While Washington has been deadlocked over reauthorization of the State Children's Health Insurance Program (SCHIP), many governors and state policymakers have actively supported Congress not only reauthorizing the program but expanding it further to include uninsured children in families with incomes between 200 percent and 300 percent of the Federal Poverty Level (FPL). State lawmakers tend to be supportive of increased SCHIP eligibility largely because they see it as a way to "draw down" additional federal funding for their states.

State lawmakers need to remember that while an expanded SCHIP program might bring their states more federal dollars, those dollars are conditional on state governments spending additional tax money to match. Indeed, to take up Congress's offer of federal funding for expanding SCHIP, the states would collectively have to come up with as much as an additional $1.5 billion in the first year alone; that level of spending would rise in future years. As the SCHIP debate in Congress drags on, state lawmakers need to rethink whether asking Washington to further expand the program up the income scale is the best policy, not only for ensuring health care for children but for the health of state budgets as well.

The Cost to States of Expanding SCHIP Eligibility

Even though SCHIP is a joint federal-state program that, on average, requires states to pay a little more than a third of the program's costs, the debate thus far has focused mainly on the federal cost of expanding eligibility.[1] What have been largely overlooked are the associated cost implications for state budgets. Congress's proposal, which is set to meet another presidential veto,[2] expands the program's target eligibility level from children in families with incomes below 200 percent of the FPL [3] to those with incomes up to 300 percent of the FPL.[4] Should Congress override the President's expected veto, and states begin to draw down federal dollars to expand the program as Congress envisions, states will quickly learn that the additional federal "help" comes at the price of a corresponding increase in state taxing and spending.

In 2006, about 1.5 million children in families between 200 percent and 300 percent of the FPL did not have health insurance coverage.[5] Table 1 shows the theoretical cost to each state of expanding their current SCHIP program to 300 percent of the FPL. This estimate is generated by first multiplying the number of uninsured children in the target population in each state by the current per-child cost of that state's SCHIP program; then, applying the result to the Federal Matching Assistance Percentage (FMAP) for each state. Table 1 reports those results by state and shows that the aggregate theoretical cost to states would be an additional $740 million in the first year of the program expansion--on top of what states are already spending on SCHIP.

In actuality, states would end up covering roughly twice as many children--and at roughly twice the estimated cost--if they expand SCHIP in this fashion. An SCHIP expansion would encourage families in that income range with current private coverage to switch their children to the "lower-cost" or "free" public SCHIP coverage--a phenomenon known as "crowd-out." Indeed, in estimating the federal costs of such an expansion, the Congressional Budget Office (CBO) assumes that for every two children that gain coverage through the expansion, one will have previously been uninsured and one will have previously had private coverage--a 50 percent crowd-out rate.[6]

A recent Heritage analysis replicated the best study to date of the crowd-out effects of public health care programs, but with the added feature of disaggregating the results by family income to capture differences in the propensity of families with different incomes to substitute public coverage for private coverage when that is an option. The analysis found that among families with incomes in the range of 200 percent to 300 percent of the FPL, the crowd-out effect is between 44 percent and 51 percent.[7]

The results reported in Table 2 are generated using the same data and methodology as those reported in Table 1, except that in Table 2 the number of children gaining SCHIP coverage through an expansion includes both the number of uninsured children and the number of children who would move from private coverage to SCHIP coverage. Thus, Table 2 gives a more realistic picture of the likely scope and cost of expanding SCHIP to 300 percent of the FPL in any given state.

For example, Table 1 shows that Illinois has 52,403 uninsured children in the population targeted by the SCHIP expansion. Covering these children with SCHIP should theoretically cost Illinois about $47 million per year. However, after accounting for the crowd-out effect, the total number of newly enrolled children would likely range between 93,557 and 106,945, thus making the first-year cost to Illinois between about $84 million and $97 million.

Thus, according to a more realistic projection that adjusts for crowd-out effects, the states in the aggregate would end up enrolling about 2.7 million to 3 million more children in SCHIP as part of the proposed expansion--about twice the estimated 1.5 million uninsured children in the targeted population. Furthermore, despite federal match rates that are more generous than Medicaid, the proposed expansion would collectively add at least $1.3 billion to $1.5 billion annually to state government budgets. Also, expanding SCHIP eligibility would become even costlier over time as program costs continue to increase.

Health Care Already Challenges State Budgets

The National Governors Association and the National Association of State Budget Officers recently reported that state finance officers are deeply concerned about the growth of health care spending. According to the report, "Medicaid spending is approximately 22 percent of total state spending while all health care accounts for about 32 percent of total state spending and is the single largest portion of total state spending."[8] The Government Accountability Office also has warned that fiscal difficulties for state governments, driven by rapidly rising health care costs, will present serious challenges within the next decade.[9]

The current challenges faced by state governments are a pressing reason why policymakers should not ignore the impact that new initiatives might have on state budgets. While SCHIP is a smaller federal-state program than Medicaid, and the federal government pays a greater share of its cost, an SCHIP expansion would still require states to come up with a substantial amount of additional money in order to leverage federal dollars to cover the uninsured.

However, these costs can be avoided if Congress pursues a strong alternative to expanding SCHIP eligibility.

SCHIP Plus a Tax Credit: A Better Option for the States

The rising number of uninsured, growing health costs, and budget challenges have understandably put pressure on governors and policymakers. Although expanding SCHIP eligibility might bring additional federal dollars to states, it would not mitigate any of these pressures.

For states, the most promising alternative[10] in Congress to expanding SCHIP eligibility would be to couple a straight SCHIP reauthorization with a child health care tax credit for the same population targeted by proponents of an SCHIP expansion (children in families with incomes between 200 percent and 300 percent of the FPL). If Congress were to provide those families with a federal tax credit to offset the cost of private health insurance, children in those families would get the financial assistance they need to gain or keep quality private health insurance coverage. States would gain increased coverage among middle-income children, but without the need to expand public programs or to spend additional state tax dollars on health care.[11]

Furthermore, instead of simply substituting public programs for private insurance and increasing the cost of covering the uninsured, a tax credit would expand and preserve private insurance through direct tax relief for middle-class families. This alternative would enable states to focus their resources on uninsured children in lower-income families. It would also give states the flexibility to complement the tax credit with other state-based initiatives tailored to their particular circumstances or budget constraints.

Conclusion

State lawmakers should not be so focused on the prospect of more federal money resulting from an SCHIP expansion that they neglect to consider the costs to their states of matching those federal dollars. While an SCHIP expansion would certainly bring additional federal funding, states are likely to find themselves extending coverage to twice the number of children that are currently uninsured due to the crowd-out effects inherent in public program expansions. Because states already face fiscal challenges, a better option would be for Congress to keep SCHIP focused on lower-income children and pass a health care tax credit that could help middle-class families obtain or keep private health insurance.

Edmund F. Haislmaier is Senior Research Fellow, and Greg D'Angelo is Research Assistant, in the Center for Health Policy Studies at The Heritage Foundation.