Commentary

Sink this SCHIP

The State Children’s Health Insurance Program is set to expire on Sept. 30. Unfortunately, neither side in Washington seems to have considered letting this SCHIP die.

Under SCHIP, the taxpayers fund health coverage for children in families of four earning as much as $72,000 per year, though not all eligible families enroll. Democrats in Congress want to open the program to families of four earning $83,000 per year or more. President Bush is OK with expanding SCHIP to cover well-off families - but only if the states enroll 95 percent of those lower-income children first.

Yet SCHIP is senseless. Like its much larger sibling, Medicaid, the program forces taxpayers to send their money to Washington so that Congress can send it back to state governments with strings attached. Both programs force taxpayers to subsidize people who don’t need help, discourage low-income families from climbing the economic ladder - and make private insurance more expensive for everyone else.

SCHIP casts a much wider net than suggested by its stated purpose - namely, providing coverage to children in families that earn too much to qualify for Medicaid (which ostensibly serves only the poor) but still can’t afford private insurance. According to a study in the journal Inquiry, 60 percent of children eligible for SCHIP already had private coverage when the program was created.

According to the federal Department of Health and Human Services, “About 45 percent of American children are currently enrolled in either Medicaid or SCHIP.”

Inevitably, many families simply substitute SCHIP for private coverage. Economists Jonathan Gruber of MIT and Kosali Simon of Cornell University find that, in effect, when government expands eligibility for SCHIP and Medicaid, six out of every 10 people added to the rolls already have private coverage. Only four in 10 were previously uninsured.

In other words, SCHIP and Medicaid cover four previously uninsured Americans for the price of 10. That’s a bad deal even by government standards. Yet Republicans want to renew it, and Democrats think it’s an absolute bargain. They want to enroll more than 70 percent of all children.

It gets worse. SCHIP discourages these families from climbing the economic ladder. If a single mother of two earning minimum wage in New Mexico increases her annual earnings by $30,000, her net income does not change: She pays an additional $4,000 in taxes and loses $26,000 in SCHIP and other government benefits. Why should families expend that extra effort if it will leave them no better off financially? Expanding SCHIP would pull even more families into that low-wage trap.

Worse still, SCHIP makes private coverage less affordable for everyone. Under Medicaid and SCHIP rules, the government agrees to pay a percentage of what drug makers charge private payers. Economists Mark Duggan of the University of Maryland and Fiona Scott Morton of Yale find that manufacturers respond by raising prices for private purchasers an estimated 13 percent.

All told, SCHIP is a very costly way of helping targeted families obtain health coverage. Fortunately, there are better ways.

Each state forbids its residents to purchase coverage from out of state. That allows each state to enact costly health-insurance regulations without fear of competition from states with more consumer-friendly regulation. The Congressional Budget Office has estimated that these regulations increase health premiums by as much as 15 percent.

Congress could make coverage more affordable simply by letting consumers and employers purchase out-of-state coverage. Tearing down those trade barriers would force states to provide the protections consumers demand and eliminate unnecessary regulations. States that don’t provide consumer-friendly regulations would lose premium tax revenue to other states.

Sweeping away those trade barriers would make coverage more affordable without increasing government spending, trapping families in low-wage jobs or increasing prices for private purchasers.

The Supreme Court has ruled that states cannot prevent residents from purchasing wine from out of state. Why should Americans have fewer rights when it comes to protecting their health?

Congress should let SCHIP expire on Sept. 30 and replace it with the freedom to purchase health insurance from anywhere in the nation.

Some will complain that scrapping SCHIP would leave dependent families in the lurch. As a transitional step, Congress could convert federal Medicaid and SCHIP funding into a smaller, lump-sum payment to each state. That would serve as a halfway point toward eliminating these payments and simultaneously cutting taxes. States that want to maintain their current spending levels could raise the tax revenue themselves.

SCHIP’s record shows that Washington has no special wisdom that gives it the right to dictate how the states provide medical care to the needy.

Michael F. Cannon is director of health-policy studies at the Cato Institute and co-author of Healthy Competition: What’s Holding Back Health Care and How to Free It.