Highlights from the study:

  • Before expanding government programs to create “universal” health insurance, policymakers should consider states’ experiences with similar efforts.
  • Hawaii created a universal health insurance program in hopes of reaching the uninsured population, but found that more than eight in ten of those who enrolled previously had insurance. Lawmakers decided to terminate this program just seven months after its launch.
  • Government programs to create free or subsidized insurance will encourage many who currently have private insurance to join the government program. This is inefficient and will ultimately erode the private insurance system in the United States.

Executive Summary

President Obama intends to greatly expand government’s involvement in the provision of health insurance, moving toward the goal of “universal” health insurance coverage. He included $634 billion over ten years in his budget for healthcare reform, which his staff has characterized as a “down payment” for a more expensive reform package.

President Obama will find a willing partner in the cause of expanding government’s role in our healthcare system in the Democrat majority Congress. Both Speaker Nancy Pelosii and Majority Leader Harry Reidii have expressed support for universal insurance.

Yet the American people should be concerned about the march toward greater government provision of health insurance. While President Obama pledged during the campaign that nothing will change for those satisfied with their current health insurance, that will be a difficult promise to keep.

Everyone will be affected by such massive changes to our healthcare system. State forays into providing “universal” health insurance provide a helpful preview into what the public can expect from similar federal efforts. For example, the state of Hawaii recently created a program to provide free health insurance coverage for children. Lawmakers intended that this program help the uninsured population, but they found that an estimated 85 percent of those who enrolled had insurance previously.

Recognizing the program’s inefficiency and concerned about its costs, lawmakers terminated the initiative just seven months after its launch. Federal lawmakers can learn an important lesson from Hawaii’s experience: expanding government health insurance programs will crowd out private insurance by encouraging many who are currently covered by private insurance to switch to the government program. This will affect all Americans, both through the high costs of the new program and the strain placed on the private marketplace.

There are better ways for policymakers to make health insurance more affordable and accessible for all Americans: by ending the bias in the tax code for employer-provided health insurance, providing refundable tax credits for the purchase of health insurance, and eliminating regulations that require individuals to purchase policies from providers in their state. More competition and individual control of health insurance resources, not bigger government, is the answer to the United States’ healthcare challenge.


In his address on February 24, 2009 to a joint session of Congress, President Obama made reforming the healthcare system one of this Administration’s top priorities. The budget submitted to Congress contains $634 billion over ten years for healthcare reform, which has been characterized as a “down payment” on a healthcare reorganization which will cost more than one trillion dollars. The Obama administration has indicated that the ultimate goal is to move the country toward universal coverage.iii

Since taking office a few weeks ago, the Obama administration has already taken significant measures to move the U.S. a step closer to creating government-provided universal health insurance. In February, President Obama signed legislation to expand the State Children’s Health Insurance Program (SCHIP).

This new law expands eligibility requirements so that instead of focusing on the working poor, many middle-income Americans will now qualify for government assistance. This expansion is expected to cost more than $30 billion over the next four years.iv

Before the federal government moves further down the road toward universal government health insurance, the public should examine the experience of state programs that are designed to provide health insurance coverage to those currently uninsured. This paper will examine the state of Hawaii and suggest some lessons that can be drawn from their experience.

On June 30, 2007, Hawaii Governor Linda Lingle signed a bill known as the “Keiki Care bill.” Among the legislation’s provisions was the creation of the “Keiki Care plan,” which was to provide free health coverage to any child between the ages of 31 days and 19 years old who were ineligible for the state programs target to those with low incomes (either the state’s Medicaid Fee-for-Service or QUEST, which is a state-run managed care program). The only additional requirements were that the child must live in Hawaii and have been without health insurance for six consecutive months.

Those covered under Keiki Care would have no monthly premium and access to doctor’s visits for a $7 co-pay.v

Before the passage of this bill, Hawaii already had a program, through the Hawaii Medical Service Association (HMSA)–a nonprofit affiliated with the Blue Cross Blue Shield of Hawaii–that allowed families ineligible for QUEST or Medicaid to purchase health insurance coverage for a child for $55 per month.vi

In spite of these programs, between 3,500 and 16,000 children in Hawaii were estimated to lack insurance.vii Keiki Care was intended to address those families who fell into the “gap”: those who made too much income to qualify for state programs target to the low-income community, but were unable to afford paying the monthly fee for health insurance.

Yet after Keiki care was launched in April 2008, Hawaii policymakers found that it was not the “gap” kids who were primarily taking advantage of the new, free government health insurance option.

Indeed, analysts estimated that 85 percent of the 2,021 children who enrolled in the Keiki Plan were formerly covered through the HMSA program. Only about 200 of the new enrollees could be characterized as “gap” kids.viii

Dr. Kenny Fink, an administrator at Hawaii’s Department of Human Services, summed up what was happening: “People who were already able to afford healthcare began to stop paying for it so they could get it for free. I don’t believe that was the intent of the program.”ix Seven months after the program’s launch, citing higher than expected costs and growing concerns about the budget, government officials in Hawaii decided to terminate the Keiki care.

Crowding Out Private Insurance

Policymakers in Hawaii may have been surprised that so many of those who enrolled in the new program previously had insurance, but it was actually a very predictable outcome. When a free alternative becomes available, it’s sensible for families to reevaluate if they should continue paying for a service on their own or seek to qualify for the government-subsidized option. This dynamic will hold true whether the federal government starts offering preschool through the government-run public school system or if they expand eligibility for government-subsidized healthcare.

The “crowded out” effect in health insurance markets has been well-documented by economists and healthcare researchers. For example, economists Jonathan Gruber and Kosali Simon, writing for the National Bureau of Economic Research, found amply evidence that when government expands its programs offering insurance, it is not necessarily the uninsured population that shrinks, but the population that is covered under private insurance. Consider the macro-picture of what has occurred in the U.S., as described by these economists:

From 1984 through 2004, the share of the non-elderly U.S. Population that is uninsured rose from 13.7% to 17.8%. At the same time, the share of non-elderly U.S. Population that is publicly insured rose from 13.3% to 17.5%. In other words, despite an enormous expansion in the public health insurance safety net in the U.S., the number of uninsured continues to grow.

…As is clear from the numbers above, over this same twenty year period the share of the U.S. non-elderly population with private health insurance fell from 70.1% to 62.4%.x Gruber and Simon cite two possible explanations for these statistics: One, that factors unrelated to changes in healthcare policy were increasing the number of uninsured (so that, absent these public efforts, the portion of uninsured would have climbed even higher). Alternatively, public insurance may have failed to reach the uninsured population, and instead simply encouraged those already insured to make the switch to the public roles.

These explanations need not be mutually exclusive. And indeed the researchers found evidence that suggests both factors were likely at work. The majority, but not all, of the growth in public insurance came from the previously insured population. They conclude, “Our central estimates suggest crowdout of about 60%: that is, the number of privately insured falls by about 60% as much as the number of publicly insured rises.”xi

The Heritage Foundation reached a similar conclusion when studying the likely effects of raising eligibility for the SCHIP programs from 200 to 300 percent of poverty: they estimated that about half of new enrollees in SCHIP will be among the previously insured.

As government health insurance programs move from targeting the poor to providing insurance for the middle class, one would expect this “crowd out” effect to become more prominent. Simply understood, government will be offering services to a new population, a greater percentage of whom already has insurance. Therefore, one would expect a higher percentage of new enrollees to be among the previously insured.

Effects on the Private Health Insurance Market

Many citizens evaluating potential government programs may be unconcerned about the creation of these new initiatives and even about the “crowd out” effect. After all, those who move from private insurance to the public rolls are doing so voluntarily. Many presume that their decision to do so will have no meaningful effect on those who remain in the private insurance market.

Of course, everyone is affected by the large price tag taxpayers will face as a result of expanded government health insurance programs.

Yet as a smaller portion of the population pays income taxes, fewer may feel they are directly affected even by this aspect of government health insurance. Indeed, during the campaign President Obama sought to reassure those Americans satisfied with the status quo, promising “if you like your current health insurance, nothing changes.” Yet Americans should consider the dynamic that would occur as the government provides more and more publicly subsidized insurance options.

The migration from the private insurance marketplace to government programs will have consequences beyond the effects on individual families and even beyond the price tag that will have to be borne by taxpayers.

Private insurers will be losing business to the public system and will have increased difficulty offering their services at the same prices. They may have to find ways to cut costs or reduce expenses.

As their services become comparatively less attractive, more people will make the switch to the government program. Employers who today help pay for employees’ health insurance may begin to decide it isn’t worth the investment and that employees would rather have money in their pockets than private care, given the availability of the government alternative.

President Obama may sincerely not want Americans currently happy with their health insurance to be affected by new government policies. But such policies have consequences beyond their most visible beneficiaries.

There Are Better Ways to Cover the Uninsured

Something should be done to help make health insurance more readily available and affordable for American families of all income levels. Yet increasing government’s role as America’s de facto health insurance provider would take our healthcare system in the wrong direction. Simply put, government should not be in the health insurance business. Policymakers should instead focus on how to bolster the market for private insurance, making it more affordable and responsive to individual needs.

Policies deserving consideration include:

  • Create a tax credit for health insurance: Instead of encouraging people to participate in the government health insurance program, qualifying individuals and families could receive a refundable tax credit to purchase health insurance. This would give them the freedom to choose a plan that makes the most sense for their individual needs.
  • Reform the tax treatment of health insurance: Currently our tax code is biased in favor of employer-provided health insurance and against those who purchase healthcare from the individual market. Congress should extend the tax treatment of employer-provided health insurance to individual health insurance. This would make individual insurance more affordable.
  • Enable individuals to purchase health insurance from any state: State regulations can greatly raise the cost of health insurance. Instead of being limited to policies issued in their state, individuals should be able to purchase insurance from anywhere in the country.


Expanding government programs to provide health insurance won’t just affect the uninsured population; it will encourage many to drop private insurance and join the government-subsidized plan.

This “crowd out” effect will lead to higher costs and will impact the private insurance market, which will have fewer customers to target as it competes on an unlevel playing field with government subsidized plans.

Instead of increasing government control, policymakers should seek other ways to make health insurance more accessible and affordable by ending the bias in favor of employer-provided health insurance, eliminating regulations that raise the cost of insurance and price people out of the insurance market, and creating refundable tax credits for the purchase of private insurance.

Carrie Lukas is Vice President for Policy and Economics at the Independent Women’s Forum


i See website: http://www.speaker.gov/pdf/newsroom/speeches?id=0104

ii See website: http://reid.senate.gov/issues/healthinsurance.cfm

iii Ceci Connolly, “Obama Proposes $634 Billion Fund For Health Care: Aides Call Money a ‘Down Payment’

Toward Universal-Coverage Efforts,” Washington Post, February 26, 2009, p. A01. iv Ibid.

v See “Hawaii Covering Kids” website, at: http://www.coveringkids.com/news/Section_253.asp

vi See “Hawaii Covering Kids” website, at: http://www.coveringkids.com/community/Section_14.asp

vii “Hawaii Ends Universal Child Health Care 7 Months After Start,” FoxNews.com, October 18, 2008.

Available at: http://www.foxnews.com/story/0,2933,440561,00.html.

viii “Assure health care to Hawaii’s children,” Star Bulletin, November 30, 2008. (editorial)

ix Hawaii Ends Universal Child Health Care 7 Months After Start,” FoxNews.com, October 18, 2008. Available at: http://www.foxnews.com/story/0,2933,440561,00.html

x Jonathan Gruber and Kosali Simon, “Crowd-out Ten Years Later: Have Recent Public Insurance Expansions Crowded Out Private Health Insurance?” National Bureau of Economic Research Working Paper, 12858, January 2007, p. 1.

xi Ibid, p. 2.