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.