More than half of the cost of Sen. Kerry’s health plan will fund an expansion of Medicaid and SCHIP (State Children's Health Insurance Program). 4 The goal is to insure almost 18 million additional people. The burden for taxpayers would be about $500 per year for every household in America. But what would the nation really get in return for assuming this extra burden?

A. Problem: Reduction in Private Insurance

Studies show that the expansion of “free” public insurance crowds out private insurance. This means that some people who are privately insured give up their private coverage because they have the opportunity to enroll in the public program. For example, people cease making contributions to an employer plan or they cease making premium payments for individually owned insurance. Or, employers of low-wage workers stop offering employer-provided insurance and instead pay higher wages because private insurance is a less valuable fringe benefit if there is a free care alternative.

The existence of such crowd-out means that the cost of expanding public insurance programs is much higher than people suppose, relative to the gain. For example, if for each new enrollee in a public program at least one person loses private insurance, there will be no net reduction in the number of uninsured, despite the higher taxpayer burden. If for every two new enrollees in the public program one person loses private insurance, the cost for each newly insured person will double. 5

A study by Harvard University Professor David Cutler and Massachusetts Institute of Technology Professor Jonathan Gruber found that Medicaid expansions in the early 1990s were substantially offset by reductions in private coverage. They found that, for every additional dollar spent on Medicaid, private sector health care spending was reduced by 50 to 75 cents on the average. 6 Thus taxpayers incurred a considerable financial burden, although little was accomplished. [See Figure I.]

Crowd-out apparently happened after SCHIP was implemented in 1997. Because of expansions of Medicaid and SCHIP, enrollment of low-income children in public programs increased from 29 percent to 33 percent. At the same time the percent of children from low-income families covered by private insurance fell sharply — from 47 percent to 42 percent. 7 [See Figure II.] During this period, the percentage of children with private health coverage who were not from low-income households did not change. Thus, despite increased spending on public programs, the number of uninsured children was not reduced overall. 8

A casual look at Figure II suggests that in the latter 1990s the crowd-out of private insurance due to the expansion of public programs was close to one to one. More recent data suggests a similar conclusion for the current decade. From 2001 to 2003, the proportion of low-income Americans enrolled in public programs rose by 6.1 percentage points. However, this increase was offset by a 4.9 percentage point decline in coverage by employer-sponsored plans. Overall, the rate of uninsured fell only about one-half point. 9 [See Figure III.] In this case, the data suggest that it takes a 13 percentage point increase in public coverage to reduce the uninsured rate by 1 percentage point.

Kerry’s (i.e., Thorpe’s) estimates assume a 30 percent crowd-out. 10 That is, for every 10 new Medicaid enrollees, three people lose private coverage. As a result, in order to insure 18 million new people (on net) through Medicaid expansion, Kerry would enroll about 26 million to make up for 8 million who lose private coverage. Kerry’s assumptions are much too optimistic, however. The evidence we have seen suggests the crowd-out rate will almost certainly be much higher, perhaps approaching 100 percent.

Bottom line: It is entirely possible that the Kerry plan could spend more than $500 billion and achieve no reduction whatsoever in the number of uninsured.

B. Problem: Failure to Enroll

Making people eligible for enrollment is not the same thing as actually enrolling them. Estimates vary, but anywhere from 10 to 14 million Americans who are eligible for free Medicaid and SCHIP health care are not enrolled. 11 Kerry would extend this opportunity to enroll to millions more. To prod people into accepting coverage, he proposes automatically enrolling children in public schools or when they use community health centers. Past experience suggests this will not be easy. In fact, we can be fairly confident in predicting it will not succeed.

Why do 10 to 14 million Americans who are eligible for government funded health care not even bother to enroll? A possible answer is that they are getting free health care anyway.

A study by the Texas State Comptroller’s office found that Texas currently spends about $1,000 per year on free care for every uninsured person in the state, on the average. 12 These estimates imply that the value of “free” care is about $4,000 per year for a family of four. Interestingly, $4,000 is a sum adequate to purchase private family coverage in many Texas cities. Granted, the two alternatives are not exactly comparable. But to many, the free care alternative appears more attractive than buying private insurance with aftertax dollars.

To our knowledge, no other state has duplicated the kind of intensive study done in Texas. However, an Urban Institute study estimated that uncompensated care to the uninsured nationwide totals about $800 per uninsured individual each year. 13 If the value of uncompensated physician care were included, this total would probably rival the $1,000 Texas figure.

The existence of free care may make enrollment in Medicaid unnecessary. In fact an NCPA analysis of health regions in Texas found that where Medicaid spending was low, free care spending was high — and vice versa. 14 Free care, in other words, appears to be a substitute for Medicaid.

How exactly does this substitution work? Despite a raft of studies claiming that being insured affects access to health care, there often is no difference in services rendered to those who seek care. Take Parkland Hospital in Dallas, for example. Both uninsured and Medicaid patients enter the same emergency room door, see the same doctors and receive the same care. The hospital rooms are the same, the beds are the same, and the care is the same. As a result, patients have no reason to fill out the lengthy forms and answer the intrusive questions that Medicaid enrollment requires. The doctors and nurses who treat these patients are paid the same, regardless of patients’ enrollment in an insurance plan. So they tend to be indifferent about who is insured by whom. In fact, the only people concerned about who is enrolled or not enrolled in what plan are hospital administrators, worried about who will pay the bills.

At Children’s Medical Center, next door to Parkland, a similar exercise takes place. Medicaid, SCHIP and uninsured children all enter the same emergency room door; they all see the same doctors and receive the same care.

Interestingly, at both institutions, paid staffers make a heroic effort to enroll people in public programs — even as they wait for their medical care. Yet they apparently fail to enroll eligible patients more than half the time! After patients are admitted, staffers valiantly go from room to room to continue this bureaucratic exercise. But even among those in hospital beds, the failure to enroll rate is significant.

As an aside, we might ask why anyone should care whether people enroll or do not enroll in Medicaid or SCHIP. In Dallas County, thousands go to hospital emergency rooms to obtain free health care. But the same thing is true in Toronto and London. The difference is that in Toronto and London the patients are said to be “insured” and the fact that the care is “free” is a source of great national pride. In our country, the patients, who are probably getting better care than they would in Toronto or London, 15 are said to be “uninsured” and the fact that they are getting free care is often a source of great national embarrassment.

Problem: Quality of Care. Although it may come as a surprise to many readers, Medicaid (for the poor) now spends more than Medicare (for the elderly and the disabled). The amount equals about $1,000 for every man, woman and child in the country every year. Sen. Kerry calls for a vast expansion of this program and he freely admits that the expansion will shift many from private to public insurance. But is this a good thing for patients?

Medicaid has always experienced problems finding physicians and providers willing to participate in the program. 16 Compared to the privately insured, Medicaid patients have fewer choices of physicians, fewer choices of facilities, and are more likely to experience rationing by waiting. This may, in part, explain why pregnant women covered by Medicaid tend to enroll late, enter prenatal care late (often in their second or third trimester) and receive fewer prenatal visits than privately insured women. 17

Part of the problem is the Medicaid patients’ relationship to Medicaid is very different from a privately insured’s relationship with a commercial insurer. Indeed, Medicaid is far more likely to respond to the pressures of special interests than to the needs of patients. For example: 18

• In Dallas, Medicaid pays some hospitals 50 percent more than other hospitals for the same services; statewide, such practices lead to the waste of hundreds of millions of dollars.
• In Ohio, Medicaid’s method of cost-plus reimbursement pays for 13,000 empty nursing home beds.
• In El Paso, Medicaid over-compensates hospitals and under-compensates primary care, which is desperately needed by the city’s predominantly young, Hispanic population. As a result, clinics have to send patients to hospitals for x-rays and simple blood tests.

Moreover, when state government budgets get squeezed, politicians tend to cut enrollment (“optional” populations) and whole categories of treatment (“optional” services, such as drugs) rather than cut waste. These economy measures are virtually unheard of among employer-provided plans.

Precisely because the enrollees are not the real clients of Medicaid, the program is scandal-prone. Virtually every state has experienced exposés, but a Chicago Tribune investigation a decade ago was particularly revealing: 19

• Over a nine month period, one woman saw 52 doctors — obtaining 2,000 Prozac antidepressant capsules.
• A man was diagnosed with 53 different medical problems from 79 different doctors; the 260 office visits he made cost Medicaid $51,764.
• In the course of 156 visits to 33 doctors, another woman obtained almost 6,000 doses of a codeine-based pain-killer, the tranquilizer Librium, and the sleeping aid Halcion.
• In one 12 month period, a 40-year-old patient saw 58 different physicians for a total of nearly 250 office visits.
• In one year, one patient obtained 9,218 Zantac pills.

Apparently, things have not much improved. A recent General Accounting Office report finds widespread fraud and abuse in every state. 20