What Annapolis Won’t Say About Kidcare: Medicaid Plan Would Cost Big, Cover Little

A “State Child Health Insurance Program,” called the S-CHIP, was included in the 1997 federal budget. This assistance program provides states with federal funds to extend coverage and services to uninsured, low-income children. It appropriates specific sums for each of fiscal years 1998 through 2007, which the states can obtain through a matching process similar to that found in the Medicaid program. Maryland can expect approximately $300 million over the next five years, with a required match of 35 percent.1 This is a more favorable rate than Medicaid, which requires a 50 percent state match.

The federal government allows participating states considerable flexibility in implementing this new children’s health program. The states may devise it more or less as they please. So one vital decision for policy makers is whether to use the new federal moneys to expand Medicaid or, instead, to create an altogether different program. Maryland has until March 31, 2000 to submit a plan of action.

Current Status

Right now, there are an estimated 200,000 children in Maryland without health insurance at any one time.2 But not all of these children are poverty-stricken or without options under the current system. Approximately 40,000 of them live in families with annual incomes of $40,000 or more, families that could obtain catastrophic health-insurance coverage for a relatively small proportion of their income. Another 20,000 or so have parents with insurance, though for various reasons the coverage does not extend to the children, despite the relatively low cost of adding them. (The average cost of adding two children to adults’ health policies is usually about $1,350.)3 Then there are about 60,000 children already eligible for Medicaid, only their parents have not applied. Approximately 14,000 children lack coverage for a month or so at any given time because income fluctuations force their parents to move in and out of Medicaid. Finally, about 20,000 children are uninsured because their parents are temporarily unemployed. That leaves 45,000 to 50,000 who may be called the “hard core” of uninsured children.

Maryland’s Medicaid program is already very generous. Children in Maryland are eligible for Medicaid up to a family income of 185 percent of the federal poverty level (FPL).4 A family of four at 185 percent of FPL earns about $28,000 a year. The precise eligibility thresholds by age are shown on table 1.5 Though eligibility appears to diminish with age, in fact eligibility for children aged 1 to 14 is boosted up to 185 percent of FPL through a special Medicaid-like program in Maryland called Kids Count, which uses federal money to make primary-care services available to these children.6

This is important because the new federal law creating the children’s health-insurance program has a “maintenance of effort” clause, known as an MOE in Washington. The MOE prevents Maryland from backtracking; that is, from tightening the eligibility requirements for regular Medicaid in order to put those kids already covered by Medicaid into the new program (thus making them eligible for the new money at the more favorable matching rate). It is currently unclear if, for children aged 1 to 14, the U.S. Health Care Financing Administration (HCFA) will recognize Maryland’s Kids Count 185 percent FPL eligibility level or the lower thresholds at which children receive regular Medicaid.

The Maryland Department of Health and Mental Hygiene (DHMH) has made an estimate of the number of uninsured children in the state eligible to participate in the new program if eligibility is permitted up to 200 percent of the FPL – roughly 60,000 children. The Glendening administration envisions a Medicaid expansion up to this level. While it might be possible to raise eligibility to 235 percent, at least for some age groups, the administration has not proposed this, quite possibly because its proposed method of coverage – an expanded Medicaid program – is so expensive.7

A Bad Idea

The conventional wisdom in Maryland, among some health officials and especially in the Glendening administration, is to use the new federal money to expand the current Medicaid program (now called HealthChoice). This is a bad idea for several reasons.

First, by expanding Medicaid, fewer children will be covered. Medicaid artificially inflates the cost of insurance due to the tremendous expense of the federal and state mandates requiring certain benefits to be included in the package. With a finite amount of money and a higher unit cost, the number of low-income children who can be offered insurance must decrease. It is that simple.

Federal Medicaid law requires that states provide beneficiaries with a generous set of benefits. It is unclear how worthwhile some of these benefits really are. The effect of federal mandates is to make the cost of insurance 10 percent more expensive relative to what is offered in the commercial insurance market.8 On top of this, the State of Maryland requires additional benefits to be included in its Medicaid package, raising the cost by another 22 percent.9

The result of these mandates is to make a child’s health plan under Maryland Medicaid approximately $700 more expensive than a similar package bought commercially. DHMH estimates that a Medicaid package for a child under age 1 will cost $3,400 annually and, for older children, about $1,300 annually.10 If a commercial policy in Maryland is approximately $700 less, then the extra Medicaid cost represents almost a doubling of that figure for older kids. So if Maryland went outside of the Medicaid system, it could save enough money to insure 30-40 percent more children.

Crowd Out

A second inevitable result of expanding government coverage will be the overwhelming temptation for parents and employers simply to shift the burden of providing children’s health insurance to government. This will escalate taxpayer costs without necessarily helping the uninsured. Parents will drop their children’s coverage at work and allow Medicaid to pick up the tab (a phenomenon known as “crowd out”). A considerable amount of public money will be used up to insure children who really do not need the assistance at all.

For example, take a parent making $30,000 annually with two children covered through a private plan at $900 apiece (total of $1,800). If the parent decides to shift to Medicaid, she and the employer can split the $1,800 in the form of higher wages and greater profit while the government takes on the responsibility for the children. Under the governor’s proposed scheme, the parent and the employer would have every incentive to do this.

There is precedent. In 1986, both Congress and the states began a series of Medicaid expansions. The result is that Medicaid now covers a larger portion of the population. In 1987, a full 73.2 percent of children received their health insurance through their parents’ private insurance, while just 15.5 percent were covered under Medicaid. By 1995, well after the end of the recession, only 66.1 percent had private insurance, while 23.2 percent were enrolled in Medicaid. Meanwhile, the total number of uninsured Americans increased during this period from 13.1 percent to 13.8 percent.11 So the burden of coverage had simply shifted to the taxpayer, without tackling the problem of the uninsured.

Entitlement Mentality

Private insurance is not an entitlement. Medicaid is. This means that any individual who meets the income standards for Medicaid is entitled to receive benefits. This is true even if funds for the children’s health-insurance program are exhausted or if, in an economic downturn, the state budget is cramped. In this way, the potential cost of insuring children is much greater than the cost of Maryland’s match. If the eligible population remained constant, but funds did not, the courts might demand that the funds be raised even if it meant increasing taxes. To be absolutely precise, while a Medicaid expansion under Title XIX of the Social Security Act (traditional Medicaid) is an entitlement, a Medicaid expansion under Title XXI (the new S-CHIP program) would technically not be. It is, however, quite possible that the courts in the future might rule it to be an entitlement.

To make matters worse, after Maryland’s federal allotment of dollars for the new program is exhausted, the state remains eligible for federal support only at the less favorable matching rate of 50 percent. The Glendening plan would thus be the classic example of the false promise of temporary federal program dollars: After a few years of funding, state taxpayers are left holding the bag.

A Better Plan

For those children already in Medicaid, allow them to remain in Medicaid up through age 18. This is not because Medicaid has a smooth and well-run administrative apparatus. It is simply that it is easier for parents in this income category to work with one insurance arrangement. It is confusing for parents to have children moving in and out of different plans as they grow older or to have multiple plans in one family because the children are all at different ages.

For those children not now covered by Medicaid, a private-sector approach would form the basis of the new program. This would include the establishment of a private non-profit corporation similar to Florida Healthy Kids Corporation, where health plans are provided through eligible providers such as commercial insurance plans and HMOs. Through this corporation, children’s insurance would be subsidized for two populations: (a) those who had parents covered at work and (b) those whose parents were uninsured, whether because their employers did not offer coverage or because, as part-time employees, they could not obtain coverage.

Those Already Covered

One problem in helping the working population is that parents who already scrimp to cover their children in a group plan would not be eligible to participate in the new program. This would seem an injustice to parents who had made a considerable financial sacrifice to insure their children – while those not making the sacrifice would be eligible. For those children already in employer plans, the effort should be made to assist their parents in keeping the children enrolled in the work-based group plan.

A second problem would be “crowd out,” if not tackled properly. The new program should be designed so as to prevent parents from simply dropping their children’s coverage at work, taking higher wages and asking the state to carry the responsibility of insuring their children. Some states have decided to handle this problem by requiring children to be uninsured for a period before becoming eligible. For example, in California, the wait is three months.12 Maryland has been considering a waiting period of two to three months.

Any plan involving a waiting period has serious drawbacks: (a) many parents might decide to take the risk and allow their children to go bare for the time needed to become eligible; (b) it would not help parents who had already been sacrificing financially to cover their children; and (c) it would not help parents forced to work in dead-end jobs because they feared exposing their children to a period of no insurance if they left those jobs.

A reasonable approach to the dual problems of punishing the responsible “scrimpers” and creating “crowd out” would be to drop the time requirement altogether while, at the same time, fixing a subsidy that admittedly might tempt parents or employers to drop coverage already in effect but to a lesser degree than if the Medicaid program was simply expanded.

For the low-wage population, a subsidy would be provided toward the premium for the coverage offered through the non-profit corporation. This could be set at roughly half the premium’s cost (decreasing as means-tested income rises), assumed here to be from $1,300 to $1,600 for two minor dependents. The employee would receive a form from the non-profit corporation containing a section for the employer to complete. The paperwork would then be returned to the non-profit and payment would be made directly to the employer for the amount the employee was eligible to receive in subsidy. The employee would be eligible for a dollar amount equivalent to up to the same amount he or she would be eligible for through one of the plans offered by the non-profit. The employer would use this money to purchase coverage through the non-profit, deducting this amount from the employee’s pre-tax earnings.

To illustrate, take a parent making $30,000 annually and herself covering her two children through her employer-based group plan at $675 apiece ($1,350 total). If she were to drop her children’s coverage and then receive a subsidy of $300 apiece (total of $600) from the non-profit corporation to help pay for that coverage outside of work, she would save up to $750 in pre-tax dollars (if the non-profit’s premium was $1,350). It is reasonable to expect a parent earning $30,000 to chip in $750 pre-tax. At the same time, under a simple Medicaid expansion, she would save $1,350 – much more incentive for “crowd out.”

As for “crowd out,” in California some conservatives have pushed to prevent this by raising the threshold at which assistance would be received for newly enrolled children. In effect, they suggest a program best described as “high-threshold Medicaid.” A parent making $30,000 annually would receive assistance for all chilren’s medical expenses above 4.5 percent of gross income. This means coverage for all expenses above $1,350 in full, by the state, as with its Medicaid program. Expenses up to that point would be paid for out-of-pocket by the parent.

The problem with this approach is that $1,350 is approximately the cost of health insurance for two dependents. If these people had $1,350 available, they would be able to purchase their own insurance anyway. Additionally, even taking into account the high threshold, the state would remain liable for costs incurred above $1,350.

The plan presented here improves this situation by being more generous up front (by subsidizing the purchase of insurance), while being slightly less generous afterwards (insurer payments would require co-payments). A greater effort is made to help parents with the initial expense of medical insurance, and later assistance kicks in at a higher level. This is a better approach because the major problem for families at this income level is getting any health insurance at all for their children, not considerations of the generosity of coverage after the first $1,350 dollars are paid out in medical bills. Also, instead of the state’s being responsible for the bills above $1,350, the private sector would be (pooling the risk).

For this reason, we propose a plan retaining the most advantageous features of the California high-threshold Medicaid approach and a traditional insurance approach. Maryland would provide a subsidy for the purchase of insurance. The subsidy would be transferred to the employee via the employer in the manner previously described. As is not currently the case with traditional insurance, the annual deductible would not be fixed. Rather, it would be established as a percentage of income. Expenses remaining after the insurance provider had paid its share of procedural costs would, if they amounted to more than 5.0 percent of income (at most), be covered by the state with S-CHIP funds. The threshold percentage of income would vary according to a means test. The sliding scale we propose is shown in table 2.

Those with No Coverage

The non-profit corporation would offer coverage through eligible insurance providers for those parents until now unable to get any sort of employer-based coverage, or whose employers did not offer coverage for dependents, or whose group health plans did not conform to the legal requirements of the S-CHIP program. The non-profit itself would not act as an insurer, nor would it self-fund the plan. Rather, eligible providers would contract with the non-profit. These providers would offer children the protection of insurance regulation by the Maryland Insurance Commission in the same way that other consumers are protected in Maryland. This state regulation would protect covered children against plan insolvencies and would insure that plan marketers be licensed in health insurance.

The sliding scale described above could be used in this population, except for a slight adjustment upward in the subsidy. Because parents in this category would not be purchasing insurance through an employer, they would not be able to pay their share of the premium with pre-tax dollars. So the subsidy for the insurance premium should be slightly more generous – say, one-sixth more generous – in order to compensate for this disadvantage. The subsidy would be paid directly by the non-profit corporation to the insurance plan chosen by the parent. This would prevent parents from using the money for purposes other than insuring the children.

Final Word

Maryland has been given a tremendous opportunity to insure thousands of its children. It should do so in a way that covers as many children as possible. It should also do so in a way that is fiscally responsible. This means a public/private partnership, not an expansion of Medicaid.

Dr. Dworkin is an anesthesiologist and the chairman of the board of trustees of the Calvert Institute.

End Notes

[Top] 1. State of Maryland, Department of Legislative Services (DLS), Health Care Regulation in Maryland: Legislative Perspective (Annapolis, Md.: DLS, September 1997).

[Top] 2. Derived from data in Robert Goldberg, “Bad Medicine for Kids,” Wall Street Journal, May 8, 1997, p. A22.

[Top] 3. Derived from data obtained by the author by calling various health-care insurance providers in the Baltimore area, winter 1997-1998.

[Top] 4. Eligibility standards are even more liberal than the income limits suggest because of the federal allowance known as “income disregards.” Income disregards, which include the cost of child care, day care, child support payments, alimony and transportation expenses to and from work, can be deducted from gross income in the determination of Medicaid eligibility. Hence, the income level at which children cease to be eligible for Medicaid in Maryland is actually much higher.

[Top] 5. From data provided by State of Maryland, Department of Health and Mental Hygiene (DHMH).

[Top] 6. From data provided by the DHMH. The program uses federal money, though not with the usual matching arrangement, as the benefits supplied in the Kids Count program are not the same as in Medicaid.

[Top] 7. The federal rules for the S-CHIP program allow states that have eligibility levels between 150 percent and 200 percent of the FPL to raise the level by 50 percent for the new program. Maryland provides children up to age 1 with Medicaid up to 185 percent of the FPL. Theoretically, Maryland can cover children in this age group in the new S-CHIP program up to 235 percent of the FPL. See Tom Bliley, State Children’s Health Insurance Program: Implementation Guide (Washington, D.C.: U.S. House of Representatives, Committee on Commerce, November 1997), passim.

[Top] 8. Bliley, State Children’s Health Insurance Program, p. 8.

[Top] 9. Bliley, State Children’s Health Insurance Program, p. 8.

[Top] 10. From data provided by the DHMH.

[Top] 11. Merrill Matthews, Jr. and Kristin A. Backer, “Best and Worst Ideas for Insuring Children,” National Center for Policy Analysis Brief Analysis, No. 242, October 1, 1997.

[Top] 12. Thomas McClintock, “CCHP: California Children’s Health Plan … or California Copying Hillary’s Plan?” transcript of speech given at a Heritage Foundation/State Policy Network conference, “What HCFA Won’t Tell You About Kidcare: Dangers and Opportunities for States, November 14, 1997, p. 42.

Posted in: Health Care, News Series