# 560  

September 2007

SCHIP Expansion: Socialized Medicine on the Installment Plan

by David Hogberg, Ph.D.



The State Children’s Health Insurance Program (SCHIP) was created by Congress and President Bill Clinton as part of Balanced Budget Act of 1997.  SCHIP was intended to give $24 billion in federal matching funds over ten years to state governments for the provision of health insurance to about 5 million uninsured children.  Eligibility was supposed to be restricted to children whose parents earned too much to qualify for Medicaid, but less than 200 percent of the federal poverty level.1

Like most government programs, SCHIP soon exceeded its intent.  By 2006, about 6.9 million children received insurance benefits through SCHIP.  From 1997-2006, the federal government provided over $40 billion in matching funds.2  Many of the children now on SCHIP were not previously uninsured, but had private coverage which their parents dropped, a phenomenon known as “crowd out.”  Furthermore, seven states have set eligibility standards above 200 percent of the federal poverty level, and four of those have set it at 300 percent or above.3  They were able to do this because the original SCHIP statute never set a specific poverty level for eligibility.  Rather, it stated that the program was supposed to be for “targeted low-income children,” which the Department of Health and Human Services initially interpreted as 200 percent of the poverty level.4

Now a majority in Congress wants to codify into law this violation of SCHIP intent.  Both the House and Senate have passed bills that would enable families earning up to 400 percent of the federal poverty level to qualify for SCHIP benefits.  This would have two major effects.  First, it will dramatically worsen the problem of “crowd out.” Second, it would make a program that is unfair into one that is regressive.


Congress is taking up SCHIP this year because the original authorization for the program expires on September 30, 2007.  As Congress has gone in a far more liberal direction since the election in 2006, a push has resulted in Congress to expand SCHIP well beyond its original purpose of providing health insurance for low-income children.

On August 1, the House of Representatives passed its version of SCHIP reauthorization (House Resolution 3162) by a margin of 225-204.  It was a near party-line vote, with only ten Democrats voting against it, and only five Republicans voting for it.  The House bill arguably creates more mischief than does the Senate version.  It increases spending amounts for SCHIP in two ways.  First, it does not establish annual spending amounts for SCHIP (often called “allotment caps”).  Rather, the amount of money the federal government will spend on SCHIP will be limited only by the number of children the states can enroll.5  Second, the House bill adds “performance bonus payments.”  Among the ways that states can win bonus payments include “eliminating verification of income eligibility” and “doing away with in-person interviews in determining eligibility.”6  In other words, states can get more money from the federal government for SCHIP by removing procedures that guard against fraud.

If SCHIP funding were to remain at its current level, it would cost about $25 billion over five years and $50 billion over ten.7  According to the Congressional Budget Office, the House bill would cost $47.4 billion over five years and $128.7 billion over ten.8  However, the actual cost of the bill over ten years is likely to be closer to $159.9 billion.9   Too make the costs appear lower, in the final version of the bill the House of Representatives removed over $20 billion in bonus payments from 2014-2017 and eliminated another $8.7 billion by altering the formula for matching funds.10  If history is any guide, those funds will be restored at some future point.

Furthermore, the House bill now leaves the income eligibility standards up to state governments.  While the original SCHIP never set an explicit income limit for eligibility, the relatively limited matching funds provided by the federal government prevented most states from extending SCHIP eligibility beyond 200 percent of the federal poverty level.  The House bill, however, has no allotment caps; federal funding is limited only by how many children states can enroll in their programs.  Thus, it is uncertain what standard states will use to limit eligibility, but 400 percent of the federal poverty level is a reasonable guess for two reasons.  First, New York is the state with the highest eligibility limit, and its limit is 400 percent of the poverty level.11  Second, an SCHIP reauthorization bill submitted by Senator Hillary Clinton (D-NY) earlier this year also expanded eligibility to 400 percent of the poverty level.12

The Senate version of SCHIP reauthorization (S. 1893) passed on August 2, 2007.  Unlike the House version, it was not a stand-alone bill.  It was attached as an amendment to a bill providing tax relief for small businesses.  This maneuver helped attract the support of seventeen Republican Senators.  Along with the support of every Democratic Senator, the bill passed through the Senate on a vote of 68-31. 

That was not the only way in which the Senate bill differed from the House one.  The Senate bill does contain allotment caps for SCHIP funding for fiscal years 2008-2012.  The total funding it provides for those years is $61.4 billion.13  In order to cap the amount allocated to SCHIP, the Senate bill puts some limits on eligibility.  States only receive full matching funds for children in families under 300 percent of the federal poverty and limited matching funds for children in families over 300 percent.14 

Both the House and Senate bills fund their respective SCHIP expansions in part by increasing the federal excise tax on cigarettes.  Currently, the federal government taxes small cigarettes at a rate of $19.50 per thousand cigarettes and large cigarettes at a rate of $40.95 per thousand cigarettes.  (Small cigarettes are ones weighing less than three pounds per thousand cigarettes, while large ones are those weighing more than three pounds per thousand.)  Since there are about twenty cigarettes in the average pack, it amounts to a per-pack tax of 39 cents for small cigarettes and 82 cents for large cigarettes.  The House bill increases the tax to on small cigarettes to $42.00 per thousand for small cigarettes and $88.50 per thousand for large cigarettes.15  The Senate bill increases the tax on small cigarettes $50.00 per thousand, and on large cigarettes to $104.99 per thousand.16 On a per pack basis, the House bill increases the tax to 84 cents per pack for small cigarettes and $1.77 for large cigarettes, while the Senate bill increases it to $1 per pack for small cigarettes and $2.10 for large cigarettes.


“Crowd out” occurs when people who have private insurance coverage drop that coverage in favor of getting coverage from a government-run insurance program.  The term first came to prominence in 1996 in a seminal article on Medicaid by Professors David Cutler and Jonathan Gruber.17  In that study, Cutler and Gruber found that when states expanded their Medicaid roles, for every ten people who were new enrollees in Medicaid, five were previously uninsured while five previously had private coverage.

Some later research disputed the findings of Cutler and Gruber.18  Earlier this year, Gruber, along with Professor Kosali Simon, revisited the issue of crowd out, addressing the criticism of the Cutler and Gruber study.19  In this new study, Gruber and Simon also examine the crowd-out effect of SCHIP.  Gruber and Simon found a crowd-out rate of 60 percent for SCHIP.  That is, for every ten new children in SCHIP, private coverage of children declines by six.

The CBO estimates that about 3.3 million new children will be signed up for SCHIP.  Of those, 1.4 million will have previously had private coverage.  That is a crowd-out rate of 42 percent.  If the Gruber-Simon rate of 60 percent is applied, nearly 2 million of the 3.3 million new children on SCHIP would have previously had coverage.  Yet even that estimate might be too low.  The Gruber-Simon study examines the current SCHIP program, which enrolls primarily children in families below 200 percent of the poverty level.  Both the House and Senate bills, in effect, increase the eligibility so that children in higher income families can be enrolled.  The higher the level of income, the higher the likelihood that a child has private coverage.  Exposing even more children with private coverage to SCHIP enrollment might result in an even higher rate of crowd out.

The crowd out caused by SCHIP has at least three serious consequences.  First, the intent of SCHIP was to provide uninsured children with access to health insurance.  Crowd out violates that intent.  Second, crowd out increases the cost for the taxpayers who fund SCHIP.  In addition to shouldering the burden of providing coverage for uninsured children, taxpayers will also have to pay for the children of parents who want a “free lunch” at taxpayer expense.  Finally, crowd out will likely increase an “entitlement mentality,” especially if SCHIP is extended to the middle and upper classes, as would happen under both the House and Senate bills.  As more and more people drop their private coverage in favor of SCHIP, people who still have private coverage will increasingly feel that they, too, are entitled to have government-provided insurance coverage for their children.  It may be that this is the intent of those supporting the expansion of SCHIP. 


The way in which the legislation reauthorizing SCHIP is written will undoubtedly make the program into one that is regressive.  But the fact is that SCHIP is already unfair; thus, the legislation currently before Congress would only worsen it.

SCHIP is unfair in the sense that, through SCHIP, the federal government gives proportionally more money to children who are not as poor as the children on Medicaid.  As noted above, SCHIP is supposed to insure children for families that make too much money to qualify for Medicaid.  Presumably, then, children on Medicaid are in families that are poorer than are children on SCHIP.  Yet the federal government matches the dollars states spend on SCHIP at a proportionally higher rate than it does Medicaid.  In 2006, states spent a total of about $132 billion on Medicaid, while the federal government matched that with $165 billion.  That means, on average, the federal government spends 1.2 dollars on Medicaid for every one dollar the states spend.  For that same year, states spent almost $2.4 billion on SCHIP and the federal government sent the states $4.8 billion in matching funds.20   Thus, the federal government spends two dollars on SCHIP for every one dollar the states spend.  In short, the federal government spends proportionally more on the children in SCHIP than it does on the poorer children in Medicaid. 

The legislation passed by Congress takes this unfair system and makes it regressive.  First, much of the new funding for SCHIP comes from a large increase in the cigarette tax.  As Table 1 shows, people with incomes under 200 percent of the poverty level smoke at rates higher than those with incomes above 200 percent of the poverty level.21

Table 1: Smoking and Poverty

Thus, the taxes to fund the expansion of SCHIP will fall disproportionately on those making under 200 percent of the federal poverty level. 

It could be argued that this is a fair system if all children in families under 200 percent of the poverty level were eligible for SCHIP and if only those under 200 percent of poverty were eligible for SCHIP.  But none of this new revenue goes to those under 200 percent of the poverty level; benefits for those children are already funded via other taxes.  The added revenues from the cigarette tax are for the purpose of funding the expansion.  Indeed, both SCHIP bills passed by Congress take the tax revenues from those under 200 percent of the poverty level and give it to those children who live in families above 200 percent of poverty, likely all the way up to 400 percent of the poverty level.  Table 2 shows the income amount by family size for each poverty level.22

Table 2: Income and Family Size

It is not inconceivable that a parent with one child with an income of $13,690 will be funding benefits for two children in a family of four with an income of $82,600.  In short, SCHIP expansion would result in families whose income puts them in the bottom 15 percent of households funding benefits for children who are in families close to the top 25 percent of households.23

It is quite common for the political left to attack a flat tax as regressive.  SCHIP expansion is expected to impose not only a flat tax on cigarettes, but it then to take the revenue from that tax and distribute it up the income ladder.  It seems clear the political left has an agenda other than basic fairness when it supports SCHIP expansion.

On its face, it is difficult to understand why the political left would support this expansion of SCHIP.  First, the expansion does not focus on low-income children, but rather extends benefits to those clearly in the middle class and a few in the upper class.  Second, the expansion is  funded by imposing taxes on the lower class.  In short, SCHIP expansion results in the lower class paying for benefits of the middle and upper class—something that the political left should adamantly oppose.

But fairness has never been the primary concern of the political left on health care.  The primary concern has been achieving a universal, government-run system.  Providing near universal coverage for children, and funding it via cigarette taxes, is a big step toward achieving that goal.  “Children” are an effective propaganda tool.  Anyone who opposes providing coverage for children can be attacked as heartless and cruel.  Cigarette taxes are one of the few types of taxes that the public will not oppose.  Indeed, anyone who opposes cigarette taxes can be attacked as being “pro tobacco.”  The thinking of the political left seems to be that if government covers enough children of enough people high up the income ladder, then eventually enough of the public will be supportive of extending such government insurance to everyone.  Call it “socialized medicine on the installment plan.”

Given how poorly universal, government-run health care systems work in many other nations, such a system is not the route the United States should travel.  Thus, we should not allow SCHIP to be used as a stepping stone toward such a system.  SCHIP should be returned to its original purpose of covering only children in families making no more than 200 percent of the poverty level.

David Hogberg, Ph.D. is a health care policy expert and former senior fellow and senior policy analyst at the National Center for Public Policy Research.


1  “State Children’s Health Insurance Program Summary,” Center for Medicare and Medicaid Services, found at http://www.cms.hhs.gov/MedicaidGenInfo/05_SCHIP%20Information.asp    as of September 7, 2007.

2  Data on SCHIP enrollment from “2006 CMS Statistics,” U.S. Department of Health and Human Services, found at http://www.cms.hhs.gov/CapMarketUpdates/downloads/2006CMSStat.pdf as of August 19, 2007.  Data on matching funds from "State Children's Health Insurance Program," Congressional Budget Office, May 2007, p.9, found at www.cbo.gov/ftpdocs/80xx/doc8092/05-10-SCHIP.pdf as of August 19, 2007.

3  Nina Owcharenko, ‘The Truth About SCHIP Shortfalls,” WebMemo #1381, The Heritage Foundation, March 5, 2007, found at http://www.heritage.org/Research/HealthCare/wm1381.cfm as of August 21, 2007.

4  U.S. Code, Title 42, Chapter 7, Subchapter XXI, “The State Children’s Health Insurance Program,” Section 1397bb, “General contents of State child health plan; eligibility; outreach.”  “State Children’s Health Insurance Program Summary,” Center for Medicare and Medicaid Services, found at http://www.cms.hhs.gov/MedicaidGenInfo/05_SCHIP%20Information.asp as of September 7, 2007.

5  Cheryl Smith, ‘The House SCHIP Bill: Enlisting States as Agents of Government Depeendency,” WebMemo #1593, The Heritage Foundation, August 29, 2007, found at http://www.heritage.org/Research/HealthCare/wm1593.cfm as of August 30, 2007.

6  Ibid.

7  U.S. Code, Title 42, Chapter 7, Subchapter XXI, “The State Children’s Health Insurance Program,” Section 1397dd, “Allotments.”

8  Congressional Budget Office, “Estimated Effect on Direct Spending and Revenues of H.R. 3162, the Children's Health and Medicare Protection Act, for the Rules Committee," August 1, 2007, at cbo.gov/ftpdocs/85xx/doc8519/HR3162.pdf.

9  “Estimated Effect on Direct Spending and Revenues of H.R. 3162, the Children's Health and Medicare Protection Act, as Ordered Reported by the House Committee on Ways and Means on July 27, 2007,” July 27, 2007, at www.cbo.gov/ftpdocs/85xx/doc8501/hr3162Rangel.pdf.

10  Congressional Budget Office, "Estimated Effect on Direct Spending and Revenues of H.R. 3162, the Children's Health and Medicare Protection Act, for the Rules Committee," August 1, 2007, at cbo.gov/ftpdocs/85xx/doc8519/HR3162.pdf.

11  http://www.heritage.org/Research/HealthCare/wm1580.cfm

12  “S. 895.  A bill to amend titles XIX and XXI of the Social Security Act to ensure that every child in the United States has access to affordable, quality health insurance coverage, and for other purposes,” Senator Hillary Clinton, March 15, 2007, 110th Congress, 1st Session.

13  “Children’s Health Insurance Program Reauthorization Act of 2007,” Engrossed Amendment to H.R. 976, August 2, 1976, pp. 4-5 and 21-22.

14  Ibid, pp. 77-78.

15  “H.R. 3162, an act to amend titles XVIII, XIX, and XXI of the Social Security Act to extend and improve the children’s health insurance program, to improve beneficiary protections under the Medicare, Medicaid, and the CHIP program, and for other purposes,” Representative John Dingell, 110th Congress, 1st Session, p.494.

16  “Children's Health Insurance Program Reauthorization Act of 2007,” Engrossed Amendment to H.R. 976, August 2, 1976, pp. 240-241.

17  David Cutler and Jonathan Gruber, "Does Public Health Insurance Crowdout Private Insurance?" Quarterly Journal of Economics, 1996, pp. 391-430.

18  See, for example, Kenneth Thorpe and Curtis Florence, “Health insurance coverage among children: the role of expanded Medicaid coverage,” Inquiry, 1998, Vol. 35 No. 4 , pp. 369–379, and Linda J. Blumberg, Lisa Dubay, and Stephen A. Norton. 2000. “Did the Medicaid expansions for children displace private insurance? An analysis using the SIPP,” January 2000, Journal of Health Economics, Vol. 19, No. 1, pp.33-60.

19  Jonathan Gruber and Kosali Simon, “Crowd-Out Ten Years Later: Have Recent Public Expansions Crowded Out Private Health Insurance, National Bureau of Economic Research, NBER Working Paper Series, January 2007.

20  Data on Medicaid and SCHIP from “State Expenditure Report, Fiscal Year 2005,” National Association of State Budget Officials, Fall 1996, pp. 49 and 101, found at http://www.nasbo.org/publications.php as of August 20, 2007.

21  Data in Table 1 from “Smoking Among Adults: US, 2000-2005,” U.S. Department of Health and Human Services, National Center for Health Statistics, found at as of August 20, 2007.

22  Data for Table 2 from “The 2007 HHS Poverty Guidelines,” U.S. Department of Health and Human Services, found at http://aspe.hhs.gov/poverty/07poverty.shtml as of August 20, 2007.

23  Data on household income from “HINC-01. Selected Characteristics of Households, by Total Money Income in 2006,” U.S. Census Bureau, Current Population Survey, found at http://pubdb3.census.gov/macro/032007/hhinc/new01_001.htm as of August 20, 2007.

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