Members of Congress from both parties support
legislative proposals to expand private health insurance coverage
to millions of Americans through a system of tax credits. The
health care tax credit proposal received a strong boost during the
congressional debates over a stimulus package to help our nation
recover from its current recession and address the needs of
millions of Americans who are at risk of losing their coverage as a
result of the economic downturn. With bipartisan interest in
using refundable tax credits to provide coverage for most uninsured
persons, a key challenge is to devise a system for implementation
that would be both efficient and effective for current and
displaced workers.
Subsidized Health Benefits with Choice of
Plans
A
current model of subsidized health benefits that uses workplace
sign-up and incorporates choice exists in the Federal Employees
Health Benefits Program (FEHBP), which provides coverage for 9
million federal government workers--including Members of
Congress--and their dependents. To implement a comparable system
for workers without employer-sponsored coverage, using health
insurance tax credits and payroll deductions, the proposed service
centers could also serve as clearinghouses for information on
available health plans to ensure that employees can make an
informed choice from a spectrum of options for coverage. Additional
information could be made available through health plans, brokers,
and other sources.
There
are several reasons to use the payroll deduction approach. One is
that the majority of uninsured Americans are in the labor force or
are members of families with workers. In fact, recent research
indicates that more than 85 percent of the uninsured are in working
families.
A workplace-based sign-up and payment system for new workers would
be able to serve most of the uninsured.
A
second reason is that automatic payroll deductions are an
exceptionally efficient way to handle routine, regular payments and
earmark a portion of a worker's salary for priorities before it is
spent on other items.
A
third reason is that all business firms and workers are already
part of this payroll deduction system. Employer payroll processes
already handle a minimum of eight standard payroll-based deductions
and required reports, including Social Security payments, Medicare,
income tax payments, and unemployment and disability insurance.
In
addition to such automatic deductions, many employers offer a
number of voluntary payroll deduction options--sometimes with
employer contributions--for their workers. Most employer health
insurance and pension/savings plans are funded in this way, as are
many contributions to charitable organizations. The payroll
deduction system has proven its efficiency, and more than $2
trillion in financing is allocated through this system each year.
The
proposal to include a service center to which an employer could
remit payroll deductions would simplify the employer's task.
Whereas without a service center, an employer might have to send a
separate check to each selected health plan, through a service
center, an employer would need only to send one check, along with a
list of workers, their Social Security numbers, health plans, and
payroll deduction amounts.
In
addition, the widespread use of office computers and business
software has made the payroll deduction system exceptionally
efficient. A small business software program that will keep all
payroll records, calculate deductions, prepare reports, and write
checks now costs approximately $30. The most widely used integrated
business management, accounting, invoicing, and payroll software
programs for small business now sell for between $90 and $200. Business
accounting services are now accessible through the Internet, and
accounting programs typically are updated at least annually (and in
many cases quarterly), so they could readily incorporate new
payroll deduction options.
In
their efforts to secure a qualified workforce, employers who do not
now offer health insurance benefits would benefit by enlisting in a
new health insurance tax credit system and thus becoming more
competitive with other firms that provide health care. At the same
time, their employees would benefit through the program, and those
who previously were uninsured would have a viable option for health
care coverage, receiving a tax credit toward those benefits. By
purchasing health insurance through payroll deductions, they would
avoid high marketing costs and other costs of the individual
coverage market. The benefits of this system would far outweigh the
small task for employers of sending one additional check per pay
period and adding one item to their workers' current list of
payroll deductions.
Maximizing Participation
The
effectiveness of a system for health insurance tax credits can be
measured by its enrollment rate. One factor in employee
participation is the existence of a convenient vehicle to inform
workers of insurance options, execute enrollment choices, and make
payments.
Even
with such a system, achieving a high voluntary enrollment rate will
still be challenging if tax credits are of a modest amount (for
example, $1,000 per worker). An element that would encourage a high
take-up rate would be the automatic enrollment of all new workers
in conjunction with a $1,000 tax credit that could cover most of
the cost of insurance. Even though enrollment choices, as well as a
"default" plan, would be automatically available, the system would
still be voluntary in that workers would be able either to enroll
in a plan of their choice or to decline enrollment in any plan and
forgo the tax credit.
The
automatic enrollment mechanism has proven to be effective in both
the public and private sectors. A public-sector example is
Medicare. The Medicare Part B, or Supplemental Medical Insurance
(SMI) program, has successfully used automatic enrollment for more
than three decades. It now enrolls 38 million persons. As they near
age 65, senior citizens are notified that they will be
automatically enrolled in Medicare Part B and that the
premiums--now $54 per month ($648 per year)--will be automatically
deducted from their monthly Social Security checks, unless they
decline participation in writing. Approximately 95 percent of
eligible retirees now elect to be enrolled in SMI, which, under
current law, is 75 percent subsidized from general tax revenues.
The acceptance rate for enrollment was similarly high even in the
earlier years of Medicare, when there was a less generous 50
percent subsidy of Medicare Part B premiums.
In the
private sector, automatic enrollment--even without an employer
contribution--has produced high worker enrollment in 401(k)
retirement plans. A recent study published by the National Bureau
for Economic Research shows that the enrollment rate for new
workers--with an unmatched worker contribution of 3 percent of
wages--rose from 37 percent to 86 percent after introduction of the
automatic enrollment process. The study found particularly
impressive increases in the enrollment of younger workers (a rise
from 25 percent to 83 percent participation for workers under the
age 25), for lower-income workers (a rise from 12.5 percent to 79.5
percent for workers with incomes below $20,000), and among Hispanic
workers (a rise from 19 percent to 75 percent participation). Since these
population groups tend also to have low levels of health insurance
coverage, it is significant that automatic enrollment alone was so
successful in influencing their choices regarding 401(k) plans.
Automatic Enrollment Options
If
automatic enrollment is adopted for new workers who are eligible
for health insurance, a policy decision will be needed as to the
low-expense default option--a health benefits plan in which they
will be enrolled unless they select an alternative plan or decline
coverage (and the tax credit). There are two approaches, which
differ in worker financial contribution and in the generosity of
the benefit package:
- A
"zero premium" plan, which provides only those benefits that can be
paid for by the health insurance tax credits alone (for example,
$1,000) at no cost to a worker.
- A
"basic" plan, which provides expanded coverage with benefits whose
costs equal the sum of the health insurance tax credit (for
example, $1,000) plus a standard worker contribution (for example,
$500).
Under
the first option, workers would be automatically enrolled in a free
health insurance plan with a $1,000 premium, unless they declined.
Few individuals are likely to decline a $1,000 benefit, so
near-universal coverage of formerly uninsured workers could be
expected. However, with its low premium, this option would offer
sub-par benefits.
Under
the second option, workers would be enrolled in plans that offered
a higher level of benefits but would also entail a standard worker
contribution via an automatic payroll deduction. A worker
contribution of $500 entails a per-week deduction of approximately
$10 and, with a $1,000 tax credit, would provide coverage with a
$1,500 premium--high enough to provide Medicare-level benefits for
uninsured full-time workers.
Though
Medicare has gaps in coverage, health plans that offered Medicare
benefits would nonetheless likely be considered by workers as
offering good basic benefits. Since Medicare enrollees now pay $648
per year for Medicare SMI benefits--often from Social Security
checks that average only about $10,000 per year--it would not be
unreasonable to ask workers to pay $500 a year for such health
insurance coverage. Nevertheless, the take-up rates for a health
care benefit with a two-thirds subsidy (a $1,000 tax credit for a
$1,500 premium) would likely be lower than under the "zero premium"
option. With either approach, workers could also be afforded an
opportunity to sign up for supplemental programs to assist
lower-income workers and their families such as SCHIP, if they
wished, or some new form of subsidized private coverage.
Health Insurance Tax Credit for Displaced
Workers (and Students)
The
combination of automatic enrollment, health insurance tax credits,
and an efficient sign-up system in the workplace should result in
high take-up rates among current workers. A similar arrangement can
be used to address the health care needs of displaced (unemployed)
workers, their families, and others.
Many
workers who lose employer-based coverage are covered by COBRA,
which qualifies them for up to 18 months of continued coverage, but
their only option is to pay the full premiums themselves for the
benefit plan in which they formerly had participated through their
workplace. This is usually expensive coverage that carries with it
a "sticker shock" for workers who are about to lose their
paychecks. For example, while employed, a worker may have paid only
$1,000 for a $5,000 premium subsidized by his employer.
Faced
with the massive expense of paying the full premium for health
insurance, the overwhelming majority of workers (more than 80
percent) do not elect to continue COBRA coverage. Many other
displaced workers are not eligible for COBRA coverage because they
worked in firms with fewer than 20 employees, or worked for firms
that did not offer health insurance benefits.
A
simple way to fill these gaps in health care coverage would be to
extend eligibility for the health insurance tax credit for the
18-month period specified by COBRA through automatic enrollment
with a range of affordable private health options. For displaced
workers not eligible for COBRA, a similar system--including a tax
credit, health plan options, and automatic enrollment
provisions--could be administered through the unemployment
insurance offices. Workers who signed up at UI offices would be
able to pay premiums through deductions from UI checks if they
chose to do so. Similarly, students who become ineligible for
coverage under their parents' plans could also qualify for health
insurance tax credits, automatic continuation coverage, and
enrollment options.
Affordable Coverage with Personal
Choices
Presenting displaced individuals who are
about to lose previous subsidized coverage with a convenient
sign-up system, a menu of affordable options, and health insurance
tax credits will maximize the likelihood that they will make a new
arrangement for health coverage. If an eligible person wanted to
apply a tax credit to pay a COBRA premium, of course, that person
could do so; but a menu of affordable private health plan options
and alternative financing plans could also be incorporated in the
existing COBRA notification and sign-up process, as well as being
offered at UI offices and for students who lose coverage (through a
COBRA-like process).
Likewise, there is no reason why a person
could not voluntarily sign up for a public program if he or she
chose to do so. Workers could also be informed of the availability
of SCHIP coverage for their children and could be provided with
application forms at this time.
A Role for the States
Federal tax credits can provide basic
financing for uninsured workers, but they will need to be
supplemented to cover the nearly 38 million uninsured.
State-administered programs already assist in expanding SCHIP,
Medicaid, or other financing for low-income children and
non-workers. During times of economic downturn, states could also
work with Congress and the Administration to coordinate a new
system of tax credits with means-tested programs to expand private
health insurance coverage.
States
could also directly supplement the tax credit for workers and their
families who are most in need. To improve the efficiency and
effectiveness of their efforts, states could make available their
health care financing options for working families as part of the
administrative systems described above. Issues of health insurance
market regulation will also need to be resolved.