About the Economic and Social Research Institute

The Economic and Social Research Institute (ESRI) is a nonprofit organization that conducts research and policy analysis in health care and in the reform of social services. ESRI specializes in studies aimed at enhancing the effectiveness of social programs, improving the way health care services are organized and delivered, and making quality health care accessible and affordable.

About the Authors

Jack A. Meyer, Ph.D., is the founder and President of ESRI. Elliot K. Wicks, Ph.D., is a Senior Fellow at ESRI. Stephanie E. Anthony, J.D., M.P.H., is a Senior Research Associate at ESRI. Laurie E. Rosenberg. M.H.S., is Project Coordinator at ESRI. Michael J. Perry, M.A., is Vice President at Lake Snell Perry & Associates, a Washington-based focus group and survey research firm.

Acknowledgments

The authors express their appreciation to the people who helped with this project, especially Neil J. Robertson, Christoper G. Marshall, and Evan Stark, with Lake Snell Perry & Associates; Linda Loranger and Mary Darby of Burness Communications for help in preparing this summary and designing a dissemination strategy for the report; and Mark Legnini of ESRI for help in interviewing. We are also grateful to the Robert Wood Johnson Foundation for their support of this study.

Copyright

© 1999 by the Economic and Social Research Institute, Washington, D.C. All rights reserved. No part of this publication may be used or reproduced in any manner without permission in writing from the Economic and Social Research Institute, except in the case of brief quotations embodied in news articles, critical articles, or reviews.

The Study in Brief

Setting the Stage

Jim and Susan are parents of two children, ages 2 and 5. Jim is a custodian at a major hotel and Susan works part time at a coffee shop. Together they earn about $17,000 a year. Through Jim’s job, they are able to get health insurance for their children at a cost of $2,000 a year for their portion of the premium. Although they are glad to have insurance for their children and are happy with their pediatrician, the cost is a heavy burden for them. In addition, they are concerned that their plan does not cover prescription drugs. Recently, their state expanded its health care coverage for children of low-income families through the State Children’s Health Insurance Program (CHIP), which Congress established to help states reduce the number of uninsured children in the United States. Jim’s employer is aware of the new program, and Jim and Susan are wondering how the program might affect them and their family.

This situation raises two sets of questions:

• Will Jim’s employer decide to stop covering its employees’ children, based on the assumption that they can get cheaper and possibly better coverage with the new CHIP program? Will the company seize the opportunity to lower its own health care costs by shifting employees’ children into CHIP coverage?
• Will Jim and Susan decide that they can save a significant amount of money by moving their children into CHIP? Or will they opt to keep their employer-sponsored coverage, since they like their pediatrician and are secure with the quality of care that their children currently receive?

The answers that employers and employees give to these questions carry important implications for CHIP, according to a study by the Economic and Social Research Institute (ESRI) titled Business and Employee Attitudes Toward the New State Children’s Health Insurance Program. Although CHIP was designed to provide health insurance for children who currently have no other coverage options, concerns have arisen that CHIP coverage may wind up displacing—or "crowding out"—existing private insurance coverage. That is, funds allocated to cover uninsured children could be used to insure children who already have some insurance. The ESRI researchers found that there is some cause for concern about crowd-out under CHIP: Nearly one-fifth of employers surveyed—all of whom employ significant numbers of workers potentially eligible for CHIP—said they would consider dropping paid coverage for their employees’ children if a CHIP-style program were available. Parents’ responses are more difficult to gauge, but some of them too may be moved to drop expensive employer-sponsored coverage for their children in favor of CHIP coverage, the ESRI researchers found.

Findings

Most low-wage employers are not poised to dump their workers’ children into publicly financed health insurance programs, but a significant number probably would take advantage of such an opportunity if they perceive no drawbacks to doing so, the study concluded. In ESRI’s survey of 594 low-wage employers that currently offer health insurance, 19 percent said that they would stop paying premiums for children’s coverage if a CHIP-style program were available. However, that percentage dropped significantly if employees’ children would have to face a waiting period for CHIP eligibility, during which they would not be covered. For example, in the face of a six-month waiting period, the proportion of businesses that said they would stop paying for dependent health coverage fell to 5 percent; when the waiting period was extended to nine months, that proportion dropped even further, to 3 percent. Employers were also much less likely to consider dropping paid dependent coverage if they would have to do so for all of their employees, including managers.

Parents clearly have mixed feelings about CHIP, the study found. During focus groups conducted by ESRI, low-wage working parents expressed a high level of interest in CHIP upon first learning of it, thinking that it could ease the financial burden of obtaining health insurance for their children. However, they subsequently voiced significant concerns and even suspicions about the program. They raised questions about hidden costs, quality of care, possible social stigma, and the possibility of being forced to change their pediatricians. Because of these concerns, many participants doubted that they would enroll in a CHIP program if it were available to them.

Among the study’s findings:

• Despite the publicity it has received, employers and parents generally are not aware of CHIP.
• When told about CHIP, 40 percent of employers believed that their competitors would drop paid coverage for children if CHIP were available in their state (contrasted with only 19 percent that said they would consider dropping coverage themselves).
• Nearly 25 percent of employers believed that more than half of their employees whose children were insured through the company health plan would switch their children to CHIP if it were available.
• Employers that contributed generously to employee premiums were much less likely to report that they would drop paid dependent coverage than employers that contributed little. They also were less likely to believe their employees would substitute CHIP coverage for employer-sponsored coverage.
• Four in ten employers that favored substitution of CHIP coverage for company-sponsored coverage said that they would welcome relief from the financial burden of paying for dependent coverage. Many employers believed that their employees would be able to get less expensive and better coverage for their children through CHIP.
• Parents identified five factors that would make them more inclined to enroll their children in CHIP: the ability to keep their current pediatrician, lower overall costs for CHIP than their current coverage, high quality of care, limited government involvement in administering the program, and the absence of a waiting period for eligibility.

   

Thus, the ESRI study suggests that, although cost is a significant factor in employers’ attitudes toward children’s health insurance and CHIP, employers are also concerned about their employees’ welfare. These concerns can be used to design policies that discourage employer-initiated crowd-out. The study also suggests that if CHIP coverage is good, if switching to CHIP saves parents money, and if parents are confident that their children will receive good care, some low-wage working parents will switch their children to CHIP coverage. However, if parents view CHIP coverage as poorer than their current employer-sponsored coverage, if their choice of doctors is limited, or if the program has a "welfare" stigma attached to it, switching is less likely. Again, the inclusion of a waiting period seems likely to discourage some but not all parent-initiated substitution.

Recommendations

To ensure that CHIP reaches its intended target, states should consider the following strategies:

• Impose eligibility waiting periods of at least six months but no longer than nine months for children currently covered by an employer plan.
• Require that employers eliminate premium payments for children of all workers if they do so for any workers.
• Use cost sharing for CHIP that is high enough to deter employees from dropping dependent coverage but low enough to remain affordable.
• Use a small portion of CHIP funds for limited subsidies to lower-income workers who could, but do not now, enroll in an employer-sponsored health plan.
• Launch a strong consumer education program to help ensure appropriate enrollment in both CHIP and Medicaid programs.
• Continuously assess the quality of health care plans in which CHIP children enroll.

The study underscores the need for states to devote as much attention to designing and publicizing programs that attract eligible families as they do to preventing crowd-out. A modest amount of substitution may actually not be a waste of CHIP funding if it occurs among families heavily burdened by the cost of premium-sharing, as ESRI’s findings suggest might be the case.

Executive Summary

Concerns About Uninsured Children Give Rise to CHIP

Mounting concern about the growing ranks of uninsured children led to the creation of the Children’s Health Insurance Program (CHIP) under the Balanced Budget Act of 1997, which dedicated $48 billion over 10 years to increasing health care coverage for children. The largest expansion of funding for children’s health care since the enactment of Medicaid, CHIP is designed to provide coverage for children in low-income families whose parents have no other alternative. The idea is not to provide cheaper or better coverage for children who are currently enrolled in Medicaid or employer-sponsored programs, but to provide some coverage for those children who have no access to health insurance.

According to the Current Population Survey, 11.3 million children are uninsured in the United States. Approximately 5.1 million of these children are eligible for Medicaid but not enrolled in it, while 4 million are eligible for CHIP. Most uninsured children (87 percent) live in families with at least one working parent, yet nearly one in four of these children lacks employer-sponsored health insurance, and half have no coverage at all.

CHIP allows states to expand their existing Medicaid programs, create or expand their own separate children’s health programs, or use a combination of the two approaches. The program is aimed primarily at lower-income children and families. To be eligible for assistance, families generally must have incomes below 200 percent of the federal poverty level, be ineligible for Medicaid, and not be covered by employer-sponsored insurance.

Although the Balanced Budget Act instructs states to prevent public coverage from displacing employer-sponsored coverage, it offers no concrete plan for accomplishing that objective. The Health Care Financing Administration (HCFA) has come out with guidelines for states to use in trying to minimize substitution, but basically states are free to devise their own methods.

As states move ahead with CHIP implementation, concerns have arisen that significant levels of program money will be diverted to children who already have some insurance coverage. Although the Clinton Administration originally estimated that CHIP would provide coverage for 5 million uninsured children, the Congressional Budget Office estimated that only 2.3 million uninsured children would be covered, based in part on projections that large numbers of currently insured children will move to CHIP. The belief is that many low-wage working parents either will decide to drop their current coverage, or their employers will stop offering paid coverage for dependent children once CHIP becomes available. Some children will also move to CHIP from other government programs. As a result, money that is intended to provide health insurance for children who have no other sources of coverage will be used instead to displace private coverage.

A study conducted by the Economic and Social Research Institute (ESRI) shows that there is some basis for these concerns. ESRI surveyed 594 low-wage businesses that pay at least a portion of their employees’ health insurance premiums and conducted three focus groups with 29 low-income working parents. The researchers’ goals were to explore whether employers would redesign their benefits to encourage workers to move their children into publicly subsidized CHIP coverage and whether parents would drop their employer-sponsored coverage in favor of less costly CHIP coverage for their children. The highlights of ESRI’s findings follow.

Will Employers Drop Coverage?

Although CHIP has received considerable publicity, few low-wage businesses were aware of CHIP prior to participating in the survey. However, most employers seemed to approve of the concept. Sixty-one percent said that they would support a CHIP-style program, while only 18 percent did not.

Because the researchers thought that employers might be reluctant to admit that they would drop dependent coverage if government-subsidized coverage became available, they first asked employers what they thought their competitors would do under such circumstances. Forty percent of employers believed that their competitors would be likely to drop paid coverage for children if CHIP were implemented in their state. The proportion who said they themselves would consider dropping coverage was only half that (19 percent). The inclination to drop coverage was higher among firms that contributed little to the premium for children’s coverage and among those that had less comprehensive coverage. These firms also had a lower proportion of employees opting to cover their children.

Our findings that 19 percent of employers would consider dropping coverage for children is consistent with the findings from an earlier study of crowd-out under CHIP conducted by the Maternal and Child Health Policy Research Center. That study found that 7 percent of employers would drop dependent coverage, 5 percent would consider dropping it, and 12 percent would increase the cost or decrease the value of dependent coverage.

Low-wage employers were also asked how they thought their workers would react to establishment of a CHIP program. More than one-third said they did not know. About 24 percent believed that at least half of their employees who currently received coverage for their children through their company’s health plan would switch to CHIP coverage. A slightly higher proportion took the opposite view. Not surprisingly, low-wage employers’ expectations were related to how much they contributed to dependent coverage. The more the employer contributed, the less likely the employer was to believe that its workers would switch to CHIP coverage.

Employers were deeply divided on whether they favored migration of dependent children to CHIP. Thirty-two percent had no opinion, while 39 percent supported the substitution of CHIP coverage for employer-sponsored coverage, and 29 percent were against it. Four in ten said they would welcome relief from the financial burden of paying for coverage. However, 35 percent said they favored CHIP coverage because their employees would receive financial relief, and 21 percent said that employees would be able to get better coverage for their children under CHIP.

Following is a brief summary of the characteristics of low-wage businesses that were likely to stop paying for children’s coverage if a CHIP program were available.

• Smaller firms were more likely than larger firms to indicate that they would stop contributing to coverage for children.
• Employers with HMO or PPO coverage were twice as likely to drop paid dependent coverage as those with fee-for-service coverage (about 20 percent compared to 10 percent).
• Employers that contributed generously to employee premiums were much less likely to drop coverage than those that paid less.
• Firms that said they would drop coverage were much more likely to indicate that their employees were not satisfied with coverage for their dependent children (44 percent for "droppers," compared with only 8 percent for "non-droppers").

Employers’ concerns about their employees’ welfare can be used to design policies that reduce the likelihood that employers will drop coverage. The proportion of employers who said that they would drop children’s coverage fell dramatically if the CHIP program incorporated a waiting period between the termination of employer coverage and the start of CHIP coverage. Only 1 in 20 low-wage employers would consider dropping coverage if the waiting period were six months, compared to 1 in 5 with no waiting period. This finding is also consistent with the results of the study conducted by the Maternal and Child Health Policy Research Center. Waiting periods that extend beyond nine months, however, appear to have no more effect than shorter ones.

Employers would also be less likely to stop paying for dependent coverage if they had to make that change for all employees, including managers and owners. Only 4 percent of low-wage employers said that they would cease premium payments for children if they had to do so for children of all employees. Thus, anti-discrimination and unfair labor practice laws that limit the extent to which employers can provide different levels of health benefits for different categories of workers provide some protection against employer-initiated substitution.

Will Employees Drop Coverage?

Although there is some potential for employee-initiated crowd-out, it is doubtful that large numbers of employees will switch to CHIP coverage. Workers who participated in the focus groups generally were unaware of the new initiative. Their enthusiasm seemed high when they were first informed of the program’s outlines. But after thinking about potential problems, focus group participants expressed skepticism about CHIP and their enthusiasm waned. They suspected that there would be hidden costs or that benefits might be skimpy. They worried about quality of care in a publicly sponsored program and the stigma that participation in such a program might carry. They were especially concerned about having to change physicians under CHIP. While some of these reactions reflect misperceptions about CHIP, they suggest that low-wage workers would participate in a CHIP program only if they were fully convinced that they would be better off financially and that their children’s care would not suffer.

Focus group discussions revealed the following observations about low-wage working parents’ attitudes toward health insurance for their children and toward CHIP:

• The cost of coverage is the primary health care concern for low-wage parents.
• Because of their cost concerns, parents initially responded favorably to CHIP, viewing it as a way to provide coverage for their children while reducing their own financial burden. Overwhelmingly, the potential cost saving was the reason that so many participants initially found CHIP appealing.
• Upon consideration, many participants feared that their children might be worse off under CHIP than with their current—although expensive—employer-sponsored coverage.
• Parents worried about disrupting relationships with their pediatricians if they enrolled their children in CHIP.
• Parents were skeptical. They thought that the promise of a monthly premium contribution as low as $10 per child for CHIP was not credible. They feared hidden costs for prescription drugs and office visits. They even questioned whether CHIP would be any more affordable than their current employer-sponsored coverage.
• Parents felt that their children might receive poorer quality of care under CHIP.
• The idea of government-sponsored health care made parents uneasy. They were concerned about inefficiency and a large bureaucracy.
• Parents feared that there might be a social stigma attached to enrolling their children in CHIP.
• Parents overwhelmingly rejected the idea of a waiting period. They called waiting periods unfair and questioned whether the benefits of CHIP would be worth leaving their children temporarily uninsured.
• Focus group participants identified five factors that would make them more likely to enroll their children in CHIP: they must be able to keep their current pediatrician; overall costs for CHIP must be lower than their current coverage, with no significant hidden costs; the quality of care must be comparable to that of private health plans; government should have only a limited role in administering the program; and there should be no waiting period for eligibility.

Implications of Study Findings

The prospect of crowd-out is not so great as to indicate that a large portion of CHIP funds will be used to cover children who would be covered anyway. But the ESRI study shows that there is reason for some concern. Nineteen percent of employers said that they would consider dropping dependent coverage. In addition, some parents indicated that, under the right circumstances, they might switch their children from employer-sponsored coverage to CHIP.

It is important to keep in mind where substitution is apt to occur. The ESRI study shows that low-wage employers that are most likely to stop paying for dependent coverage are those that already have a very limited commitment to employer-sponsored coverage. Their workers generally pay more for their children’s health care coverage, and the benefits are frequently quite limited. Migrating to CHIP likely would result in better coverage for these children, as well as financial relief for their parents—an observation cited by many low-wage employers who said they were inclined to stop paying for dependent coverage. Even though these children are not the targets of CHIP, to the extent that they are relatively needy, money spent on covering them under CHIP would not be "wasted."

CHIP gives states the option to subsidize some of the costs of purchasing private-sector coverage for working parents, thereby helping them stay in their employer-sponsored health plans and out of public programs. So far, only Massachusetts, Wisconsin, and Mississippi have chosen to pursue this approach. Although supporters of this strategy say that it could reduce the net displacement of public coverage for private coverage, critics voice concerns that it would draw away CHIP funds by being especially attractive to already insured families who would be reluctant to enroll in a public program. To prevent that from happening, HCFA specifies that states that choose the premium-subsidy option cannot subsidize families whose children have been covered by an employer-sponsored group plan within the previous six months. HCFA further requires that the employer contribute at least 60 percent of the cost of the family premium.

Low-wage working parents who participated in the focus groups were wary of dropping their existing private health insurance for an unfamiliar and new program. They sought details about CHIP and assurance that the plan would meet their children’s needs. This suggests that as CHIP is implemented in the states, families will want detailed information before making enrollment decisions and will be cautious about making a change. Even those who currently lack health insurance for their children demonstrated caution toward CHIP.

Policy Recommendations

The research findings suggest that it will be important for states to devise and implement strategies to ensure that the children who are targeted by CHIP take advantage of it and that those who are already insured are dissuaded from switching to CHIP:

• Imposing waiting periods of at least six months but no longer than nine months for children to be eligible for a CHIP program will reduce both employer substitution and employee substitution.
• Requiring that employers eliminate premium payments for children of all workers if they do so for any workers will deter most employer-initiated switching.
• Other options for discouraging substitution include using cost-sharing for CHIP that is high enough to deter employees from dropping dependent coverage but low enough to remain affordable. Some states are using a sliding-scale premium contribution that varies with family income.
• States may also want to consider using at least a small portion of their CHIP funds for carefully developed, limited subsidies targeted to lower-income workers who have the opportunity to enroll in an employer-sponsored health plan but who do not do so because they must pay a burdensome share of the premiums.
• Consumer education can help assure appropriate enrollment in both CHIP and Medicaid programs. Unless they receive and understand good information, many of the families eligible for CHIP coverage may fail to take advantage of it.
• States may be able to alleviate parents’ concerns about quality of care by continuously assessing the quality of health care plans in which CHIP children enroll. This would include developing quality indicators tailored to children (for example immunization rates and well-baby visits) to track preventive care, working with health plans to improve their performance, and imposing sanctions on or dropping plans with persistent quality problems.

Importantly, the ESRI study highlights that public education may be one of the most important tasks that states face as they implement CHIP. The negative reactions of focus groups to CHIP—with concerns that ranged from poor quality of care to hidden costs to social stigma—show that states also need to be mindful of parents’ fears if they are to attract and enroll eligible families. States should take steps to counter negative perceptions of CHIP through carefully structured program designs and effective consumer education and outreach programs. CHIP must seem as much like "mainstream" health coverage as possible if it is to attain its goals and convince parents of its benefits.