‘All Kids’ Has All Kinds of Problems

Published December 1, 2005

While being praised by liberal interest groups as a first-of-its-kind program, Gov. Rod Blagojevich’s All Kids program is not really the first instance in which government has entered into the health insurance industry with a “product” that proposed to save money and allow greater access to health care. Maine’s Dirigo Health Plan, passed in 2003, looks eerily like All Kids–both in structure and in manner of implementation.

Since Dirigo’s passage, Maine’s health care marketplace has suffered an explosion in Medicaid costs, higher health insurance premiums (including a new 4 percent premium tax to pay for Dirigo), an erosion of the private insurance market, uncompetitive health care providers, and an extremely expensive individual insurance market. In Maine, an individual insurance policy with a $5,000 deductible now costs a 20-year-old male almost $190 a month, or $2,263 a year. If Maine’s experience is a guide, taxpayers and policymakers should take a hard look at All Kids to ensure Illinois doesn’t do irreparable harm to health care in Illinois.

Looks Appealing Initially

At first, Blagojevich’s health proposal is very seductive. It would offer uninsured children comprehensive care for monthly premiums below market prices. According to the governor, a family of four earning between $40,000 and $59,000 a year will pay a $40 monthly premium per child and $10 co-pay per physician visit. Even families making $100,000 are eligible for the program.

To subsidize the low premiums, the governor will seek a U.S. Department of Health and Human Services waiver to move Medicaid enrollees, except for the blind and nursing home residents, into a state managed care program. The estimated $56 million per year in savings from managed care will pay for what the governor claims will be a $45 million annual program for an estimated 253,000 uninsured middle-income kids.

The first sign of trouble emerges, however, when the program promises to reimburse health care providers at Medicaid rates only. Illinois has some of the lowest Medicaid reimbursement rates in the country, and that has limited Medicaid enrollees’ access to providers, forcing enrollees into emergency rooms, where care is expensive. Media outlets report doctors have attended the governor’s rallies to protest the program because of the low reimbursement rates.

We’ve Seen This Before

As with Dirigo in Maine, the governor and Democratic legislative leaders short-circuited the legislative process to expedite passage of All Kids in the fall veto session, when major legislative initiatives are rarely attempted. From the governor’s announcement to the end of the veto session, Illinois fundamentally restructured its health care market in just a few weeks.

Maine’s political leaders pulled a similar stunt when they introduced the Dirigo Health Plan with just four weeks left in Maine’s 2003 legislative session, debated it, signed it, and implemented it. Since Dirigo’s passage, we have learned that for every $1 saved in Maine’s Medicaid program there was $10 in new state health spending.

If All Kids is run similarly, a price tag of hundreds of millions per year could well be in the offing.

Could Trash Marketplace

Another troubling aspect of All Kids is its potential impact on Illinois’ health insurance marketplace.

The Dirigo plan chased private insurance providers out of the state, thus limiting choices and raising costs for consumers choosing private insurance. The All Kids program, in the name of affordability, promises to provide health insurance at below-market prices. The claim is that there are 253,000 kids currently without health insurance and that the figure will remain the same once the program is implemented. However, such a static analysis fails to account for the incentives that below-market health insurance rates will create for parents to switch to the cheaper, state-run system.

Maine shows this to be true. From 2000 to 2004, the portion of Maine’s population below age 65 on Medicaid increased 9.7 percent, while the uninsured rate dropped a scant 0.4 percent. Almost all the Medicaid expansion came when already-insured people dropped their private coverage. Maine now has the largest Medicaid program in the country. This is a record Illinois seems intent on following.

Essentially, Gov. Blagojevich is taking state government into the insurance industry and undercutting the private sector. The abundant supply of cheap government insurance will create an incentive for businesses to dump coverage for employees’ children, because parents can cheaply insure kids through the state. Parents participating in the individual market will be able to forgo covering children, put the kids in Medicaid, and then pocket the difference.

If All Kids is anything like Dirigo, Illinois will begin a vicious cycle resulting in a program much more expensive than currently estimated. Private insurers will begin exiting Illinois, and private-sector insurance pools will shrink. As pools shrink, private insurance premiums will have to rise because risk will be spread among a smaller population. That will price more families out of the private health insurance marketplace and force them to enter All Kids.

The result we can expect from All Kids is the same result we received with Medicaid: an unsustainable program unable to pay its bills.

Greg Blankenship ([email protected]) is executive director of the Illinois Policy Institute.