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