Examining Substitution: State Strategies to Limit "Crowd Out" in the Era of Children's Health Insurance Expansions. A. State initiatives to insure children have yielded a new set of concerns regarding the substitution of public coverage for private health benefits.


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. Each state will receive a portion of the total amount, and such allotments shall remain available for up to three years.

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.