Examining Substitution: State Strategies to Limit "Crowd Out" in the Era of Children's Health Insurance Expansions. Mechanism 1: Identifying the Affordability of Private Coverage: Setting Premiums and Copayments That Do Not Deter Utilization or Enrollment


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.

States have also struggled with the issue of identifying individuals who should be limited from entering state programs based solely on their ability to afford employer-sponsored insurance. For example, Rhode Island’s RIteCare queries applicants on their access to and affordability of coverage for individuals above 185% FPL. In such instances, RIteCare has defined affordable insurance premiums as less than $150/month for an individual or $300/month for families. RIteCare does not formally verify this information, and the verification process is based on the "honor system." Although determining affordability is essential in the effort to develop a balance between increasing enrollment and decreasing substitution, elaborate verification processes have been identified as costly, administratively burdensome, and difficult for state programs to conduct.

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.