Cover Kids First

The upcoming debate over health insurance for children will send a strong signal about the direction that the health policy debate will take in the new Congress.

The State Children's Health Insurance Program must be reauthorized this year or it will expire. And some states are running out of money and have their hands out to Washington for more.

When Congress created SCHIP 10 years ago, it set the program up in a new way. Instead of making it an open-ended entitlement to benefits for recipients, like Medicare and Medicaid, it created block grants to the states, capping expenditures at $40 billion over the last decade.

The states are not accustomed to this discipline. Several of them ran over their allotments last year, and the Republican Congress appropriated another $283 million. So far this year, 14 states have over-committed and face shortfalls of a total of $745 million. The Democratic Congress is ready to appropriate the money.

(You have to wonder what kind of parents they would be: "I've run out of allowance money, Dad." "Oh that's okay, son. Here's some more.")

The new Democratic leadership signaled early on that they would like to expand SCHIP to cover every eligible child, but the price tag is a whopping $60 billion over the next five years.

Senate Finance Committee Chairman Max Baucus must figure out where to get the extra money, and in the meantime will try to tack the short-fall appropriation onto another bill this spring.

Would it surprise you that six of the nine states that GAO surveyed which have over-spent their allotments were states that cover adults through their State Children's Health Insurance Programs? In Minnesota, 87% of total SCHIP enrollees in 2005 were adults, and 66% in Wisconsin. In Arizona, 56% of those enrolled in SCHIP were adults, yet the state has one of the highest rates of uninsured children in the nation at 16%. Where is the outrage?

Of the 6.1 million people enrolled in SCHIP in 2005, more than 10 percent (639,000) were adults, according to Government Accountability Office. And those 639,000 were from just nine states where GAO could get data.

"Adults accounted for an average of 55 percent of enrollees in the shortfall states, compared with 24 percent in the nonshortfall states," according to GAO.

It seems that Congress could benefit from a few guidelines before moving forward:

  • Cover Kids First. As the GAO points out, covering adults is not the point of SCHIP, and it means that funds are being "diverted from the needs of low-income children." The Congress tried last year to put the brakes on more states adding adults to the program, but it needs to make a firm statement that the program is for kids.
  • Cover low-income kids first. Fourteen states use SCHIP to cover kids who live in families with incomes above 200% of poverty, or annual incomes of $41,300. New Jersey covers kids up to 350% of poverty — which means taxpayer subsidized health care for kids whose parents make more than $72,000 a year!

    New Jersey is a shortfall state.

  • Don't crowd out private coverage: A National Bureau of Economic Research Study looked at the first five years of experience with SCHIP in 2002 and found that "perhaps as much as half of the new SCHIP enrollment was offset by declining private coverage." In other words, a free or mostly-free government program was taking the place of private coverage. And that leads to…
  • Give parents the option to put their kids on their own policies. If a parent has the option of a policy at work that could cover dependents for relatively little, why leave this money on the table? The original SCHIP legislation made it an option to turn the SCHIP benefit into a premium assistance stipend, but the administrative process is so cumbersome that only a few states have been able to succeed in doing this. Lightening the administrative burden is essential. It's inexpensive to add children to family policies, but by making the process to difficult, private money is left on the table, and the taxpayer picks up the full tab.
  • Create new purchasing pool options for families. Congress could take President Bush up on his offer to use some of the money that is currently being sent to the states for uncompensated care to create new state purchasing pools. This could make it much simpler for states to administer a premium assistance program, and could allow working families without other sources of coverage to buy in as well.

    Private competing plans that meet the benefits test could compete to offer coverage to families, paid for by SCHIP's premium assistance, employer contributions, and worker payments. The structure of the Federal Employees Health Benefits Program (and the vision, but not the reality, of the Massachusetts Connector) could be a model.

  • Get the subsidies right: States have an incentive to add more of their citizens to SCHIP because they are paid more by the federal government for doing so. That's because the funding formulas for SCHIP are upside down. The federal government matches state spending at a higher percentage for higher-income SCHIP kids than for lower-income Medicaid children. What is wrong with this picture?

    The federal government pays an average of 70% of SCHIP costs but only 59% of Medicaid costs. This is bad policy. The federal government should provide a higher match rate for covering kids in the poorest families, and the match should scale back as their family's income rises.

    It makes no sense, for example, for New Jersey to get an SCHIP match rate of 65% for adding adults to SCHIP but only 50% for adding kids into Medicaid. Is it any wonder that New Jersey is expanding its SCHIP program? It's all about incentives.

    To protect the ability of SCHIP to serve needy low-income children and to preserve the program's core purpose of covering children, states should receive a Federal match rate that reimburses them at a higher rate for adding lower-income children to the program, with the match scaling back as they expand the program to higher-income children. And adults should not be on the children's program.

It's up to Congress now to decide whether this program will run out of control or inject real discipline and bring it back to its core purpose.



  • Distributive injustice(s) in American health care
  • The uninsured versus the insured: Who subsidizes whom?
  • Health information technology is a vehicle, not a destination: A conversation with David J. Brailer
  • Three steps to better healthcare
  • Lean new pharma
  • Treasury, IRS issue guidance helping employees transition to HSAs

Authors: Clark C. Havighurst and Barak D. Richman
Source: Law and Contemporary Problems, 01/07

Clark C. Havighurst and Barak D. Richman of the Duke University School of Law explore the "serious and systematic unfairness in the American way of financing, regulating, and dispensing health care" in a lead article for a symposium volume on distributional issues in health care. The authors write that "the U.S. health care system operates more like a robber baron than like Robin Hood, burdening ordinary payers of health insurance premiums disproportionately for the benefit of industry interests and higher-income consumer-taxpayers." They argue that these consumers "also bear excessive costs for their own health care because, not seeing the costs they bear with any clarity (since the tax system makes those
costs appear to fall on their employers rather than themselves), they demand unnecessarily costly coverage and resist efforts to economize."

Author: John R. Graham
Source: Pacific Research Institute, 02/07

The notion that the privately insured pay a "hidden tax" to subsidize the uninsured is "greatly misguided," writes John Graham of the Pacific Research Institute. Graham cites a report by Families USA that "estimates that the uninsured used about $29 billion worth of health services in 2005 that the privately insured paid for through higher premiums." The uninsured, however, are not the primary cause, writes Graham. "As a group, the uninsured voluntarily pay more than $150 billion worth of extra federal income taxes – explicit taxes which dwarf the hidden tax of uninsurance," he writes. "Because they use only half the health services, per person, that insured Americans use, the uninsured pay a kind of 'hidden subsidy' to the insured," concludes Graham. "The hidden tax of overinsurance – which the insured unconsciously levy on each other, is far greater than the relatively insignificant hidden tax of uninsurance."

Author: Arnold J. Milstein
Source: Health Affairs Web Exclusive, 02/15/07

David Brailer, former national health information technology coordinator, offers insights in this Health Affairs interview into the challenges in implementing HIT. He also addresses the crucial issue of ownership of medical records. President Bush has called for widespread adoption of electronic health records by 2014, but conflicts between health plans and providers may impede progress, says Brailer. "There is a real debate over whether health information is owned by doctors and hospitals or by consumers," he says. "We advocated for more consumer ownership, but the question remains unsettled." Health plans and providers "seem to agree that consumers should not predominantly control health information," says Brailer. Yet "two-thirds of consumers say that they carry some form of their health information in paper, a notebook, a shoebox, or maybe electronically…What matters is that 40 percent of consumers who think about health care regularly understand the importance of their information being available."

Author: Henry J. Aaron
Source: Los Angeles Times, 02/10/07

"Healthcare analysts have long deplored the linkage between health insurance and employment," writes Henry Aaron of The Brookings Institution. The president's health care proposal seeks to change that by offering a standard deduction for health insurance that would give families the opportunity to own health insurance that is portable from job to job. Aaron would prefer a tax credit instead, but adds that "President Bush's proposed fix does not go far enough…Two additional steps are necessary for genuine reform: measures to make the individual health insurance market work, and assistance to low-income households that makes insurance affordable," he concludes.

Author: Scott Gottlieb, M.D.
Source: Forbes Online, 02/13/07

AEI's Scott Gottlieb examines recent efforts by pharmaceutical companies to cut costs and finds that it "cannot help but leave the impression that the drug industry is less a growth story than an aging industrial complex readying itself for life as a regulated public utility." Although spending on research and development increased 150% from 1993 to 2004, "the regulations on development and the demands of government payers have grown far faster than those research budgets," writes Gottlieb. "In the end, this cost cutting is not a transformation strategy…These companies are treading water until they can start to grow again," concludes Gottlieb. "In this kind of regulated world, where the cost of development and the price of finished goods are increasingly controlled by the government, and where the cost of production goes up even as the selling price goes down, the drug companies will need to find additional ways to cast off more of their fixed costs to focus instead on core competencies in late development, distribution and marketing."

Source: U.S. Department of the Treasury, 02/15/07

The Treasury Department and the IRS have issued guidance "regarding how employers can rollover their health Flexible Spending Arrangements (health FSAs) and Health Reimbursement Arrangements (HRAs) to Health Savings Accounts (HSAs) for their employees."


Alternative Medicine: The Savvy Consumer's Guide to Healthcare
Greenwood Press Book Launch
Saturday, February 17, 2007, 7:00 p.m.
Lexington, KY
For additional details, go to:

The Media and Medical Science: Redefining Roles and Responsibilities
Center for Medicine in the Public Interest Conference
Wednesday, February 21, 2007, 9:00 a.m. – 5:00 p.m.
Washington, DC
For additional details and registration information, go to:

The Future Of Medicaid: Is It Sustainable, And Should It Be Reformed?
Urban Institute Event
Friday, February 23, 2007, 9:00 a.m. – 10:30 a.m.
Washington, DC
For additional details and registration information, go to:

Fair and Equitable Tax Policy: Is It the Key to Comprehensive Health Reform?
The Heritage Foundation Seminar
Friday, February 23, 2007, 10:00 a.m.
Washington, DC
For additional details and registration information, contact Rachel Oliphant at 202-608-6062 or

How Will the President's Tax Deduction for Health Insurance Work?
American Enterprise Institute Event
Monday, February 26, 2007, 9:00 a.m. – 1:30 p.m.
Washington, DC
For additional details and registration information, go to:

Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at

If you wish to subscribe to this free weekly newsletter, update your address, or be removed from our list, please send an e-mail message to The views expressed in this newsletter are the
opinions of the authors and do not necessarily reflect the views of the Galen Institute or its directors.