Hawaii’s Keiki Crash Offers Lesson for All

Published January 1, 2009

Hawaii just had a vivid lesson in health care economics, learning that if you offer people insurance for free—surprise, surprise—they’ll quickly drop other coverage to enroll.

As a result, Hawaii has ended the only state universal children’s health-care program in the country … after just seven months.

The program, called the Keiki (Child) Care Plan, was designed to provide coverage to children whose parents can’t afford private insurance but who make too much money to qualify for other public programs, such as Medicaid and Hawaii’s State Children’s Health Insurance Program. Keiki Care was free, except for a $7 office-visit fee, for these “gap kids.”

Leaving Private Plans

But then state officials found families were dropping private coverage to enroll their children in the plan  “People who were already able to afford health care began to stop paying for it so they could get it for free,” said Dr. Kenny Fink of Hawaii’s Department of Human Services.

In fact, 85 percent of the children in Keiki Care previously had been covered under a private, nonprofit plan that costs $55 a month.

When Gov. Linda Lingle (R) saw the data, she pulled the plug on funding. With Hawaii facing budget shortfalls, she realized it was unwise to spend public money to replace private coverage that children already had.

Yet Lingle is facing a political firestorm from critics who say she’s denying children health insurance—even though children in Hawaiian families earning up to $73,000 a year are eligible for Medicaid.

Lesson for Washington

All this is a lesson for political leaders in Washington who are drafting plans to expand SCHIP to children in families earning up to $82,000 a year or more. That expansion would wind up doing what Keiki Care did: Crowd out the private coverage that millions of middle-income kids already have.

During last year’s Washington debate over expanding SCHIP, many politicians took a principled stand against expansion of the program into these middle-income families. They supported President George W. Bush’s veto because they feared SCHIP expansion would largely just crowd out existing private insurance.

Plus, two-thirds of kids who lack health insurance are already eligible for government help through either SCHIP or Medicaid. The opponents of expansion said Congress’s first priority should be to make sure these poorer, uninsured children are taken care of.

States have struggled to get these children enrolled. If there is a stampede to cover higher-income kids, the poorer kids will likely continue to get left behind.

Massive Crowd-Out

The Hawaiian debacle also should be a caution to President-elect Barack Obama, who wants to mandate health insurance for all children at the national level. That would require not only penalties for those who don’t comply, but also new programs to help parents get their children covered. The risk of further crowd-out will be great.

MIT economist Jonathan Gruber says his studies “clearly show that crowd-out is significant,” on the order of 60 percent. That means SCHIP coverage replaces private health insurance in 60 percent of all cases, and the rate will be greater if we extend eligibility to families with even higher incomes.

Universal coverage in any form is an increasingly elusive goal. Several states (including California, Illinois, Pennsylvania, and Wisconsin) have attempted major efforts to advance toward health coverage for all citizens. All have had to turn back because the costs were prohibitive.

Unintended Consequences

Massachusetts enacted a universal-coverage law in 2006, but state officials no longer claim achieving that goal is even possible. The law’s backers had insisted universal coverage was imperative to get costs under control, yet the state faces serious budget shortfalls even after imposing new fees and taxes and getting an extra $21 billion from the federal government to try to balance the program’s books.

Health care reform is a tricky business—any change can bring unintended consequences, especially if lawmakers don’t get the incentives right.

That’s why Hawaii had to say “Aloha” to its Keiki Care program twice in just seven months.

Grace-Marie Turner is president of the Galen Institute, a nonprofit research organization focusing on health reform. This column originally appeared in the New York Post and is reprinted with permission.