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My Two Cents

A Strong Defense of SCHIP

Chris Farrell Oct 6, 2007

This is the best defense of why the President should have signed rather than vetoed the SCHIP legislation. It’s posted on Greg Mankiw’s blog. Mankiw also has a defense of the President’s position that comes from inside the White House. I didn’t find it convincing, but check it out, too.

Furman on SCHIP
On my invitation, Brookings economist Jason Furman, a frequent adviser to Democrats in Congress and on the campaign trail, offers his response to the White House’s view of SCHIP:


Thanks for voluntarily subjecting yourself to the Fairness Doctrine. Last week Senator Grassley, the Republican ranking member of Senate Finance, got so angry about the White House’s description of the SCHIP legislation that he said the President’s “understanding of our bill is wrong, and I would urge the president to reconsider his veto message based upon the bill we might pass, not something that some staffer has told him wrongly about our bill.” I have to agree.

While we might have differences of opinion about health insurance and the role of government we should all be basing our opinions on the same set of facts. And some key ones are:

(1) The President supports a proposal that would reduce annual spending on SCHIP relative to inflation and reduce the number of covered children and pregnant women by 840,000 according to the Congressional Budget Office (CBO).

You might ask how the $5 billion increase in spending over 5 years promised by the White House could result in more uninsured. The answer is that for technical reasons the CBO baseline assumes $5 billion in nominal dollars annually going forward, something depicted in the flat green line in your previous post. But spending at this baseline would fall relative to general price inflation and plummet relative to health spending growth. As a result, under CBO’s baseline the number of people covered would fall from 7.4 million in 2006 to 3.5 million in 2017, despite an increase in the eligible population.

(2) The Democrats and a substantial number of Senate Republicans support a proposal whose principal focus is covering low-income children who are currently eligible (3.2 million according to CBO) plus expanding coverage modestly to new children (600,000 according to CBO). In total 85 percent of the coverage expansion is for those who are already eligible but are not getting coverage either because the funding limits assumed in the baseline are projected to be reached leading states to turn away currently eligible children or because families simply do not sign up for the coverage that is available to them.

(3) Although the SCHIP legislation is typically described as “costing” $35 billion, much of this sum is needed simply to maintain the current enrollment and service levels. Democrats insisted that the entire $35 billion be paid for without increasing the deficit. This was significant because some in the party were arguing that there was no need to pay for the portion of the $35 billion that covers the continuation of current service levels, just like Republicans argue that there is no need to pay for the extension of tax cuts.

And to continue on the subject of fiscal responsibility, it is indeed unfortunate that the SCHIP bill has a cliff after 2012 (although it’s an odd accusation for supporters of the 2001 and 2003 tax cuts to be making). It is, however, important to realize that the cliff wasn’t in the original House bill which helped pay for the SCHIP expansion with $50 billion over five years in Medicare spending cuts along the lines recommended by Congress’ bipartisan Medicare Payments Advisory Commission (MedPAC). Senate Republicans insisted on taking out the Medicare spending cuts, leaving behind a cliff in net spending. But as long as PAYGO is still in force five years from now the extension will again have to be paid for, hopefully next time with many of the spending cuts originally supported by House Democrats.

(4) States have always enjoyed flexibility on setting their own income eligibility levels under the SCHIP program. And since 2001, the Administration has actively encouraged states to apply for waivers to use SCHIP funds for adults. All but two of the waivers covering parents or adults without children were approved by this Administration. The House bill left this flexibility in place but at the insistence of the Senate, the bicameral SCHIP legislation actually significantly scale back current state flexibility. As Senator Grassley explained:

This bipartisan bill refocuses the program on low-income children. It phases adults off the program. It prohibits a new waiver for parent coverage. It reduces the Federal match rate for States that cover parents. It includes new improvements to reduce the substitution of public coverage for private coverage… The compromise bill discourages States from covering higher income kids by reducing the Federal matching rate for States that wish to expand eligibility over 300 percent of Federal poverty limits. It rewards States that cover more low-income kids by providing targeted incentives to States that increase enrollment for coverage of low-income kids.

(5) About three-quarters of people covered by SCHIP are in HMOs run by private insurance companies. Moreover, the new bill expands private insurance options for SCHIP beneficiaries. Which might be why the hospital insurance lobby AHIP – not usually a proponent of steps towards a government-run system for all Americans – supports the bill. (PhRRMA and the American Medical Association also support the bill.)

You believe in a smaller government. But in this case there’s no free lunch. The White House veto will deliver a smaller government but at the cost of a reduction in the number of currently eligible low-income children covered by SCHIP and an increase in the number of uninsured. You might have better ideas about to reduce the number of uninsured children. But I have a hard time seeing how a Presidential veto could be one of them.


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