State Children's Health Insurance Program: When do federal benefits start becoming an economic disincentive?

The 2005 book Freakonomics gave non-economists insight into the world of economic research in a entertaining and easy to read format. The authors used thought-provoking approaches to address questions like:

• 'What do Schoolteachers and Sumo Wrestlers have in common?' [ans. Their incentives to cheat are similar]
• 'How Is the Ku Klux Klan Like a Group of Real-State Agents' [ans. They both operate on a principle of scarce information]
• 'Why Do Drug Dealers Still Live with Their Moms?' [ans. They actually don't make that much money]

The overarching theme of the book - the Freakonomics of it all - is that we all respond to economic incentives and disentives. One take home message is that public-policy makers have to be very mindful that this dynamic exists, lest we all become victims of the Law of Unintended Consequences.

Welfare, prior to its reform, was a classic example of economic disincentives and the Law of Unintended Consequences at work. None other than Bill Clinton used the mantra "End welfare as we know it" as his theme for welfare reform; a reform based on:

...strong work requirements, performance bonuses to reward states for moving welfare recipients into jobs and reducing illegitimacy, state maintenance of effort requirements, comprehensive child support enforcement, and supports for families moving from welfare to work-including increased funding for child care...

To many, the success of welfare reform can be measured not only in the individuals that have been helped to move from welfare to work, but also in the fact that the predicted reform apocalypse never materialized.

Unfortunately, the misinformed policies that allowed the well intentioned Welfare program to get out of control are rearing their heads again. The Federal State Children's Health Insurance Program (SCHIP) is up for renewal in 2007. Originally funded at $24 billion for 10 years in 1997 and desinged to address the needs of children in families with income above the poverty guidelines, SCHIP:

...is jointly financed by the Federal and State governments and is administered by the States. Within broad Federal guidelines, each State determines the design of its program, eligibility groups, benefit packages, payment levels for coverage, and administrative and operating procedures. SCHIP provides a capped amount of funds to States on a matching basis for Federal fiscal years (FY) 1998 through 2007...

Many children's health proponents (NCJW, Robert Wood Johnson Foundation, Campaign for Children's Health Care, PICO) and the politicians that support their recommendations want to use the reauthorization of SCHIP as a vehicle to provide healthcare for all uninsured chilren. This is a laudable goal. But like Welfare before it was reformed, many of the policy recommendations, when looked at closely, go against the grain of creating a culture of self-sufficiency.

The post "[A] victim of her own success" and the convenient omission of a 'little' detail posed the question:

[W]hen did $60,000 a year start being considered working poor?!?!"

The question was offered as an observation to a fact reported by Julie Rovner (of National Public Radio) in her report, Governors Focus on Children's Health Program:

...When it comes to deciding who will be covered and who won't, each state has its own definition of the working poor. Some states like New Jersey are relatively generous; covering families with three-and-a-half times the poverty level or $60,000 a year for a family of three...

Others are also finding these guidelines to be a bit 'rich'. The Heritage Foundation's Vice President of Government Relations, Michael Franc, rightly noted in his commentary States' Addiction to Welfare Corrupts Federalist System that:

...The Founders' notion that the states would be the government closest to the people has been eviscerated by the more than $450 billion that Washington bureaucrats send the states each year to finance such traditionally local responsibilities as education, health care, law enforcement, fire fighting, and even home heating assistance.

To the nation's governors, however, even $450 billion of dependency isn't enough. No program better captures this trend than the State Children's Health Insurance Program (SCHIP) enacted in 1997. Congress intended SCHIP to complement Medicaid by expanding health coverage to children in families with incomes up to twice the poverty level. But one decade and $40 billion later, profligate states have morphed SCHIP into a far more expensive and expansive program that now covers children in families with annual incomes as high as $72,000, their parents, and even some childless adults.

Seven states now permit families with incomes as high as $60,000 to claim this welfare-style benefit. New Jersey leads the pack, having moved its eligibility limit up to $72,000. In January, Maryland Gov. Martin O'Malley (D.) went even further, proposing to cover families with incomes four times the poverty level -- $82,600 per year. [ed. See Maryland House Bill 997 (pdf): Maryland's Children's Health Program - Expansion of Eligibility]

Not surprisingly, these expansions have depleted SCHIP's coffers and prompted the governors of more than a dozen overextended states to petition Washington for a $13-billion bailout to "fully meet each state's healthcare coverage objectives for SCHIP." Translation: The cocktail waitress in Nebraska should happily subsidize the health costs of families in New Jersey or Maryland with three or four times her income.

In an Orwellian twist, lawmakers have used federalist logic to argue for a federal takeover. "These policies are necessary," Rep. Frank Pallone (D.- N.J.) explained, because "the cost of living is significantly higher in New Jersey than in other parts of the country, and so we must extend our eligibility above other states."

With a bipartisan group of lawmakers calling on Congress to guarantee coverage to every uninsured child in America by pouring an additional $60 billion into SCHIP over the next five years, the momentum behind an enormous expansion of the federal role in health care may be insurmountable.

But before lawmakers lure middle-class families into the welfare system, they should contemplate the absurdity at work here. Most of these families pay at least some federal tax. The IRS even considers some of them "rich."

That's right. In 2004, approximately 40,000 households earning $75,000 or less in the states with the most generous SCHIP coverage paid the odious Alternative Minimum Tax (an out-of-control provision enacted in 1969 to require 155 millionaires to pay at least some federal tax, but that now shakes down some three million taxpayers). The $66.6 million in AMT payments these taxpayers have forked over to Uncle Sam could have gone toward private health coverage for their children...

Moreover, the vast majority of the SCHIP benefits are offered by the states without requiring any type of asset tests.

Ms. Susan Molina of Denver (the single-mother, activist and subject of the Ms. Rovner's NPR report) has testified before Congress and supports benefits for families up to 300% of the federal poverty guidelines (see Table: 2006 HHS POVERTY GUIDELINES) of $16,600 for a family of 3. With that policy, a family like Ms. Molina's (1 parent, 2 children) would be eligible for assistance while still having an income up to $49,800 (300% of $16,600).

$49,800 is more than the $47,250 the Economic Policy Institute found (see figure B and Table 1) would be needed for the basic budget of a family of 4 (2 parents, 2 children) in Denver, Colorado which includes health care!

How many policy-makers have actually looked at the implications and potential economic disincentives of this level of funding? Clearly, tax paying Americans want to assist those that need help on their way to self-sufficiency, but Americans don't won't to create a culture of dependency.

There's a corollary to Sun Tzu's ('On the Art of War') observation that generals who try to protect everything end up protecting nothing. A system of government that attempts to take care of everyone (instead of promoting self-sufficiency), risks creating a situation where there's nothing left to take care of those that really need taking care of.

Determining the real needs...there's the rub which is best tackled with heart and mind.