S-chipping away at free markets.(PUBLIC POLICY)(expansion of State Children's Health Insurance Program)

TEN years ago, Congress enacted the State Children's Health Insurance Program, or S-CHIP, to cover kids whose parents were doing too well to qualify for Medicaid assistance but not well enough to buy their own insurance. Now the program is up for reauthorization, and congressional Democrats want to expand it as a down payment on national health care.

The program has already expanded beyond its original mission. New York is planning to cover families that make four times the federal poverty line. Almost 700,000 adults get their coverage through the program. The design of the program abets its growth: When states expand benefits, the federal government picks up most of the tab.

The program's expansion has come at the expense of private health-care coverage. The Congressional Budget Office estimates that the Democrats' proposal would get insurance to 2.3 million additional children but simply replace private insurance for another 1.7 million. (It does not report on how many adults would also lose their private coverage.) Liberals are untroubled by this prospect. The replacement effect "hardly matters as long as the net effect is an expansion of insurance," says The New Republic. But it means that taxpayers are not getting much bang for their bucks.

S-CHIP also creates a trap for low-wage workers. Michael Cannon of the Cato Institute notes that, in combination with other welfare programs, S-CHIP levies a very high effective marginal tax rate on many such workers. If they work hard to make more money, that is, the resulting loss of benefits can put them behind where they started.

Senate Democrats would finance the S-CHIP expansion by hiking cigarette taxes. These taxes fall most heavily on the poor; they cannot be hiked much further without stimulating black-market activity; and they will not raise the ...