SCHIP’s Perverse Incentives

Picking the worst government program would be a huge challenge, but picking the worst funding system is much easier. Programs involving joint federal-state funding contain built-in incentives to expand the size of government because politicians at either level can buy more votes by expanding the program, knowing that they only have to pay (depending on the formula) a share of the cost. In other words, lawmakers can promise $1 worth of goodies for, say, 50 cents. This is one of the reasons why Medicaid is a fiscal disaster. It’s also why welfare reform was a step in the right direction (the old system funneled more money to states when they added more people on the dole, creating a terrible incentive system). Unfortunately, politicians generally make things worse rather than better, and a Wall Street Journal editorial (sub only) shows how the SCHIP program is encouraging more government:

Schip was created in 1997 to help insure children from low-income families, but it has since become a stealth vehicle to expand government control of health care. Schip expires next week, and House and Senate negotiators are hashing out a “compromise” that would expand the program by about $35 billion over the next five years (plus a budget gimmick concealing at least $30 billion). … Many states like New Jersey have been taking advantage of Schip’s “flexibility” and covering more affluent children, their parents, and even childless adults. In a tardy response to this trend, the federal Department of Health and Human Services announced in August that before states could further expand their Schip programs beyond 250% of poverty, they would have to enroll 95% of children below 200% of poverty. …For several years the number of uninsured New Jersey children under 200% has held steady, while New Jersey’s Schip rolls have grown by about 10% a year. One major reason is that the state continues to enroll families with incomes up to $72,275. … Governor Corzine could always tax his own residents to pay for this largesse. Then again, New Jersey already has one of the worst tax burdens in the country, and Trenton has raised taxes five times in the last six years. For the Governor, the political beauty of Schip is that it allows New Jersey to finance its spendthrift ways on the backs of more responsible states.