Examining Substitution: State Strategies to Limit "Crowd Out" in the Era of Children's Health Insurance Expansions. Executive Summary


In recent years, state initiatives to provide health insurance for low-income children have raised a new set of concerns regarding the actual and potential impact of employer- and individual-based substitution. As a number of states elected to expand Medicaid in the late 1980s, researchers began to explore the possibility that Medicaid was substituting for private coverage. By 1992, substitution became a more salient concern as states expanded coverage to all pregnant women and children up to age 6 with incomes up to 133% of the federal poverty level (FPL), and more than half of the states elected to receive federal matching funds to cover all pregnant women and infants up to 185% FPL. As Federal and state governments seek to increase the proportion of people with health coverage, it is critical to understand the nature and extent of substitution. Concerns focus on the potential that if Medicaid and other public expansions are responsible for shifting individuals from employer-sponsored insurance to public programs, the effectiveness of public funds to expand insurance coverage might be limited. As programs minimize the effects of substitution, states will then have the ability to target funding specifically for insuring children who do not have access to affordable health coverage.

Enabled under Title XXI of the Social Security Act, the State Children’s Health Insurance Program (CHIP) is providing $24 billion in funding to states over a five-year period to provide health insurance to uninsured children. The purpose of the law is to assist states in initiating and expanding children’s health assistance programs to uninsured, low-income children. This assistance can be provided through one of three methods: (a) a program to initiate and expand the provision of health care assistance via a separate State Insurance Program; (b) a Medicaid expansion; or (c) a combination of these methods. Eligibles include children under age 19 not eligible for Medicaid with family incomes below 200% of the federal poverty level or 50% above the current state Medicaid limit. State expansions could begin as early as October 1, 1997.

The primary objective of Title XXI, to insure uninsured children, charges states to expand the number of eligible children with health insurance beyond current Medicaid eligibility limits. As research has suggested that substitution is most commonly seen in higher income ranges, substitution of state-funded programs for private insurance coverage has become a substantial concern. Further complicating the issue, families are making difficult decisions which may directly impact individually-based substitution. For example, families may opt to substitute a separate state program for private insurance or for Medicaid. It is important to understand that family decisions are based upon affordability of plans, comparability of the benefit packages, and health status of children. State and national research has not produced conclusive evidence that employers are dropping coverage, yet there is evidence that employer-based coverage is declining. Several states have suggested that the coverage issue, in most cases, is not employers dropping coverage, rather individuals are choosing to opt out of private insurance coverage for state subsidized programs.

Research has attempted to assess the amount of substitution, suggested ways to limit its effects, and weighed the benefits and costs of expanding Medicaid with the potential of crowding out private insurance. Limited data and the complexity of the issue make it difficult to accurately measure the crowd out of public programs for employer-sponsored insurance. Actual substitution is complicated by secular trends including the following: the decline in employer-sponsored insurance; increasing levels of employee premium contributions; the decrease of unionization; and the shift from manufacturing to lower wage service industries. The complexity of measuring substitution and limited state-specific data contributes to conflicting estimates of substitution and makes it challenging for State governments to address substitution in the design and implementation of their children’s health insurance programs. It has also been difficult to apply research focusing on Medicaid expansions to other models of providing low-income children with health coverage. With few estimates indicating the degree of actual substitution and little data on the demographic profile of the "substituters," the discussion on substitution has been primarily based on the perceived effect of crowding out private coverage.

There are two ways that substitution can occur under CHIP. First, there can be substitution of coverage which can occur when families or employers drop existing private coverage to enroll in CHIP. Second, there can be substitution of premiums which can occur when employers reduce their contribution levels of dependent coverage because families are able to obtain subsidies that offset the reduced amount of contributions. To assist states as they address issues related to substitution in their Title XXI plans, this paper focuses primarily on an examination of the experiences of a set of states that have already developed and implemented children’s health insurance programs prior to the creation of Title XXI. Qualitative data, which was collected from state officials through interviews and a round-table discussion, augments previous research by examining states’ perceptions and their actual experiences with substitution.