When Does Crowd-Out Occur?
Crowd-Out: A phenomenon whereby new public programs or expansions of
existing public programs designed to extend coverage to the uninsured prompt some
privately insured persons to drop their private coverage and take advantage of the
expanded public subsidy.
Crowd-out also occurs when such programs act as an incentive for employers to
contribute fewer dollars to employees’ health insurance coverage, or altogether drop
coverage in an effort to prompt employees to enroll their children in the new program.
Crowd-out is a concern of both State and Federal programs because it may create shifts
in coverage from private to public insurance rather than decreasing the number of
uninsured children, leading to:
- Fewer improvements in access to care and health status than expected.
- Greater increases in public expenditures than expected.
- The program being less cost effective than expected.
The Health Care Financing Administration (HCFA),now the Centers for Medicare and Medicaid Services (CMS), indicated in a February 1998 letter to State officials
(this letter and other HCFA (now CMS) guidance can be found at http://www.cms.hhs.gov/home/schip.asp  ),
that the potential for
crowd-out—substitution of SCHIP coverage for private group health coverage—exists
because SCHIP provides low-cost coverage for similar benefits that some individuals and
employers currently purchase with their own funds.
There is a concern that in order to save money, employers with low-wage employees could
potentially stop offering dependent coverage and encourage their employees to enroll their
children in SCHIP; or that parents who are currently contributing significantly toward
family coverage may drop that coverage in order to take advantage of the lower
out-of-pocket cost of the SCHIP plan.
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Crowd-Out 
