Crowd-Out

Background

A number of economic studies have investigated crowd-out in various public programs. Studies have examined crowd-out associated with the expansion of the Medicaid program in the late 1980s and early 1990s, in various state-initiated health insurance programs and in the State Children's Health Insurance Program (SCHIP), which was enacted in 1997 and initially authorized for a 10-year period. The public policy debate on whether the SCHIP should be reauthorized in 2007 focused national attention on the issue of crowd-out.

There have been many carefully conducted studies of crowd-out. In some cases, the studies defined crowd-out in different ways, reflecting both the various perspectives of the researchers conducting them and the various databases they used. Few studies have sought to identify the mechanism through which crowd-out is operating. As a result, the estimates on the extent of crowd-out can vary greatly across studies. Some studies suggest that it accounts for a very small percentage of changes in a population's health insurance coverage, while other studies put the figure as high as 60%, depending on the public program. The 2007 U.S. Congressional Budget Office's (CBO's) study of the SCHIP estimated the extent of crowd-out at 25% to 50%. In other words, for every 100 children who enrolled as a result of the program, there was a corresponding reduction in private health insurance coverage of between 25 and 50 children.

Policy Issues

For many state and national policymakers, one of the most challenging aspects of creating or expanding public insurance programs is how to provide a public health insurance option to individuals who are truly in need without distorting private behavior (crowd-out). On one hand, their goal is to increase the number of individuals covered by health insurance. On the other hand, they do not want to waste scarce public money, which merely shifts the source of funding from private to public insurance and does not result in improved access to healthcare or health status. An additional concern is that when healthy individuals shift from private to public insurance, those remaining with private insurance may be adversely affected. Risk may have to be spread over a smaller group and may trigger higher premiums.

Several factors appear to increase the likelihood of crowd-out. Expanding the eligibility of public programs to include higher income levels increases the potential for crowd-out because many individuals and families with higher incomes have private health insurance. Another factor is family eligibility: Parents are much more likely to enroll their children in a public program if they can also join it.

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