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Frozen Out 

The fate of North Carolina's model child health insurance program offers an early test of the state's budget priorities

Until the start of this year, when patients showed up at his Wake County pediatric offices without insurance, Dr. Wallace Brown knew he could help them find a way to pay for their care. For those occasions, Brown, who's a member of Raleigh Pediatric Practice, kept a stack of brochures handy describing North Carolina Health Choice for Children. The statewide plan offers free or low-priced health insurance to children of families earning too much to qualify for Medicaid but too little to afford the rapidly-rising cost of standard premiums.

Health Choice was launched in 1998 as part of the federal Children's Health Insurance Program (CHIP), an initiative that offered grants to states to buy health care coverage for low-income kids. While all 50 states created programs, North Carolina's CHIP has drawn special praise from national research and advocacy groups as one of the most effective programs for children of the working poor. Initially projected to serve 71,300 kids over its 10-year life, by last fall Health Choice had already passed the 69,000 enrollment mark, with new enrollees signing up at the rate of 1,500 per month.

But in January, the state hit a financial wall. Facing a growing budget shortfall, and with the number of children entering Health Choice threatening to outstrip the $28 million in state funds budgeted for this year, North Carolina became the first state to freeze enrollments in its child health insurance program. Dick Perruzzi, director of North Carolina's Division of Medical Assistance, which oversees Health Choice, says the state seriously underestimated the number of working families whose children would qualify for the program. "We had to freeze enrollments in order to stay within the budget," he says.

While they don't dispute the financial numbers, what concerns practitioners like Brown is that in the name of fiscal responsibility, state leaders have put the brakes on a program that draws almost $3 in federal matching funds for every $1 North Carolina spends on insuring children who would otherwise go without health care coverage.

"The good news is that we've got 70,000 kids enrolled," says Brown, who is co-chair of the state Pediatric Society's Health Choice Task Force. "It's discouraging that folks are now targeting that success as a crisis."

While children already signed up for Health Choice remain covered, those qualifying after Jan. 1, or those who failed to re-enroll before the end of last year, have been placed on a waiting list. By the middle of February, that list had grown to 3,714 names. The numbers are even more significant when you consider that children have to be uninsured for at least two months before they can qualify for Health Choice.

Physicians are among those now furiously lobbying elected officials to lift the enrollment freeze, but they're not optimistic that a thaw will occur before the end of the budget year on June 30--or even later, if lawmakers decide to keep the program capped.

"On health issues, we're probably third or fourth in line after Medicaid and the state employees health plan," says Brown, a cloud temporarily darkening his professionally sunny expression. "It's frustrating to know that we have the means to successfully identify those in need, but we can't actually get more kids enrolled in this program."

Hostage To The Budget


You don't have to tell that to Marion McNeil. She was covered under Medicaid until two years ago, when she got a job as a clerical assistant for the state Department of Health and Human Services in Raleigh. McNeil's new $21,000-a-year salary meant her two children qualified for Health Choice. But when she failed to renew her son and daughter's membership in the program before the January freeze, she discovered that her family had been dropped from the rolls. McNeil says she was moving at the time and might not have received notices sent out by the state about the need for early renewals because of the cap on enrollments.

"What happened was, I took my son to the dentist to get a tooth pulled and that's when I thought I could fill out the paperwork," says the 35-year-old Raleigh native. "But the lady informed me that they had a freeze on and there was no telling what the timeline would be" for ending it.

In the past few weeks, 10-year-old Quentin caught the flu and had to visit the emergency room, while 9-year-old Jasmine has a cavity that needs to be filled. Without Health Choice, McNeil is scrambling to find the money to pay for those services on her own.

"It's hard," she says, a shard of anger cutting through her voice. "The emergency room is $200 just to see a doctor. If health care at my job was affordable, I'd get it there. But for a family it costs between $300 and $400 a month, and that's too big a chunk out of my paycheck.

"You have people who are working that are trying to use social services only for a small portion of help," McNeil adds. "Right now, with this freeze on, it's easier for someone who doesn't have a job to get health care" assistance from the state.

Advocates for affordable health care had hoped state legislators would agree before January to release $1.5 million in reserve funds to allow Health Choice to continue enrolling children for the remainder of the current fiscal year. Instead, decisions about funding the program are now hostage to the larger debate over the state budget, which Gov. Mike Easley is expected to present to the General Assembly on March 5.

If state legislators approve more funds for Health Choice, say advocates like Jonathan Sher, president of the North Carolina Child Advocacy Institute and vice-chair of the multi-group Covenant With North Carolina's Children, there is plenty of federal money available to lift the freeze and expand enrollments.

Sher points out that North Carolina was one of only 10 states that managed to use its entire federal child health insurance grant. As a reward, the Tar Heel state will receive an extra $21 million this year in funds unspent by other states--providing North Carolina lawmakers come up with the $7.2 million match. Health Choice currently spends just under $121 per month per child, says June Milby, the program's coordinator. At that rate, $28.2 million translates into coverage for another 19,283 children--more than enough to meet the projected need had there been no freeze imposed.

In a normal budget year, state leaders say, more money for Health Choice wouldn't be an issue. But with an $800 million hole looming in this year's spending plan, backers of the program have been asked to stand in line along with everyone else in a competitive process known as "zero-based budgeting."

In theory, the process means the budget starts from zero and every spending item must be justified before funds are approved. But not everyone buys the idea that that's how zero-based budgeting works in practice.

"I believe it's a strategy to lower the expectations of state employees, retirees, people seeing coverage for their children," says Dana Cope, executive director of the State Employees Association of North Carolina. Legislators "just don't want to have to deal with the advocacy groups this year." For example, he says, there's no way that state leaders are going to start from scratch on such key budget items as public schools.

While politicians from Gov. Easley to state House Speaker Jim Black (D-Mecklenburg) insist they support the goals of insuring more low-income children, so far, elected officials have failed to commit the money to allow Health Choice to do just that. Easley's recent State of the State address made not a single mention of Health Choice, despite claims by his Policy Director, Alan Hirsch, that the program is one of the governor's "top priorities."

The irony is, state leaders are reining in a program that's been hailed as an unqualified success. A study of a dozen states by the national consumer group Families USA found that North Carolina showed the greatest jump in the number of insured children between 1996 and 1999--up 15.8 percent. And Health Choice's most recent annual report shows the number of uninsured children from low-income families in North Carolina dropped by 8.6 percent between1999 and 2000 from 119,081 to 108,849.

Now, in place of progress, the state's child health insurance initiative "has gone from being a national example to being a national disappointment," says Adam Searing, director of the Raleigh-based N.C. Health Access Coalition. "What we're going to have to do with the legislature is say, 'If you're not going to spend this money on children, what are you spending it for? What could be more important?'"

Funding and Fairness


One item the state is spending money on is a tax credit for middle- and upper-income families who pay for their children's health insurance. The credit, which is based on family size and income, ranges from $100 to $300 and is available to those with yearly salaries of up to $100,000.

In 1999, the state's Office of Fiscal Research reports that 71,249 North Carolina tax returns included the child health insurance credit. The total price tag for the state was $12.7 million--much less than the $65 million the credit was expected to cost, but nearly double the amount needed to draw down extra federal dollars now available for Health Choice.

The tax credit was among several compromises lawmakers made when Health Choice was created during a fiercely partisan special legislative session in the spring of 1998. While the state Senate supported then-Gov. Jim Hunt's plan to cover 71,000 low-income kids by expanding benefits available under Medicaid, House Republicans balked at what many viewed as an overly generous plan.

GOP leaders proposed a number of changes in the initial program design, including a tax credit with no income limit for families who pay for their own insurance. In the end, Democrats held their ground on program benefits, creating Health Choice as a separate program with services comparable to the wide range offered under Medicaid (See infobox, opposite). For their part, Republicans won on program enrollment fees and a tax credit for families earning up to $100,000.

Health Choice supporters say state leaders looking for funds to expand enrollments don't have to look any further than the tax credit historically linked to the program. If the credit is eliminated or capped at a lower income, they argue, money would be freed up to enroll more children in Health Choice.

"What we're saying is, let's look at the credit and instead of covering people that way, why not use it over on the program side, where we can draw down $3 for every $1 in state funds?" says Dan Gerlach, of the North Carlolina Budget and Tax Center, which is a member of the Covenant with North Carolina's Children.

Besides the fiscal argument, there is a fundamental fairness issue at stake, says Sher, of the Child Advocacy Institute, since no limits have been placed on the amount of state funds available to families who qualify for the tax credit. For those families, "there is no cap on state dollars, no freeze, no waiting list," for a publicly financed benefit, he says. "Meanwhile, children of the working poor who need help are being frozen out of Health Choice."

So far, state legislators--even those who have previously supported the child health insurance program--haven't been quick to champion the idea of cutting or eliminating the tax credit.

"My impression is that there probably will be interest in closing such [tax] loopholes, but not until we are further down the road," says state Sen. Bill Martin (D-Guilford), chair of the Senate Health and Human Services Appropriations Committee. "First, we have to see what other savings can be found in the budget."

Such reticence may change as a new tax commission, headed by former state Treasurer Harlan Boyles, begins its work. Easley called for creation of the commission to review loopholes that are now costing the state up to $2 billion a year.

But in the absence of any clear direction from the governor on which loopholes he wants to see closed or which needs he would target with those revenues, efforts to eliminate specific breaks--such as those offered to upper income families who pay for child health care coverage--will likely be a hard sell with the legislature.

Outside the General Assembly, long-time critics of Health Choice are already gearing up to fight any moves to alter the tax credit associated with the program.

"That would be disgusting," says John Hood, president of the conservative John Locke Foundation in Raleigh. "What you'd be doing is ripping away the only fairness that people who've been making sacrifices by not being on the public dole receive, as a way to entice other people to come on the public dole.

"What I'd like to see is at least some attempt to introduce some modest cost-sharing into this program"--including higher enrollment fees, Hood adds. "And secondly, I'd want to tighten the eligibility a bit more."

Sending A Signal


Targeting Health Choice to those who need it most was at the heart of the debate when the program was created. The idea was that the working poor and children from low-income families shouldn't suffer because their parents' salaries made them ineligible for Medicaid. A little political sleight of hand also came into play in order to achieve passage: The program was not created as an "entitlement" (wherein anyone who qualifies would receive benefits), but instead was funded based on an estimate of the total need--then projected at 71,300 kids over 10 years. That way, the state was supposed to be able to control costs while avoiding closing the door on new applicants.

So what happened? Health Choice Coordinator Milby points to the lack of precise data on how many people need the program.

"It's like trying to catch a moving target," she says. "We're trying to guess what the maximum number of children out there might be. We [now] think it's somewhere in the neighborhood of 100,000 but there's just no good way to measure if that's accurate."

Census figures can't account for the complexities of how many working people will drop their insurance because employers are passing along a larger share of rising premium costs, she says, or how many parents will move off welfare into jobs that don't come with health care coverage for their kids.

"So then the issue becomes, when do you put the cap on the program?" Milby says. "The legislature needs to make the decision about whether they want to keep the level where it is or take it up to the maximum that federal dollars will allow."

At the same time, the state is bracing for an anticipated 25 percent drop in federal funding for Health Choice that goes into effect next year. In a move that, like the freeze on enrollments, has nothing to do with the realities of how the program works, federal child health insurance block grants to the states were artificially lowered for a three-year period as part of a compromise to keep the federal budget on track. Federal funds then go up slightly for the remaining years of the program.

"In order to plan for that reduction we have to be careful about how we spend money in the program's first three years so we can get over the notch," says Perruzzi, of the state Division of Medical Assistance. The last thing state officials want to do, he adds, is invite children into a program that they'll later have to cut back.

But advocates for affordable health care argue that by freezing enrollments at a time when an extra $21 million in federal funds are available, North Carolina is missing an opportunity to fill an immediate need. And for many who believed from the start that Health Choice should be an entitlement program, the warnings from Raleigh about out-of-control costs are a bitter irony.

"There is a big disconnect in state government about how this program is working," says Searing, of the Health Access Coalition. "This is not an unlimited program, it's not an entitlement. What we're talking about is simply raising the cap to cover another 20,000 or so kids." At that level, Health Choice would cost the state an additional $7.6 million next year and $15.9 million the following year.

There is a long-term funding problem with Health Choice implied by the drop-off in federal funds, says Tom Vitaglione, a former head of state Children and Youth Services who helped design the program. But North Carolina's decision to freeze enrollments assumes that Congress will fail to provide any additional money in future years--an unlikely scenario, he believes, given the long-term prospects for federal budget surpluses.

Lifting the freeze on Health Choice would send a signal to federal grant makers that state leaders view the program as a priority, says Vitaglione, who's now a senior fellow at the Child Advocacy Institute. And it would allow elected officials to respond to a need that's been demonstrated across the state.

"There is a positive side to having a waiting list, because every member of the General Assembly has [constituents] that are on it," Vitaglione says. "I think we'll come back to this point and realize we should never have had a freeze in the first place."

For the moment, elected officials appear fixated on the short-term difficulties posed by a tight state budget. Support for expanding Health Choice, "isn't a philosophical problem, it's a practical problem," says Alan Hirsch, Gov. Easley's policy director. "The argument that costs won't grow uncontrollably in future years doesn't get us to first base in paying for it today."

In searching for added funds for the program, Hirsch says the governor is reviewing the existing state budget, and is talking with federal officials about the size of North Carolina's child health insurance grant. "Our position is, you either have the money or you don't," Hirsch says. "Right now, we are looking everywhere we can to find funds to pay for this incredibly important program."

Who Pays?


One question that doesn't often get aired in discussions about Health Choice is what it would cost the state not to expand the program. For that answer, Don Dalton looks no further than his bulging files on North Carolina hospitals.

A spokesman for the state Hospital Association, Dalton has been collecting information on how much hospitals spend caring for the uninsured. His surveys show that in 1997, hospitals in the state spent $1.34 billion on such services. In 1998, that number climbed by $56 million, in 1999 by another $115 million and last year by an additional $177 million.

"So by next year, hospitals will be looking at spending between $1.3 billion and $1.4 billion for care of the uninsured for which they never get reimbursed," Dalton says. "That pushes up the cost of all other hospital services and the cost of insurance," which in turn leads to a rise in the number of people without coverage.

A survey recently done for the hospital association by the accounting firm Deloitte and Touche shows that every 1 percent rise in health insurance premiums in North Carolina costs an average family of four $55, and pushes 5,400 more people into the uninsured category. And with health care costs continuing to mount, "nobody in this state is predicting just a 1 percent increase in insurance premiums," Dalton warns. "They're predicting double-digit increases."

Beyond the numbers in such surveys, child advocates say common sense suggests the state won't be saving any money by failing to provide children with needed health care coverage.

"Do we think it's smarter to have kids relying on expensive emergency room care?" asks Sher of the Child Advocacy Institute. "What's the cost of having a kid repeat a grade in school because they can't afford eyeglasses?" In addition, the need for affordable health care coverage may be greater than anyone realized. June Milby notes that outreach efforts in the first years of the program have concentrated on families on the lower end of the eligible income scale, potentially leaving out children from homes at the higher income levels.

Latino families are another group that's likely been underserved by the program. Right now, 6 percent of children enrolled in Health Choice are Latino, but census figures don't provide enough evidence to show whether that's adequate to meet the needs of the state's growing Spanish-speaking communities. Also, the program's annual report points out, the required two-month waiting period means that families of children with disabilities are less likely to take advantage of Health Choice because they are least able to risk going without coverage, however expensive, even temporarily.

And then there are the worrisome side effects of the state's new two-year limits on public assistance that were imposed as part of welfare reform. A recent survey commissioned by the Durham County Social Services Department showed less than 20 percent of clients who had left the state's basic assistance program, known as Work First, for jobs had moved into positions with employer-provided health insurance.

"My colleagues and I are very concerned about the ability of families to be able to survive without Work First and Medicaid if we're going to have waiting lists for Health Choice," says Dan Hudgins, the department's director.

One worry voiced by critics of Health Choice--that the program will encourage families to drop private insurance coverage so their children can qualify for lower-cost care--appears to be unfounded. Studies of the program by the Cecil Shepps Center for Health Services Research at the University of North Carolina at Chapel Hill found less than 1 percent of Health Choice enrollees had intentionally dropped private coverage to participate in the program. That means for the vast majority of enrolled families, Health Choice is the only access their children have to affordable health care--another reason why supporters are fighting so hard to lift the freeze.

"Families are in desperate situations when they don't have access to health care," says Michelle Rivest, director of the Orange County Partnership for Children, one of numerous community agencies that have volunteered to help publicize Health Choice. "It's clear that people want and need this program. And if we had more resources, we could do even more with it."

A Test of Priorities


So why is a program that's a policy "no brainer" having trouble finding political backing? "It isn't that we lack friends," says Sher, of the Child Advocacy Institute. "It's that this issue has gotten swept up in the larger budget debate." Many legislators view a decision to provide even the relatively small amount of money needed to lift the freeze on Health Choice as a slippery slope.

"There are a lot of folks out there who support various programs that need just $1 million or $2 million," says Rep. Lanier Cansler (R-Buncombe), a member of the Health and Human Services Appropriations Committee who participated in the legislative session that created Health Choice. "Individually, none of them seem that big. But when you add them all together, it's a lot of money."

"The budget has put this program in a more precarious position," says his Senate colleague Martin, of Guilford County. "I'm very confident that it will continue at the current level. But in terms of expanding it, that's the difficult part right now."

It doesn't have to be that way. Pam Silberman, a former deputy director of the state Health Planning Commission, remembers that in 1991, when the state was facing another severe budget shortfall, the General Assembly still chose to invest significant funds in a statewide program aimed at reducing infant mortality.

"Even within a budget shortfall there is always some reallocation of resources," says Silberman, who was a lobbyist for N.C. Legal Services at the time and is now associate director for policy analysis at the Shepps Center at UNC-Chapel Hill. "The question is, will this [Health Choice] program be a priority or not?"

Given the governor's failure so far to identify new revenue sources beyond a lottery for education, many Health Choice supporters in the General Assembly are worried that the likely answer is "No."

And what of the dreaded T-word?

"There isn't a will to raise taxes in the Legislature--although I do see that will among the public," says state Rep. Ruth Easterling (D-Mecklenburg), co-chair of the Appropriations Committee. "Unfortunately, we're going about things all wrong. We ought to decide what the needs are and then raise the money. Instead, we're seeing what money we have and trying to fit the needs in."

Despite the popularity of Health Choice, activists see the current struggle to expand the program as one more sign that when it comes to setting priorities, the needs of the working poor are usually far down the list. Says Adam Searing of the Health Access Coalition, "Poor children don't vote and nobody wants to talk about closing tax loopholes. I think we're going to have to fight for this program because legislators are still looking to poor and vulnerable people to foot the budget bill." EndBlock

More by Barbara Solow

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