State Children's Health Insurance Program: CMS Should Improve Efforts to Assess whether SCHIP Is Substituting for Private Insurance
Released: 2009-03-23T00:00:00

Letter

Background

SCHIP is a federal-state program that, in general, allows states to provide health insurance to children in families with incomes of up to 200 percent of FPL, or 50 percentage points above states’ Medicaid eligibility limits that were in place as of March 31, 1997. States submit plans for their use of SCHIP funds to CMS. The agency reviews and approves these plans and monitors their implementation. Within broad federal guidelines, states have considerable flexibility in designing their SCHIP programs in terms of establishing eligibility guidelines, the scope of benefits, and administrative procedures. A number of states have made use of this flexibility by expanding SCHIP eligibility to children in families with income levels as high as 350 percent of FPL.

States’ choices in structuring their SCHIP programs have important programmatic and financial implications. States have three basic options for structuring their SCHIP programs: (1) a Medicaid expansion program, (2) a separate child health program, or (3) a combination program that includes both a Medicaid expansion and a separate child health program. A Medicaid expansion program allows a state to expand eligibility levels within the state’s existing Medicaid program and requires the state to follow Medicaid rules, including those on eligibility determination, benefits, and cost sharing. States that operate Medicaid expansions continue to receive federal funds at the regular Medicaid matching rate after they have exhausted their SCHIP funds. In contrast, a separate child health program may depart from Medicaid rules, including introducing limited cost sharing and creating waiting lists for enrollment. A separate child health program only receives a defined SCHIP allotment from the federal government, and the state can limit its own annual contribution and or enrollment once funds for SCHIP are exhausted. Even programs with the same structure do not always operate in the same way. For example, Medicaid expansion programs can operate under a section 1115 demonstration waiver, which allows states to implement policies that do not follow traditional Medicaid rules. Similarly, separate child health programs can operate as “Medicaid look-alike” programs, generally following Medicaid rules but maintaining limited funding.

Federal law requires states to implement policies to minimize the potential for crowd-out. The SCHIP statute defines a “targeted low-income child” as one from a family that does not qualify for Medicaid and is not covered under a group health plan or under other health insurance. To help minimize crowd-out, states are required to implement policies that would discourage a family from dropping other private health insurance, and states must coordinate eligibility screening with other health insurance programs, such as Medicaid.

CMS has provided general guidance to the states regarding activities to minimize and monitor crowd-out. In 1998 and 2001, CMS outlined the types of activities states would need to implement to minimize and monitor crowd-out, and gave states flexibility in choosing specific activities. In August 2007, CMS issued additional guidance for states that wished to expand eligibility to children in families with effective income levels at or above 250 percent of FPL.

Most research efforts describe crowd-out as the movement of individuals from private to public health insurance. However, among these research efforts there is no universally accepted method to measure the extent of crowd-out, and as a result, estimates vary widely. One reason for this variation is differences in study type. Broadly, researchers have used population-based, enrollee-based, and applicant-based studies to measure crowd-out. Population-based studies measure crowd-out by estimating any decline in private health insurance within a population. Enrollee-based studies estimate the number of SCHIP enrollees who had insurance within a specified time frame, accounting for specific losses of private health insurance because of job loss or other circumstances. Applicant-based studies use state application data to identify the number of applicants declined for having current or prior health insurance. (See table 1.) Instead of providing a measure of crowd-out, applicant-based studies estimate the amount of crowd-out averted because of a state’s eligibility determination process.

Assessments of the potential for crowd-out must take into account an understanding of the extent to which private health insurance is available and affordable to low-income families that qualify for SCHIP. With regard to the availability of private health insurance, the extent to which private firms offer health insurance to their employees varies by state. According to the 2006 Medical Expenditure Panel Survey (MEPS), 55.8 percent of private sector firms offered insurance—either individual or family health insurance—to their employees. Across the states, the percentage of private sector firms offering individual or family health insurance to their employees ranged from 89.6 percent of firms in Hawaii to 40.1 percent of firms in Montana. Smaller firms were less likely to offer individual or family health insurance to their employees than larger firms. For example, 35.1 percent of firms with fewer than 10 employees offered individual or family health insurance, while 98.4 percent of firms with 1,000 or more employees offered individual or family health insurance to their employees. There is some evidence suggesting that the availability of private health insurance for families is declining. For example, a recent study found that from 2003 through 2007, the percentage of low-income employees offered individual insurance through their employers did not change, but the percentage of low-income employees offered family health insurance decreased from 71.1 percent to 63.6 percent.

With regard to affordability, MEPS looks at the amount that individuals paid annually in order to obtain private health insurance. The national average annual premium—which includes both employee and employer contributions—for a single employee was $4,118 and for a family was $11,381. Premiums also showed some variation by state, ranging from $3,549 in Hawaii to $4,663 in Maine for an individual, while premiums for family health insurance ranged from $9,426 in Hawaii to $12,686 in New Hampshire.

When viewed by household income level, households at higher income levels were more likely to be offered health insurance—either individual or family health insurance—through their employers. For example, employed households with incomes less than 300 percent of FPL were less likely to be offered health insurance than households earning more than 300 percent of FPL. (See fig. 1.)

In addition to employers offering health insurance, the costs of such insurance play an important role in the extent to which individuals accept such insurance. Based on an analysis of MEPS, lower-income households paid less for insurance premiums—either individual or family health insurance—than did households with higher incomes (see fig. 2). However, the estimated premiums paid by lower-income households constituted a larger percentage of the total income for these households (see fig. 3).

CMS Provided Guidance to States on Crowd-Out; Information It Collected Was of Limited Use in Assessing the Extent to Which Crowd-Out Should Be a Concern

CMS provided guidance to states regarding activities to minimize crowd- out in SCHIP, and the information it collected was of limited use in assessing the extent to which crowd-out should be a concern. In issuing guidance to states, CMS instituted specific requirements for program designs the agency identified as being at greater risk of crowd-out, including programs with higher income eligibility thresholds. CMS officials told us that they reviewed states’ SCHIP annual reports, analyzed national trends in public and private health insurance, and commissioned studies on SCHIP, and on this basis believed crowd-out was occurring. However, each of the approaches CMS used was limited in providing information on the occurrence of crowd-out and the extent to which it should be a concern. In particular, CMS did not collect certain indicators in the SCHIP annual report—such as whether applicants’ employers made private health insurance for families available and at what cost to the applicant— that could help show the potential for crowd-out. Moreover, information CMS did collect was not provided consistently by states.

CMS Established Specific Requirements for Certain SCHIP Program Designs

CMS established specific requirements for SCHIP program designs it identified as being at a greater risk for crowd-out. In issuing the SCHIP final rule, CMS outlined broad regulatory requirements regarding substitution of private health insurance with SCHIP and stated that it planned to incorporate additional flexibility into its review of state plans in this area. CMS could not apply eligibility-related crowd-out prevention requirements to Medicaid expansion programs except those operating under an 1115 demonstration waiver. CMS did outline specific requirements for separate child health programs with higher income eligibility levels, explaining that there is a greater likelihood of crowd-out as incomes increase. For example, the agency required separate child health programs at all eligibility thresholds to monitor crowd-out, and it required states with SCHIP eligibility thresholds from 201 to 250 percent of FPL to implement policies to minimize crowd-out should an “unacceptable level” of crowd-out be detected. CMS officials told us that they did not define an “unacceptable level” for all states, but rather negotiated with states individually. CMS viewed waiting periods as a policy to minimize crowd-out; therefore, states with waiting periods were not required to monitor for an “unacceptable level” of crowd-out, and only three states currently do so. CMS also required that states institute a number of requirements for premium assistance programs, including a waiting period. (Table 2 provides examples of program designs for which CMS provided specific guidance.)

In a letter issued on August 17, 2007, CMS provided specific guidance on crowd-out for states operating separate child health programs above 250 percent of FPL, but implementation of the requirements in this guidance has been suspended. In this letter, CMS outlined specific activities states with separate child health programs should use to minimize crowd-out if they wish to cover children with effective family incomes above 250 percent of FPL. Among other things, these activities included a 12-month waiting period, a cost-sharing requirement, and efforts to prevent employers from changing health insurance offerings that would encourage a shift to public programs such as SCHIP. The letter caused states to raise a number of concerns, including those about the potential effect on current enrollees, and we have reported concerns regarding the issuance of this guidance. In a memorandum dated February 4, 2009, for the Secretary of Health and Human Services, the President directed that the August 17 letter be withdrawn immediately.

Approaches CMS Used Did Not Address All Information Important to Assessing the Extent to Which Crowd-Out Should Be a Concern

CMS reported using a variety of approaches to assess the occurrence of crowd-out in SCHIP, including reviewing states’ SCHIP annual reports, national estimates, and CMS-commissioned studies. From this information, CMS officials said they believed that crowd-out was occurring and that the potential for crowd-out was greater at higher income levels. However, the approaches CMS used provided limited information on the occurrence of crowd-out and thus the extent to which it should be a concern.

The questions on crowd-out that CMS asked states to answer for their annual reports did not collect certain indicators of the potential for crowd- out, such as the extent to which SCHIP applicants were offered private health insurance for their families through their employers. In the annual reports that states must submit, CMS requires states to report the “incidence of substitution” in their state by calculating the percentage of applicants who drop private health insurance to enroll in SCHIP; however, CMS did not specify how states should calculate this incidence. While this question measures the number of SCHIP applicants who were enrolled in private health insurance and decided to take up SCHIP, it does not include SCHIP applicants who had private health insurance available through their employers but never enrolled. It also does not provide information on changes in insurance status, such as the extent to which SCHIP recipients gain access to private health insurance but remain enrolled in SCHIP. In addition, CMS does not specifically require states to provide information in their annual reports on the affordability of private health insurance available to SCHIP applicants.

CMS has recently updated the requirements for the information that states must provide on crowd-out in their 2008 annual reports. For example, states will be expected to include more information on SCHIP applicants’ insurance status. Whereas states have previously been required to report only the percentage of applicants who have other insurance, CMS plans to require states to provide the percentage of applicants who have Medicaid and the percentage of applicants who have other insurance. In addition, CMS plans to require that states with waiting periods report on the percentage of applicants who meet exemptions to the waiting period. While these questions are useful from an eligibility standpoint, they still do not account for applicants who were offered private health insurance for their families through their employers but did not take it up. These questions also do not address the extent to which available private health insurance is affordable to the SCHIP population.

CMS’s information on the occurrence of crowd-out is also limited because states did not consistently provide the information that CMS requested in their annual reports (see table 3). We reviewed SCHIP annual reports from 2007 for state responses on the percentage of applicants who dropped private health insurance to enroll in SCHIP and found that less than half of the 51 states provided a percentage in response to CMS’s question. Of those states providing a percentage, 7 states answered the question directly, with 1 reporting no crowd-out and the remaining 6 reporting an incidence of crowd-out of 1 percent or less. Two of the states reporting an incidence of less than 1 percent also reported this number for the percentage of applicants who had insurance at the time of application. Forty-one states provided a response related to what they knew about the insurance status of applicants, provided descriptive responses, or reported that data were not available. Three states did not answer this question in their annual reports.

CMS officials told us that in cases where states had missing or incomplete responses to questions in the annual report, the agency allowed states to address these questions in the next year’s report. CMS officials also noted that states used different data sources when analyzing crowd-out. For example, they said that some states used surveys to measure crowd-out, while others relied on data collected through application questions.

In addition to reviewing state annual reports, CMS officials told us that they used national data to assess the occurrence of crowd-out. Specifically, they said that they used the Current Population Survey and CMS enrollment data to track changes in public and private health insurance over time. While this type of analysis can account for broad trends in changes in insurance usage, it cannot account for the reasons for these changes. For example, it cannot isolate whether an increase in public insurance resulted from crowd-out or an unrelated decline in the availability of private health insurance.

CMS officials told us that they commissioned two studies to look at the issue of crowd-out in SCHIP. However, the results of these studies did not provide a clear sense of whether crowd-out should be a concern. A 2003 study provided information on states’ early experiences with SCHIP based on state annual reports from 2000. The study reported that states’ estimates of crowd-out in SCHIP ranged from 0 to 20 percent, but cautioned that state data must be interpreted carefully because of a number of factors, including the limited experience upon which states based their estimates. A 2007 study assessed the SCHIP program, and included a background paper on crowd-out. The background paper synthesized evidence on the occurrence of crowd-out in SCHIP and concluded that while the evidence suggested that crowd-out occurred, the magnitude of the occurrence ranged widely—from 0.7 to 56 percent— depending on how crowd-out was defined and measured. The study commented on the strengths and weaknesses of various ways to define and measure crowd-out, but it did not indicate a preference for any specific methodology.

States Used Similar Types of Policies to Minimize Crowd-Out, but Not All Collected Adequate Information to Assess whether Crowd-Out Should Be a Concern

In general, states implemented similar types of policies in their activities to minimize crowd-out, but not all states collected information adequate to assess whether crowd-out should be a concern. States’ policies largely sought to deter individuals from dropping private health insurance. Officials we interviewed in the nine sample states generally believed that their policies were effective in minimizing crowd-out. However, little evidence existed to confirm this belief. Less than half of states investigate whether applicants had access to private health insurance, which is key to understanding the extent to which crowd-out should be a concern.

States Used Similar Types of Policies to Minimize Crowd-Out, but Little Is Known about Their Effect

Forty-seven states used one or more policies to minimize crowd-out. These policies deter individuals from dropping private health insurance in order to take up SCHIP. Our analysis found that waiting periods—required periods of uninsurance before applicants can enroll in SCHIP—were the most common policy states had in place to minimize crowd-out; premiums and other types of cost sharing were also frequently used (see fig. 4). As expected, these policies were more common in separate child health and combination programs than in Medicaid expansion programs operating with 1115 demonstration waivers. A waiting period is meant to discourage individuals from dropping private health insurance. Premiums and other types of cost sharing are used in SCHIP to narrow the cost difference between SCHIP and private health insurance, thereby reducing the likelihood that lower out-of-pocket costs for SCHIP will attract individuals who already have other health insurance. Ten states reported having premium assistance programs, where states used SCHIP funds to pay premiums for private health insurance sponsored by employers. In contrast to CMS’s view that premium assistance programs could raise concerns about crowd-out, 5 states reported that such programs were a policy to prevent crowd-out. One state reported instituting a policy directly aimed at affecting employer behavior. This state made it an unfair labor practice for insurance companies or employers to encourage families to enroll in SCHIP, for example, through changing benefit offerings, when the families already have private health insurance.

Thirty-nine states had waiting periods, and they varied in length. The most common waiting period length was 3 or 6 months (see fig. 5). At least 2 of the 39 states reduced their waiting periods after concluding that crowd-out was not a significant problem and that the original waiting period length was unnecessarily long.

All 39 states with a waiting period included exemptions designed to account for instances where a child involuntarily lost private health insurance. These exemptions were mostly related to the availability rather than the affordability of insurance (see table 4). Exemptions varied among states, but the most common exemptions were for a change in job status that led to a loss of private health insurance, a change in family structure, and exhaustion of health insurance provided through the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). CMS does not require states to consider issues of affordability in developing exemptions, and just over 10 states provided an exemption specifically for economic hardship, that is, if private health insurance makes up too much of a family’s income.

SCHIP officials in the nine sample states generally believed that their policies to minimize crowd-out were effective but did not cite any specific data to support their assessment. Officials from these nine states generally reported that waiting periods, outreach efforts to inform applicants about program requirements, and premiums and other cost-sharing mechanisms were successful policies to minimize crowd-out. Officials in four of the states also noted that these policies may have unintended consequences, such as limiting families’ access to insurance.

Among the nine states in our sample, seven states reported no immediate plans to change their policies to minimize crowd-out, while two states were considering reducing the requirements in place regarding waiting periods. Officials from one of the two states said that they are considering reducing the state’s waiting period. Officials from the other state wanted to add an economic hardship exemption to the state’s waiting period.

Our analysis of previous research found few studies that estimated the effect of different policies on minimizing crowd-out, but those that did primarily focused on waiting periods and cost sharing. These studies concluded that waiting periods and cost sharing can have negative effects on individuals’ participation in SCHIP. These studies also suggested that policies to minimize crowd-out may deter SCHIP enrollment by eligible uninsured children at a faster rate than they deter use by individuals who have private health insurance. However, little is known about how variation in policies, such as the length of a state’s waiting period, affects efforts to minimize crowd-out.

Not All States Collected Information Adequate to Assess Whether Crowd- Out Should Be a Concern

All 51 states monitored crowd-out by asking applicants questions about whether they had private health insurance, but fewer states asked whether applicants were offered health insurance through their employers—a key piece of information in understanding whether crowd-out should be a concern.

All 51 states asked applicants if they were currently insured, and 44 of the 51 states asked applicants whether they had been insured in the past. Twenty-four states asked applicants about their access to private insurance. Of these 24 states, 15 states asked applicants if they had access to any private health insurance and 9 states asked applicants if they had access to specific types of private health insurance (such as through state or school employment). The remaining 27 states did not ask questions to determine whether applicants had access to private health insurance through their employers.

The majority of states made efforts to verify applicants’ responses to their questions about insurance. Twenty-five states used a database to verify applicants’ enrollment in private health insurance, 14 states verified applicants’ responses with employers, and 7 states used both. States conducted verification of insurance most frequently at the time of application, although about half of the states verified insurance status at eligibility renewal or at other regular intervals. (See table 5.)

Twenty-nine states used databases at some point to verify individuals’ enrollment in private health insurance; however, there were differences in the databases used. The database sources states used included (1) databases from private insurance companies, (2) databases run by third-party administrators, and (3) databases that were maintained by the states. The databases also varied in the scope of insurance information they provided. For example, some databases included information on the majority of the population with private health insurance in a state, while other databases were more limited, such as those for state employees. While all of the databases verify insurance status, they do not determine whether individuals have private health insurance available through their employers but did not make use of it for their families.

Another way states often verified insurance status was by checking with individuals’ employers—which could allow a state to determine whether the individuals had private insurance available to them. We identified 18 states that used various approaches to verify insurance status with employers at some point. Generally, the states asked whether (1) the individual was insured, (2) the individual had access to employer insurance, and (3) the individual paid out-of-pocket expenses for private health insurance. Other differences included the number of individuals states verified insurance status for and how employer information was collected. For example, at least 2 states only verified insurance status with employers if they found evidence that an individual might have private health insurance available through an employer, such as a pay stub showing that wages were deducted for health insurance premiums. Another state reported that it verified the availability of private health insurance through (1) an annual survey sent to all employers in the state and (2) an individual questionnaire sent to the employers of specific applicants and enrollees.

The nine states whose officials we interviewed varied in the extent to which they measured crowd-out, with five states providing some estimate of crowd-out and four states reporting that they could not estimate it at all. The five states that did measure crowd-out developed their estimates differently. Officials from one of the five states based their estimate on the number of applicants who did not meet the eligibility criteria for SCHIP because they were enrolled in other insurance. However, this estimate measures how successful the state was in avoiding the inappropriate use of SCHIP rather than crowd-out. Officials from the remaining four states based their estimates on the number of individuals who dropped insurance for reasons that—by their states’ definitions—constituted crowd-out. For example, one state included in its estimate of crowd-out circumstances in which families had private health insurance available but dropped it because it was unaffordable, while another state explicitly excluded this reason from its estimate.

None of the officials in our sample of nine states viewed crowd-out as a concern, with most basing this assessment on a variety of indicators, including the availability and affordability of private health insurance for the SCHIP population in their state. Six states told us that private health insurance was not readily available and three other states believed that where insurance was available it was not affordable. Another state referred to the small number of SCHIP enrollees at its highest eligibility level—from 250 to 300 percent of FPL—as indicating a low potential for crowd-out.

Conclusions

Understanding the potential for crowd-out is a complex task that begins with understanding the extent to which private health insurance is available to children in families whose incomes make them eligible for SCHIP. SCHIP is designed to offer health insurance to eligible children who would otherwise be uninsured, not to replace private health insurance. For crowd-out to occur, private health insurance must be available to low-income families who qualify for SCHIP, and these families must find such insurance affordable. CMS and the states differ in their views on whether crowd-out is a concern for SCHIP, yet the information on which both base their views is limited in providing a basis for assessing the occurrence of crowd-out.

CMS’s guidance to and reporting requirements for states provide limited information on the extent to which crowd-out should be a concern. While precise measurements of crowd-out are difficult, certain indicators could help improve assessments of the extent to which crowd-out should—or should not—be a concern. In particular, asking SCHIP applicants who work whether they are offered private health insurance for their families through their employers could provide an initial assessment of the extent to which private health insurance is available to these individuals and thus better assess whether concerns about crowd-out are warranted. For low- income working families, the affordability of available private health insurance is also important in determining whether crowd-out should be considered a concern. However, CMS does not currently have this information, as states are not required to collect and report it. Information about the availability and affordability of private health insurance could help ensure the best use of SCHIP funds and help determine the future funding needs of this important program.

Recommendation for Executive Action

To improve information on whether crowd-out should be a concern in SCHIP, we recommend that the Acting Administrator of CMS refine CMS policies and guidance to better collect consistent information on the extent to which applicants have access to available and affordable private health insurance for their children eligible for SCHIP. Such actions should include ensuring that states collect and report consistent information on the extent to which SCHIP applicants have private insurance available to them and take appropriate steps to determine whether available private health insurance is affordable for SCHIP applicants.

Agency Comments and Our Evaluation

CMS reviewed a draft of this report and provided written comments, which are reprinted in appendix I. In addition to comments on our recommendation, CMS provided us with technical comments that we incorporated where appropriate.

Overall, CMS concurred with the report’s findings, conclusions, and recommendation. CMS commented that the issue of crowd-out is complicated and that assessing or measuring it is difficult because of variations in definition and methodologies for assessing its occurrence. CMS agreed that the availability and affordability of health insurance are relevant issues in reviewing crowd-out. They also agreed with our recommendation, stating that information on the availability and affordability of health insurance from states would be extremely helpful in evaluating the potential for crowd-out.

CMS also listed a number of concerns in response to our recommendation about the collection and submission of additional information related to the availability and affordability of private health insurance. CMS stated that the reliability of any information states collect from applicants about the availability or affordability of private coverage would be suspect if it were self-reported. However, our work found that much of the information currently collected by states and submitted to CMS on applicants’ insurance status, which is used for eligibility determinations, is also self- reported by applicants. Moreover, our work shows that the majority of states take steps to verify this self-reported information. Thus, the use of self-reported data is not unusual and collecting such data could help CMS make an initial assessment of the extent to which private health insurance is available and affordable. With these data, CMS could better assess whether concerns about crowd-out are warranted.

CMS also noted that there is currently no national definition of affordability and that it does not believe it would be appropriate for the agency to develop one because of the diversity of states’ economies and health insurance markets, as well as the flexibility that is a key tenet of SCHIP. Further, CMS commented that its existing definition of a targeted low-income child does not specify that children only receive SCHIP if private health insurance is not affordable. We agree that CMS should not be responsible for devising a national standard of what is considered affordable within a state. We believe that states are in the best position to make such a determination, and as noted in our report, some states already make such designations in their assessments of an individual’s access to private health insurance.

Finally, CMS commented that because of the administrative and reporting burdens that would be associated with additional data reporting, the agency would need to provide states with opportunities to discuss the changes needed to collect and report this information. We agree that such steps may be necessary. We also note that CMS recently updated questions in its SCHIP annual report template to help ensure that states are collecting and reporting necessary information related to crowd-out. Thus, the administrative efforts associated with additional information collection and reporting are well within the scope of CMS’s responsibility.

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If you or your staff have any questions about this report, please contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II.

Appendix I: Comments from the Centers for Medicare & Medicaid Services

Appendix II: GAO Contact and Staff Acknowledgments

Acknowledgments

In addition to the contact named above, Carolyn Yocom, Assistant Director; Kristin Bradley; William Crafton; Kevin Milne; Elizabeth T. Morrison; Rachel Moskowitz; and Samantha Poppe made key contributions to this report.