Summary
In health policy, “crowd out” or “substitution” occurs when public funds substitute private dollars that otherwise would have been spent on health care. It is an inevitable consequence of any effort to subsidize coverage for people in America’s voluntary health care system where individuals and their employers can drop private coverage when better, more affordable public options are available.
For example, “crowd out” occurs when the availability of a public subsidy causes:
- Employers to stop offering health coverage to their employees; drop the option for dependent coverage; increase the cost to employees of enrolling in dependent coverage; or be deterred from pursuing efforts to offer coverage in the future.
- Individuals to drop out of employer-based coverage; drop dependent coverage; or, decide not to switch jobs to one that offers health benefits.
It is important to highlight that crowd out is not an issue linked only with expansions in publicly-subsidized health insurance programs. To the contrary, it occurs whenever the government takes steps to subsidize coverage, including through the tax code. For example, it is widely believed that offering refundable tax credits to people for the purchase of health insurance in the individual market would generate significant crowd out of employer-based coverage. 1
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 Framing the Issue
Footnotes
1. For example, see J. Gruber, “The Cost and Coverage Impact of the President’s Health Insurance Budget Proposals,” Center on Budget and Policy Priorities (February 15, 2006).
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