The Trade Adjustment and Assistance (TAA) Act1 that was signed into law last year provides health care tax credits for the purchase of insurance for two specific groups of Americans without health coverage: trade-affected workers who lost their jobs and Pension Benefit Guaranty Corporation (PBGC) beneficiaries. The federal health care tax credit will be equal to 65 percent of the health insurance premiums of these individuals and can be applied only to specific types of coverage that states can play a key role in offering.
States that elect to provide health care coverage to these tax credit recipients can choose among a range of approaches and access National Emergency Grants to design and administer the coverage options. The federal grant money provides states with a unique opportunity to explore creative approaches that incorporate greater choice and competition and that build an infrastructure that could accommodate a wider range of residents seeking coverage. All states, regardless of the number of residents who qualify for the health care tax credits, should take advantage of this opportunity.
COVERAGE OPTIONS FOR THE STATES
The TAA Act authorizes the use of the credits for a select group of coverage options. Certain tax credit recipients will have access to COBRA coverage, through which workers can continue their participation in the plan provided by their former employers; the health plan of a spouse's employer; or coverage through an individual policy that was purchased previously.2 In addition to these options, states may elect to offer other coverage options that would qualify for the tax credit.
Under the Act, states may choose to offer one or several of the following options:
- State-based
continuation coverage
Several states have established COBRA-like provisions for employees of firms that have fewer than 20 employees. Under this approach, recipients of the tax credits could apply their credit to this "mini-COBRA" coverage option. - State high-risk
pool
Many states have established high-risk pools for individuals who are difficult to insure. States could choose to allow qualified tax credit recipients to enroll in such a pool and to use their tax credits toward their premium payments. (States that establish and maintain high-risk pools are eligible to receive additional federal funds.) - State employee
health plans
States could elect to open the health plan established for state employees to the TAA tax credit recipients. Since there would be no employer (state) contribution, tax credit recipients would apply their tax credit to the full cost of the policy. - A plan similar
to the state employees' plan
States could elect to design a separate pool for tax credit recipients, providing them with a benefits package that would be similar to that offered to state employees but would be administered separately. The tax credit would then be applied to the cost of the benefits package. - Other state
group-plan arrangements
States could elect to contract with a group health plan, an insurer, an administrator, or an employer to provide coverage for the tax credit recipients. If such an approach included insurers of individual policies, tax credit recipients could have the ability to obtain a plan that is better tailored for their individual needs. - Purchasing
pool
States could design an arrangement through which tax credit recipients could choose from an assortment of competing health plans. This approach could be modeled after the highly successful Federal Employees Health Benefits Program (FEHBP) and could easily be expanded to accommodate residents other than the tax credit recipients.3 - State-operated
health plan
States that administer a health plan with no federal assistance could elect to offer such state-based coverage to tax credit recipients. As with the other approaches, the tax credit recipients would apply their credits to the premium for this insurance and would be responsible for paying any remaining costs.
A MODEL FOR STATES
It is likely that many recipients of the health care tax credit will apply their credits to conventional coverage options such as COBRA coverage or to participating in their spouse's coverage. In addition, states with a qualified high-risk pool could be an attractive option for tax credit recipients with serious, high-cost medical conditions.
Although recipients of the tax credits have the potential to use their credits for a range of options, the TAA Act prohibits recipients from using their credits for the most direct and sensible option: purchasing an individual plan in the private market.4 Nevertheless, the fact that federal grant money is available to set up the infrastructure to accommodate these recipients gives states an opportunity to think creatively about how to improve existing private health insurance markets and to enhance choice, competition, and portability.
The FEHBP, through which federal employees and Members of Congress can choose from a menu of competing private health care plans, could serve as an ideal model for states. Through such a system, states could allow tax credit recipients to select the health plan that best suits their financial and medical needs, offering them a choice of plans while developing an infrastructure that could be extended to and benefit other populations.
In developing such a system, states should:
- Create a health
insurance "service center"
This center, which could be either a state or a private entity, would serve as a clearinghouse for a variety of qualified, competing plans from which participating individuals could choose. The service center would enroll individuals in the various plans and would administer an annual open enrollment through which participants could switch coverage. In addition, the center would function as a financial aggregator. It would put in place a system for collecting premiums from multiple sources, matching them with the coverage that had been selected, and transmitting them to carriers. - Determine a core
group of participants
Due to the small population receiving the TAA tax credits, states should consider expanding the participating population beyond tax credit recipients. A beginning point could be to incorporate state employees and their dependents within the system. Participation in the system could also be opened to one or more additional groups such as county and municipal employees, employees of small businesses, the self-employed, families eligible for SCHIP,5 or some Medicaid recipients. - Establish rating
rules that ensure portability of coverage offered through the
service center
The TAA Act already establishes certain requirements regarding the coverage that is provided to tax credit recipients. To promote portability, the model approach should allow anyone with sufficient previous coverage (e.g., 18 months or more) to switch his or her plan once a year during the open season, with payments being adjusted only with regard to the age and geography rate scales of the new plan and without medical underwriting or the exclusion of coverage for preexisting condition. Furthermore, to encourage eligible individuals to keep continuous coverage and prevent adverse selection, plans participating in the program should be allowed to impose limited rating surcharges and preexisting condition exclusions on individuals who lack continuous coverage. - Set in place a
reinsurance pool mechanism to cope with adverse selection
To address the concerns of possible adverse selection (whereby healthier persons gravitate disproportionately to less expensive plans), the state could establish a nonprofit, self-governing corporation that would be administered and financed by the participating health insurers and would create a pool to which insurers could cede the financial risk of higher-cost individuals without disrupting their continuity in coverage.
States can design an FEHBP-style approach in a variety of ways. For example, a state could create an independent purchasing pool, redesign a state employee health plan, or choose a combination of options. As long as the tax credit recipients were included in the pool, the state could apply for federal grant money to help set up a system that offers coverage options to a variety of participants.
CONCLUSION
States should seize the opportunity to offer coverage options for their tax credit recipients. While such efforts are intended initially to serve a small and select group, states can take advantage of the opportunity to use federal grants to build an infrastructure that has longer-lasting benefits.
During this legislative session, Congress and the Administration are expected to consider a variety of health care initiatives that will affect the states, including health care tax credits for the uninsured and Medicaid reform. States that capitalize on present opportunities and develop adaptable models, such as the FEHBP model discussed above, will also be better prepared for forthcoming policy initiatives.
Nina Owcharenko is a Health Care Policy Analyst, and Edmund Haislmaier is a Visiting Research Fellow in Health Care, at The Heritage Foundation.
2. The term "COBRA coverage" refers to a provision in the Consolidated Omnibus Budget and Reconciliation Act of 1986 which allows a worker to maintain coverage through his or her former employer, provided the employer has more than 20 employees and the employee is willing to pay the full cost of the policy (the former employer's portion and the employee's share, plus a small administrative fee). Applying the credit to a spouse's coverage is permitted, provided that the spouse's employer does not contribute more than 50 percent of the cost of the policy. Applying the credit to an individual policy is permitted only if the recipient of the tax credit had an individual policy 30 days prior to leaving his or her place of employment.
3. In a recent analysis on the uninsured, health policy analysts examined tax credits and the FEHBP model as a possible approach to the uninsured. See Stan Dorn and Jack A. Meyer, "Nine Billion Dollars a Year to Cover the Uninsured: Possible Common Ground for Significant, Incremental Progress," in Covering America: Real Remedies for the Uninsured, Economic and Social Research Institute, Current Policy Series, No. 4, October 2002, pp. 5-11.
4. The exception to the rule is in those rare instances in which the recipient of the tax credit obtained an individual policy before he or she was laid off.
5. State Children's Health Insurance Program. For further information, see Centers for Medicare and Medicaid Services Web site at http://cms.hhs.gov/schip/.
