Examining Substitution: State Strategies to Limit Crowd Out in the Era of ChildrenHealth Insurance Expansions

This section reviews the nine mechanisms states identified as strategies to address substitution. Exhibit 1 exemplifies the range of state mechanisms used to limit substitution. States investigated various mechanisms that either purposefully or inadvertently limited substitution. States have also emphasized the importance of distinguishing between two types of substitution: individual-based and employer-based. Because different dynamics drive employee and employer substitution, states have implemented specific mechanisms to address these two types of substitution. For the most part, state officials agreed that the primary concern is whether, and to what extent, previously insured workers are dropping their employer-sponsored coverage. Substitution of coverage seems to be primarily driven by individual choices rather than employers strategically eliminating coverage. Although states have distinguished between individual- and employer-based substitution and have established mechanisms focused on limiting both types of crowd out, states and researchers also have identified the overlap between the two. Substitution is a result of the dynamic relationship between the types of benefits employers want to provide to employees and the willingness of employees to participate in the programs offered. Both employers, in offering coverage, and employees, in taking up coverage, are forced to make complex decisions which are driven by complicated issues such as secular trends in the economy and family dynamics.

The extent to which states deliberately institute mechanisms limiting substitution varies by program and state. In some cases, substitution appears to be restricted indirectly through mechanisms established in program designs for other purposes. For example, many states require copayments for services rendered which mirror cost-sharing in the private market. Although required copayments are customarily included in program design for financial purposes, when comparable to private market copayments they limit the number of individuals who drop private insurance to enroll in state-subsidized programs.

The information represented in this document is focused on the experiences of nine states that were either interviewed and/or attended the roundtable discussion. Most states represented in this paper identified the issue of individual-based substitution as a major concern. Other states, either in their current initiatives or future initiatives under Title XXI, may be even more concerned about substitution in its various forms as they cover higher income children under Title XXI.

State mechanisms to limit individual-based substitution primarily target those dynamics that prompt family decisions to opt out of private coverage such as: the cost comparisons of copayments and premiums; the affordability of private coverage; and the comprehensiveness of benefits. The majority of states’ efforts to curb substitution has focused on the dynamics that drive families to opt out since individual-based substitution is a greater concern than employer-based substitution. The primary mechanisms utilized by states include the following: (1) evaluating affordability of private coverage; (2) requiring periods of uninsurance; (3) providing subsidies; and (4) limiting the scope of benefit packages. These mechanisms are effective ways to curb substitution by making state-sponsored children’s health insurance comparable to employer-sponsored coverage.

STATE PROGRAM	MECHANISMS TO LIMIT INDIVIDUALS FROM SUBSTITUTING PRIVATE COVERAGE
	Evaluating Affordability of Private Coverage		Periods of Uninsurance	Providing Subsidies	Limiting Scope of Benefit Package
	Increasing Premiums	Redefining Copayments
CaliforniaKids					X
Children’s Medical Security Plan (MA)	X			Under consideration^g	X
Colorado Child Health Plan			To be implemented^e	Under consideration^f
Florida Healthy Kids Corporation		X	X^a	Under consideration
MinnesotaCare			X		X^j
NY Child Health Plus	X^b	X^c			X^d
Oregon Health Plan			To be implemented^h	To be implementedⁱ
RiteCare		X
Washington Basic Health Plan Plus

Several states have identified the affordability of employer-sponsored insurance as an important consideration in the implementation of mechanisms to limit crowd out. Affordability is usually defined as the percentage of family income that is believed families could or are willing to use to purchase health care. Although states are interested in the affordability of private coverage, there is a lack of research that has identified the basis upon which to determine the affordability of private insurance coverage. A recent study conducted by economists at the Agency for Health Care Policy and Research identified that high employee contribution rates may discourage employees from participating in employer-sponsored plans while rising premiums may also discourage employers from offering coverage. Data from a MinnesotaCare evaluation found that of individuals questioned in 1995, approximately 73% of those who were uninsured stated that they could not afford to purchase insurance. The overall lack of data has led states to experiment with specific strategies to determine effective cost sharing levels in their children's health insurance programs. In developing strategies, states have considered the tradeoffs between encouraging participation and limiting substitution. Specifically, states have identified the importance of establishing cost sharing (e.g., premiums and copayments) that is low enough to encourage participation, yet high enough to limit substitution.

Moreover, states have experimented with the balance between limiting substitution without discouraging enrollment and participation through the use of premiums and copayments. Through this experimentation, states have been able to identify general threshold levels for cost sharing in their programs.

Setting Premiums. While there are no data that directly link the establishment of premiums as a deterrent to families opting out of employer-based coverage, several states anticipate that this is the case. New York specifically identified that while increases in monthly premiums were not established as a mechanism to discourage substitution, it is anticipated that newly established increases will ultimately result in reducing individual-based crowd out. The state has identified that a $9 to $13 monthly premium per child should discourage families from dropping employer coverage to enroll in the New York Child Health Plus Program. Florida’s Healthy Kids program has set premiums that range from $5-10 per child per month for families below 130% FPL and $13-27 per child per month for families from 131-185% FPL. Families pay 100% of premium above 185% FPL. Florida experimented with raising premiums beyond ten dollars, but found these amounts directly resulted in decreased enrollment. Nevertheless, state program representatives felt that premiums at a lower level (between $5-10) were a viable means of evoking a sense of responsibility in participants by making public insurance comparable to employer-sponsored coverage.

Defining Copayments. Many existing children’s health insurance programs have established copayments for physician visits, prescriptions, and emergency room use as mechanisms to mirror the requirements of private coverage. The initial intent behind establishing copayments varied by program. The primary rationales state officials expressed were to offset costs and to instill a sense of responsibility in participants. Some states believe that price sensitivity was a critical aspect of determining copayments and cost-sharing policies. Florida and Rhode Island program officials identified the importance of establishing copayments that do not deter eligible families from enrolling in state programs and utilizing necessary services, yet do not encourage the inappropriate use of services. In Florida, all families pay copayments for certain services at the time they are rendered. While there is no copayment for wellness checks and immunizations, there are copayments for regular doctor office visits, ER, glasses, outpatient behavioral health, etc. Copayments generally range from $3-5 except for ER which is $25 if the use is inappropriate. States believed that families would be less likely to opt out of private coverage if copayments were similar for both public and employer-sponsored insurance. An additional issue regarding the collection of copayments is the administrative burden that will be placed either on the program or its providers to collect a minimal amount of funds. Many programs have shifted the burden of collecting copayments to the providers in order to reduce the administrative costs to the program. However, it has been suggested that, in many cases, providers were either unable or unwilling to collect copayments from beneficiaries who were incapable or unwilling to pay for services rendered. This becomes a concern for providers who collect copayments from patients as a portion of their reimbursement under the program. For these providers, the inability to collect copayments may result in an overall decrease in their total reimbursement by the program.

States emphasized the "the concept of price sensitivity" in determining cost sharing: premiums and copayments must be set at levels considered reasonable and affordable to potential program beneficiaries, yet substantial enough to not encourage individuals from dropping private coverage. Determining this balance between setting cost sharing levels that limit substitution and not limiting enrollment is very difficult to predict and achieve. Although there is limited research on the price sensitivity of low income workers, one might suspect that it is an important issue. Nevertheless, the pressing question is to what extent do states discourage the really poor from enrolling in programs in order to prevent the less poor from dropping private coverage.

Several states have established requirements based on access to employer-sponsored insurance, employer contributions, and/or specific periods of uninsurance as a means to limit substitution. MinnesotaCare has instituted relatively stringent time and cost requirements, described by some as "firewalls" in order to prevent the crowd out of employer-sponsored insurance. For example, MinnesotaCare requires that prior to enrollment in the program, families may not have access to employer-sponsored coverage in which an employer subsidizes 50% or more of the cost of the policy for at least eighteen months preceding application to the program. However, some exemptions apply. All children under 150% FPL are exempt from this requirement. Children in families over 150% FPL are exempt from this requirement if a parent becomes unemployed and loses access to employer sponsored coverage.

Additional states have instituted policies that base eligibility on an inability to access employer-sponsored insurance in accordance with minimum employer contribution levels; however, the minimum employer contribution and rates of access vary across programs and states. Overall, states have suggested that eligibility based on access to employer-sponsored insurance is an effective requirement that limits substitution. For example, Florida has found that most of their enrollees are either self-employed or employed in industries where insurance is not available, thus reducing the probability of individuals entering the program for the purpose of substituting for employer-based insurance.

Three states have established periods of uninsurance, whereby individuals enrolling in programs would by definition already be uninsured. Florida initially implemented a six-month period of uninsurance for children whose applications indicated that they had access to employer coverage. However, this restriction was eliminated after hearing testimony from families and identifying evidence that families who otherwise lost their insurance through no fault of their own would possibly postpone seeking services during the six month period. This might result in an increased pent up demand upon their initial enrollment and possibly a more costly health problem for health plan partners to treat. Colorado is evaluating what the "most appropriate" period of uninsurance to limit substitution would be without hampering timely access to coverage. Currently, Colorado requires a three-month period without insurance coverage. In addition, some states have identified underinsurance as an eligibility requirement. MinnesotaCare has liberally defined underinsurance as any child below 150% FPL who lacks both dental and vision benefits; therefore, such children meeting other eligibility criteria may be granted access to the program.

With respect to uninsurance periods, waiting lists have been found to inadvertently limit substitution. Few states have waiting lists, yet for those that do, individuals with employer-sponsored insurance will be deterred from dropping existing coverage in order to be placed on a waiting list. Although this has occurred naturally, states have not purposefully instituted waiting lists as a means to control substitution.

The process of verification of access to employer-sponsored insurance, employer contributions, and periods of uninsurance has been challenging for states. Most states verify eligibility based on self disclosure or the "honor system," as other means of verification are costly and increase the complexity of enrollment processes. Some states have chosen to piggy back on other existing state programs in order to efficiently evaluate eligibility status. The most commonly cited example has been the process used by the Florida Healthy Kids Corporation in which eligible children are required to qualify for the National School Lunch Program. Other states have chosen to utilize existing verification structures of state Medicaid programs to assist in the determination of eligible enrollees. MinnesotaCare has utilized an audit procedure by which enrollees are retrospectively surveyed to determine if they had access at the time of enrollment. In addition, if an individual applies for MinnesotaCare and the program believes that their employer provides insurance, the enrollment office sends an "employer report form" to the employer to verify that no coverage is offered. Anecdotal evidence provided by MinnesotaCare has suggested that most individuals are not purposefully substituting, but rather do not realize they have access to coverage with an employer contribution of at least 50%.

Some states are designing their programs to work in tandem with employer-sponsored coverage as a means of limiting substitution. Assisting families to purchase private coverage with public funds may deter families from dropping, or not pursuing employer-sponsored insurance beyond their economic reach. While subsidies support families in purchasing insurance in the private market, they may also contribute to substitution. Oregon's 1997-1999 budget proposed the creation of the Family Health Insurance Assistance Program (FHIAP), an insurance subsidy program for families with incomes between 100% and 185% of poverty. Essentially, FHIAP will establish a voucher system for families with access to employer-sponsored insurance, assisting eligible families in buying into employer-sponsored programs. In an attempt to maintain administrative simplicity while limiting crowd out, FHIAP will use an automated billing system to limit administrative costs. Colorado has also considered subsidizing families’ insurance as a viable means of limiting substitution and is considering the implementation of a voucher program. Colorado has identified this strategy as an approach that will prompt the public and private sector to cooperate in the process to insure children. Florida is also considering a type of voucher mechanism that will assist families in purchasing coverage as a supplement to Healthy Kids and other efforts.

Limiting the scope or comprehensiveness of the benefit package is another mechanism that seems to deter families from opting out of employer coverage. The CaliforniaKids program, the Massachusetts Children’s Medical Security Plan, and until recently, New York’s Child Health Plus program, declined to offer inpatient care with the rationale that it was better to provide a more modest benefit package to greater numbers of children. Although CaliforniaKids and Child Health Plus were primarily concerned with stretching their funding to meet the basic health care needs of as many children as possible, representatives from both programs believed that excluding inpatient care deterred substitution. These programs were comfortable with offering a limited benefit package, knowing that Medicaid would serve as a safety net for children requiring inpatient care or extended benefits. Because most employer plans include inpatient care, families were less inclined to drop private coverage. Limited benefit packages also reduce the risk of adverse selection within state-funded programs. Families with children having special health care needs may not select out of private coverage or Medicaid in order to obtain coverage under a state program offering a less generous benefit package. In addition to the benefit package, families with such children may also examine the provider network encompassed by the state program before substituting for their existing coverage. As children with special health care needs must often access specialty services, parents are faced with complex choices which relate not only to cost, but substantially to access of health services. Such considerations may limit adverse selection into state programs that provide limited benefit packages and access to specialty services as compared to private insurance plans and Medicaid.

While there is no evidence to suggest that employers are strategically eliminating health coverage so that their workers may receive public insurance, several states have been proactive in designing mechanisms to encourage the availability of affordable employer-sponsored insurance. Exhibit 2 exemplifies state mechanisms to limit employers from dropping insurance coverage. Because small businesses, usually defined as less than 50 employees, have difficulty purchasing health insurance at reasonable rates, state efforts to encourage employer-sponsored insurance have specifically targeted small businesses. Oregon, Rhode Island, Washington, Colorado and Massachusetts are examples of states that have either already implemented, or are currently considering, mechanisms to enhance the affordability of employer-sponsored insurance.

STATE PROGRAMS	MECHANISMS TO LIMIT EMPLOYERS FROM DROPPING INSURANCE
	Purchasing Cooperatives	Buy-Ins	Reimbursements
CaliforniaKids
Children’s Medical Security Plan (MA)			Under consideration
Colorado Child Health Plan		Under consideration
Florida Healthy Kids Corporation	X^a
MinnesotaCare
NY Child Health Plus
Oregon Health Plan	X
RiteCare	X
Washington Basic Health Plan		X

Health insurance purchasing cooperatives, which assist employers in purchasing insurance at more affordable rates, are enabling small employers to offer benefits in Oregon and Rhode Island. The State supported Associated Oregon Industries’ (AOI) efforts to develop a privately sponsored Health Insurance Purchasing Cooperative (HIPC) targeted at small group employers. AOI, Oregon’s largest business organization, shows promise for assisting small employers in maintaining existing or establishing new insurance programs to employees. Rhode Island has four small business purchasing cooperatives that may be deterring crowd out by making the provision of insurance by small businesses affordable.

Allowing employers to directly buy into state programs at reasonable costs is another means of encouraging employers to take responsibility for sponsoring workers' insurance. The Washington Basic Health Plan (BHP) established provisions in which employers can buy into the program. As BHP is generally less expensive than private insurance for most employers due to subsidized premiums for low-income workers, there is a positive incentive for employers to participate. The employer buy-in also provides employers the benefit of the larger purchasing power and risk pool of the state. Employers contribute approximately $45 per employee per month and employees contribute the remainder of the premium based on a sliding fee scale. For low income workers, the $45 employer contribution covers the employee share of the monthly premium . However, if a low income worker enrolls in BHP as an individual, the monthly premium is approximately $10 for that individual. Despite the reasonable cost of employer buy-in, Washington state has found that some employers will offer to "subsidize" employees for the $10 premium required for individual enrollment in BHP, rather than contributing $45 as their employer. This has made the buy-in program challenging, as it is administratively difficult for the program to control. Other states have considered similar programs to increase employer participation. A small employer alliance in Colorado has also expressed an interest in participating in a buy-in program with the Colorado Child Health Plan. The Children's Basic Health Plan is currently examining the possibility of implementing an employer buy-in program.

Assisting employers through reimbursement plans is another strategy geared toward helping small employers purchase health coverage. Massachusetts has planned the implementation of an experimental program in the year 1999, entitled the "Insurance Reimbursement Plan" to be administered through the Medical Assistance program. The Plan will be structured to reimburse small businesses (i.e., employers with less than 50 workers) that cover in excess of 50% of the cost of insurance for their employees. Eligible employers will be annually reimbursed $1000 for family coverage, $800 for couples coverage, and $500 for individual coverage. This option, not yet implemented, has been considered quite controversial as it would be paying employers to provide insurance, which in some cases, they may already offer.