Politics & Policy

S-Chipping Away at Free Markets

Ten years ago, Congress enacted the State Children’s Health Insurance Program, or S-CHIP, to cover kids whose parents were doing too well to qualify for Medicaid assistance but not well enough to buy their own insurance. Now the program is up for re-authorization, and congressional Democrats want to expand it as a downpayment on national health care.

The program has already expanded beyond its original mission. New York is planning to cover families that make four times the federal poverty line. Almost 700,000 adults get their coverage through the program. The design of the program abets its growth: When states expand benefits, the federal government picks up most of the tab.

The program’s expansion has come at the expense of private health-care coverage. The Congressional Budget Office estimates that the Democrats’ proposal would get insurance to 2.3 million additional children but simply replace private insurance for another 1.7 million. (It does not report on how many adults would also lose their private coverage.) Liberals are untroubled by this prospect. The replacement effect “hardly matters as long as the net effect is an expansion of insurance,” says The New Republic. But it means that taxpayers are not getting much bang for their bucks.

S-CHIP also creates a trap for low-wage workers. Michael Cannon of the Cato Institute notes that, in combination with other welfare programs, S-CHIP levies a very high effective marginal tax rate on many such workers. If they work hard to make more money, that is, the resulting loss of benefits can put them behind where they started.

Senate Democrats would finance the S-CHIP expansion by hiking cigarette taxes. These taxes fall most heavily on the poor; they cannot be hiked much further without stimulating black-market activity; and they will not raise the target amount of money unless a lot more people take up the newly expensive habit. (House Democrats would raise additional money by also kneecapping the private-sector component of Medicare.)

A lot of children are going without health insurance for the same reasons that a lot of adults are: Government policies have made health markets dysfunctional. Instead of giving up on those markets and having the federal government pick up the tab, we should fix those policies. We could start by taking two steps the Bush administration advocates. The first is to reform the tax code so that individuals who buy health insurance for themselves can get the same tax break that employer-provided health insurance gets. The second is to allow individuals to cross state lines, and thus jump over their own states’ onerous mandates, to buy insurance.

Cannon, the Cato Institute health-care expert, makes a strong case for a third step: treating S-CHIP and Medicaid the way we treat welfare. In 1996, we reformed welfare by block-granting it to the states. Similarly, Congress should give a set amount of money to the states to cover needy families. It should not reward the states for being more generous.

The Democrats are in no mood to do any of these things. “Health insurance for kids” is a popular slogan, of course, and much of the business community is with the Democrats. Health-care providers are happy to get new subsidies, and some of them are afraid that Congress will ding them if they don’t get on board.

If the Democrats agree to enact some free-market reforms, it might be worth supporting a modest expansion of S-CHIP. Otherwise, President Bush should make good on his veto threat.

The Editors comprise the senior editorial staff of the National Review magazine and website.

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