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SCHIP: Why Pay When You Can Get It For Free?

Opinion Editorial
September 9, 2007

By Linda Gorman

People supporting substantial expansions in government health entitlement programs like SCHIP, Medicaid, and state run insurance pools should be interested in some new results on crowd-out, the term used to describe the fact that expansions in government health programs encourage people to stop paying their own way.

Using a variety of specifications on data from the Survey of Income and Program Participation, which more accurately measures the number of long-term uninsured than the Census bureau survey numbers just released, economists Jonathan Gruber and Kosali Simon sought to determine how many people dropped private health insurance in order to enroll themselves or their children in the SCHIP expansions that occurred between 1996 and 2002. They found that “making more of the family eligible for public insurance lowers private insurance coverage at a much more rapid rate than it raises public insurance take-up.”

Their estimates of crowd-out range from 24 to 37 percent when individual coverage is measured, to 78 to 81 percent when measures of family eligibility are adjusted to account for differences in state insurance trends. They regard 61 to 68 percent crowd-out as their central estimate. This means that out of every 100 people who sign up for a state SCHIP expansion, roughly 65 have dropped private insurance to do so.

In short, SCHIP is not an effective program unless one wishes to increase dependence on government and reduce the size of the private sector.

Gruber and Simon also have some interesting things to say on why the percentage of uninsured Americans has stayed roughly the same despite decades of government programs with the declared purpose of reducing it. The share of people who are not elderly and who are enrolled in public insurance programs rose from 13.7 percent in 1984 to 17.8 percent in 2004. Despite unprecedented expansions in public “insurance” programs, the fraction of the non-elderly without health insurance rose from 13.7 percent to 17.5 percent. The share of non-elderly people with private insurance fell from 70.1 percent to 62.4 percent during the same period.

Putative health reformers on the left have historically interpreted these numbers as proof that the mixed public private U.S. health care system is so expensive, and so broken, that the rising tide of uninsured has swamped all attempts to do anything about it. If follows that the entire U.S. system needs to be remodeled along the lines of the even more broken and dysfunctional government controlled systems in the rest of the industrialized world.

The Gruber and Simons results suggest an alternative conclusion. It is possible that the huge expansion in government health care programs has caused the fall in the number of privately insured. When rational people hear about free care at emergency rooms and clinics and know that they can apply for Medicaid anytime they need really expensive health care, they conclude that only suckers would continue to pay their own money for something that is free.