Health Policy for Children Af ' fected by the Family Support Act of 1988 : Economic Issues

A desire to decrease the number of children who lack health insurance and to decrease the percentage of families dependent on welfare for their livelihood is leading to attempts to free Medicaid eligibility from welfare participation. The Family Support Act of 1988 requires that, beginning in April of 1990, families that lose AFDC eligibility owing to earnings increases remain covered by Medicaid for up to 12 months. This paper analyzes anticipated effects of this Medicaid extension, including the probability of insurance coverage for the target population and the influence of such coverage on medical care utilization and health status. The analysis uses the 1984 wave of the SIPP data. Two alternative strategies are offered for providing health insurance in ways that may have longer-run gains. Health Policy for Children Affected by the Family Support Act: Economic Issues Among the large number of children in this country who are poor--12.8 million in 1987, according to Census Bureau figures--are many who receive more limited health care yet have more health problems than their higher-income ~eers. ' Private health insurance covers much of the health care enjoyed by more affluent children, while most poor children either have no coverage or are publicly covered under Medicaid. Relying on Medicaid to finance medical care for the poor has several problems: (1) not all poor families are eligible for it, and health care for those not covered is sometimes not received or is postponed; (2) quality of care received may be impaired by the inefficiencies that result from using different care-givers rather than a regular, nonemergency room provider; (3) Medicaid may reduce the labor force participation of poor parents by providing an inducement to receive public assistance, and along with it Medicaid benefits, rather than work. A provision of the Family Support Act of 1988 attempts to redress the last problem in particular by extending, for a limited period of time, Medicaid coverage to families that lose eligibility because their earnings increase. The effects of this change in Medicaid coverage can be studied by addressing several types of research questions: How many children who would previously have gone without coverage will be covered under the Medicaid extension? Are they older or younger children (under or over age 9)? How does the extension influence utilization of medical care? As a consequence of the Act, are women more likely to accept jobs that do not offer health care coverage? Will their wages tend to be higher than before the Act? What is the potential for receiving private coverage when the Medicaid extension 2 expires? What will be the response by those eligible if the state exercises its option to charge an income-conditioned premium during the second half of the period of extension? This paper anticipates some of the answers to these questions. It first describes the nature of Medicaid coverage and the current insurance coverage of the general target population of the Family Support Act. It then considers the expected impact of the Act, discussing the link between insurance coverage and health. Alternative strategies for providing coverage to the target population of the Act are presented as well. COVERAGE OF CHILDREN UNDER MEDICAID Medicaid is a joint federal-state public health insurance program that finances medical care for certain categories of people: low-income persons who are aged, blind, or disabled; members of families eligible to receive Aid to Families with Dependent Children (AFDC); and certain other low-income pregnant women and children. The majority (68 percent) of Medicaid recipients are on AFDC, and children make up about 40 percent of all Medicaid recipients. AFDC eligibility depends on state rules, which differ widely in income eligibility limits and in the nature and scope of Medicaid coverage. To be eligible, a family must have income below 185 percent of a standard of need, determined by the state. Standards vary to a considerable degree: for example, in 1989 for a family of three in Kentucky the standard was $218 per month, but in Illinois it was $740 per month (U.S. House of Representatives, 1988, p. 539). ' As a result, more than half of all children in families who are poor according to the Census Bureau 3 definition are not covered by Medicaid. The situation of poor children deteriorated significantly between 1970 and 1987. ~ Many states also have a program for the "medically needy," covering those who are in the categories eligible to receive welfare benefits but who have incomes before medical expenses that are somewhat above the state AFDC eligibility limit. To qualdy, their incomes after deduction for medical expenses must be below the cutoff for welfare benefit^. ^ About 12 percent of Medicaid payments for female family heads and their children are for the medically needy. As a result of this structure of eligibility, 25 to 40 percent, or between 9.5 and 11 million, of poor families are without health insurance. ' Among all children living in families below the poverty line, over 50 percent are covered by Medicaid, about 17 percent have private coverage, and the rest, about 30 percent, are ~ninsured. ~ Medicaid has grown as a percentage of the total welfare benefit package, increasing the likelihood that persons are attracted onto AFDC to obtain its benefits: and also that, once on AFDC, they have an incentive to remain there. An extensive literature on AFDC and Food Stamps finds strong evidence that these means-tested benefits reduce work effort (see Moffitt, 1988, for a review of this literature). There is far less evidence on Medicaid. The one published study (Blank, 1989) does not find a sigmficant incentive effect, but a study recently completed (Moffitt and Wolfe, 1989), which develops an index of the value of Medicaid for each family, finds strong evidence that Medicaid is an inducement to enter the welfare rolls. The effect is concentrated 4 among those families whose members have health problems and is more an incentive to enter AFDC than to stay on it.8 relations hi^ of Coverage to Utilization of Health Care Another drawback to present coverage under Medicaid concerns various aspects of utilization. There is evidence that, controlling for health status, persons with either private or public health insurance are more likely to use medical care than those not covered: children in poor families that receive Medicaid have as many check-ups and immunizations on average as middle-income children, but poor children not covered do not.9 However, children with Medicaid do not receive care in the same locations as higher-income children with private insurance. Under Medicaid, care is more often received in health clinics, hospital emergency rooms, or outpatient clinics than in private doctors' offices. This pattern tends to reduce continuity of care, which in turn is believed to reduce the quality of care received. Among children whose families go on and off Medicaid rolls, care tends to be received in hospitals, accentuating the problem of continuity and raising the costs of care in real terms relative to care in private settings. '' Children covered by Medicaid rarely use private care, in part because of the low reimbursement rates paid by Medicaid in a number of states. This problem has in recent years grown more severe, as Medicaid fees increased very little during the 1980s while private physicians' fees continued to rise. " A number of private physicians will consequently not provide care to those covered by ~ed ica id . '~ Since emergency room care is more expensive than the care given by private providers, present expenditures on 5 Medicaid may exceed even those that would result from a modest increase in reimbursement rates. Paying attention to utilization is important because it is thought to be connected to health status, although the link is difficult to establish since health is difficult to measure. Infant mortality rates provide one means to do so, but are a very limited measure of differences in health. In some cases, however, the link appears strong. A recent followup study of about two hundred patients who lost eligibility for Medicaid in California showed a decline in health status, as measured by mortality and health problems, in comparison with a control group that maintained eligibility (Lurie et al., 1984). Recent results from the Health Insurance Study conducted by the Rand Corporation found only marginal effects from greater use of medical care, but the study compared groups with varying levels of insurance rather than those with full versus no coverage, which is more likely the circumstance of a family that loses Medicaid coverage. CURRENT COVERAGE OF THE TARGET POPULATION For purposes of the Family Support Act and of this paper, the target population consists of single mothers and their children. Based on data collected in a four-month period during winter and spring of 1984 in Wave 3 of the Survey of Income and Program Participation (SIPP), Robert Moffitt and I have estimated that approximately 12.9 million children live in such families. Of them, 58.4 percent live in families with income below the poverty line, and another 23 percent live in families with incomes between one and two times the poverty line--the "nearly poor. " About half of these children have fair 6 or poor health, according to reports by their mothers, and the other half are reported to have good or excellent health. Those in poor or fair health are more likely to live in families with incomes below the poverty line than those in better health.13 Examination of the insurance coverage of these children indicated that 24.6 percent, about a quarter of this population, had no insurance coverage, just over 40 percent had Medicaid coverage, and slightly more than a third (34 percent) had private coverage. Another 1.1 percent had both private and Medicaid coverage over the fourmonth per