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.
State Mechanisms To Limit Substitution
State strategies to address substitution include nine mechanisms that either purposefully or inadvertently limit 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.
Mechanisms limiting individual based substitution. 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.
Implications For Future Expansions Under Title XXI of the Social Security Act
Current research coupled with past experiences of states provides some information for states to consider as they plan and implement programs funded by Title XXI. Four major program design issues were identified as important areas in addressing substitution: the overall design of the program; determining whether to use Medicaid expansions or separate state programs; the development of specific provisions related to employer coverage; and the oversight and evaluation of the expanded program.
One of the most difficult issues facing states is how to design a program that neither limits access to new coverage, nor replaces existing insurance coverage. Among the many programmatic areas that need to be addressed are: the determination of an appropriate benefit package; the implementation of suitable cost-sharing measures; the development of an administratively simple, yet stringent enrollment process; the identification of appropriate eligibility criteria that will encourage enrollment, while limiting substitution; and strategies focused on collaboration with the private market.
It is essential for children's health insurance programs to adequately design programs that target children not eligible for Medicaid, affordable employer-sponsored, or other health insurance programs. Implementation of well-defined state programs that conduct outreach to enroll targeted children while controlling for substitution, may be a vehicle through which states can actually increase participation in all forms of available insurance.
As state programs to insure children have evolved, such expansions have raised a new set of concerns about the effectiveness of these state programs in enrolling only their targeted populations. As programs have expanded into higher income ranges, policy makers, program administrators, and researchers have expressed a concern about the potential that these programs have begun to substitute for employer-sponsored insurance. In an era of limited public resources, the erosion of employer-sponsored insurance coverage has taken center stage in the debate over new or expanded state health insurance programs at the federal level and in some states.
States' strategic choices to be evaluated in the light of federal program goals include: (a) reducing the number of uninsured children over time; (b) increasing the participation of children in public programs for which they are eligible; (c) minimizing the potential to cover children who would have otherwise had private insurance coverage; and (d) creating a private/public partnership which increases coverage for children in the private market. Given the goals of the federal program, states need to determine not only how they will develop strategies to limit substitution, but also how they will evaluate the cost of enforcing enrollment barriers of potential eligibles and the overall impact on administrative complexity.