Issue Analysis 51 – Top Twelve False Claims Made About the Hatch-Kennedy Children’s Health Coverage Bill

Sens. Orrin Hatch (R-UT) and Ted Kennedy (D-MA) have proposed legislation to establish a new federal program to buy health coverage for five million children. Sen. Hatch has characterized their proposal as the “free market approach” to insuring children. Unfortunately, neither the bill (S. 525) nor its funding mechanism (S. 526) have been fairly represented.

1. “This is not an entitlement.”1

The bill requires participating states to “ensure that qualifying children’s policies are available to all eligible children in the State and that each eligible child has the opportunity to enroll for coverage” (p. 4 lines 9-12; emphasis added). The “all eligible children” clause seems to create a legal cause of action that constitutes an entitlement. Additionally, the bill grants “budget authority in advance of appropriations Acts” in an apparent attempt to circumvent mandatory spending rules (p. 19-20, lines 22-2). Utah Governor Michael Leavitt (R) notes, “It contains all of the old entitlement language.”2

2. “It’s fully-financed.”3

The bill imposes unfunded financial burdens on the states. Participating states are required to finance 50 percent of the program’s administrative expenses (p. 16, lines 15-19) and a “state matching percentage … equal to 40 percent of the percentage of the amount the State is responsible for expending” under Medicaid (p. 16, lines 20-25; p. 17, lines 1-6). Under no circumstances are the states to contribute less than 10 percent of the program’s cost (p. 17, lines 7-12). This will require additional taxes at the state level.

3. “The tax is a user fee[.]”4

S. 526, a companion bill to S. 525, provides the funding mechanism for Hatch-Kennedy. It nearly triples the federal tax on cigarettes, hitting the poor 48 times as hard as the wealthiest taxpayers.5 The tax used is just that — a tax, in this case a $30 billion tax hike targeted at the poor. Unlike taxes, user fees are paid in exchange for a service. An excise tax on cigarettes is no more a user fee on tobacco than the income tax is a user fee on income.

Senator Kennedy claims this punitive tax will discourage children from smoking. Whether or not this is true, the bottom line is that the tax will either generate revenue for the federal government or it will discourage the purchase of tobacco. It cannot do both. As a result, any revenue shortfall will inevitably be made up with still more tax increases.

4. “It will not create massive, new bureaucracies.”6

The bill will create new health care bureaucracies in all fifty states. S. 525 specifically requires participating states to “designate an appropriate State agency to administer the State program” (p. 10 lines 14-16). This will require either the creation of new bureaucracies or the expansion of existing bureaucracies. The bill will also require new bureaucratic oversight within the Department of Health and Human Services.

5. “It relies on the marketplace, with coverage provided through private insurance and the existing network of local community health centers.”7

Rather than rely on the marketplace, this bill empowers government to administer the provision of health insurance (p. 4 lines 6-7). Moreover, the “direct service benefit option” (p. 6-9) puts government in a position not just to pay for coverage, but to pay directly for health care. At the same time, the bill would provide health insurance companies and managed care plans some $20 billion of taxpayer funds. It will also be a windfall for employers, effectively subsidizing employers who drop children’s health coverage from their benefits package.

6. “This legislation clearly represents a free market approach at solving an important national problem.”8

This legislation does no such thing. In a free market, consumers make their own health coverage decisions, and businesses live and die by how well they are able to meet consumers’ needs. This bill moves America even farther from a free market for health insurance and closer to a government-run system. It taxes consumers and gives them whatever health coverage government deems appropriate. Instead of answering to consumers, insurance companies and managed care plans will simply cater to the needs of politicians.

7. “The fact is that this bill is a far cry from the Kennedy-Kerry bill[.]”9

Hatch-Kennedy is nearly identical to its predecessor, the Kennedy-Kerry bill (S. 2186), introduced in the 104th Congress. Despite minor changes, both bills would create a new entitlement, empower government to buy insurance policies on behalf of children, require new taxes, encourage employers to drop coverage, and impose unfunded financial burdens on the states.

In fact, Hatch-Kennedy imposes greater unfunded financial burdens on states than Kennedy-Kerry. Kennedy-Kerry would have made states responsible for only 25 percent of administrative costs (S. 2186; p.8, lines 1-4, and p.22, lines 16-19). Hatch-Kennedy requires states to contribute 50 percent of administrative costs, 40 percent of their Medicaid contribution and at least 10 percent of the total program costs at all times (p. 16, lines 20-25; p. 17, lines 1-12).

8. “Children that are not covered should be covered, and that is what the Hatch-Kennedy bill will do.”10

Sens. Hatch and Kennedy claim the bill will cover five million uninsured children. Yet the Census Bureau reports that of 68 million children in the U.S., only 2.8 million are chronically uninsured. Forty-eight million children (or 70 percent of all children) have constant coverage. The remaining 18 million children have spells of noncoverage that usually last four months or less, but not longer than two years.11 Moreover, the General Accounting Office estimates that 2.9 million children who are eligible for Medicaid do not take advantage of the program.12

The reason coverage levels aren’t even higher is because high taxes have taken away families’ income while government regulations (such as mandated health benefits) have driven up the price of insurance.13 Sen. Kennedy knows S. 525 will cause more employers to drop coverage: “[O]nce you move into this type of approach, you’re going to find some slippage. That’s in the definition. We understand that.”14 Hatch-Kennedy would destroy the health insurance system that is already covering over seven out of every ten children.

9. “[T]his is going to be a state program, run through the private sector[.]”15

While states would administer the program, it would effectively be run from the federal government by the Secretary of Health and Human Services. For instance, the secretary must approve each state’s program (p. 3, lines 13-22). The bill also requires the state to establish “reasonable” eligibility requirements for children, leaving the federal government room to strike down “unreasonable” requirements (p. 24, lines 5-11). If the state determines the funds available for the program are “not sufficient to provide premium subsidies … the state may adjust the applicable eligibility criteria appropriately or adjust the state program in another manner specified by the secretary prior to the program year” (p. 13-14, lines 15 – 2). Further, while the secretary initially disburses grants to states based on the Medicaid formula, the bill directs the secretary to create and implement a new formula (without congressional approval) by 1998 (p. 15, lines 3-23). For all practical purposes, these and other powers put the federal government in charge of the program.

10. “It gives the states the flexibility to decide whether to participate and how to target benefits.”16

Utah Governor Michael Leavitt confirms the opposite: “I don’t think Hatch-Kennedy gives states the flexibility we need to insure more children.”17

The program is not voluntary. Citizens who do not participate — including those who are too poor to participate — are still forced to fund the program no matter in which state they reside. States that do not participate will see their federal tax dollars being distributed to other state governments. State legislators will be hard pressed to defend such an arrangement to their constituents.

As for targeting benefits, the bill requires states to provide the Medicaid benefits package which is more generous and expensive than most private health insurance packages, and which in many states includes coverage for abortions (p. 5, lines 21-25; p. 8, lines 21-24). The bill requires states to contract with health centers in each area of a state served by such a center (p. 7, lines 3). It prohibits states from implementing any form of cost sharing for preventative services (p. 8, lines 4-6). Lastly, the bill locks into place current Medicaid eligibility requirements, forbidding any waivers to reduce children’s eligibility (p. 28, line 23).

11. “The states set their own eligibility.”18

States may set eligibility requirements, but only within the parameters dictated by the federal government. For instance, the bill writes into federal law that states must pay for at least 95 percent of the total premium cost for families with incomes under 185 percent of the federal poverty level. Again, the bill leaves the federal government authority to strike down unreasonable eligibility requirements (p. 24, lines 5-11).

12. “It’s about as moderate to conservative of a bill as you can get.”19

This bill creates a new, multi-billion dollar entitlement program, imposes new unfunded financial burdens on the states, erects new state health care bureaucracies, restricts states’ flexibility under Medicaid, and funnels $20 billion of taxpayer funds to health insurance companies and managed care plans. It encourages employers to drop coverage. Its companion, S. 526, raises taxes on the poorest Americans.

Moreover, the bill is very much in line with the strategy developed by the Clinton administration to phase in government-run health care. Documents obtained from First Lady Hillary Clinton’s Health Care Interdepartmental Working Group reveal that the Clinton administration considered several options for implementing universal coverage. One of these options was named “Kids First.” “Under this approach,” writes the group, “health care reform is phased in by population, beginning with children.” Kids First is designed to develop “structures for transitioning to the new system and the phasing in of certain population groups.”20 Today, not three years after the failure of the Clinton health care plan, Sens. Hatch and Kennedy are leading us once again down that road.


Children do not suffer from too little government. They suffer from too much government. To make health insurance affordable for more families, Congress should instead eliminate the governmental barriers to provision of affordable health insurance.

Congress’ first step should be to repeal the provisions in the current medical savings account (MSA) pilot program that cap the number of people who can participate, restrict the program to the self-employed and small businesses, sunset the program after five years, and impose tax penalties on participants who withdraw funds from their MSA at the end of the year. S. 572, introduced by Sen. Wayne Allard (R-CO), would make the pilot program a permanent option for all individuals. By making the MSA option more workable, Congress can make it easier for parents to finance their children’s health care.

Ultimately, Congress must also eliminate the unfair tax treatment that allows employers to buy health coverage with pre-tax dollars, but forces consumers to buy coverage with after-tax dollars. This can best be achieved as part of a comprehensive tax reform initiative.

Whatever problems exist in our health care system are the result of government meddling. Further meddling will only make these problems worse, and will bring us closer to a system of government-run health care. America’s children deserve better.

1 Sen. Hatch, NBC’s “Meet the Press,” April 6, 1997.

2 Paul Gigot, “Republicans to Prodigal Senator: Snap Out of It,” The Wall Street Journal, April 18, 1997.

3 Sen. Hatch, news release, remarks before the Children’s Defense Fund, March 13, 1997.

4 Sen. Kennedy, press release, April 7, 1997.

5 Based on tobacco expenditures as a proportion of income, Consumer Expenditure Survey, Bureau of Labor Statistics, 1995.

6 Sen. Hatch, news release, remarks before the Children’s Defense Fund, March 13, 1997.

7 Sens. Hatch and Kennedy, “‘Legislative odd-couple’ proposes CHILD bill,” The Hill, April 9, 1997.

8 Sen. Hatch, news release, April 8, 1997.

9 Sen. Hatch, NBC’s “Meet the Press,” April 6, 1997.

10 Sen. Kennedy, NBC’s “Meet the Press,” April 6, 1997.

11 U.S. Census Bureau, “Health Insurance Coverage Status of Children Over a 28 Month Period During 1992 to 1994,” Survey of Income and Program Participation, chhitab2.html, March 13, 1997.

12 U.S. General Accounting Office, “Health Insurance for Children: Private Insurance Coverage Continues to Deteriorate,” GAO/HEHS-96-129, June 1996, p. 3.

13 See U.S. General Accounting Office, June 1996; Michael F. Cannon, “By Mandating Health Benefits, Congress Will Make Even More Americans Lose Their Health Insurance,” Citizens for a Sound Economy Foundation, Issue Analysis, Number 45, January 29, 1997; and “Contrary to Media Reports, Total Tax Bill Still Larger Than Food, Clothing and Housing Bill,” Tax Foundation, News Release, October 8, 1996.

14 News conference on expanding health care coverage for children, January 16, 1997. Sen. Kennedy discussed the Kennedy-Kerry bill, whose language is identical to Hatch-Kennedy.

15 Sen. Kennedy, NBC’s “Meet the Press,” April 6, 1997.

16 Sens. Kennedy and Hatch, “‘Legislative odd-couple’ proposes CHILD bill,” The Hill, April 9, 1997.

17 Paul Gigot, “Republicans to Prodigal Senator: Snap Out of It,” The Wall Street Journal, April 18, 1997.

18 Sen. Hatch, NBC’s “Meet the Press,” April 6, 1997.

19 Sen. Hatch, NBC’s “Meet the Press,” April 6, 1997.

20 Health Care Interdepartmental Working Group, April 9, 1993.

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