75,000; no access to employer-sponsored insurance, or if employer offers contribution, cannot exceed 80% of premium for families under 200% of poverty and 50% for other families 90% for families under 200% of poverty, phased out at $75,000 Federal tax credits, Treasury Department; family pays its share to state, which pays health plan; federal government provides tax credit to health plan Health plans that currently contract with the federal government must offer a child-only policy Certifies plan if federal guidelines are met concerning scope of benefits and premium; ensures reasonable choice of plans; determines eligibility and extent of premium subsidy State may not change Medicaid eligibility requirements determined as of 1 July 1996 S (Kerry/Kennedy) Private plans Consistent with highquality group plans; requires benefits similar to Medicaid's Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) program Children under age nineteen and: not eligible for Medicaid; monthly family income under 300% of poverty 100% for families under 185% of poverty, phased out at 300% Federal payments to states; states make payments to plan in which child is enrolled; family pays plan its share; annual income reconciliation statement must be filed with state State flexibility, but only one plan required Determines eligibility for program and extent of premium subsidy; administers annual income reconciliation determination State may not change Medicaid eligibility requirements as of 1 July 1996 S.24 (Specter) Private plans Preventive, primary, acute care services Children under age eighteen and: not eligible for Medicaid 100% for families under 185% of poverty, phased out at 235% State provides voucher to eligible families for their children; voucher can be used for a health plan and to pay for employer-sponsored insurance Any qualified health plan that provides requisite scope of services Establishes a program Medicaid expansions Medicaid or private plans Current law Children not currently eligible with Section 1115 waiver Free; could impose copayments with federal approval Administered through state Medicaid program State Medicaid program Determines to receive and distribute benefits, vouchers; determines payments, eligibility and dollar and amount of voucher eligibility for eligible families; ensures that dollar amount of voucher does not exceed average cost of health plan; administers annual income reconciliation No state maintenanceof-effort HEALTH AFFAIRS - J u I y I A ugu s t

5 NET EXHIBIT 2 Policy Options And Design Issues In Current Children's Health Insurance Proposals (cont.) Design feature Interactions with private insurance Insurance market rules Proposal S.13 (Daschle) 12-month waiting period if Employers now child was previously contributing toward cost insured through employer; of insurance cannot not eligible if child has reduce their contributions access to employersponsored plans; however, premium subsidy reduced for eligible children; families under 20% of by amount of employer poverty eligible if employer contribution for eligible contributes less than 80% children of premium. Families earning less than $25,000 eligible if employer contributes less than 50% of premium. Uniform premium for all children; guaranteed issue; no preexisting condition limits SOURCE: Author's summaries of legislation. S (Kerry/Kennedy) No preexisting condition limits for children under 185% of poverty; limited to six months for other eligible children S.24 (Specter) Families may use vouchers to purchase employer-sponsored coverage None outlined Medicaid expansions Eligibility based on income and asset criteria; no specific exclusions concerning current insurance coverage None 68 CHILDREN Medicaid, as well as expansions in efforts to enroll currently eligible (and uninsured) children. Public Or Private Provision Of Health Insurance? Perhaps the most fundamental choice to be made is whether a children's health insurance initiative should rely on the existing Medicaid program structure or be administered as a separate program by the states. Expanding children's coverage through Medicaid could be accomplished under current law or augmented through federal legislation. States now can expand Medicaid eligibility to children under age nineteen (as well as to other categorically eligible groups) through the use of more liberal income and asset tests (under the Section 1902 (r)(2) provision). States also can seek a Section 1115 research and demonstration waiver, which allows states substantial flexibility in expanding coverage (through program savings generated through the waiver) to previously uninsured populations. The administration's proposal would ease these waiver requirements as part of its Medicaid reform package. These alternatives for expanding coverage are discussed below. Medicaid expansion. An expanded Medicaid program could follow the approach adopted by several states that have initiated state-funded expansions of Medicaid coverage for children. 2 These states have targeted uninsured children with family incomes above their state's Medicaid eligibility thresholds. For instance, in Hawaii, HEALTH AFFAIRS - Volume 16, Number 4

6 CHILDREN'S HEALTH INSURANCE children between the ages of one and eighteen who are living in families with annual incomes at or below 300 percent of poverty are eligible for subsidies based on their income. In Pennsylvania, children under age fifteen in families with annual incomes below 185 percent of poverty (and who are not Medicaid eligible) receive free coverage. State subsidies are provided for eligible children with annual incomes between 185 and 235 percent of poverty. 3 Another option for working within the current Medicaid framework is to guarantee eligible children coverage throughout the year. Under current law, parents and children are recertified for coverage either monthly or quarterly. Federal funding for private insurance. Alternatively, policymakers could establish a program that is separate from Medicaid (although states would jointly administer it) to cover currently uninsured children. Under this option, the federal government would provide grants to states, allowing the states to contract with private health plans. A key policy choice is the channel through which financial assistance would flow: tax credit, direct state payments, or vouchers provided directly to eligible families. Tax credit A major issue in using the tax system to deliver subsidies is the timing of when dollars would be available to eligible families and health plans. More families would purchase insurance for their children if federal assistance were available when purchasing a policy. Under a tax-credit approach, funding would be available for eligible families when they file their tax returns. If the tax credit were refundable, taxpayers would receive the difference between their federal tax liability and the credit as a direct payment. In this case, the credit would be available only after the April 15th filing deadline for the previous year's coverage. One of the few refundable tax credits under current law, the Earned Income Credit (EIC), is an example of this approach. The EIC is set at a specified percentage of wages up to a maximum dollar amount ($28,495 for a family with two or more children in 1996). In addition, eligible taxpayers may choose an advance-payment option that allows filers to periodically receive the proceeds as part of their paychecks. Despite this advantage, however, only about 1 percent of those eligible for the credit use the advance-payment option. 4 In 1990 Congress passed a supplemental tax credit for families who purchased health insurance for a qualifying child. This tax credit had the same income limits and phase-out range as the EIC had, but unlike the EIC, it was not available on an advance-payment basis. Moreover, the credit could not exceed the costs incurred by the family in purchasing health insurance. In 1993, the final year of the supplemental credit, nearly three million families some 20 per- SAFETY NET 69 H E A L T H A F F A I R S - J u I y I A u g u s t

7 NET 70 CHILDREN cent of all EIC families took the credit. Because of compliance issues, as well as the anticipation of national health care reform, the supplemental credit was repealed in The EIC experience has provided important lessons for policymakers interested in using the tax code for administering a children's health initiative. Only 20 percent of eligible families used the supplemental insurance credit when it was available. This could, in part, be traced to the timing mismatch between when insurance was purchased and when the federal payments were received. A key issue is making the federal assistance available when insurance is actually purchased. In addition to the timing issue, it is doubtful that the benefits were targeted to families with uninsured children. The tax credit was not focused on uninsured workers but in fact was available to subsidize the insurance of currently insured and uninsured families. Second, the credit contained no method for actually verifying the purchase of health insurance. Third, the lack of a full advance-payment option likely discouraged families without insurance from availing themselves of the program. In short, if tax credits are used to deliver subsidies to eligible families, an "automatic" advance-payment option could be used to pay health plans directly (this is generally the approach suggested in S. 13). Direct payments to states and vouchers. Providing payments to states and health plans for purchasing insurance addresses some of the potential shortcomings associated with use of the tax system. Monthly payments made to states for use when eligible families purchase insurance ensure that the timing of financial assistance and the purchase of insurance coincide. The use of vouchers paid directly to individuals also addresses the timing issue, as does a refundable tax credit that is periodically paid to health plans when children enroll. Scope Of Benefits Covered The scope of benefits provided in a children's initiative involves several trade-offs; more comprehensive benefits with lower cost sharing would reduce out-of-pocket spending, induce more timely and appropriate treatment, and likely improve the health of children. More generous policies, however, also would increase the federal costs of the program, which potentially would reduce its political prospects of enactment. A middle-ground approach would be to provide a package of benefits that focuses on preventive and outpatient care with some limitations on inpatient coverage (for example, five days). Care beyond five days could be financed through the Medicaid program (likely with some additional federal spending). Under current law, many of these severely ill children would likely receive Medicaid if HEALTH AFFAIRS - Volume 16, Number 4

8 CHILDREN'S HEALTH INSURANCE their state has a medically needy option. In this case, private insurance would provide some savings, as sick children would receive Medicaid benefits only after their private insurance and spenddown requirements were met. Compared with more comprehensive benefits, this approach would reduce the federal cost of expanded coverage. Federal Subsidies Generosity. More generous federal support will increase program participation among uninsured children. At the same time, more generous support will increase the federal costs of the program. Phasing out federal benefits at higher income levels may also attract interest among children with health insurance. Many are concerned that generous subsidies could adversely affect the employer-sponsored insurance market by providing financial incentives to substitute coverage under the new federal program for employer-sponsored coverage. Such substitution is, to some degree, likely to occur with either a continued expansion of Medicaid or the private options. This substitution could occur if workers simply decline to accept employer-sponsored dependent coverage in favor of the new public program. The interactions could be broader if employers in low-to-average-wage firms stop contributing to the costs of dependent coverage (or increase premiums). There is some preliminary indication that the Medicaid expansions over the past five to six years may have induced such substitution. Several studies have examined this "crowding-out" phenomenon, although the results provide widely divergent estimates of its magnitude. 6 Design. The design of federal subsidies involves a trade-off between federal costs and coverage. Some proposals would provide free coverage to all children with annual family incomes under 185 percent of poverty. What differs, however, is the income at which federal benefits are phased out. Recent proposals have ended federal support at 235 percent of poverty, 240 percent, or 300 percent, with one proposal as high as $75,000 (approximately 450 percent of poverty for a family of four). The more generous programs will increase participation among uninsured children. However, these proposals will also result in higher rates of participation among insured children. The magnitude to which existing employer-sponsored coverage is dropped in favor of newly available public coverage depends on several factors, including the relative cost of employer-sponsored dependent coverage and the new public coverage, the relative scope of benefits covered, and the ease (or difficulty) of enrolling in the new public program (that is, the length of time that a child must be uninsured to be eligible for the public program). SAFETY NET 71 H E A L T H A F F A I R S - J u I y I A u g u s t

9 NET 72 CHILDREN Of the 6.3 million children living in families with incomes between 251 and 300 percent of poverty, five million nearly 80 percent have employer-sponsored coverage (Exhibit 1). In contrast, only 600,000 children in this income bracket are uninsured. The results are more dramatic among families with annual incomes above 300 percent of poverty. More than 88 percent of children living in these families 23.5 million have employer-sponsored coverage, while 1.3 million are uninsured. These results highlight the daunting issues facing those seeking to expand coverage to the 10.5 million uninsured children. While most uninsured children live in low-income families, 25 percent live in families with annual incomes above 200 percent of poverty. Extending federal subsidies above this level to enroll these children risks enrolling some portion of the 33.7 million children covered through employer-sponsored insurance. At issue is the marginal federal cost associated with enrolling an uninsured child when federal subsidies phase out at various levels of income. On the other hand, more modest efforts that focus on lower-income children (that is, under 200 percent of poverty) will likely cover fewer uninsured children but also will attract fewer currently insured children. Role Of The States Participation by the states in a children's health insurance initiative depends on the approach selected to expand coverage. Under an expansion of Medicaid, states would continue their role in determining eligibility, enrolling children, and defining the scope of benefits covered. Children would receive coverage and services through the Medicaid program. In contrast, if federal grants were provided to states to contract with health plans, states might face a broader set of responsibilities, including defining the benefit package, negotiating premium rates with health plans, and establishing the insurance rules for children's enrollment and the establishment of premiums (for example, allowed variation in rates, rules for underwriting, and rules concerning preexisting conditions). States also would determine program eligibility and administer federal subsidies. Whether the states could effectively coordinate the new program with their existing Medicaid programs depends on several key issues. The first concerns the definition of income used to determine eligibility. Eligibility could be based on monthly, quarterly, or yearly income. Income could be defined as cash income or adjusted gross income; it also could include asset testing. 7 States also would be in the position of assigning eligible children to their Medicaid program, as well as the new federal program. What rules would prevent states from placing sicker children in the HEALTH AFFAIRS - Volume 16, Number 4

10 CHILDREN'S HEALTH INSURANCE federal program, leaving less-expensive children in the Medicaid program? Would the states define the "tiers" of insurance coverage (would payments be made per child, or would there be single-child and multiple-child policies), or would the federal government establish such rules? If premiums were established per child, for example, families could enroll sick children in the federal program and perhaps use another approach for their other children. In short, a private option would require several additional aspects of program implementation not needed in a simple Medicaid expansion. Moreover, allowing the states flexibility (as opposed to imposing more specific federal guidelines) in establishing these rules may provide incentives for states to maximize federal payments through the selective enrollment of children across programs. Interactions with the current Medicaid program. One attractive element of a Medicaid expansion is that states could build on their existing administrative structure to determine eligibility. In contrast, some of the private options would create different time frames for determining income (for example, annual compared with the monthly or quarterly time frame now used by the states for Medicaid) and potentially different definitions of income (adjusted gross income versus cash income or income plus assets testing). Use of monthly or quarterly income allows for periodic adjustment in eligibility and periodic adjustment of federal subsidies. At the same time, the shorter time frame would increase program costs. Use of an annual income test would reduce program costs yet would require an annual income reconciliation. At issue is who would perform this reconciliation (the Treasury Department or each state) and whether the states could perform this function with federal dollars on the line. Interactions with optional state programs for children. Another important policy choice concerns the interaction between the new children's program and optional programs for children already operating in the states. The most notable of these optional programs are expansions of Medicaid eligibility for children above federally mandated levels. Under federal law, all children under age six who are living in families with annual incomes below 133 percent of poverty are eligible for Medicaid. Moreover, by 2002, all children ages six through eighteen living in poverty will be eligible for Medicaid. However, several states have expanded coverage for children above these thresholds, either through a Section 1115 waiver or through the 1902(r)(2) process. At issue are the income thresholds for defining free federal coverage. If 185 percent of poverty is selected, states would have a strong incentive to drop their optional Medicaid programs in favor of the new fully federally financed pro- SAFETY NET 73 HEALTH AFFAIRS - J u I yi A u g u s t

11 NET gram. States would have fewer incentives to drop these optional programs if full federal financing were limited to 133 percent of poverty. The trade-off is that the latter approach would enroll fewer uninsured children than the former would. If the higher income threshold is selected, policymakers face three options: simply picking up the state share of current Medicaid expenses for these optional programs; imposing maintenance-of-effort provisions on states (found in S. 13 and S. 2186), which typically require states to maintain their eligibility rules as of a specific date; or allowing states to phase out their programs over a period of time. 74 CHILDREN Financial Implications Many of these policy choices will have important financial implications. In addition, the financial impact of some policy choices is not clear. For instance, would participation among uninsured (or insured) children differ if the expansion flowed through Medicaid or through private health plans? We have little empirical evidence available for making such estimates. Thus the analysis here presents estimates for some, but not all, of the program design choices discussed above. For illustration, I examine the financial impacts of three policy choices: the scope of benefits covered, the generosity of federal subsidies, and the extent to which the program would attract currently insured children. The simulated packages are presented in Exhibit 3. Although they are not tied to any single proposal, they span the range of choices facing policymakers. Across each of the options, children eligible for Medicaid are not eligible for the new public program. Moreover, children must be uninsured for at least six months before they can receive benefits under the new program. Families with access to employer-sponsored insurance in which the employer contributes more than 50 percent of the premium are not eligible for the new plan. I assume that participation in the new program depends on the relationship between the premium payments made by the family and annual family income. 8 Yearly program costs. One important result of my analysis concerns the financial impact of families' substituting a federally subsidized plan for employment-based coverage. In each case, such substitution would increase the yearly costs of a children's health insurance plan by approximately $2.3-$3.6 billion per year (Exhibit 4). The cost of the less generous federal subsidy would range from $3.4-$6.5 billion per year, depending on the number of currently insured children enrolling in the program and the scope of benefits provided. The more generous federal subsidy would increase program costs by less than a billion dollars per year in the no-dropping HEALTH AFFAIRS - Volume 16, Number 4

12 CHILDREN'S HEALTH INSURANCE EXHIBIT 3 Illustrative Children's Health Insurance Initiatives Scope of benefits covered a Similar to benefits covered through the Blue Cross/Blue Shield standard-option plan. Same as above, except hospitalization limited to five days per year. Generosity of federal subsidies b Free care for children under 185 percent of poverty, phasing out at 240 percent. Free care for children under 185 percent of poverty, phasing out at 300 percent. Interactions with privately Insured c Limited substitution of new programs for employer-sponsored insurance policies. Privately insured children enroll if cost of public program is less than cost of private health insurance. SOURCE: Stylized packages developed by author. a Using data from the 1987 National Medical Expenditure Survey, I estimate that the per capita costs for children are approximately 40 percent of the per capita cost for adults. For the Blue Cross-type package, I estimate a monthly cost of approximately $80. The more limited package, which includes all other services included in the standard-option package, is limited to five days of hospitalization annually and costs approximately $60 per month. b Assumes that the program uses monthly cash income to determine eligibility. If annual income were used, the federal costs of the illustrative packages would be approximately 20 percent lower than those displayed in Exhibit 4. c Assumes that workers would drop dependent coverage if the cost of private insurance were more than the cost of the public program (Ps). The cost of private health insurance has two components: the direct premium cost paid by the worker (Pw), and the component paid by the employer (Pr) that the worker (in the long run) would receive in higher wages. For the high cost-dropping assumptions, I assume that the private cost includes both of these components. Thus, the worker would drop coverage if Ps < [Pr + (1-t) x Pw], where (1-t) represents the marginal tax rate facing the worker. This is clearly an upper estimate. scenario and as much as $2 billion per year if dropping of employersponsored insurance is assumed. Exhibit 4 illustrates the sensitivity of federal program costs to some of the key policy choices discussed earlier. Yearly costs of a children's plan would range from $3.4 billion to $8.6 billion, depending on the generosity of federal subsidies and the extent of participation among currently insured children. Number of newly insured children. Exhibit 5 presents estimates of the number of children participating in the new program. Two important findings surface; the first concerns the number of newly insured children participating in the program. These estimates range from 2.7 million, with less generous federal subsidies and more generous benefits, to 3.3 million, with the more generous subsidies and less generous set of benefits. As a result, these proposals would reduce the number of uninsured children from 10.5 million to approximately 7.5 million. At the same time, if children living in poverty participated fully when they were eligible for Medicaid, another 4.1 million children would receive health insurance. When combined, these programs could reduce the number of uninsured children from 10.5 million to fewer than four million when the Medicaid expansions are implemented fully in The second finding, however, highlights a major issue facing the design of a children's health insurance initiative: how to focus pro- HEALTH AFFAIRS - ] u I y I A u gu s t

13 N E T EXHIBIT 4 Federal Costs Associated With Illustrative Children's Health Insurance Initiatives, 1998 (Billions Of Dollars) Federal subsidy 185%-240% No employer-sponsored insurance dropping With employer-sponsored insurance dropping 185%-300% No employer-sponsored insurance dropping With employer-sponsored insurance dropping Broader benefits package Restricted benefits package a a $ $24 SOURCES: Estimates based on data from the March 1996 Current Population Survey; and KPMG Peat Marwick, Health Benefits in 1996 (Tysons Corner, Va.: KPMG Peat Marwick, October 1996). a Cumulative program costs over five years $ $ CHILDREN gram costs and benefits on uninsured children. The results presented in Exhibit 5 indicate that most of the children approximately two-thirds who would be likely to participate in the new insurance program already have health insurance. For instance, approximately five million privately insured children nearly three million of whom have employer-sponsored coverage would have a financial incentive to switch to the new program. Phasing program benefits out at 240 percent of poverty would reduce the number of privately insured children enrolling in the new program by 600,000, with relatively little change in the number of uninsured children enrolling in the program. 9 Children who were covered through op- EXHIBIT 5 Number Of Children (In Millions) Participating In The New Federal Insurance Program, By Previous Insurance Status, 1998 Federal subsidy 185%-240% Broader package Restricted package 185%-300% Broader package Restricted package Insurance status Uninsured Private Other a Total SOURCE: Author's tabulations. a Includes children covered through state "optional" Medicaid programs and other forms of public insurance (federal employees, military) CM CO HEALTH AFFAIRS - Volume 16, Number 4

14 CHILDREN'S HEALTH INSURANCE tional Medicaid programs could, unless a strict state maintenanceof-effort provision were included, also enroll in the new program. These children would increase the federal cost of an expansion in coverage by nearly $700 million per year. Conclusions Policymakers seeking to reduce the number of uninsured children face many choices in designing a children's health insurance initiative. The options chosen have important implications for the administration of the program, its costs, and the number of children enrolling in the program. The analysis presented here illustrates how some of these choices could affect program outcomes. The first observation is that more generous federal subsidies would reduce the number of uninsured children. However, even in the less generous program (phasing out at 240 percent of poverty), more children with private insurance would have incentives to enroll in the program than would those without insurance. A second observation concerns the desirability of expanding the federal subsidies even further perhaps to families with incomes up to 300 percent of poverty. As the analysis reveals, expanding the subsidies from 240 percent to 300 percent of poverty could increase the federal costs of the program by $2 billion but only enroll another 400,000 uninsured children. Most of the federal costs in such an expansion would be directed toward children who have health insurance, particularly those with employer-sponsored coverage. Thus, the ability to target uninsured children becomes more difficult as program subsidies extend to higher-income families. This is not to say that federal and state policies designed to extend coverage to uninsured children should not be pursued. Indeed, efforts by the states through both Medicaid and special private programs aimed at children have expanded coverage for children. Rather, the message is that federal programs designed to build on these efforts need to recognize the interactions between program expansions and current state efforts and the potential impact of such expansions on the employer-sponsored insurance market. The latter concerns not only the fiscal impact of an expansion but also the segmentation of the health insurance market into adults' and children's policies. The enrollment of adults and children in different plans could increase the administrative costs for working parents and could complicate care-giving. Despite these difficulties, public policy efforts to reduce the number of uninsured children are a desirable policy objective. SAFETY NET 77 H E A L T H A F F A I R S - ] u I y I A u gu s t

15 NET The author acknowledges the computational assistance provided by Patrick Perrin. 78 CHILDREN NOTES 1. K.E. Thorpe, "Incremental Strategies for Providing Health Insurance for the Uninsured: Projected Federal Costs and Number of Newly Insured," Journal of the AmericanMedical Association (23 July 1997). 2. By September 1996, thirty-four states exceeded federal mandates for eligibility for children and pregnant women, eleven exceeded income thresholds for children between ages one and five, and twenty-four states exceeded federal minimums for children ages six and older. National Governors' Association, State Strategies for Increasing Health Coverage for Uninsured Children, Issue B (Washington: NGA, 4 March 1997). 3. For detailed descriptions, see National Governors' Association, Innovative State HealthInsuranceInitiativesfor Children (Washington: NGA, 21 July 1995). 4. See, Committee on Ways and Means, Overview of Entitlement Programs, 1993 Green Book (Washington: U.S. Government Printing Office, July 1993). These data report that 0.5 percent of eligible families took advantage of the advance-payment option. More recent, unpublished data from the Treasury Department place this figure at 1 percent. Several theories exist concerning the low participation rate, including lack of knowledge of the option, families' reluctance to go through their employer to initiate the advance payment, and concern that changes during the year (for example, in family structure or income) could result in a tax bill when taxes are actually filed. 5. According to unpublished data from the Treasury Department, during the final year of the program, more than $760 million some $260 per family was spent under the supplemental child health insurance credit program. 6. Compare, for example, D. Cutler and J. Gruber, "Does Public Insurance Crowd Out Private Insurance?" Quarterly Journal of Economics (May 1996): ; and K.E. Thorpe and C. Florence, "Health Insurance Coverage among Children: The Role of Expanded Medicaid Coverage" (New Orleans, La.: Tulane University School of Public Health, January 1997). 7. The financial implications of these choices are important. Use of monthly cash income versus annual income would increase program costs by 20 percent. 8. For illustration, I use the participation assumptions used by the Department of Health and Human Services to estimate federal costs and participation during President Clinton's first term. Participation in the program varies with the ratio of premium payments to family income, as presented below. Cost of health insurance as percentage of income Free Less than 2% 2-6% 6-10% 10-14% 14-20% 20% or more Percent purchasing insurance 75% Although eligibility for the program stipulates that children must be uninsured for six months prior to entering the program, I assumed that families with a financial incentive to enroll their children in the new program would do so. As a result, these estimates may overstate the federal costs of the program. HEALTH AFFAIRS - Volume 16, Number 4