A Diverse and Dynamic Uninsured Population

According to the U.S. Bureau of the Census, 41.2 million Americans did not have health insurance coverage in 2001.1 Roughly half of the members of this diverse population are uninsured for a period of six months or less, and about 40 percent are uninsured for a period of 18 months or more.2

The overwhelming majority of the uninsured are young, between the ages of 18 and 34; over 80 percent are part of a working family.3 They tend to be employed in small businesses and are concentrated in wholesale and retail trade industries as well as in agricultural, forestry, fishing, mining, and construction.4 They are disproportionately minorities, largely Hispanic.5 While a substantial majority of these Americans are low-income working people, the fastest growing portion is comprised of middle-income to upper-middle-income families.6

Although the majority of Americans have health care coverage through their place of work, lower-income working Americans are less likely to have employer-sponsored coverage.7 Yet Americans get unlimited tax relief for the purchase of health insurance if--and only if--coverage is provided through their employer. In 2000, the tax subsidy linked to employer-sponsored coverage was estimated to be $126 billion.8

Lower-income working Americans who do not or cannot get health insurance at their place of work have few choices; they can either purchase non-group coverage outside of the place of work (and do so with after-tax dollars) or go without coverage altogether. Health care economists concluded long ago that this health care tax policy is inequitable and inefficient, and that it distorts the insurance markets and contributes significantly to the number of the uninsured in the United States.9

Policymakers should also consider the "cost" of the uninsured to the public--including the costs of government payments and programs and other public spending for health care. In a recent research paper, Urban Institute analysts Jack Hadley and John Holohan estimate that, in 2001 dollars, the public paid $35 billion in uncompensated care and that $30.6 billion of this payment was in the form of government spending.10 As Hadley and Holohan explain:

We...estimated that governments finance most of the uncompensated care received by the uninsured, spending about $30.6 billion on payments and programs largely justified to serve the uninsured and covering possibly as much as 80-85 percent of the uncompensated care costs through a maze of grants, direct provision programs, tax appropriations, and Medicare and Medicaid payment additions. Most of this money comes from the federal government, primarily through Medicare and Medicaid, followed by state/local tax appropriations for hospitals, Medicaid DSH and UPL payments, and VA's direct care programs.11

Replacing this inefficient and messy system with direct assistance to the uninsured would be both simpler and more cost-effective.

The President's Plan to Expand Coverage and Choice

President Bush is proposing changes to address the needs of America's uninsured by fixing the inequities of the current system and mainstreaming uninsured individuals and families into the private insurance market. While liberal policymakers would like to enroll the uninsured in public programs such as Medicaid (which are, even now, overwhelmed and underperforming), available survey research shows that Americans prefer to have private health coverage rather than government-run public programs.12 To achieve this objective, the Bush Administration would create a new system of tax credits for health care coverage that targets low-income individuals and families who do not have employer-provided coverage.

In addition, President Bush has put forward a series of policy changes aimed at improving existing health care accounts. These policy recommendations would enable individuals and families to control decisions regarding their own health care and decide for themselves how best to spend their health care dollars.

The President's proposals to expand coverage and return personal choice and control to individuals and families include the resubmission of a system of tax credits, targeting individuals and families who do not get health insurance through the workplace; allowing the carryover of existing flexible spending arrangements (FSAs) to enable individuals and families to build up savings for health care expenses; and the elimination of statutory restrictions on medical savings accounts (MSAs).

Health Care Tax Credits
The President is resubmitting an $89 billion health care tax credit proposal to assist millions of Americans who are without health insurance provided through the workplace. The health care tax credit would provide a subsidy of up to 90 percent of the cost of a health insurance premium, up to a dollar amount of $1,000 per person and $3,000 per family. Families with an adjusted gross income of $25,000 or lower would be eligible for the maximum credit of $3,000. For families with incomes above $25,000, the size of the credit would vary with income and would be phased out at income levels of $30,000 for an individual with no dependents and $60,000 for families with children.13

In its structure, the proposed Bush tax credit would be refundable, meaning that low-income individuals and families who owe minimal or no taxes would still receive a direct subsidy for the purchase of health insurance. It would also be "advanceable," meaning that individuals or families would get the assistance at the time premium payment is due and not have to wait until the end of the year for reimbursement.

The Bush tax credit proposal outlines a new role for the states, both in building an infrastructure that incorporates choice and competition and in providing additional subsidies for low-income Americans. Under the terms of the original Bush tax credit proposal outlined last year, a person could purchase individual health insurance with the tax credit; under the terms of the revised version, in addition to options in the non-group market, a person could purchase health insurance through private-sector purchasing pools, state-sponsored insurance-purchasing pools, and state high-risk pools.14 These state purchasing arrangements are similar to those extended to states under the Trade Adjustment and Assistance (TAA) Act.15

At the discretion of state authorities, after December 31, 2004, individuals and families who would not otherwise be eligible for public assistance could receive a federal tax credit to buy into certain state-sponsored purchasing groups where private insurance is offered or to buy into state government employee health-purchasing groups.16 Moreover, states could supplement the federal tax credits used for group purchasing of private health plans with additional state contributions. Under the terms of the Bush proposal, states could make an additional contribution of up to $2,000 per adult for those with incomes at 133 percent of the poverty level; this contribution would be phased down to $500 per adult for those with incomes that are 200 percent of the poverty level.17

Health Care Accounts
Beyond the tax credit proposals, the Bush Administration has unveiled a broad range of policy improvements to make health care coverage more affordable by giving individuals greater control of their health care spending. In 2002, the U.S. Department of the Treasury issued a ruling to clarify the status of health reimbursement arrangements (HRAs). Through these arrangements, employers could offer employees a health plan in combination with a tax-free spending account for health care expenses, allowing any unspent funds to be carried over from year to year, tax-free.18

Beyond this administrative change in the system, the Bush Administration is also proposing statutory changes that would expand and improve Archer MSAs and FSAs.19 Changes in Archer MSAs are particularly significant, given that nearly 73 percent of MSA enrollees were previously uninsured.20

Flexible Spending Arrangements
Under current law, employees can participate in employer-based flexible spending arrangements, through which employees can set aside a portion of their salaries in a special, pre-tax account to use for anticipated qualified health care expenses. If employees do not use the funds they have set aside in their FSA by the end of the year, however, they lose them. They may not carry over any unused funds to the following year. Under the Bush proposal, employees could carry forward up to $500 of unused funds in their FSAs tax-free every year for medical expenses.

Medical Savings Accounts
Today, some Americans are permitted to open medical savings accounts from which individuals and families can pay for their medical expenses. These accounts are tax-free and can be rolled over from year to year. Under current law, no more than 750,000 individuals can have a medical savings account, and the MSA demonstration is scheduled to end after December 31, 2003.21 These stipulations are both a profound restriction on the health insurance market and a legal impediment designed to discourage the growth of such plans.

In addition to these restrictions, there are a number of statutory and regulatory restrictions that determine how such accounts may be used. For example, under current law, an MSA must be coupled with a high-deductible health plan. The law specifically defines a high-deductible plan as one that has "deductible(s) in the range of $1,700 to $2,500 in the case of individual coverage, and $3,350 to $5,050 in other coverage arrangements, with out-of-pocket limits set at $3,350 for individual coverage and $6,150 in "all other cases."22

The Bush proposal would eliminate the artificial participation cap on MSAs and make the demonstration permanent. These changes would remove market disincentives and allow supply to meet market demand. The Bush proposal would open up the MSA option to any individual who wanted one (with the exception of those who would otherwise be eligible for a refundable tax credit) and change the definition of a "high-deductible" plan to any plan with an annual deductible as low as $1,000 for an individual and $2,000 for family or other coverage, with an additional provision to encourage preventive medical services. In addition, it would allow both employers and employees to contribute to the account and would permit contributions up to 100 percent of the annual deductible.23

Making the President's Proposals Better

The problems of the uninsured reflect a broader problem of the health care system--the current federal and state tax treatment of health insurance. The current system undermines the portability of insurance, inhibits personal ownership and control of health plans, prohibits genuine consumer choice, and obstructs the functions of the market. Heritage Foundation health policy analysts have long championed a comprehensive and universal reform of America's health care system and have recommended replacing the existing federal and state tax structure for health insurance with a national system of tax credits.24

Short of such a comprehensive reform, President Bush's health care policy agenda is laudably ambitious. It would make health care coverage more affordable and would help millions of Americans secure health insurance coverage. The President's policy would ensure the expansion and availability of private health insurance coverage for individuals and families.

Congress should work with the Bush Administration to make further improvements in health care policy. Specifically, Congress should:

1. Permit states to determine the level of tax credit supplement and allow employers to contribute. As described above, the Bush proposal allows states to supplement the federal tax credit. However, there are limits regarding the amount that states may contribute and whom they may assist. States should have the flexibility to leverage all available resources to enhance the federal tax credit as they see fit for their residents. Furthermore, for employees who are not receiving employer-sponsored coverage, regulatory policy should be amended to permit employers to make a contribution on behalf of their employees.
2. Provide a partial tax credit for employer-sponsored health insurance. While a number of uninsured workers do not have access to employer-sponsored coverage, there are those who simply decline employer coverage due to cost.25 Furthermore, those insured low-income families who make a financial commitment to get insurance through their employer would not be eligible for assistance. Therefore, to promote equity, certain income-eligible individuals should be able to receive a partial tax credit that can be applied to an employer-sponsored policy. Such a policy could also encourage some small businesses to offer coverage. According to a recent survey, "75 percent of uninsured small employers said that they would consider offering a health plan if the government provided tax credits to workers to help them pay for coverage."26 Senator James Jeffords (I-VT) incorporated such an approach in legislation introduced in the 107th Congress.27
3. Expand the FSA carryover to include all unused funds. There should be no limit to the carryover amount of unused FSA funds. Monies contributed to an FSA are set aside from the employee's earned wages. It is the employee's money; therefore, any unspent dollars in the account should be carried over year to year. Instead of simply anticipating planned annual medical expenses, workers would also be able to save for future, unexpected, or uncovered services.
4. Establish individual ownership of HRAs. Currently, employers control health reimbursement arrangements, including the accounts. While employees are able to carry over unspent funds from the account year to year, when an employee leaves his or her job, the employer controls the account funds. Some employers have decided to allow their employees access to any remaining funds in the accounts after they leave. However, if an employer chooses not to do so, there is little incentive for an employee not to "spend down" the funds in the account before separating from the company. A better solution would be to give employees control and ownership of these accounts so that, upon their departure, they would be able to maintain the HRA policy on their own and continue to have full access to the account.
5. Expand the use of re-employment accounts for health care-related expenditures. President Bush has proposed establishing re-employment accounts for certain unemployed workers. These accounts would be worth up to $3,000 and could be used to purchase training and supportive services.28 Since most workers lose their health insurance when they lose their jobs, unemployed workers should also be allowed to use the funds in these re-employment accounts to assist with health care-related costs, including premium payments on a health insurance policy, during their period of unemployment.

CONCLUSION

The President has laid out an ambitious health care policy agenda that includes substantial revisions in the federal tax code and the federal tax treatment of health insurance. These tax changes would broaden access to private health insurance coverage, establish equity in the treatment of health insurance, and improve the overall function of the private health insurance market by incorporating consumer choice and market competition.

The President's proposals establish a high bar for success. With the help and support of Congress, the bar can be reached--and, in some cases, raised even higher.

Nina Owcharenko is Health Care Policy Analyst in, and Robert E. Moffit, Ph.D., is Director of, the Center for Health Policy Studies at The Heritage Foundation.