The Economic Rationale for Investing in Children: A Focus on Child Care. Crowdout


In 1993, 67 percent of U.S. children were covered by private health insurance provided primarily by their parent's employers, 20 percent were covered by Medicaid, and 13.5 percent were uninsured (U.S. General Accounting Office, 1995b). A good deal of recent research focuses on the issue of whether public insurance tends to crowd out private insurance. The figures on insurance coverage for children are extremely suggestive: Despite the dramatic increases in public insurance coverage discussed above, the fraction of children without insurance coverage has stayed remarkably constant in recent years because private health insurance coverage has fallen by the same amount that public insurance coverage has risen (U.S. General Accounting Office, 1995b). However, private health insurance coverage has also been falling among groups that one would not expect to be affected by the Medicaid expansions, such as single men. Thus, it is not obvious to what extent the relationship between increases in public insurance and decreases in private insurance is causal.

Estimates of the extent of crowdout are sensitive to the methods used to control for possibly pre-existing trends in the provision of private health insurance coverage. At the high end of the spectrum of estimates, Cutler and Gruber (1996, 1997) estimate that for every two people covered by the Medicaid expansions, one person lost private health insurance. However, some of these people (such as household heads who decided they would no longer purchase health insurance once their children became eligible) were not themselves eligible for Medicaid  so not all of the people crowded out ended up getting insurance at public expense. They calculate that in fact about 40 percent of those crowded out ended up on Medicaid. Other observers have posed the question somewhat differently, and come up with correspondingly different estimates. For example, Dubay and Kenney (1997) find that about 22 percent of the increase in Medicaid coverage came from people who used to be privately insured. Since not everyone who became eligible for Medicaid did so as a result of the expansions, this number is necessarily smaller than Cutler and Gruber's estimate. Finally, one might ask what share of the overall decline in private insurance coverage is a result of the Medicaid expansions. The answer to this question is about 15 percent which suggests that a great deal of research remains to be done on the causes of this decline.

One issue obscured by the focus on crowdout is the fact that Medicaid insurance coverage may be better than what is privately available to many families. For example, many private policies do not cover routine pediatric preventive care such as immunizations, and most have copayments and limits on what they will pay. Hence, the substitution of Medicaid for private insurance coverage may improve children's health care, and this improvement should be valued when the costs and benefits of the expansions are weighed. Also, from a societal point of view, it does not matter whether private or public insurers pay for health care, except in so far as taxation creates a dead-weight loss, and public insurance transfers resources to families with children. Still, policy makers reluctant to raise (or eager to cut) taxes remain deeply concerned about crowdout.