What Benefits Cliffs Teach Us About Incentives

A Case Study on Florida Children’s Health Insurance

Written by: Jonathan Guarine

Throughout the U.S. and in Florida, a variety of federal and state public programs exist to provide economic stabilization and promote economic self-sufficiency for low-income individuals and families with children. These public supports are often designed with specific income eligibility limits so that benefits phase out as an individual or family earns more. Although constructed to reduce reliance on public assistance over time while empowering families to move up the economic ladder, this program design can sometimes have the unintentional consequence of creating a “benefits cliff” that stifles upward mobility.

“Benefits cliffs” refer to situations where a small increase in income—such as from a pay raise or a new job—results in a total or partial reduction in public benefits.[1] For illustrative purposes, if an individual receives a $2,000 annual pay raise but loses $10,000 in expected public benefit due to eligibility cutoffs, that individual has experienced a benefits cliff and a net loss of $8,000. These particular adverse outcomes can work against efforts to improve the health and economic well-being of vulnerable families and can create a perverse incentive to reject work, pay raises, and other forms of economic advancement.

As stated by the U.S. Administration for Children & Families, “In most states, there is not a single benefits cliff, but rather a series of cliffs.”[2] Different public programs, such as Temporary Assistance to Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP), and Medicaid often have varying income limits and eligibility requirements, adding to the complexity for many families to navigate through. 

For Florida, the state’s Children Health Insurance program provides a case study to understand the complex interplay between benefits cliffs, incentives, and outcomes for families. Before the COVID-19 pandemic, an estimated 343,000 Florida children were uninsured in 2019, accounting for 7.6 percent of children in the state.[3] In other words, one in thirteen kids were uninsured in Florida prior to the pandemic. 

Children’s access to health insurance implicates certain economic and fiscal considerations. Based on an aggregate medical study comparing children with health insurance to those without, researchers found that possessing public health insurance resulted in better health status; improved access to medical, preventive, and dental care; greater use of preventive care; and reduced out-of-pocket costs for parents.[4] Parents reported savings of approximately $2,886 per child per year due to fewer visits to the emergency room and lower chance of hospitalization. 

From a fiscal standpoint, lower utilization of the emergency room also provides taxpayers with savings since the bulk of uncompensated care is largely financed through public funds. Additionally, a past study by the National Bureau of Economic Research (NBER) found that insured children paid more in cumulative taxes by age 28 compared to uninsured children, primarily due to improved economic outcomes and lifetime earnings.[5]

The Florida KidCare program—established in 1998 and expanded since then—seeks to provide free, subsidized, and full-pay health insurance options to uninsured children and their families. KidCare is an umbrella term that encompasses four programs:

• MediKids (ages 1 through 4);
• Florida Healthy Kids (ages 5 through 18);
• Children’s Medical Services Health Plan (birth through 18 for children with special needs); and
• Medicaid for children (birth through 18).[6]

Families with children that qualify for the three KidCare programs other than Medicaid are responsible for paying monthly premiums and co-payments for certain services.[7] Based on the 2021 eligibility guidelines, a family’s income (depending on family size) that falls between 133% and 200% of the Federal Poverty Line (FPL) would pay between a $15 and $20 monthly premium to insure their children.[8] As an example, a single mother earning $34,800 a year with one school-aged child would pay a $20 monthly premium for her child's health insurance under the Florida Healthy Kids plan.[9]

The issue of a benefits cliff comes into play when a family makes above the 200% of FPL threshold, at which point the parent(s) have the decision to either enroll in a full-pay plan that is more expensive or decline coverage. Continuing the example provided above, if the same mother made an additional $50 (annual income of $38,850), her monthly premium for children’s health insurance would go from $20 to $243.[10] Although a hypothetical example, the situation conveys how a marginal increase in income can discourage a working parent from pursuing more pay, at risk of facing higher monthly premiums or possibly losing health insurance for the child. The result is less affordability and a regressive disincentive.

Due to complex and varied rules and requirements between various low-income assistance programs, arriving at specific policy recommendations to mitigate benefits cliffs can prove a hefty task. For the children’s health insurance example provided in this article, one substantive way to maximize health outcomes for children and minimize the benefits reduction for families would be to gradually raise the premium amounts that families pay. Such an incremental approach would conceivably allow families to phase out their use of public health insurance without being too financially burdened and disincentivized.

Another worthy goal would be to adequately assist and educate families on the potential impacts of their employment-related decisions. The Federal Bank of Atlanta, for example, maintains a Career Ladder Identifier and Financial Forecaster (CLIFF) tool that helps working families prepare for possible benefits changes.[11] On a more aggregate scale, a crucial step in addressing benefits cliffs is to better understand how public program rules and requirements in Florida interact with each other.

Overall, incentives matter. The potential of losing benefits from a marginal increase in income can be motivation enough to avoid economic opportunities for many families. Financial barriers to economic mobility affect businesses, workers, governments, and taxpayers alike. For these reasons, the issue of benefits cliffs simply cannot be ignored, especially as Florida prepares for a dynamically changing workforce and economic landscape beyond COVID-19.