THE PROBLEM OF UNINSURANCE
The
issue of the uninsured is prominent in health care policy debates
today, and the estimates being cited are, on their face, quite
stunning. According to the most recent Current Population Survey of
the U.S. Bureau of the Census, 44.3 million Americans were without
health insurance in March 1999--about 1 million more than were
uninsured at the same point in 1998.
The
Center for Risk Management and Insurance Research at Georgia State
University projects that the number of uninsured, non-elderly
Americans will grow to 53 million, or about 21 percent of those who
are not eligible for Medicare, by 2007. Should there be an economic
downturn, or if health care costs rise faster than the Health Care
Financing Administration (HCFA) projects, this same study estimates
that the number of uninsured could reach 60 million--or nearly one
in four Americans. Representative
Fortney "Pete" Stark (D-CA), in testimony before the House Ways and
Means Committee, cited a National Coalition on Health Care study
with comparable findings: The uninsured population could soar to
61.4 million by 2009.
The
Washington-based Lewin Group, a health policy consulting firm, has
issued similar estimates as well. Chart 1 shows the Lewin Group's
projections, which predict a continual rise in the numbers of
uninsured from 1980 to 2007, both in absolute numbers and as a
percentage of the overall population. Lewin's projections are also
consistent with the findings of other studies.
Clearly, the numbers of uninsured
Americans has been climbing over the past decade and will continue
to climb in the foreseeable future.
Who Are the Uninsured?
Perhaps surprisingly, 76.2 percent of the
uninsured either are employed or are dependents of a worker. Uninsured Americans
typically are low-income minorities who are employed in a small
business in the service industry. Of the uninsured, 64 percent say
the "main reason" they are uninsured is because coverage is "too
expensive."
It
is instructive to note that the number of uninsured Americans is
not quite as high as reported by the Census Bureau, for several
reasons. For one, there appears to be a significant underreporting
of Medicaid coverage. An estimated 5.2 million people claimed to be
uninsured when in fact they were eligible for Medicaid.
Additionally, approximately 2 million children have been covered by
the Children's Health Insurance Program enacted in 1997. And about 3 million
of those counted by the Census Bureau as uninsured were illegal
aliens. This would bring the total estimate today of those
uninsured down to about 33 million.
Although the uninsured largely are
lower-income workers, they are not exclusively low-income
Americans. In most states, the poorest Americans--those below the
poverty line--are eligible for Medicaid coverage, although not all
of them are aware of it. The characteristics of the remainder of
the uninsured are described in Chart 2.
Over
10 million people--workers and their dependents--are uninsured
solely because they have declined their employer-provided coverage.
Many of these workers are simply unable to afford the employees'
share of the premiums--which is complicated by the fact that a
rising percentage of policy premiums must be shouldered by the
employee. In 1991, the average single worker paid 13 percent of an
employer-provided plan. By 1996, 22 percent of the cost was
shouldered by the employee. The employee's share of family coverage
also increased from 23 percent in 1991 to 31.2 percent in 1996.
The
Congressional Budget Office (CBO) has estimated that for every 1
percent increase in premiums, 200,000 to 300,000 people lose their
health insurance. A Lewin Group study
estimated that number at 300,000 for every percentage point.
Moreover, the CBO recently estimated that the House-passed
Patients' Bill of Rights would cause premiums to rise an additional
4.1 percent.
Thus, the relationship between health care
costs and uninsurance is clear.
How the Current System Exacerbates the
Problem
Under current law, the tax code gives
considerable preference to workers whose employers have purchased
their health insurance. This system became prominent during the
1950s, after wage controls during the World War II years forced
employers to offer benefits such as health insurance to attract
employees from the scarce numbers available. Several years after
the war, the Internal Revenue Service ruled that the amount of
money spent by an employer for an employee's health insurance can
be excluded from an employee's taxable compensation.
This
ruling means that workers do not pay any federal, state, or payroll
taxes on the amount spent on their health insurance coverage.
Additionally, the cost of providing health insurance to employees,
like other forms of compensation, is a tax deduction for the
employer. These two factors continue to provide a strong incentive
for employers and employees to stay within the employment-based
system. For individuals and families without access to an
employer's plan, there are few or no tax breaks available
today.
Cracks in the system began to appear in
the late 1970s and 1980s as health insurance premiums and the cost
of medical care consistently outpaced inflation and, in some cases,
the willingness of employers to pay those increased costs. The
predictable result was that fewer employers offered health
insurance and the number of uninsured began to rise. That trend
continues to this day and is expected to continue unabated. It can
be attributed in large measure to the element of third-party payers
who shelter the consumers of health care from its true costs.
The Special Problems of Small
Business
The
problem of rising costs to employers is accentuated by the
difficulty that small businesses (relative to large Fortune
500 firms) experience in affording and providing health coverage to
employees. Small businesses employ 60 percent of America's
workforce, yet they lack the advantages of large companies in
designing and purchasing health care packages. They lack the
ability, for example, to pool the risks of thousands of employees
to reduce the cost per individual. In addition, the Employee
Retirement Income Security Act (ERISA) allows businesses to
self-insure, thereby escaping costly state mandates and
regulations. Unfortunately, very few small businesses can afford to
self-insure. Finally, big businesses almost universally set up
sophisticated human resources departments to evaluate the available
health insurance options and present the best alternatives to their
employees.
Not
surprisingly, in 1996, less than 50 percent of businesses with
fewer than 50 employees each offered health insurance to their
employees. In firms of this size that pay most employees less than
$10,000, only 19 percent of workers were offered coverage.
The
way the tax code is structured for individuals is highly
regressive. The more expensive a health insurance plan (the kind
that tends to be offered to highly paid individuals), the greater
the tax break. This is especially true the higher the marginal tax
bracket of the worker becomes. Eugene Steuerle of the Urban
Institute estimates that families in the top income quintile enjoy
nearly six times the subsidy of families in the lowest quintile
($1,560 per year, compared with $270).
The
Lewin Group estimates that the federal government "spends" (in
foregone income and payroll taxes) almost $126 billion per year to
subsidize health insurance through the exclusion. States "spend" an
additional $15 billion. (See Chart 3.)
Like
the Steuerle findings, the Lewin Group's conclusions demonstrate
the regressivity of the present tax code. The average federal tax
"expenditure" per family is $1,155 annually. However, for families
with incomes below $15,000 in 2000, the average federal
"expenditure" is only $79, while for families with annual incomes
exceeding $100,000, it is $2,638. (See Chart 4.)
This
analysis illustrates the tendency of federal tax subsidies to
accrue heavily to the rich while offering minimal assistance to
those who need it most. It is no wonder that people with lower
incomes cannot afford health insurance: They have less disposable
income and are effectively discriminated against by the tax
code.
TAX CREDITS AS A SOLUTION
There is a growing bipartisan consensus on
using tax policy to improve the health care system. Both
presidential candidates in the Democratic primary, former Senator
Bill Bradley and Vice President Albert Gore, offered credit
proposals. Bradley, in particular, offered a sweeping proposal that
not only would apply to middle-income Americans, but also would
replace the outdated and bureaucratic Medicaid system for
low-income persons with new private health insurance options, thus
mainstreaming low-income workers into America's commercial health
insurance markets.
Members of Congress also see the value of
allowing tax credits for the purchase of health insurance.
Policymakers from across the political spectrum now recognize that
the employer-based system no longer effectively serves all
Americans.
In
June 1999, House Majority Leader Richard Armey (R-TX) and
Representative Pete Stark--the self-described "ultimate
congressional odd couple"--agreed in a joint article published in
The Washington Post that the problem of the uninsured is the
"biggest health problem facing the country." They also agreed
on the root causes of uninsurance: a workforce that is
"increasingly mobile and part-time" and a perverse tax code that
"discriminates against not only insurance purchased outside the
workplace but also lower paid, part-time and small-business
workers." They promoted the
idea of refundable tax credits as "a bipartisan remedy," and
identified three characteristics of a successful tax credit for
health insurance:
-
"The credit must be sufficiently generous
to buy a decent policy."
-
The credits would have to be "available to
those who owe no tax liability."
-
"To prevent fraud, (the credits would have
to be) paid directly to insurers or other entities, not to
individuals."
Representatives Armey and Stark are
correct: Refundable tax credits represent the best way to address
the problem of uninsurance, provided these three criteria are
met.
There are a number of advantages to the
tax credit approach.
Advantage #1. It would restore equity
to the tax code.
Because the current tax code is skewed heavily in favor of both
the rich and the employer-based system, refundable tax credits,
depending on their design, can target subsidies to where they are
needed most--to lower-income Americans who lack coverage. They
would help end the tax discrimination against 8.3 million Americans
who currently purchase non-group policies.
Advantage #2. It would promote consumer
choice of health plans.
Today, only 17 percent of American employers offer their employees
a choice of health plans. The resulting
frustration felt by workers is the major reason Congress is
embroiled in debate over the right to sue health plans. If
individuals were allowed to choose and switch plans, as they are in
the Federal Employees Health Benefits Program (FEHBP) for federal
workers and Members of Congress, rates of dissatisfaction would
diminish. Choice largely quells the desire to sue.
Advantage #3. It would shift control
over health plans to consumers and automatically give patients a
right to sue.
Tax credit policies would enable an individual to sign a contract
directly with a health insurer. The insurer then becomes an agent
of the individual and his family, who no longer are simply the
recipients of terms and conditions that are decided by the employer
and insurer. Workers and their families thus would become the
principals in the contractual relationship--an arrangement
radically different from today's employer-based insurance coverage
in which employers are signatories to the contract. Under this
plan, if the insurer violated the terms of the contract, the
individual would be free to sue that insurer for breach of contract
without the uncertainty of an employer's liability. Real
accountability would be established in the insurance market.
Advantage #4. It would provide an
alternative to the employer-based system.
As costs continue to rise, more and more employers are unable or
unwilling to purchase health insurance for their employees. This
trend will be exacerbated by any expansion of liability for health
plans. According to a recent survey of 600 U.S. companies by Hewitt
Associates, 36 percent would reconsider offering health insurance
to their employees if the companies themselves were subject to
possible litigation; 40 percent of that sample favored changing the
tax code to allow for defined contributions, whereby employers
would give employees an established amount of money so that they
could go out and purchase their own insurance. Under current law,
individuals and families wanting to purchase coverage must do so
with after-tax dollars. This is prohibitively expensive for many
families who lack coverage from their employer, and most simply
choose to go without coverage. Tax credits would help level the
playing field.
Advantage #5. It would stimulate groups
other than employment-based pools to sponsor their own
plans.
There exist other large, stable groups that could act as employers
do and sponsor health insurance plans. Unions, for example, which
in some instances have over a million members nationwide, could
offer plans to their members. Some unions, such as the Mailhandlers
and others, organize plans within the FEHBP. Outside of the federal
government, however, union-sponsored plans are rare.
Union-sponsored plans are alternatives for blue-collar workers.
These workers may move around between jobs, but their union
affiliation and health coverage would remain intact. Large church
organizations in African-American or Hispanic communities, for
example, also could sponsor plans. It is considerably more common
these days for an individual in such communities to be a lifetime
member of a church than a lifetime employee of a particular firm.
Tax credits would facilitate the emergence of these groupings.
Advantage #6. Health insurers would be
more directly responsive to the wants and needs of
families.
Under the current system, in most cases, the purchaser and owner
of health insurance is the employer, not the individuals and
families actually covered. Therefore, insurance companies market
their products to employers, whose primary concern is cost and not
benefits-package design, rather than to families. Large
Fortune 500 companies have employee benefit managers who
take the time to study the benefit design for purposes of
attracting and retaining members of the workforce, and not just to
control the cost of a plan. But for a small employer under the
tight pressures of running a business on a day-to-day basis, there
is often neither the time nor the expertise to study the various
needs of an often diverse group of workers to determine what plan
will best accommodate them all. For many workers in smaller firms,
it would be better for them to purchase health insurance through an
affinity group or an association with a much larger risk pool, such
as a union, a religious group, a fraternal organization, or perhaps
a college alumni association.
Advantage #7. Consumers would have real
portability of health insurance.
Tax credits would allow people to maintain their coverage even as
they change jobs. The choice of doctor and insurance plan would no
longer be at the mercy of an employer or a worker's employment
status. Professor Mark Pauly, a leading health economist at the
University of Pennsylvania's Wharton School of Business, considers
this among the "main advantages" of individual insurance over group
insurance. This holds
particular appeal for younger Americans who are more apt to change
jobs and start new companies. Addressing the issue of portability
is also a tremendous advantage for individuals with pre-existing
conditions. A person's medical history can be a barrier to
employment, especially with smaller employers and employers that
self-insure.
ANSWERING COMMON OBJECTIONS
There remains a series of objections
commonly raised against proposals offering tax credits so that
families can have the resources to purchase health insurance
outside of the employment-based system. Explanations to satisfy
each one are readily available.
Objection #1. People are not capable of
making decisions about something as highly complex as health
insurance.
This is a common but patronizing argument. People choose a bank to
handle their mortgages, colleges to educate their children, and
mutual funds in which to invest, as well as automobile, fire, and
life insurance. Ordinary Americans are just as capable of
purchasing a health insurance plan as federal employees are of
picking their own plan through the FEHBP. People's interest in
picking a suitable plan for themselves and/or their families is far
greater than that of any employer. This self-interest
also suggests that they would spend substantially more time and
effort in selecting appropriate coverage.
Objection #2. The cost of individually
purchased plans would be significantly higher than the cost of
group-purchased plans, and therefore unaffordable.
A recent study done by Professor Pauly found that the
administrative cost differential between individual and group
policies has been shrinking steadily since 1970. In a world of tax
neutrality--where tax credits are available to individual
purchasers--Pauly predicts that this difference would shrink even
further. Mass-marketed, non-group health insurance purchased over
the Internet, for example, likely would experience changes that
mirror what happened to automobile insurance in the 1970s, when new
policies permitted people to shop for the lowest rates over the
telephone. In addition, as
discussed above, tax credits would facilitate the purchase of
health insurance by groupings other than employers, such as unions
and church groups, so families would not necessarily be restricted
to individually purchased policies.
Objection #3. The market for individual
insurance is too small to handle the influx of millions of
people.
The reason the individual insurance market is small is the lack of
demand for such insurance. Less that 7 percent of the population
has non-group insurance. This can be
attributed to the fact that the tax code strongly favors
employer-provided coverage. If tax credits were available,
individuals and their families would have the resources with which
to purchase plans. The market would respond accordingly. Demand
inevitably creates supply.
Objection #4. Tax credits would ruin
the employer-based system; younger and healthier workers would
leave to buy their own (cheaper) plans, leaving businesses to
insure an older and sicker (more costly) pool of workers.
The purpose of the tax credit approach need not be to undermine
the employer-based system, but to offer an alternative to a system
that has been shown to be increasingly inadequate. Design elements
could be included such as allowing the credit only in cases where
the worker is not offered insurance from an employer. This would
erect a "wall of separation" and ensure that successful employer
plans are not threatened.
Objection #5. Lower-income people would
not utilize a tax credit, and therefore would not gain coverage,
because they cannot afford the luxury of waiting until the
following year for a tax refund.
Incorporated into the tax credit bills introduced by
Representatives Armey and Stark is language creating pre-payment of
the credit. A person signing up for health insurance could have the
value of the credit transferred directly to the insurance provider
from the Treasury Department. This need not be complicated. It
could simply be factored into the withholding of the insurance
company. This important feature would maximize the effectiveness of
any credit by ensuring that it is readily available to those most
in need.
Objection #6. Much of the credit would
simply go to people who already are buying coverage, thereby
costing the government lost revenue without reducing the number of
uninsured.
As many as 8.3 million Americans who currently purchase non-group
coverage could benefit from a tax credit, depending on eligibility
restrictions. These individuals
currently are discriminated against by the tax code. Allowing them
tax treatment similar to that enjoyed by those in
employer-sponsored plans is a simple matter of fairness, and ending
the inequity is one of the major goals of the tax credit approach.
While there are various design proposals for tax credits, even the
least generous (a 30 percent credit for workers without access to
employer coverage) would still add an estimated 1.5 million people
to the ranks of the insured. Thus, not only
would credits help to alleviate tax code discrimination for over
millions of Americans, but the tax change also would reverse the
steady increase in the number of uninsured.
Objection #7. Tax credits will not
insure everyone.
This is a fallacy. Any government program that is voluntary will
not have full participation by all people that are eligible.
Regardless of the tax credit approach taken, and short of making
health insurance a federal requirement, there always will be those
who remain uncovered for any number of reasons. Persuading all
young, healthy, lower-income single men, for example, to spend
scarce money on health insurance because of what "might" happen
will be impossible. But just because tax credits will not cover
everyone does not mean that the approach should be discarded. The
fact is that tax credits could add millions of Americans to the
insurance rolls, reversing the current trend, and in the process
restore equity to the tax code.
THE IMPORTANCE OF TAX CREDIT DESIGN
While there is broad agreement that tax
credits can help the uninsured, the impact of any particular
proposal will depend on the credit design, which in turn depends on
a number of considerations.
The
first decision is whether or not to make the credit
refundable. A refundable credit means that even a taxpayer
with no federal tax liability would receive a "refund" from the
government in the amount of the credit for the purchase of health
insurance. If a single taxpayer, for example, owed $600 in federal
income taxes but had a $1,000 tax credit, then instead of having to
send the federal government $600, that taxpayer would receive $400
from the government.
It
is widely accepted that making a credit refundable is critical if
it is to have a significant impact on reducing the number of
uninsured. This is because 45 percent of the uninsured today are
not liable for federal income tax. If a credit were
not refundable, it would be of zero value for nearly half of the
uninsured population.
The
second decision is how to structure a tax credit. There are
basically two ways:
-
A fixed dollar credit typically
would involve establishing set amounts for single taxpayers,
married couples, and families (depending on the number of
children). Each type of household would be assigned a maximum fixed
dollar credit that could be used to offset the cost of a health
insurance plan. (Rarely, if ever, would an approved plan cost less
than the credit amount; but if it did, the credit would only match
the amount spent on the plan.) A flat credit would likely be of
more value to lower-income people who have less money to put out
"up front" for a policy. If a family was eligible for a $3,000 tax
credit, for example, a properly designed credit would allow them to
have that money sent directly to an insurer to receive, depending
upon availability, a policy at no or little cost. A fixed dollar
credit has greater potential to limit the inflationary impact that
tax subsidies have on health care costs.
-
A percentage credit would offset
the cost of a plan at whatever percent was made law. If a family
purchased a $4,000 plan and had a 50 percent credit, they would
subtract $2,000 from the amount of tax they owed to the federal
government. A percentage credit would be fairer to taxpayers with
higher incomes that wished to purchase a plan with a more expensive
benefits package.
Some
credit proposals would target the credits only to taxpayers
below certain income limits. This is meant to ensure that resources
are dedicated exclusively to lower-income people, who make up a
disproportionate number of the uninsured. While this has certain
appeal, it raises effective tax rates significantly for people
whose income progresses through the income limit and past the
phaseout.
For
example, let us say that single taxpayers with up to $30,000 in
adjusted gross income (AGI) were eligible for a $1,000 tax credit
and that this credit was phased out completely by $40,000 in AGI.
If a single individual earned $30,000 in AGI and took the $1,000
tax credit, his effective tax rate would be 8.1 percent. If he were
suddenly given a raise to $40,000, his effective tax rate would
skyrocket to 14.4 percent. This policy would
be thought of as unfair to the affected taxpayer.
Another consideration is whether to
restrict the credit or allow it for employees who opt out of
their employer plans. Several proposals would restrict the tax
credits to people who are not offered insurance at work. This
restriction is designed to avoid offering incentives for healthier
and presumably less costly workers to exit the employer-based
system. The fear expressed by some, especially in the business
community, is that if these younger, healthier employees took
advantage of a credit, employers would be left insuring the more
costly workers. This potential result could be mitigated by making
the credit available only to people who are not offered insurance
at work.
The
downside to limiting the use of the credit to those not offered
insurance at work is that it would not be available to assist those
Americans who have to pay a portion of their premiums. Today, 10.2
million Americans--nearly 25 percent of the uninsured
population--are workers (or dependents of workers) who have
declined insurance that was offered by an employer. Most do so as a
result of being unable to afford their portion of the cost-sharing.
They would receive no help if the credit is limited to people who
are not offered insurance at work.
A
tax credit also could include a pre-payment mechanism,
whereby resources are transferred directly from the U.S. Treasury
to the health insurer on behalf of the individual or family
purchasing coverage. This need not be complicated and could be done
simply by the insurer's changing its tax withholding. Similar to
making the credit refundable, this feature is critical if the
credit is to be utilized by lower-income Americans. In many cases,
lower-income taxpayers are unable to pay out the money for health
coverage up front and recoup it a year later in the form of a tax
refund. Making the credit pre-payable would help taxpayers to
afford coverage when they really need it.
ESTIMATING THE "TAKE-UP" RATE
The
estimated take-up rate of a proposed tax credit is another major
factor to consider. This refers to the number of Americans who
would become "newly insured" as a result of a tax credit policy.
The Lewin Group has analyzed the cost and take-up rate of six
proposals and the Heritage plan to provide alternative tax
treatment for the purchase of health insurance.
- A tax deduction:
Before analyzing credits, Lewin looked at the effects of allowing
a tax deduction for the full premium costs of non-group
individually purchased policies. The deduction modeled was
above-the-line (not itemized), and therefore was available to all
taxpayers regardless of income. With this new deduction, premium
payments would no longer count in determining health expenses above
7.5 percent of adjusted gross income, the threshold for the
itemized health deduction today, because they would have been
deducted already.
Approximately 51.7 million Americans would
qualify for this new deduction, of which 43.4 million are currently
uninsured and 8.3 million currently have non-group coverage. The Lewin Group
assumes that all 8.3 million people currently buying non-group
coverage would take advantage of the deduction, while 3.9 million
previously uninsured people would be likely to purchase
coverage.
Such a deduction would "cost" the federal
government $6.3 billion in reduced tax revenue, with $2.7 billion
going to the newly insured and the remainder to those already
buying insurance. The average annual cost per newly insured person
would be $1,599.
-
A credit of $500 per individual and
$1,000 per family:
In the design studied, availability would be restricted to
people who are not participating in an employer-sponsored plan. As
with the deduction proposal, 51.7 million persons could be eligible
for the credits. Of those, all of the 8.3 million currently buying
coverage would take the credit. An additional 4 million uninsured
individuals would obtain coverage as well. Under this plan, the
government would lose $5 billion in revenue; $1.7 billion would go
to the newly insured and $3.3 billion to those previously with
coverage. The average cost of the newly insured would be
$1,247.
-
A 30 percent credit for workers without
access to employer coverage, workers who make below $35,000 (AGI),
and married couples who make below $50,000 (AGI):
In this scenario, the full 30 percent credit would be allowed for
single taxpayers with an AGI below $25,000, phasing out at $35,000.
For married couples and families, it would be $40,000 and $50,000,
respectively. The Lewin Group estimates that 15 million workers and
their dependents would be eligible for this credit; 2.8 million
would already have coverage, and 12.2 million would be uninsured.
It is assumed that all of the 2.8 million with insurance would
utilize the credit, in addition to 1.5 million of the uninsured.
The lower take-up rate is due to the modesty of the credit. Many
low-income Americans cannot afford to pay 70 percent of the cost of
a typical health insurance policy. The cost for the government is
estimated to be $3.3 billion, with $2 billion of that going to
those already with coverage and the rest dedicated to the newly
insured, which would mean a cost of $2,121 per newly insured person
per year.
-
A 30 percent tax credit to all workers
and non-workers, with the same income restrictions as in the
previous model:
This credit would be available to workers who do not have access
to employer-provided insurance, those who contribute a portion to
the cost of their employer-provided plan and those who do not
work. This option would
insure more people because it also would be available to many of
the 10.2 million workers and dependents who currently decline
employer coverage. About 6.1 million Americans falling under these
income limits decline employer coverage. Lewin estimates 1.8
million of these people would use this credit to purchase coverage.
Another 1.5 million (as discussed above) who do not have access to
an employer plan also would gain coverage, while 1.1 million
persons in non-worker families also would buy coverage. That brings
the total of newly insured to 4.5 million at a cost to the
government of $11.3 billion. The average yearly cost of the newly
insured would be $2,530.
If the percentage of the credit were
increased to 50 percent or 80 percent, the take-up rate would be
significantly higher. A 50 percent credit available (with the same
income restrictions as above) to both workers and non-workers, who
could use the credit whether or not an employer contributes to
their plan, would add 7.1 million workers to the ranks of the
insured at a cost to the government of $21.9 billion. An 80 percent
credit would pick up 14.6 million persons at a cost of $50.2
billion.
- A fixed dollar credit of $800 per
taxpayer, $400 per child, and $2,400 maximum per family, which
would replace today's exclusion: In this scenario, all individuals
and families are eligible for the same refundable credit amounts.
The credit could be used for group or non-group policies. It would
replace the exemption currently enjoyed by employees when they
receive compensation in the form of health benefits. Workers thus
would pay income tax on the money that currently is spent by an
employer on their health insurance.
All 210 million Americans not covered by
Medicare, Medicaid, or some other public program would be eligible
for the credit. This includes both the 43.4 million uninsured and
the 166.4 million with private coverage. It is estimated that 9.8
million of the currently uninsured would gain coverage, but 5.2
million currently with coverage would become uncovered due to a net
reduction in their tax subsidies. That leaves a net increase in the
insured population of 4.6 million persons at a cost to the
government of $48.6 billion. The net cost would be $10,541 per
newly insured person.
The advantage of this approach is that it
makes more equitable use of federal tax exclusions and deductions.
Under the system now in place, families earning $15,000 per year or
less receive on average $79 in federal subsidies, whereas families
earning over $100,000 receive $2,638. With this plan in place,
subsidies to the poorest Americans would increase over 400 percent
to $402 annually. Subsidies to the richest Americans would increase
only 6.8 percent to $2,821. The increase for the average American
family would be nearly 45 percent--from $1,155 to $1,670. All
income groups would see an increase in federal subsidies for the
purchase of health insurance, on average.
- A choice of credit or
exemption:
Another model looked at by Lewin examined the impact of allowing
taxpayers a choice between maintaining their current employer
exemption and taking the fixed dollar credits in the amounts above.
For 45 percent of families, taking the credit would be most
advantageous. The remaining 55 percent would stay with their
current exclusion. Under this proposal, 9.8 million Americans would
be added to the rolls of the insured. The government would lose
$53.2 billion in revenues, making the cost of each newly insured
person $5,429 annually.
The Heritage Foundation Proposal
The
Heritage proposal calls for an elimination of the current tax
exclusions for employer health benefits, including employer and
employee contributions to Section 125 plans. It also would
eliminate the deduction for medical expenditures in excess of 7.5
percent of adjusted gross income. The revenue from eliminating
these tax breaks would be used to partially fund an identical
refundable tax credit available to all Americans to cover health
insurance premiums and out-of-pocket expenses. The credit would
reimburse 25 percent of health care spending below 10 percent of
AGI, 50 percent between 10 percent and 20 percent of AGI, and 75
percent for any spending above 20 percent of AGI.
Under this plan, employers would be
required to cash out their health plans and individuals would be
required to purchase coverage in the individual market.
State-mandated insurance benefits and restrictions on managed care
plans would be preempted nationwide by federal law. A federally
determined minimum benefits package would be established, and
premiums would be permitted to vary only by age, sex, geography,
and family size--not by health status.
Due
to the requirement that all individuals purchase health insurance,
the Heritage plan would cover all 43.4 million uninsured Americans.
The net cost of the plan would be $55.3 billion, for an average
cost per newly insured of $1,274. Significantly, the Heritage plan
would be most beneficial to families with incomes below $15,000. As
mentioned above, the average current federal tax subsidy for
families in this income bracket is $79. Under the Heritage plan,
the average subsidy for this group would increase to $2,064. For
the highest-income grouping, families with incomes over $100,000,
the average subsidy would decline slightly, from $2,638 to
$2,170.
Comparing Tax Incentives.
Jonathan Gruber, a professor of economics at the Massachusetts
Institute of Technology, and Larry Levitt, the director of the
Changing Health Care Marketplace Project of the Henry J. Kaiser
Family Foundation, also performed a study using various tax
incentives. Their base model was a refundable tax credit of a fixed
$1,000 per individual and $2,000 per family. The credit would be
available to single filers with adjusted gross incomes below
$45,000. The credit would phase out at $60,000. For joint filers,
the figures would be $75,000 and $100,000, respectively. The tax
credit could not be used to offset employee contributions to an
employer's plan, but individuals who opt out of employer coverage
could use it.
Gruber and Levitt found that the new
credit would cost the federal government $13.3 billion per year.
Those taking the credit would include 18.4 million persons, of
which 4.7 million would be from the previously uninsured, 8.6
million who already purchase non-group insurance, 4.7 million who
have employer coverage, and 400,000 on Medicaid. Just over 4
million persons on net would gain insurance, for an average annual
cost per newly insured of nearly $3,300. However, the Gruber and
Levitt estimates are based on the present cost of non-group
coverage. If the average
cost per policy were lower, more people would gain insurance. In a
world in which credits of this size were available, it is entirely
possible that an insurance product could emerge that is equal to
the value of the credit amount. This would not be
a comprehensive policy, but it would be "free" to the person
utilizing the credit, thereby increasing take-up rates
significantly, decreasing the average cost per newly insured, and
providing coverage where it did not previously exist.
THE CONGRESSIONAL PROPOSALS
There is an ever-increasing number of
health care tax credit bills in Congress. Several more are in
development and will be introduced in the near future.
H.R. 1136: The Affordable Health Care Act
of 1999
H.R.
1136, sponsored by Representative Charles Norwood (R-GA), includes
several refundable fixed dollar tax credits. The legislation offers
a $1,200 credit to each adult and $600 per child, up to a family
maximum of $3,600 if insurance is not offered at work. If an
individual declines employer coverage, the credit amounts are
reduced to $400, $200, and $1,200, respectively. The purpose of
these differing credit amounts is to minimize disruption of the
employer-based system by offering credits so large that even those
people insured at work might be tempted to leave the system to
purchase coverage on their own. The credits in H.R. 1136 are
available to anyone regardless of income level.
This
legislation contains other provisions to expand access to health
insurance. It includes language to help create "Healthmarts," or
health insurance supermarkets that would serve a defined
geographical region. An employer, if it chooses, could give a
voucher to an employee in an amount equivalent to what it would
contribute to the employer-provided plan. The employee could take
that voucher, which would remain excluded from taxable
compensation, down to the Healthmart and purchase a plan from among
all available policies.
H.R.
1136 also would help create association health plans (AHPs) by
amending the Employee Retirement Income Security Act to enable
small-business trade associations to band together across state
lines to purchase health insurance policies just as Fortune
500 companies do. Small-business owners and their employees who are
members of the National Federation of Independent Business (NFIB),
for example, could access the NFIB plan regardless of their state
of residence. These alternative pooling mechanisms would be
advantageous to small-business owners and their employees because
they would increase the number of available insurance options.
Individuals and their families could use the tax credit toward the
cost of this coverage.
Finally, H.R. 1136 would lift the cap on
the number of medical savings accounts (MSAs) by repealing the
artificial limit on the number of MSAs set at 750,000 by the Health
Insurance Portability and Accountability Act of 1996. All employers
would be permitted to offer MSAs.
H.R. 1177: The Health Insurance
Affordability Act
H.R.
1177, sponsored by Representative Steve Chabot (R-OH), would allow
taxpayers, whether or not they itemize deductions on their returns,
to deduct what they spend on insurance premiums in addition
to a portion of their uncompensated medical expenses that
exceed 7.5 percent of their adjusted gross income. The fact that
H.R. 1177 contains no language stipulating whether this deduction
is available to workers who contribute to an employer-provided
plan, however, creates some confusion. Under current law, a
taxpayer can deduct the cost of health insurance premiums and
out-of-pocket expenditures only if the sum exceeds 7.5 percent of
his or her adjusted gross income.
Approximately 51.7 million Americans would
qualify for this deduction, including all of those currently
without insurance and the 8.3 million who purchase non-group
coverage. The Lewin Group assumed that all of these 8.3 million
would take advantage of the deduction, in addition to 3.9 million
of the uninsured. Because deductions are useful only to individuals
who are liable for federal income tax, the benefits of H.R. 1177
would be of little assistance to lower-income taxpayers.
H.R. 1687: The Patients' Health Care
Choice Act of 1999
H.R.
1687, sponsored by Representative John Shadegg (R-AZ), would create
refundable tax credits in the amounts of $500 per individual and
$1,000 per family for the purchase of health insurance. The credits
would be available to taxpayers when insurance is not obtained
through an employer. Opting out of an employer plan and using these
credits would be permissible.
Lewin examined this scenario and estimated
that 4 million persons would become covered that were not
previously covered. All of the 8.3 million persons currently
purchasing non-group insurance would use the credits as well. The
annual cost to the federal government would be $5 billion, for an
average cost per newly insured of $1,247.
H.R.
1687 is similar to the Norwood H.R. 1136 bill in that it would
create Healthmarts, allow for AHPs, and lift restrictions on MSAs.
These measures, in addition to the tax credits, would
simultaneously expand health insurance options for Americans while
allowing them greater resources with which to purchase
coverage.
H.R. 1819: The Working Uninsured Tax
Equity Act of 1999
H.R.
1819, introduced by Representatives Jim McDermott (D-WA) and James
Rogan (R-CA), would allow taxpayers a credit equivalent to 30
percent of the value of a health insurance policy. A taxpayer could
use this credit if he or she is not eligible to participate in an
employer's plan. This could occur if they are part-time or
temporary workers or because their employer does not offer
insurance at all. Use of the credit would be restricted to
individuals who make under $30,000 in adjusted gross income and
married couples with under $50,000 in AGI. The credit would phase
out to zero at $10,000 above each of these amounts. This credit is
unique in that it would be partially refundable. It could exceed
the amount of income tax paid, but it could not exceed the sum of
income tax and Social Security taxes.
The
Lewin Group model examined that most closely resembles the proposal
in H.R. 1819 estimates that approximately 1.5 million uninsured
Americans would be added to the ranks of the insured with a tax
credit of this scope. If the credit were
also made available to workers who pay a portion of their
employer-sponsored plan as well as non-workers, 4.5 million could
gain insurance. Maintaining this expanded eligibility and
increasing the percentage of the credit to 50 percent or even 80
percent of the cost of premiums would reduce the number of
uninsured Americans by 7.1 million and 14.6 million,
respectively.