While Congress is debating "patients' bill of rights" legislation, a far more serious issue facing America is the large number (roughly 43 million by Census Bureau estimates) of Americans without health insurance. ¹ With rising health care costs and a slowdown in the economy, this number will surely increase.

To address this problem, some Members of Congress, such as Senator Edward M. Kennedy (D-MA) favor a national health insurance program. The promise and performance of such a conventional approach to health care financing and delivery, well established in Britain and Canada, is very well documented. ² Others, including representatives of the Health Insurance Association of America (HIAA) and Families USA, a liberal group, favor an incremental expansion of government programs, including Medicaid, coupled with new tax breaks targeted to employers, including small employers, to encourage them to cover previously uninsured Americans. ³

Beyond either dramatic or incremental expansion of government health programs, there is another option. Many moderate and conservative policymakers argue that the best way to make progress in cutting the number of Americans without health insurance is to give individuals and families tax credits for the purchase of insurance. This approach would rectify inequities in current tax law, which favor high-income rather than low-income taxpayers, and, if crafted properly, could cover as many people as possible. Moreover, tax credits, if they are refundable, can sharply reduce the number of Americans without health insurance while promoting consumer choice and competition in the private markets. Politically, tax credits are particularly appealing because they advance personal freedom: When individuals and families can pick and choose their own plans, benefits, and doctors, they are far less likely to be attracted to government-run health insurance programs that determine (a) what they will and will not get and (b) under what government-defined conditions they will or will not receive their medical care.

Assuming that Congress and the Administration adopt a tax credit strategy, a related issue is how current markets would respond to such a major change in policy. Many of the current assumptions about the viability of the tax credit approach are based on the current market, which is largely dominated by employer-based health insurance arrangements and a small individual market. Another key question is how the tax credit, as well as the insurance product, is actually marketed to the uninsured population. There is a growing consensus among health policy analysts that the marketing, not just the size of the credit , is a key issue in expanding coverage among the uninsured population.

New research, based on an analysis of actual consumer behavior in the individual market and conducted by researchers at eHealthInsurance.com, a major broker of insurance policies on the Internet, shows that many assumptions about the individual market are outdated. Indeed, based on this latest analysis, health care tax credits, particularly those being proposed by the Bush Administration and leading Members of Congress in both parties, are a viable option, and their availability would make health insurance coverage affordable for millions of Americans who are currently without it.

The Coming Debate Over Tax Credits

Will tax credits work to reduce the number of the uninsured? The short answer is yes. The degree to which a tax credit strategy can reduce the number of the uninsured would depend on a variety of factors: the character of the marketing that one assumes with a tax credit strategy; the size of the tax breaks; whether the tax credit is refundable or not; how employers would respond; how insurers would respond; and how government responds, particularly at the state level where insurance regulation is heavy and benefit mandates, driving up health care costs, are not uncommon. Moreover, for policy analysts, an accurate measure of the effectiveness of the tax credit strategy would also depend on such factors as the data base of the market and the kind and quality of the economic model being used to measure the impact of such a tax credit strategy.

Critics of the tax credit policy argue that tax credits, even refundable tax credits, would not be enough to offset or help lower-income families buy health insurance. The major reasons: (a) Individuals are incompetent to make such complex decisions, which should be left to corporate health care benefit managers or other professionals; and (b) individual health insurance policies are too high, and even with tax credits going to individuals and families, the insurance coverage is too expensive to purchase outside of the place of work, so the "take-up rates" for a tax credit system would be too low to make much of a dent in the thickening ranks of the uninsured. In a related vein, some analysts say that current tax credit proposals would generally be insufficient for certain categories of the uninsured, particularly persons who are older but not yet eligible for Medicare. ⁴

Some models of tax credit options do suggest a relatively low take-up rate, but tax credit proponents make the common-sense argument that if one offers a richer or more generous level of assistance, the take-up rate will naturally be higher, and the number will increase significantly if it is properly explained and marketed. For example, Professor Mark Pauly of the Wharton School of Business at the University of Pennsylvania has argued that a change in tax policy through direct tax relief (equivalent to a giant tax cut) would have a significant impact in expanding private coverage to millions of Americans. According to Professor Pauly and his colleague Bradley Herring, a tax credit equal to 50 percent of the premiums would reduce the number of uninsured by half. ⁵ Similarly, Stuart M. Butler, Vice President for Domestic and Economic Policy Studies at The Heritage Foundation, has outlined how a tax credit strategy could supplement employment-based health insurance and sharply expand coverage. ⁶ Butler has also recently proposed an updated version of the original and comprehensive Heritage health care consumer choice plan, under which the generosity of refundable federal tax credits would increase for those with lower incomes or higher health care costs, combined with a program of supplemental state assistance to help low-income persons. ⁷

New Research on the Individual Market

What do people actually buy if they have a chance to buy their own coverage? Is there a real market that reflects consumer choice? As it turns out, there is in fact such a market. There is new, groundbreaking research on this emerging market. It is not based on surveys of health care benefit managers, assumptions or extrapolations based on employer-provided health insurance, or what employers or employees might think, but on real consumer behavior in the individual health insurance market.

At a June 21, 2001, press conference with House Majority Leader Dick Armey ( R-TX), House Ways and Means Health Subcommittee Chairman Nancy Johnson (R-CT), Representative William Lipinski (D-IL), and White House adviser Mark McClellan, the executives of eHealthInsurance outlined the findings of their study, "Analysis of National Sales Data of Individual and Family Health Insurance: Implications for Policymakers and the Effectiveness of Health Insurance Tax Credits" (available at www.eHealthInsurance.com).

Surprising Findings.
This unprecedented market analysis shows that premiums for health care coverage are far more affordable than many analysts have previously thought and that tax credit policies would substantially offset the cost of many of these policies for millions of Americans who do not now get health insurance through the place of work. The company examined 20,000 policies purchased in 42 states covering 95 percent of the U.S. population, roughly divided equally between men and women. There were 7,000 different health policies offered by more than 70 insurers, including large Blue Cross/Blue Shield plans.

This study of the individual market has direct implications for consumer choice options being promoted by both the Bush Administration and conservatives and moderates in Congress. For example, Representatives Dick Armey (R-TX) and William Lipinski (D-IL) have sponsored the Fair Care for the Uninsured Act (H.R. 1331). Their bill would create a tax credit of $1,000 per individual, $2,000 per couple, or up to $3,000 per family. As Representative Lipinski remarked, " Not only do eHealthInsurance's findings provide insight into the cost effectiveness of tax credits for the uninsured, but the data also proves that the proposed tax credit will cover plans that are good for the consumer." According to White House health policy adviser Dr. Mark McClellan, "The eHealthInsurance report, which is based on real world data on the affordability of private health insurance, is another piece of evidence showing that health insurance tax credits can significantly reduce the number of uninsured Americans. The report highlights the importance of implementing a workable tax credit, like that proposed by President Bush and many members of Congress."

Some of the key findings:

• Policies are more affordable than commonly thought.
  The data show that individual policies are $100 to $125 per month, or $1,200 to $1500 per year. According to the report, "These market data points from eHealthInsurance, together with average premium data from various health plans and government programs, all seen to refute the perception that average premiums are multiples of two to three times more."

  Another surprising finding is that the insurance premiums in this market were lower than those commonly found among small businesses in the small group market. Why is the perception so widespread that individual market premiums are so much higher? According to the report, "General perception may stem from specific high premium cases rather than from statistically significant and geographically and demographically diverse data sets. Individuals paying high premiums may typically have pre-existing health conditions, be near Medicare age or reside in one of the few states with high prices due to guaranteed issue regulation for the individual market."

• Tax credit options make individual insurance policies even more affordable, particularly for low-income working people.
  The study also found that a generous tax credit proposal, like the Armey-Lipinski proposal, would be "meaningful": Half of the individual and family premiums purchased are within the limits of the proposed tax credits, and three-quarters have premiums that are within 75 percent to 100 percent of the tax credit amounts.
  
  
• These consumers buy "comprehensive" coverage rather than just "basic" or "bare bones" coverage.
  The policies that people buy on the individual market are more likely to be "comprehensive" than "basic." The study defined "basic" as policies with a limited set of services and/or high deductibles, sometimes called "catastrophic" policies. It defined "comprehensive" as having coverage equal to the current Medicare Part A and B benefit coverage with some level of Medicare supplemental coverage. In practice, this means that the private market insurance products that persons are actually buying would cover not just hospitalization and physicians services, but richer benefit packages including, almost invariably, prescription drugs. Eighty-eight percent of the insurance policies purchased by single individuals and 84 percent of the plans purchased by families were in the "comprehensive" category.
  
  
• These consumers buy plans with modest deductibles.
  According to the report, of the health maintenance organizations (HMOs) that these consumers purchased, 80 percent had no deductibles at all; of the preferred provider options (PPOs), 71 percent had deductibles of less than $1,000.
  
  
• In terms of value for money, these consumers show a strong preference for less insurance company management rather than more.
  Seventy-five percent of the consumers showed a preference for PPOs, while only 16 percent picked HMOs. According to the report, "This would appear to contradict any assumption that policies in the individual market unduly restrict utilization of health services. Rather, it suggests that when confronted with the various tradeoffs and options, most consumers are willing to accept some, but not substantial restrictions, in exchange for lower premiums."

Economists call this rational economic behavior. Consumers of health insurance, contrary to what critics of consumer choice sometimes assume, are not stupid.

Conclusion

The recent eHealthInsurance analysis unveiled on June 21, 2001, is an unprecedented look into consumer behavior in the individual market. The data base is new, and the assumptions about consumer behavior in the individual market are not borne out by the consumer behavior recorded in this data base. Plans are more affordable than commonly assumed. Individuals are willing to make rational economic trade-offs, buy plans with modest deductibles, and pay more for more comprehensive coverage than "basic" coverage. Moreover, the affordability of such plans means that tax credit options will have a significant impact, reducing the cost of many of these plans significantly and thus making health insurance more widely available to families who need it.

Robert E. Moffit, Ph.D., is Director of Domestic Policy Studies at The Heritage Foundation.

Endnotes

1 It should be noted that the official Census Bureau numbers are probably an overestimate because of misreporting by Medicaid beneficiaries among other things. Nonetheless, the problem is serious and could get significantly worse.

2 See James Frogue, "A High Price for Patients: An Update on Government Health Care in Britain and Canada," Heritage Foundation Backgrounder No. 1398, September 26, 2000; see also Robert E. Moffit et al., "Perspectives on the European Health Care Systems: Some Lessons for America," Heritage Foundation Lecture No. 711, July 9, 2001.