[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]


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79-970

2002


 
      HEALTH CARE TAX CREDITS TO DECREASE THE NUMBER OF UNINSURED

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 13, 2002

                               __________

                           Serial No. 107-58

                               __________

         Printed for the use of the Committee on Ways and Means


                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel



Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

 
                            C O N T E N T S

                               __________
                                                                   Page
Advisories announcing the hearing................................  2, 4

                               WITNESSES

U.S. Department of the Treasury, Hon. Mark Weinberger, Assistant 
  Secretary for Tax Policy.......................................    20
Council of Economic Advisors, Hon. Mark McClellan, Member........    22
                               __________
Center on Budget and Policy Priorities, Iris Lav.................    86
eHealthInsurance Inc., Vip Patel.................................    68
Heritage Foundation, Stuart Butler...............................    78
Progressive Policy Institute, Jeff Lemieux.......................    97

                       SUBMISSIONS FOR THE RECORD

American Academy of Actuaries, Cori E. Uccello, and Task Force on 
  Health Insurance Rate Filing, Roderick E. Turner, joint 
  statement......................................................   119
Communicating for Agriculture and the Self-Employed, Inc., Fergus 
  Falls, MN, statement...........................................   123
Gruber, Jonathan, Massachusetts Institute of Technology, 
  Cambridge, MA, statement and attachments.......................   123
Healthcare Leadership Council, Mary R. Grealy, statement.........   128
National Association for the Self-Employed, statement............   131
Providence Health System, Seattle, WA, Sister Karin Dufault; 
  PeaceHealth, Bellevue, WA; Providence Services, Spokane, WA; 
  and Swedish Health Services, Seattle, WA; joint statement......   133

 
      HEALTH CARE TAX CREDITS TO DECREASE THE NUMBER OF UNINSURED

                              ----------                              


                      WEDNESDAY, FEBRUARY 13, 2002

                          House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 11:25 a.m., in 
room 1100 Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory and revised advisory announcing the hearing 
follow:]

ADVISORY

                  FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 6, 2002
No. FC-14

             Thomas Announces a Hearing on Health Care Tax

              Credits to Decrease the Number of Uninsured

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
the President's proposal to reduce the number of uninsured through tax 
credits. The Committee will also examine other tax credit proposals, 
such as the one that passed the House in December. The hearing will 
take place on Wednesday, February 13, 2002, in the main Committee 
hearing room, 1100 Longworth House Office Building, beginning at 10:00 
a.m.
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include Bush Administration experts on health care tax 
credits and proposals to help reduce the uninsured population. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing
      

BACKGROUND:

      
    On February 4, 2002, the President submitted his fiscal year 2003 
budget to the Congress, which included a refundable, advanceable tax 
credit for the purchase of health insurance. This initiative addresses 
the fundamental, chronic, institutionalized uninsured problem in 
America. Despite recent declines in the total number of uninsured--38.5 
million in 2000, down from a high of 44 million in 1998--the prospects 
for a continued and sustained rise in the uninsured have grown with the 
resurgence of double digit health inflation and a war-weakened economy.
    Premiums for employer-sponsored health insurance increased 11 
percent last year, the largest increase in recent years, and 
projections for the near future peg health inflation even higher. As 
health costs are the primary reason most people forgo insurance, the 
return of double-digit health inflation will likely exacerbate the 
uninsured problem. Because most individuals obtain health coverage 
through their employers, the combination of higher premiums and recent 
increases in unemployment mean providing increased access to affordable 
insurance policies will prove more challenging and requires more 
creative solutions.
    In December of 2001, the House passed economic stimulus legislation 
(H.R. 3529, the ``Economic Security and Worker Assistance Act of 
2001'') that included an advanceable, refundable tax credit for the 
purchase of health insurance. That bill would provide a 60-percent 
credit for the purchase of qualified insurance policies for those 
involuntarily terminated from their jobs. Individuals would have the 
choice to stay in their employer-sponsored COBRA policy or to purchase 
a policy in the individual market. The President's 2003 budget provides 
a $1,000 credit for individuals and up to $3,000 for families for the 
purchase of qualified policies up to certain income limits.
    In announcing the hearing, Chairman Thomas stated: ``This hearing 
will help lay the groundwork for insuring all Americans. Because nearly 
40 percent of uninsured adults and 25 percent of uninsured children 
have no regular source of health care, they receive less health care 
and often resort to more costly interventions such as inappropriate 
emergency room utilization. While it was unfortunate the Senate failed 
to act on any uninsured proposal, I am committed to working with 
Republicans and Democrats and the Administration to ensure access to 
quality, affordable health insurance.''
      

FOCUS OF THE HEARING:

      
    The focus of the hearing is to review various proposals to provide 
a refundable tax credit for the purchase of health insurance, including 
the President's proposal.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
``[email protected]'', along with a fax copy to 
202/225-2610 by the close of business, Wednesday, February 27, 2002. 
Those filing written statements who wish to have their statements 
distributed to the press and interested public at the hearing should 
deliver their 200 copies to the full Committee in room 1102 Longworth 
House Office Building, in an open and searchable package 48 hours 
before the hearing. The U.S. Capitol Police will refuse unopened and 
unsearchable deliveries to all House Office Buildings.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.

    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
``[email protected]'', along with a fax copy to 
202/225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.

    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.

    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.

    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.

    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                


                   * * * NOTICE--CHANGE IN TIME * * *

ADVISORY

                  FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 11, 2002
No. FC-14-Revised

             Change in Time for Hearing on Health Care Tax

              Credits to Decrease the Number of Uninsured

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the full Committee hearing on health 
care tax credits to decrease the number of uninsured scheduled for 
Wednesday, February 13, 2002, at 10:00 a.m., in the main Committee 
hearing room, 1100 Longworth House Office Building, will be held 
instead at 10:45 a.m.
    All other details for the hearing remain the same. (See full 
Committee Advisory No. FC-14 released on February 6, 2002.)

                                


    Chairman THOMAS. Good morning. I would like to welcome our 
witnesses and guests to today's hearing. I apologize for the 
lateness of the beginning of the hearing. There was necessary 
administrative business that had to take place.
    Today's hearing is an important one on how to make health 
insurance more affordable, specifically for displaced workers 
but also for those who do not have health insurance. As we 
know, a million Americans have lost their jobs since September 
11, and when people lose their jobs, if they had it, they lose 
their health insurance coverage.
    Some 40 million Americans are uninsured. When the uninsured 
receive their medical care but can't pay for it, pretty 
obviously they get the care but the costs are shifted to 
others. Exacerbating the problem is that same uninsured 
individual's tendency to deal less in preventive care and often 
resort to the most expensive kind of medicine, emergency room 
use of a doctor of last resort.
    Six weeks ago now the House passed legislation providing 
unemployed workers access to the health insurance of their 
choice. If the Senate had acted, millions of unemployed, 
uninsured workers and their families would already be receiving 
a 60 percent refundable and advanceable tax credit to assist 
them in purchasing the health insurance that best fits their 
family's needs. Unfortunately, the response that we got from 
the Senate was for the last century's response of unemployment 
insurance.
    I think three fundamental principles should govern our 
solution to this problem: One, obviously availability; two, 
affordability; and, as much as possible, allowing consumer 
choice. The Displaced Worker Tax Credit I believe meets all of 
these principles.
    The tax credit is refundable. That means even people with 
little or no tax liability receive assistance to purchase 
private health insurance. The tax credit is also advanceable. 
That means assistance is provided when it is needed, and 
individuals don't have to wait until the end of the year to get 
a refund check from the Internal Revenue Service. And, most 
importantly, it allows individual to choose the health care 
that best fits their family's needs, whether they choose to 
stay with their former employer's plan or opt for a new, 
perhaps more affordable one.
    The President's budget reserves over $100 billion for two 
new health insurance tax credits, credits for all lower- and 
moderate-income uninsured individuals, and the Displaced Worker 
Tax Credits which passed this House in December.
    The Displaced Worker tax credit is a large umbrella. If you 
have lost your job, you are eligible. It will cover all those 
who find themselves unemployed through no fault of their own, 
not just people who were lucky enough to have insurance while 
they had a job. It helps everyone, but particularly those at 
the lowest income level.
    The broader uninsured tax credit is specifically targeted 
at lower- and moderate-wage earners without insurance, because 
on their jobs they don't have that insurance. It recognizes the 
diversity of the uninsured and allows them to purchase the 
health plan that is best for them.
    Passing the problem off to the States, already struggling 
with skyrocketing Medicaid costs, is probably not the answer. 
Forty States are running budget deficits and six are not even 
in session this year. The prospect that these States would 
magically expand Medicaid, fundamentally a welfare program for 
the poor, to middle-class individuals is I think a long shot at 
best.
    Health insurance for the unemployed should be just one 
component of a modern health care system that offers choice, 
independence, and the ability to tailor to your particular and 
specific needs. But the real answer is to restore our economy 
to full health, creating the jobs and paychecks that will get 
displaced workers back on their feet. They still may, however, 
have a job but no health insurance.
    [The opening statements of Chairman Thomas and Mr. Ramstad 
follow:]
Opening Statement of the Hon. Bill Thomas, a Representative in Congress 
from the State of California, and Chairman, Committee on Ways and Means
    Good morning. I'd like to welcome our witnesses and guests to 
today's hearing on how to make health insurance more affordable for 
displaced workers.
    A million Americans have lost their jobs since September 11.
    When people lose their jobs, they often lose their health insurance 
coverage too. Now, nearly 40 million Americans are uninsured. When the 
uninsured receive medical care but can't pay for it, the costs are 
shifted to others. Exacerbating the problem is that these same 
uninsured individuals tend to receive less preventive care and often 
resort to emergency rooms as the doctor of last resort.
    Six weeks ago, the House passed legislation providing unemployed 
workers access to the health insurance of their choice. If the Senate 
had acted, millions of unemployed, uninsured workers and their families 
would already be receiving a 60% refundable and advanceable tax credit 
to assist them in purchasing the health insurance that best fits their 
families' needs. We are still waiting for the Senate to act.
    Three fundamental principles should govern our solution to this 
problem: availability, affordability, and consumer choice. The 
displaced worker tax credit meets all those goals.
    The tax credit is refundable--that means even people with little or 
no tax liability receive assistance to purchase private health 
insurance. The tax credit is advanceable--that means assistance is 
provided when it is needed, and individuals don't have to wait until 
the end of the year to get a refund check from the IRS. And most 
importantly, we trust individuals to choose the health care that best 
fits their families' needs, whether they chose to stay with their 
former employer's plan or they opt for a new one.
    The President's budget reserves over $100 billion for two new 
health insurance tax credits: credits for all lower and moderate income 
uninsured individuals and the displaced worker tax credits, which 
passed the House in December.
    The displaced worker tax credit is a large umbrella: if you've lost 
your job, you're eligible. It will cover all those who find themselves 
unemployed through no fault of their own, not just people who were 
lucky enough to have insurance while they still had a job. It helps 
everyone, but particularly those at the lowest income level. The 
broader uninsured tax credit, is specifically targeted at lower and 
moderate wage earners without insurance, because their jobs don't offer 
health care. It recognizes the diversity of the uninsured, and allows 
them to purchase the health plan that is best for them.
    Passing the problem off to the states--already struggling with 
skyrocketing Medicaid costs--is not the answer. Forty states are 
running budget deficits and six are not even in session this year. The 
prospect that these states would magically expand Medicaid, a welfare 
program for the poor, to middle class individuals is a long-shot at 
best.
    Health insurance for the unemployed should be just one component of 
a comprehensive modern health care system that offers choice, 
independence and the ability to tailor care to your specific needs. But 
the real answer is to restore our economy to full health, creating the 
jobs and paychecks that will get displaced workers back on their feet.
    Before proceeding to our witnesses, I would ask the Ranking Member, 
the gentleman from New York, if he wishes to make an opening statement.

                                


Opening Statement of the Hon. Jim Ramstad, a Representative in Congress 
                      from the State of Minnesota
    Mr. Chairman, thank you for calling this important hearing and for 
your strong leadership on decreasing the number of uninsured Americans 
through tax incentives.
    The President's health insurance tax credit proposal and the 
similar provision the House passed in December in the ``Economic 
Security and Workforce Assistance Act'' would go a long way toward 
providing uninsured Americans with the health insurance they so 
desperately need.
    Over 40 million Americans currently have no health insurance. With 
a weakened economy and double-digit health care inflation, this crisis 
is not likely to improve without bold action.
    President Bush and this Committee are providing the leadership 
needed to tackle this issue. We must examine creative ways to give more 
Americans access to quality, affordable health care.
    I also want to compliment the Bush Administration for its proposal 
concerning Flexible Spending Accounts (FSAs), which allow workers to 
save for future health care costs. The President's proposal is similar 
to legislation I introduced, H.R. 1590, which allows workers to roll 
over $500 from one year to the next instead of forfeiting their FSA 
balance at the end of the year. This reform will encourage workers to 
save for health care expenses and make smart purchasing decisions.
    I certainly look forward to hearing from the witnesses today about 
ways to address the crisis of uninsured Americans, and once again, 
thank you, Mr. Chairman.

                                


    Chairman THOMAS. Now, prior to calling on our witnesses 
today, the Chair would recognize the Ranking Member, the 
gentleman from New York.
    Mr. RANGEL. Thank you, Mr. Chairman.
    It seems like it was only yesterday that the leadership of 
this august Committee was contemplating pulling up the Tax Code 
by its roots. One of the reasons was the tax credits and the 
things that made the Code so complicated. Of course, when you 
think of the political priorities as to whether or not we would 
want to simplify the Tax Code or whether we would want to 
destroy employer-based health plans, then we have to decide 
which is the priority and which way that we are going to go.
    It just seems to me that even when we talked about the 
stimulus package, that we could have found an uncomplicated way 
to do it on a temporary basis, and we can move on with these 
hearings to see whether or not the system that you are 
recommending or the Administration has recommended is employee-
friendly, whether it gives older folks an equal opportunity, as 
well as people who are not that healthy. In any event, Mr. 
Stark has developed an expertise in this area as the Ranking 
Member of the Health Subcommittee, and with your kind 
permission I would like to yield to him, and I might add for 
the Chairman's comfort, just to him.
    Mr. STARK. Thank you, Mr. Chairman and Mr. Rangel.
    The issue today of the health insurance tax credit is 
important to all of us, and most important I suppose to the 40 
million Americans who go today without health insurance, which 
means basically in this country they don't get health care. It 
need not be a partisan issue. Obviously there are some great 
philosophic differences here.
    And I am concerned that this hearing should focus not on 
the goal, is going to focus not on the goal of helping the 
uninsured get insurance, this hearing is going to focus on tax 
credits, whether they solve the problem or they don't. And we 
have much research to show that health care tax credits create 
more problems than they solve, unless in fact they are 
universal and come with strict controls on the health insurance 
industry, which is not suggested.
    The choice of--well, we will see some research that 
Professor Gruber will give us, that shows that under the health 
tax credits we would reduce the number of uninsured by less 
than 2 million, and we could better spend the money to put 
those people who are uninsured into existing government 
programs. The tax credit proposal purports to give choice to 
people, but the choice of an inadequate, expensive plan isn't a 
choice. Americans who are deemed bad risk--heart condition, 
history of cancer, high blood pressure, arthritis, asthma, 
allergies--have very little real choice in the private 
individual market, and the tax credits aren't going to do them 
any good.
    I know that the Chairman has been critical of the employer-
based system. I would like to put into the record the Joint 
Economic Committee Democratic staff report on the health 
insurance tax credits. I think my colleagues will find it 
interesting, and we have copies to pass out. We also have done 
some research on what health plans are available for a family 
of four without pre-underwriting in the various communities 
around the country, which would show that these tax credits 
aren't going to go very far toward covering people.
    It is interesting to note that a famous American 
politician, a Republican, I might add, has said repeatedly that 
we should jettison the employer-based health insurance, it is 
fatally flawed, and replace it, and I think it is interesting. 
Sixty years ago under a Democratic Administration we went to 
war, perhaps the greatest war this country ever fought, and we 
created at that time the employer-based health insurance to 
protect all the Americans who were coming in off the farms to 
pitch in, to help in that war effort, and now under a 
Republican Administration 60 years later you want to destroy 
that system as we enter into another war. I think that is a sad 
commentary. Thank you.
    [The information follows:]

JOINT ECONOMIC COMMITTEE

DEMOCRATIC STAFF

SENATOR JACK REED (D-RI) VICE CHAIRMAN

                                          Joint Economic Committee,
                                       Hart Senate Office Building,
                                              Washington, DC 20510.
                     HEALTH INSURANCE TAX CREDITS:
                THE WRONG PRESCRIPTION FOR THE UNINSURED
                           February 13, 2002
Executive Summary
    Despite a strong economy over the last decade, there are still 
millions of working adults who lack health insurance. High costs and 
difficulty in gaining access to care are the primary barriers to 
insurance coverage both for workers and for the unemployed. Many low-
income workers are not offered insurance benefits through their 
employers. For them, the cost of private, non-group insurance plans can 
be prohibitively expensive. High costs also force some workers to 
decline employer-sponsored coverage because they cannot afford the 
employee share of the premiums. The unemployed face similar problems, 
and for them finding affordable health insurance coverage can be even 
more difficult.
    Providing tax credits for health insurance is one approach that has 
been proposed as a means of reducing the ranks of the uninsured. The 
Bush Administration, for example, has proposed a refundable tax credit 
for uninsured individuals and families. But tax credits cannot fully 
address the problems of access and affordability for the vast majority 
of the uninsured in the United States.
    The purpose of a tax credit is to lower the cost of health 
insurance premiums sufficiently to allow more people to buy coverage. 
Proponents argue that a health insurance tax credit would expand 
coverage by giving people money--either a fixed percentage of premium 
costs or a flat dollar amount--to use toward purchasing a plan in the 
private, non-group market.
    To be effective, the credit must be large enough to allow the low-
income uninsured to afford coverage and to give private insurers an 
incentive to provide that coverage. Under current tax credit proposals, 
however, health insurance would still be out of reach for most low-
income Americans. Many very poor families would have to spend more than 
half of their annual income on health insurance to receive coverage 
under these plans. Tax credits alone would also do little to improve 
access to coverage, because providing coverage to people with health 
risks will not be profitable for insurers unless premiums are very high 
or better methods of pooling risks are developed. As a result, 
insurance providers may still turn away some uninsured because of age 
or health status, even if the applicants can afford to pay somewhat 
higher-than-normal premiums.
    A more effective way to guarantee health coverage for the poor 
would be to extend coverage through existing public programs such as 
Medicaid and SCHIP. Most proposals would grant free coverage to the 
very poor and allow the near poor to buy into public programs at 
reduced rates. The advantage of these proposals is that they would 
virtually eliminate the problem of health insurance coverage for the 
poor, without spending public resources to subsidize those who can 
already afford and gain access to health insurance. In the longer run, 
offering tax advantages for health insurance for higher-income 
employees who are not covered by employer plans may even induce some 
employers to drop their plans, raising public costs for health 
insurance even further.
I. Why Do More Than 38 Million Americans Lack Health Insurance?
    In 2000, more than 38 million Americans did not have health 
insurance at any point during the entire year, and many more lacked 
insurance for at least part of the year. Further, many of those who did 
have some insurance did not have enough coverage to allow them to pay 
for all their health care needs. These problems occurred in spite of 
record levels of employment, the most common source of health 
insurance. As the economy slows and unemployment increases, the number 
of uninsured will continue to rise.
    Most of those without insurance are working adults under the age of 
65. More than 75 percent of the uninsured--some 30 million Americans--
are between the ages of 18 and 64. Most of them are working poor. The 
overwhelming majority (75.9 percent) worked either full- or part-time 
during the year, yet more than half of the nonelderly uninsured have 
household incomes that are less than 200 percent of the Federal poverty 
level (FPL), which in 2000 was about $17,500 for a family of four.
[GRAPHIC] [TIFF OMITTED] T9970A.001

Barriers to Coverage: Access and Affordability
    There are two primary barriers to coverage for the low-income 
uninsured--access and affordability. The cost of a comprehensive health 
insurance plan can be a significant share of a low-income family's 
monthly budget. After paying rent and buying food, many simply cannot 
afford to pay insurance premiums.
    Access to coverage is also a serious problem. Many people are 
uninsured because they do not meet the eligibility requirements for 
group plans or for public programs such as Medicaid. Those who have 
past or present health problems may be unable to find an insurer 
willing to cover them in a private, non-group plan, and these plans 
often exclude existing medical problems and are very expensive when 
they do exist.
    The problems of affordability and access plague all three markets 
for health insurance--employer-sponsored group insurance, public 
programs, and private non-group plans.
Employer-sponsored group insurance
    Most Americans with health insurance are covered by a plan offered 
by their employer. However, many of the uninsured do not have access to 
an employer-based plan. The majority (80 percent) of those who are 
working but uninsured are not offered or are not eligible for an 
insurance plan at work.\1\ Smaller firms, which tend to employ more 
low-wage workers, are much less likely than large firms or those with a 
higher proportion of high-wage employees to offer health insurance 
benefits. Even if an employer offers health benefits, many part-time 
and temporary employees are not eligible to participate. While employer 
contributions and tax advantages make employer-sponsored plans 
generally more affordable than non-group plans, the cost of the 
employee share of the premiums may still put insurance out of reach for 
low-income workers. In 2001, workers paid an average monthly premium of 
$150 for a family health insurance plan.\2\ A worker making minimum 
wage would earn $717 a month before taxes; therefore, such health 
insurance premiums would cost about 20 percent of the worker's gross 
monthly earnings.\3\
---------------------------------------------------------------------------
    \1\ Workers Without Health Insurance: Who Are They and How Can 
Policy Reach Them? Bowen Garrett, Len M. Nichols and Emily K. Greenman. 
The Urban Institute for the W.K. Kellogg Foundation
    \2\ Employer Health Benefits 2001 Annual Survey. The Kasier Family 
Foundation and Health Research and Educational Trust, September 2001.
    \3\ Calculations by the Joint Economic Committee Democratic Staff. 
Assumptions: minimum wage of $5.15 per hour, 35 hour work week, 4.3 
work weeks per month and 7.5% social security tax.
---------------------------------------------------------------------------
Public coverage
    Medicaid offers an insurance safety net for some very low-income 
families, but not all. Federal law established a stringent set of 
eligibility guidelines for the program. Very few adults without 
children can qualify, regardless of how poor they may be. More than 80 
percent of uninsured adults with incomes below 200 percent of poverty 
do not qualify for Medicaid coverage.\4\ Many of these adults are 
disabled, but even their poor health does not necessarily qualify them 
for coverage. In most states, non-working individuals with a chronic 
disability are not eligible for Medicaid unless their incomes are below 
74 percent of the poverty line (about $6,8000 for a single adult). A 
disabled adult being supported by a spouse or parent making the minimum 
wage, for example, would not qualify for Medicaid. The disabled cannot 
get Medicare coverage until they have been receiving Social Security 
disability benefits for 2 years. So while public insurance programs 
have been very effective in expanding coverage to the elderly and poor 
children, a large portion of the low-income population remains 
uninsured.
---------------------------------------------------------------------------
    \4\ ``The Health Care Safety Net: Millions of Low-Income People 
Left Uninsured.'' Families USA, July 2001.
---------------------------------------------------------------------------
Private non-group insurance
    The only avenue left for people without access to employer-
sponsored coverage and who do not qualify for public programs is 
private, non-group insurance. But securing coverage in the private 
market is very difficult. Insurers in most states have the right to 
refuse coverage based on health risk and age. This means that people 
who have had a heart attack or who suffer from chronic health problems 
may not be able to find an insurer willing to cover them. One-third of 
insurance applications from people with mild to severe health problems 
are rejected.\5\ Even those who are accepted may not be able to get 
insurance that covers their pre-existing health problems.
---------------------------------------------------------------------------
    \5\ How Accessible is Individual Health Insurance for Consumers in 
Less-Than-Perfect Health? Karen Pollitz, Richard Sorian and Kathy 
Thomas. The Henry J. Kaiser Family Foundation, June 2001.
---------------------------------------------------------------------------
    Even if someone is able to get coverage, the cost of a plan with 
adequate benefits can be prohibitive. Insurers in most states can 
charge higher premiums based on a person's age or health status. The 
high costs put this type of insurance out of reach for many people. In 
the group market, on the other hand, insurers can pool their risk and 
keep premiums lower. Low-cost insurance plans do exist, but the 
benefits are very limited--some do not even cover basic maternity 
care--and the deductibles can be as high as $5,000 per year.
A Growing and Persistent Problem
    As unemployment continues to rise and health care costs increase, 
the number of uninsured people is expected to grow in 2002. More than 
60 percent of Americans get their coverage through an employer-
sponsored plan.\6\ When people lose their jobs, they are at greater 
risk of becoming uninsured. One estimate suggests that the number of 
people without health insurance could increase by 2.4 million this 
year.\7\
---------------------------------------------------------------------------
    \6\ ``Current Population Reports: Health Insurance Coverage: 
2000,'' Robert J. Mills, U.S. Census Bureau, September 2001.
    \7\ ``Rising Unemployment and the Uninsured,'' December 2001, 
Kaiser Family Foundation. Analysis by Jonathan Gruber suggests that for 
every percentage point increase in the unemployment rate the number of 
uninsured people increases by 860,000. This estimate assumes 
unemployment rises to 6.8%.
---------------------------------------------------------------------------
    The Consolidated Budget Reconciliation Act 1985 (COBRA) (see box) 
allows many people who have insurance coverage through their jobs to 
continue it after they are laid off. The vast majority of laid-off 
workers either cannot or choose not to take advantage of this 
opportunity, however. Over 40 percent of workers and their adult 
dependents, often those in the lower-income brackets, fail to meet 
COBRA's eligibility standards. Small firms, for example, are not 
obligated to offer COBRA coverage to workers. High costs prohibit many 
of the remaining 50 to 60 percent of unemployed workers from 
participating. Under COBRA, employees must shoulder the entire burden 
of the premium costs plus an additional 2 percent administrative fee.

----------------------------------------------------------------------------------------------------------------
 
-----------------------------------------------------------------------------------------------------------------
What is COBRA? The Consolidated Budget Reconciliation Act of 1985 (COBRA) requires employers with 20 or more
 employees to offer the option of continuing group health insurance coverage if an employee is fired, has his or
 her hours reduced, retires, dies, or gets divorced or separated. Workers who are fired or have their hours
 reduced can continue coverage for 18 months, otherwise they can carry it for 36 months. Employers do not pay
 any share of the premiums. The individual must pay the full cost of the health insurance premium as well as a 2
 percent administrative fee.
----------------------------------------------------------------------------------------------------------------

    The increase in the cost of health insurance for the individual 
losing a job can be substantial because, on average, employers pay 
almost three-quarters of the cost of the health insurance they provide 
as a fringe benefit for their employees.\8\ Few continue to pay a share 
of health insurance premiums when workers become unemployed, however. 
In 2001, the average monthly premium (including both employee and 
employer shares) for an employer-sponsored plan was $221 for an 
individual and $588 for a family.\9\ This means that average workers 
with family coverage would see their share of premiums rise from $150 a 
month when they were employed to $588 a month when they were unemployed 
and using COBRA. Even those workers who are employed may find health 
insurance more difficult to get in tough economic times. As the job 
market gets tighter, employers have less incentive to offer health 
insurance benefits to lure new employees. They may stop offering 
insurance or shift a greater share of the premium cost to employees.
---------------------------------------------------------------------------
    \8\ Employer Health Benefits Annual Survey 2001. In 2001, employers 
paid 73% on average for a family health insurance plan.
    \9\ Employer Health Benefits Annual Survey 2001.
---------------------------------------------------------------------------
II. Can a Health Insurance Tax Credit Help the Uninsured?
    Tax credits have been proposed as one option to help reduce the 
ranks of the uninsured. A health insurance tax credit would give people 
money--either a fixed percentage of premium costs or a flat dollar 
amount--to use toward the purchase of a health insurance plan in the 
private, non-group market. (Some proposals would also allow the credit 
to be used toward COBRA coverage or the employee share of premiums in 
an employer-sponsored plan.) Refundable credits would allow any 
eligible individual to get the credit, even if he or she does not have 
any income tax liability.

----------------------------------------------------------------------------------------------------------------
 
-----------------------------------------------------------------------------------------------------------------
What is a Tax Credit? A tax credit is used to reduce an individual's tax liability. The recipient generally must
 complete an income tax return to get the credit. If the credit is refundable, amounts in excess of a worker's
 tax liability are paid to the worker. As opposed to a tax deduction, which reduces an individual's taxable
 income, the value of a tax credit is the same for everyone and does not increase for those in higher tax
 brackets.
----------------------------------------------------------------------------------------------------------------

    Proponents argue that health insurance tax credits can help expand 
coverage by giving people the resources to purchase coverage and 
allowing them the freedom to choose among the options in the private 
market. However, tax credits are an inefficient and relatively high 
cost tool to expand health insurance coverage, particularly for low-
income people. Tax credits do not address some of the fundamental 
problems with access and affordability of coverage in the private, non-
group market.
Affordability of Insurance with Tax Credits
    The tax credits proposed to date are too small--relative to the 
cost of premiums in the private, non-group market--to allow many of the 
low-income uninsured to buy adequate coverage. Even with the additional 
funds, insurance premiums can be a significant share of income for poor 
individuals and families. For some young and healthy individuals who 
can find inexpensive coverage fairly easily, a tax credit could make 
coverage more affordable. But premiums for nongroup coverage can be 
significantly more expensive for older and less healthy people.
    Timing of payments is also a crucial part of making insurance 
affordable. People need the money on a monthly basis to pay their 
premiums. Tax credits are typically paid out as annual, lump-sum 
payments.

     LHealth insurance premiums can be a significant share of 
income for poor families, even with the added funds from a tax credit. 
Very poor families--even with the benefit of a tax credit--would likely 
have to spend half or more of their annual income in order to purchase 
a health insurance plan. According to the Employer Health Benefits 
Survey 2001, the cost of an employer-provided family plan was about 
$7,000 in 2001. The Administration's tax credit proposal would give a 
$1,000 per adult and $500 per child for a maximum of $3,000 for a 
family. It is important to note that these estimates are based on the 
cost of premiums for group policies offered through an employer. A non-
group plan that included the same type of benefits could be twice as 
expensive and would consume an even greater share of family income.

                         Cost of Group Health Insurance As a Percentage of Family Income
                                    Credit = $1,000 per adult, $500 per child
----------------------------------------------------------------------------------------------------------------
    With a $2,000 tax credit  one adult, two children       With a $3,000 tax credit  two adults, two children
----------------------------------------------------------------------------------------------------------------
   Family Income (2001$)         Percentage of Income        Family Income (2001$)       Percentage of Income
----------------------------------------------------------------------------------------------------------------
$7,100 approximately 50% of                     70%       $9,000 approximately 50%                      45%
                poverty                                              of poverty
$14,300 approximately at                        35%       $18,000 approximately at                      22%
          poverty level                                           poverty level
$21,400 approximately 150%                      23%       $27,000 approximately 150%                    15%
             of poverty                                              of poverty
----------------------------------------------------------------------------------------------------------------
Source: JEC Democratic Staff calculations.


    A tax credit would do little toward making insurance affordable for 
these individuals and families. An alternative approach that would do 
more to make insurance affordable would be to cap the cost of premiums 
paid by poor people. For example, federal law caps the cost of premiums 
for low-income families enrolled in the State Children's Health 
Insurance Program (SCHIP) to 5 percent of family income. This approach 
would help to target federal subsidies for health insurance toward 
those who need them most.

     LPremiums in the non-group market are generally more 
expensive than comparable employer-provided or public insurance plans. 
Insurers can and do increase the cost of a plan based on a person's 
health status. In one study, almost half of all accepted applications 
had premiums above the standard rate because of a pre-existing health 
problem. The added costs are not just for people in very poor health. 
Common afflictions such as hay fever and sports-related knee injuries 
can also raise the price of insurance in the non-group market.\10\ 
Premiums also increase with age. In some cases, a healthy 55 year-old 
can be charged twice as much as a 25 year-old for the same type of 
coverage.\11\
---------------------------------------------------------------------------
    \10\ Pollitz et al.
    \11\ A 10-Foot Rope for a 40-Foot Hole: Tax Credits for the 
Uninsured. Families USA Foundation, September 2001.

----------------------------------------------------------------------------------------------------------------
 
-----------------------------------------------------------------------------------------------------------------
                                           Recent Tax Credit Proposals
 
Examples of recent health insurance tax credit proposals include:
 
In its FY 2003 budget, the Bush Administration has proposed a refundable income tax credit for the purchase of
 health insurance in the private, nongroup market for people under age 65.
 
   The maximum value of the credit would be $1,000 per individual, $500 per child, maximum credit would
   be $3,000 for a family.
   The credit would be targeted to low-income people. It would begin to phase out for individuals
   without dependents with an adjusted gross income (AGI) of $15,000 and for families with two or more children
   and an AGI of $25,000.
   Starting in July 2003, recipients could receive the credits in advance. Eligibility for the credit
   would be based on the prior year's income.
   The IRS would not seek to reconcile advance payments with actual earned income at the end of the
   year.
   The credit could not be used to pay premiums for employer sponsored or public health insurance plans.
   Starting in 2004, states could allow certain individuals to use the credit to purchase private
   insurance through a state-sponsored purchasing pool.
 
The economic stimulus package passed by the House of Representatives in December 2001 included a temporary,
 refundable health insurance tax credit for unemployed workers that would pay up to 60 percent of health
 insurance premiums for a plan under COBRA or one purchased in the private, nongroup market.
 
   Only workers who were laid off after March 15, 2001 and eligible for unemployment compensation or are
   certified by a state as eligible for benefits but are beyond their benefit year or have exhausted their
   maximum benefit levels would be eligible for the credit.
   There is no income eligibility requirement.
   The credit would only be available for 12 months.
   Eligible individuals would file for a health insurance credit eligibility certificate as part of the
   process for applying for unemployment compensation. Individuals would pay 40 percent of their premium to
   their insurance company, and the Federal Government would directly reimburse the provider for the balance.
----------------------------------------------------------------------------------------------------------------

     LPeople need the money on a monthly basis. Insurance 
payments are due every month, but most tax credits are single, lump-sum 
payments. Without a monthly flow of funds, health insurance will not be 
affordable for many low-income households. To best help low-income 
households that face tight monthly cash constraints, financial 
assistance for health insurance needs to be spread throughout the year. 
The current tax system is not structured to meet this demand. Changes 
would have to be made--new procedures, new tax laws, new tax forms--to 
an already complicated tax code in order to get the health insurance 
tax credit funds out on a monthly basis.

     LThe availability of low-cost plans is limited and the 
benefits are poor. Given the high cost of comprehensive insurance 
plans, one option for the uninsured would be to purchase a plan equal 
to the size of the tax credit. While there are some low-cost insurance 
plans ($1,000 or less annual premium for an individual) available in 
the private, non-group market, recent surveys suggest that these plans 
are not abundant, they are not always available nationwide and they are 
generally poor in quality of coverage.

      LA study by Families USA found that six of twenty-five states 
surveyed did not have any $1,000 plans available for a healthy 25 year-
old woman. Eighteen states did not have $1,000 plans for a healthy 55 
year-old woman. Because insurance coverage for families and people in 
less-than-good health is more expensive, it is likely that people in 
those circumstances will have even fewer options. And even when low-
cost insurance plans are available, there is no guarantee that 
insurance providers will approve specific applicants for coverage.

      LThe low-cost plans that do exist have limited coverage and are 
of little use to the low-income uninsured. Almost no existing insurance 
plans with annual premiums of $1,000 or less cover maternity care and 
many do not cover emergency care, mental health services or 
prescription drugs. The deductibles are very high--often ranging from 
$500 to $15,000 for a family plan. After the deductible is met, many 
plans also have a coinsurance fee that would require the insured to pay 
a certain percentage of the costs of any medical services they used. 
Some argue that deductibles, co-insurance fees and copayments help 
limit the ``moral hazard'' problem in health insurance by creating an 
incentive for people to limit unnecessary treatment. However, the 
extremely high cost of some deductibles and coinsurance rates can put 
health care completely out of reach for many low-income people.

      LSupporters of tax credits suggest that families could set aside 
funds in tax advantaged flexible savings accounts (FSAs) to cover the 
cost of deductibles. While this may be a good option for some people 
with access to an FSA and sufficient disposable income, it would not 
help most of the low-income uninsured. First, workers can only access 
an FSA through their employer. Part-time workers and workers in small 
firms are less likely to have or be eligible for an employer-sponsored 
FSA. Second, workers must have sufficient disposable income to 
contribute to the account. Low-income workers on tight budgets would be 
less likely to be able to afford regular contributions. They would also 
get less of a tax break on their savings than higher-income workers. 
Even if FSAs are modified to allow workers to rollover contributions 
from year to year (currently, a worker must forfeit any unused funds at 
the end of the year), it could still take a long time for a low-income 
worker to accumulate sufficient funds to make a $5,000 or higher 
deductible affordable.

      LInsurance companies have little incentive to offer low-cost 
insurance plans because they are not likely to be very profitable. The 
market for these plans is limited because their coverage is poor and 
most people without known health problems would get little benefit from 
them, so insurers do not have a large pool over which to spread their 
risks. If a significant number of people with low-cost plans incur high 
medical costs, the insurers could lose money.
Access to Insurance with Tax Credits
    Money is not the only barrier to coverage for the uninsured. There 
is no guarantee of coverage in the private, non-group insurance market. 
Insurers in most states have the right to deny or limit coverage based 
on age and health condition.\12\ Even with funds from a tax credit, 
some of the uninsured may simply not be able to find a private 
insurance firm willing to offer them adequate coverage. A tax credit 
does nothing to address this problem.
---------------------------------------------------------------------------
    \12\ Fifteen states require insurers to guarantee coverage for all 
participants in non-group plans. However, half of these states only 
require insurers to offer a basic plan. Even with a guarantee of 
coverage, insurers in almost all states can charge higher premiums 
based on health status and age.
---------------------------------------------------------------------------
    The problem of access also extends to the tax credit itself. If 
eligibility for the credit is based on prior-year earnings, as has been 
suggested, people in need of health insurance assistance this year may 
not qualify for the credit.

     LMore than a third of applications for non-group coverage 
may be denied due to mild or serious health conditions, according to a 
recent study.\13\ Further, more than 60 percent of the accepted 
applications imposed some kind of restriction based on pre-existing 
health conditions. Even minor problems can cause difficulties. In one 
case, some insurance carriers rejected a woman with hay fever and more 
than 80 percent of her acceptances came with coverage exclusions. A 
coverage exclusion means that the insurance plan will not cover costs 
relating to a specific illness or a part of the body. So while money is 
an important part of the equation for expanding health insurance 
coverage, it will not help people who are effectively shut out of the 
market as a result of their age or health status.
---------------------------------------------------------------------------
    \13\ Pollitz et al.

----------------------------------------------------------------------------------------------------------------
 
-----------------------------------------------------------------------------------------------------------------
Crowding Out If the government offers a tax credit for health insurance, there is a risk that some people will
 drop their employer-sponsored coverage in order to collect the money and purchase a private plan. This is
 called crowding out. This raises the possibility that, over time, employers will be less likely to offer
 insurance so that their employees can take advantage of the tax credit. Without the option of affordable, group
 insurance that mandates coverage, more people may become uninsured.
----------------------------------------------------------------------------------------------------------------

      LIn initial descriptions of its tax credit policy, the 
Administration suggests that the uninsured could get access to 
insurance through state-sponsored insurance purchasing and high-risk 
pools. However, in their current form, high-risk pools would not be 
much better than the private market. Not all states have a high-risk 
pool, and those that do have them usually limit the number of 
enrollees. Only about 110,000 people nationwide are insured through 
these pools. While people may be able to get an offer of coverage, the 
premiums are often very high--an average of $3,083 for an individual 
plan in 1999--and the deductibles and coinsurance rates are also high. 
In addition, many pools have a six to twelve month waiting period 
before an applicant can get coverage.\14\
---------------------------------------------------------------------------
    \14\ Achman and Chollett.

     LPeople who need financial assistance the most may not be 
able to access the tax credit. Most recent tax credit proposals have 
addressed the problem of eligibility for very low-income individuals by 
making the credits refundable--allowing people to get the credit even 
if they have no tax liability from which to deduct it. Most tax credits 
can only be used to offset taxes owed, but a refundable credit can be 
paid directly to people even if they do not have taxable incomes. 
However, even refundable credits are not generally available until tax 
returns are filed, which may be a year or more after a worker has 
become uninsured. This would do little to help those who need health 
---------------------------------------------------------------------------
care coverage now.

      LSome tax credit proposals would deal with this problem by paying 
insurance subsidies to those with low incomes as soon as they become 
unemployed or lose insurance, without requiring reconciliation at the 
end of the year. This means that people could get the credit without 
having to go back at the end of the year and verify that their incomes 
for the year as a whole remained below the eligibility guidelines. 
Having to do so would be a major administrative headache and could 
expose some workers to large, unexpected tax liabilities. But such a 
system has great potential to be abused if no income verification is 
ever required.

      LTo allow the credit to be pre-paid--without requiring those who 
turn out to be ineligible to pay it back--proposals generally base 
eligibility on the prior year's earnings. This means that people who 
lose their job or suffer a significant financial setback this year 
would likely not be able to claim the credit if they had good incomes 
last year. At the same time, those who have good incomes now but did 
not last year could qualify for the credit based on last year's tax 
return.
III. Implementation Problems with a Health Insurance Tax Credit
    There are inherent problems in using the tax system to get money to 
the people who need it the most, when they need it the most. The tax 
system is based on an annual accounting of income and annual payments 
of refunds and credits. But an individual's income and expenses, 
particularly for low-income households, can vary greatly on a monthly 
basis. In order for a health insurance tax credit to be effective, 
people need to get the money every month to pay their premiums. Making 
a health insurance tax credit ``advanceable''--delivering subsidies on 
a monthly basis--poses serious hurdles to effective implementation.
Making the Tax Credit Advanceable
    Current tax credit proposals do not fully address all aspects of 
the process they would use to advance money on a monthly basis. Most 
tax credit proposals acknowledge the need to make the credit 
advanceable so that people will have the money on a monthly basis. 
However, there is not an existing process by which to do this and most 
proposals offer only a limited description of how they will implement 
their idea. For example, the Bush Administration proposes that the 
credit would be paid directly to health insurance providers. 
Individuals would pay their monthly share of the premium and, using a 
tax credit identification number, providers would be directly 
reimbursed by the Treasury Department.
Implementation Questions
    What process would be used to determine income?
        LAs noted above, there are problems in using the prior year's 
income to determine eligibility for a tax credit because some people 
who need the money now may not qualify if they had good earnings last 
year. If the income tax return is used to determine income eligibility 
for the tax credit, it would create two problems. First, people who 
were not required to file an income tax return last year, but otherwise 
would be eligible for the tax credit, would not be able to get it. 
Second, people would need to apply for the tax credit throughout the 
year--not just in April when they file their return.
    What process would be used to distribute checks on a monthly basis?
        LIf a tax credit were to be paid directly to the insurance 
provider, it raises the question of how the government would determine 
what constitutes an eligible provider. In order to guard against fraud, 
a process would have to be developed to make sure that insurance 
providers are legitimate. This could certainly delay the process of 
implementation.
    What incentive would health insurance providers have to 
        participate?
        LIt is unclear whether health insurance providers would have 
sufficient incentive to participate. While they would get new business 
under this scenario, they would have to weigh that benefit against the 
costs of devoting time and resources to accounting for a new stream of 
funds. If the government does not issue the monthly premium checks in a 
timely manner, the insurance company could be forced to carry the cost 
of unpaid premiums. In addition, insurers would have to be held 
harmless for any fraudulent use of health insurance tax numbers by 
individuals.
Advancing the Tax Credit through Payroll Deductions
    Another option for getting the money into people's hands on a 
monthly basis is to lower the withholding in their paychecks. This 
would require the cooperation of employers. Almost all of the people 
who would be claiming this credit would be working in firms that did 
not offer health insurance. It is unlikely that these employers would 
want to take on the added burden of paperwork and adjusting 
withholding. Of course, individuals who do not work would not be able 
to claim the credit with this method.
    The Earned Income Tax Credit (EITC) offers an example. Data show 
that almost all recipients opt to take the credit as a lump-sum payment 
as part of their tax return. As few as 1 percent of recipients opt to 
submit the necessary paperwork to their employer in order to receive 
the credit throughout the year in their paycheck. Economic theory would 
suggest that low income individuals on tight budgets would prefer to 
receive the money over the course of the year to help meet basic 
expenses. While there is no evidence about why most EITC recipients opt 
for the lump sum, it raises the possibility that the added paperwork 
burden and the involvement of employers may discourage some people.
Access to State-Sponsored Pools
    As noted earlier, the Administration has recommended state-
sponsored purchasing and high-risk pools as one avenue for the 
uninsured to get access to coverage. This raises some implementation 
questions:
    How will the Federal government encourage the formation of state-
        sponsored pools?
        LOnly 29 states currently have high-risk insurance pools and 
many of these limit the number of people who can join. According to a 
recent report by The Commonwealth Fund, all of the existing high-risk 
pools operate at a financial loss. While some limited funds are 
contributed by insurance companies, state budgets are left to make up 
the bulk of the shortfall. The initial descriptions of the 
Administration's tax credit proposal do not include any funding or 
reimbursements to states to encourage them to establish or expand a 
state-purchasing pool. As states face tighter budget constraints, many 
states will not have the necessary resources to cover the pools.
    How will the government pool risk?
        LUninsured individuals will likely turn to state-sponsored 
purchasing pools after they have been rejected by insurers in the 
private market. This means that the vast majority of people in these 
pools will have past or present health problems that make them a poor 
risk in the eyes of the insurance provider. The insurance coverage 
options available to such a high-risk pool will be limited and carry 
high premiums.
IV. Conclusion
    Despite dramatic increases in wealth and prosperity during the 
nineties, the lack of health insurance--particularly among low-income 
individuals--remains a persistent problem. While health insurance tax 
credits may help some healthy people with good incomes to buy coverage, 
millions of Americans will not be helped by this approach.
    Tax credits do little to address the fundamental reasons why so 
many low-income people are not able to get adequate health insurance in 
this country. The size of proposed tax credits would not make health 
insurance more affordable for many of the uninsured. Premiums for 
adequate health insurance would consume a significant share of income 
for poor households--even with the boost from a tax credit. Low-cost 
insurance plans are not widely available and their benefits are quite 
limited. And tax credits do nothing to address the serious problem of 
access to insurance coverage. Even with the necessary funds, many of 
the uninsured could be turned away from insurance providers because of 
their age or health status.
    Expanding public insurance programs avoids some of the inherent 
problems with tax credits. Most current proposals would grant coverage 
free to the very poor and allow the near poor to buy into public 
programs at reduced rates. Expanding a public program to everyone below 
a certain income level, regardless of age and health status, would have 
a dramatic effect on the ability of the low-income uninsured to access 
coverage. The clear advantage of these proposals is that they would 
virtually eliminate the problem of health insurance coverage for the 
very poor.
    In order to solve the persistent problem of the uninsured, the 
nation will need to make a significant investment. Over the long-term, 
the cost of having millions of people without health insurance and thus 
without access to basic care will put pressure on public health 
services and reduce earnings among people who can least afford it.
    For additional information, please contact JEC economist Kathleen 
FitzGerald at 202-226-4065 or [email protected].

                                 ______
                                 
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Peterson, Chris L. Health Insurance Coverage: Characteristics of the 
    Insured and Uninsured Populations in 2000, Congressional Research 
    Service, November 14, 2001.
Pollitz, Karen, Richard Sorian and Kathy Thomas. How Accessible is 
    Individual Health Insurance for Consumers in Less-Than-Perfect 
    Health?, The Henry J. Kaiser Family Foundation, June 2001.
The Lewin Group: John Sheils, Paul Hogan and Randall Haught. ``Health 
    Insurance and Taxes: The Impact of Proposed Changes in Current 
    Federal Policy,'' The National Coalition on Health Care Final 
    Report, http://www.nchc.org/1999PolicyStudies/healthandtaxes.html, 
    October 1999.
The Urban Institute. ``First Tuesdays Transcript--Tax Credits or 
    Medicaid for the Uninsured? The President's and Governors' Plans, 
    May 2001'', http://www.urban.org/news/Tuesdays/ 5-01/
    mcclellan.html, May 2001.

                                


    Chairman THOMAS. The Chairman of the Health Subcommittee 
wishes to intervene.
    Mrs. JOHNSON OF CONNECTICUT. I would just like the record 
to note that Members of both parties for many, many years in 
this body have looked to subsidizing premiums for people who 
had to pay for their own health insurance as the way to close 
the gap and create a system that provided affordable insurance 
to all Americans. It is not a new idea.
    What has changed is that we have figured out how to deliver 
it promptly, how to deliver it to everyone, and how to provide 
a subsidy that really is powerful in the market. And to all 
those Democrats that have cosponsored legislation, introduced 
tax credit legislation, I just want to say, Mr. Stark, that I 
don't think that you speak for all in your party when you say 
that tax credits are not an effective means to reach the 
uninsured.
    So it is a longstanding issue with a lot of Democrat 
support, and I am pleased that we are moving forward in this 
hearing on a very powerful approach to providing health 
security to the unemployed, as well as some level of financial 
security which our unemployment compensation system is 
structured to provide. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentlewoman.
    Without objection, the Chair would place in the record an 
article from The Washington Post, June 18, 1999, the co-authors 
are Dick Armey and Pete Stark, about the positive aspects of a 
tax credit for the uninsured.
    [The article follows:]

                                ------                                

                        Medical Coverage for All
The ultimate congressional odd couple weighs in on tax credits for the 
                               uninsured.
The Washington Post
June 18, 1999
By Dick Armey and Pete Stark

    We may be the ultimate congressional odd couple. We seldom agree on 
anything. But on this we do agree: Congress should act now to help the 
43 million Americans who have no health insurance.
    The ranks of the uninsured are growing by 100,000 a month. And this 
is happening during a time of strong economic growth, despite 
continuing congressional attempts to expand coverage. Imagine what will 
happen come the next economic downturn.
    For individuals, being uninsured is a problem because too often it 
means health care forgone, small warning signs ignored and minor 
illnesses allowed to become costly crises. It's a problem for families 
because unpaid medical bills are a leading cause of personal 
bankruptcy. And it's a problem for the nation because uncompensated 
care is an unfair burden on doctors, hospitals and taxpayers.
    Why is the problem growing? Because Americans are increasingly 
unable to get coverage through their jobs. With health premiums going 
up, employers are bearing a smaller share of those premiums, and the 
work force is becoming increasingly mobile and part-time. More and more 
people find themselves working in places where coverage is either 
unavailable, unaffordable or undesirable (``one crummy HMO''). And when 
these workers try to buy insurance outside their jobs, they lose a 
generous tax break, making coverage that much less affordable.
    Indeed, today's tax code discriminates against not only insurance 
purchased outside the workplace but also lower-paid, part-time and 
small-business workers. The highly paid CEO gets a more lavish health-
care tax break than the waitress earning the minimum wage.
    These problems cry out for remedy. And happily, a bipartisan remedy 
is available. We think Congress should create a new refundable tax 
credit to enable all Americans to buy decent health coverage.
    Properly designed, such a credit could bring about near-universal 
coverage without new mandates or bureaucracy. It would eliminate 
barriers the uninsured face in today's system, enabling them to shop 
for basic coverage that suits their individual needs and is portable 
from job to job.
    To be successful, the credit would need to be sufficiently generous 
to buy a decent policy; available to those who owe no tax liability; 
and, to prevent fraud, paid directly to insurers or other entities, not 
to individuals.
    Would the existence of such a credit prompt some employers and 
employees to drop workplace coverage? Unavoidably. But job-based 
coverage is already eroding. And the erosion can be minimized by making 
the credit less attractive than most company plans.
    To be sure, we don't want to end workplace coverage. We do want to 
permit a gradual transition to a world in which individuals are free to 
obtain the kind of insurance they want, regardless of where it's 
purchased.
    What amount is ``sufficiently generous''? That's open to debate. 
But we note that $3,600 per family is roughly the amount the federal 
government spends on its own employees' families.
    Obviously this proposal would produce a revenue loss of tens of 
billions a year, risking a return to deficits. So how do we ``pay'' for 
it? Well, a portion of the surplus could be used. And we note that 
reducing the numbers of the uninsured would free billions in current 
federal cross-subsidy programs.
    Admittedly, a tax credit can't help people who are too sick to 
insure at any price. Although we differ, fairly strongly, about the 
best way to help such people, we agree a reasonable way can be found to 
do so, and we'll keep looking for it. (Rep. Stark would prefer to get 
insurers to take all customers at a common price, regardless of health 
status. Rep. Armey would set up ``high-risk pools'' to subsidize sick 
people's coverage in the 22 states that haven't already done so.)
    Too often, when Congress turns to health issues, it ends up 
applying legislative Band-Aids. It's time to address underlying causes. 
The biggest health problem facing the country is the uninsured. The Tax 
Code can be used to help them. We urge a bipartisan consensus to do so.

    Rep. Dick Armey (R-Tex.) is the House Majority Leader. Rep. Pete 
Stark (D-Calif.) is the senior Democrat on the House Ways and Means 
health subcommittee. Copyright 1999 The Washington Post 
Company.

                                


    Mr. STARK. Would the gentleman yield at that point?
    Chairman THOMAS. Certainly.
    Mr. STARK. Because he is quite correct, I worked for a long 
time with Majority Leader Armey to see if we could do it, and 
we came to the conclusion that while a minimum of a $3,600 tax 
credit was necessary, first of all it had to be universal, it 
had to replace the entire health care system, and it had to 
have regulation over the insurance industry. Mr. Armey felt 
that he couldn't get the Republicans to agree to that, we would 
have to have community rating and no underwriting, that it 
wouldn't work without regulating the insurance companies, and 
we agreed at that point that it was a good idea but politically 
impractical without the second half, which would have been our 
controlling the insurance industry.
    Chairman THOMAS. I will tell the gentleman that in his 
opening remarks he did indicate that there were individuals who 
thought the employer-based system was flawed. Apparently he is 
among them, and if he wishes to work with the Chair on those 
additions which would make an adequate tax credit insurance 
structure, the Chair is more than willing to work with the 
gentleman. Although I certainly couldn't replace Dick Armey in 
the team of Dick Armey and Pete Stark, I would be willing to 
work on that.
    And with that, it is a pleasure to have in front of us 
again the Honorable Mark B. McClellan, Member of the Council of 
Economic Advisers (CEA) in the Bush Administration, and the 
Honorable Mark Weinberger, who is the Assistant Secretary for 
Tax Policy at the U.S. Department of the Treasury. Your written 
statements will be made a part of the record, and if you could 
summarize briefly, we would appreciate that, so that we could 
move to the questions focused in part upon the President's 
proposal in his budget. I assume, Mr. Weinberger, you will 
begin?

STATEMENT OF THE HON. MARK WEINBERGER, ASSISTANT SECRETARY FOR 
          TAX POLICY, U.S. DEPARTMENT OF THE TREASURY

    Mr. WEINBERGER. Yes, Mr. Chairman. Thank you.
    Mr. Chairman, Mr. Rangel, distinguished Members of the 
Committee, I appreciate the opportunity to discuss with you 
today the President's proposal for tax credits for the purchase 
of health insurance. The Administration looks forward to 
working together with Congress to address the pressing need to 
expand access to health insurance for uninsured Americans.
    Almost 40 million Americans are reported to go without 
health insurance coverage for an entire year, and as many as 20 
million more are without health insurance coverage during some 
part of the year. The scope and persistence of this issue 
highlights the importance of our making progress this year.
    Tax credits to expand access to health insurance are a 
common element of proposals from both Republicans and 
Democrats. Many of the Members of this Committee have supported 
such proposals and sponsored such legislation in prior sessions 
of Congress. We just seek to bridge partisan divides and seek 
common ground on this key issue which enjoys such bipartisan 
support and is important to uninsured Americans.
    As we move forward together on the issue, I hope we can 
make some commitments to each other. When we see a weakness in 
a particular element of a proposal, let's make a resolution to 
try and identify a fix. When we question the motives of 
alternative approaches, let's have the resolution to focus on 
our shared objectives of better and affordable health insurance 
for all. When there are heartfelt differences of opinion, let's 
have the resolution to listen and not just hear. And when we 
recognize good ideas in each other's perspective, let's have 
the courage to learn from them, adopt and innovate.
    Finally, there are many tradeoffs in developing a 
comprehensive solution. A policy that excels along one 
dimension may do poorly along others, and we have to balance 
these competing dimensions. There is a need for flexible and 
innovative solutions to this problem. The reality is that there 
is no single approach that will resolve the entire issue.
    The uninsured population is not made up of just the poor or 
the unemployed. In 1999, 81 percent of the uninsured population 
were in families with at least one full-time worker. While more 
than one-third of the uninsured had incomes below the poverty 
line, approximately 29 percent had incomes between 100 and 200 
percent of poverty. Nearly three-quarters of the uninsured 
below 200 percent of poverty are adults, many who do not live 
in-households with children.
    Given the need for a broad approach to this problem, the 
President supports both an immediate temporary health insurance 
credit for displaced workers, as contained in the economic 
security package passed by this body, and a permanent new 
health insurance tax credit to expand health insurance coverage 
that is not dependent upon employment status. For brevity, I 
will describe the displaced worker credit and my colleague, Mr. 
McClellan, will discuss the permanent health insurance credit.
    The health credit for displaced workers is a refundable, 
advanceable tax credit that can be claimed by unemployed 
workers for up to 12 months. The credit can be used to offset 
60 percent of the cost of health insurance premium for 
unemployed workers and their families. The credit can be 
applied to the purchase of the Consolidated Budget 
Reconciliation Act of 1985 (COBRA) and other types of qualified 
non-employer health insurance. Eligible unemployed workers 
include those who receive unemployment insurance benefits and 
those who would be eligible for those benefits, except that the 
rights to benefits were exhausted or the period in which the 
benefits were payable ended.
    The design of the health credit reflects the President's 
goal of providing targeted, quick assistance to Americans who 
have lost their jobs during this recession. Because it builds 
on existing infrastructure to assist displaced workers, it can 
be fully implemented in a matter of months.
    In particular, State work force agencies will certify 
eligibility for the credit when they certify the displaced 
worker is eligible for unemployment insurance benefits. That 
certification will be presented to the insurance company along 
with the remainder of the premium. The insurer will be 
reimbursed by the U.S. Department of the Treasury for the 
amount of advance credit it provides.
    We believe that the displaced worker credit offers a number 
of advantages over competing proposals that have been advanced 
that would have been COBRA-only policies or expansion of 
Medicaid assistance. A COBRA-only credit would provide no 
benefit to 40 to 50 percent of displaced workers.
    A COBRA credit would impose a costly new mandate that 
employers would be required to implement immediately. Further, 
a COBRA credit is poorly targeted to workers who lose their 
jobs because of the economic downturn. About 60 percent of 
those eligible for a COBRA credit are workers who voluntarily 
leave their job, not displaced workers.
    Some have advocated forcing workers not eligible for the 
COBRA credit into a State Medicaid plan. There are many 
troubling aspects of that temporary relief. This would require 
these workers to drop their current insurance coverage and 
possibly change health insurance providers if they do not 
participate in Medicaid.
    Extending Medicaid to cover these displaced workers would 
require State legislation, and would necessitate delays before 
State legislatures were even in session to be able to provide 
this so-called immediate relief. The cost to States of such 
expansions could be ill afforded by many States at the present 
time, and would take away resources from their ability to fund 
expansions for low-income children and families who also need 
assistance.
    So, in short, that is the description of the displaced 
worker credit, and I turn to Mr. McClellan to talk about the 
permanent health insurance credit.

   STATEMENT OF THE HON. MARK McCLELLAN, MEMBER, COUNCIL OF 
                       ECONOMIC ADVISERS

    Mr. McCLELLAN. Mr. Chairman, Mr. Rangel, and distinguished 
Members of the Committee, I also want to thank you for the 
opportunity to discuss with you today the President's proposals 
for health credits as one element of an effective policy 
response to address the urgent problem of the uninsured in the 
United States. The second credit we will highlight is the 
permanent health insurance credit contained in the President's 
budget proposal.
    This proposal would create a refundable, advanceable tax 
credit for the cost of health insurance purchased by 
individuals under age 65. Individuals participating in 
employer-provided health plans or generally in a public plan 
would not be eligible for the credit. Eligible health insurance 
plans would be required to meet some minimum coverage 
standards, including coverage for high medical expenses.
    This credit is designed with a number of attractive 
features in mind, reflecting our efforts to learn from and 
incorporate the best ideas of previous proposals as well as 
critiques of those proposals. Our goal is to maximize the 
impact of the credit on the uninsured, while minimizing any 
undesirable effects on currently covered workers. This includes 
significant modifications of the credit that the President 
proposed in his budget last year.
    First, the credit amount varies with family size, mirroring 
the relationship of actual health insurance premiums. The 
maximum credit would be $1,000 per adult and $500 per child up 
to two children in a family. For example, a policy covering two 
adults and two or more children would be eligible for the 
maximum credit of $3,000.
    Second, the credit is targeted to lower--and middle-income 
individuals and families who are least likely to have employer-
based health insurance, resulting in an efficient use of the 
subsidy to expand coverage. The credit phases out with incomes. 
It is further limited by a cap on the amount of the premium 
eligible for the subsidy. The maximum subsidy percentage of 90 
percent would apply for low-income taxpayers and would be 
phased down at higher incomes.
    Third, the credit is refundable, so even those without any 
income tax liability can receive the subsidy.
    Fourth, the credit is available in advance at the time that 
the individual purchases health insurance, before they file 
their tax return. Eligibility for the advance credit would be 
based on the person's prior year's tax return. Individuals 
would reduce their premium payment by the amount of the credit, 
and the health insurer would be reimbursed by the U.S. 
Department of the Treasury for the amount of the advance 
credit. Alternatively, instead of an advance credit, 
individuals could claim a credit as part of the normal tax 
filing process based on their current year income. The 
availability of the advance credit will make the credit much 
more attractive for persons who want to use the assistance when 
they are actually purchasing their insurance, not later, making 
it even more effective in expanding health insurance coverage.
    Fifth, while the credit could be used for the purchase of 
health insurance in the nongroup market, qualifying health 
insurance could also be purchased through private purchasing 
groups, State-sponsored insurance purchasing pools, and State 
high risk pools. These groups can promote risk pooling and 
provide economies of scale, resulting in additional 
opportunities for individuals to get affordable coverage. 
States can also provide additional subsidies for lower income 
participants.
    There is considerable new evidence that this proposal could 
have a rapid and substantial impact on the uninsured. The 
Council of Economic Advisers has just released a new analysis 
of the credit, which I would request to be read into the 
record.
    [The information follows:]
                      Council of Economic Advisers
                           February 13, 2002
                        HEALTH INSURANCE CREDITS

    SUMMARY

    The President's proposal to introduce tax credits for the purchase 
of health insurance will enable millions of Americans to purchase 
private health insurance, improving the functioning of private markets, 
empowering patients to make informed decisions, and increasing 
utilization of high quality health care.
    This proposal is part of a broader vision for promoting access to 
innovative, high-quality patient-centered health care for all 
Americans, by encouraging effective patient choice among competing 
health care coverage options. This vision is discussed in more detail 
in the 2002 Economic Report of the President.
Program Description
     LThe health insurance credit is available to anyone under 
65 without employer-sponsored or public insurance. Individuals would be 
eligible for a tax credit of up to $1,000, and families purchasing a 
family policy would be eligible for a tax credit of up to $3,000.

     LThe health insurance credit is ``refundable,'' so that 
even those without tax liability can take advantage of it. It is 
``advanceable,'' so that people will have immediate access to the 
credit when they want to buy insurance, rather than having to wait 
until they file tax returns. The advance credit is based on income in 
the previous year, so people will not have to worry about having to 
return the credit if their incomes change over the course of the year.

     LThe maximum subsidy rate would both phase out at higher 
incomes, with a maximum subsidy rate of 90 percent. The phase-out, 
described below, would begin at $15,000 for single filers and $25,000 
for others.
Policy Effects of the Health Insurance Credit
     LA significant number of currently uninsured people will 
take advantage of the tax credit.

      LResearch suggests that the tax credit will allow 6 million or 
more Americans who would otherwise be uninsured during a year to gain 
coverage. The credit covers a substantial portion of the premiums most 
people would face in the private individual insurance market, thus 
increasing participation in and enhancing the efficiency of the 
individual market for health insurance.

      LAnyone without employer or public insurance, including people 
who would be ineligible for assistance through expansions of Medicaid 
or the State Children's Health Insurance Program and dislocated workers 
who do not have COBRA coverage available to them, would be able to take 
advantage of this program.

     LThe incentives created by the credit could improve the 
functioning of the individual private market and enable people to make 
informed decisions about their care.

      LCurrently individual health insurance policies are expensive in 
part because many healthy people do not participate in the individual 
market. The health insurance credit encourages participation, 
especially among healthier individuals, and thus improves the 
``pooling'' of health risks. Because people would have to pay at least 
some portion of their premiums, they would have an incentive to be 
well-informed and to seek out high value, high quality, informed care.

     LThe credit makes the system of subsidies more equitable.

      LEmployer-sponsored insurance (ESI) is already subsidized through 
the Tax Code, because employer contributions are untaxed, with the 
biggest tax benefits going to those with high earnings. People with the 
same income are also treated differently, based on the source of their 
insurance. The health insurance credit would make the system more 
equitable and more progressive, since it would be largest for those 
with lower incomes and would be available to those who do not receive 
subsidies through the current system.

     LThe health insurance credit will complement the employer-
sponsored group 
markets.

      LBecause the health insurance credit is less generous than the 
tax subsidy on a typical employer plan for all but the lowest-income 
workers, the proposed credit would not substitute for the employer-
sponsored group market. Any employee eligible for ESI who opted for the 
new credit would have to pay taxes on any additional wages earned in 
lieu of health insurance coverage, and would only be entitled to a 
capped credit. Employer decisions about offering health insurance, and 
the generosity of the insurance, depend on the value of the tax subsidy 
to average or typical employees and not just low-income employees. Most 
employers offering coverage would continue to do so, and low-income 
workers in these firms would continue to benefit from these generous 
contributions. Thus, the majority of those taking up the new health 
credit would be people who were either previously uninsured or 
previously covered in the non-employer market.

     LThe health insurance credit does not distort labor 
markets.

      LThe credit is available to anyone under 65 without employer-
sponsored (or public) insurance, so it does not provide a disincentive 
for employment at the individual or firm level. Because the advance 
credit is based on the prior year's income, people can take new jobs 
without fear of having to repay it at the end of the year.
The Uninsured and Health Insurance Markets
    The goal of the health insurance credit is to increase 
participation in and improve the functioning of health insurance 
markets. To see the value of this improvement, it is important to 
understand the composition of the uninsured population and how those 
markets function.
The Uninsured
    In 2000, approximately 39 million Americans, or 14 percent of the 
population, reported that they were uninsured for the entire year.\1\ 
They may go without effective health care, or may rely on inefficient 
care at emergency rooms and clinics.\2\ Expensive expansions of 
government run health care programs such as Medicaid and the State 
Children's Health Insurance Program (SCHIP) in the 1980s and 1990s did 
little to change the number of uninsured.
---------------------------------------------------------------------------
    \1\ Estimates of the number of uninsured vary depending on the 
survey question and the length of time uninsured. This estimate is 
based on the March 2001 Current Population Survey. Data from other 
surveys such as the Survey of Income and Program Participation suggest 
that 55 to 60 million were uninsured for part of a year or more.
    \2\ Kaiser Family Foundation, Uninsured in America: A Chartbook 
(2000); Urban Institute, Health Insurance Access and Use: United 
States, (July 2000).
---------------------------------------------------------------------------
    The uninsured population is not made up of just the poor or the 
unemployed. Over 80 percent of the uninsured population in 1999 were in 
families with at least one worker. Furthermore, while 36.4 percent of 
the uninsured had incomes below the poverty line, a large fraction, 
28.7 percent, had incomes between 100 and 200 percent of poverty.\3\ As 
shown in Figure 1, nearly three-quarters of the uninsured below 200 
percent of poverty are adults, most of whom do not live in-households 
with children. These childless adults would benefit from the health 
insurance credit, but would not be assisted by proposals to expand the 
SCHIP program to include parents. That said, many of the children who 
are currently uninsured are also eligible for Medicaid or SCHIP. 
Coupled with continuing outreach efforts to increase Medicaid and SCHIP 
enrollment, the availability of the credit provides another opportunity 
for low-income families to get coverage.
---------------------------------------------------------------------------
    \3\ Kaiser Family Foundation, Uninsured in America: A Chartbook 
(2000). Note that the Census Bureau does not report coverage for 
families with income between 100 and 200 percent of the Federal poverty 
line.
[GRAPHIC] [TIFF OMITTED] T9970A.002

    Insurance coverage differs significantly by race and ethnicity. In 
2000, 32 percent of Hispanics were uninsured, compared to 20 percent of 
blacks and 19 percent of Asians. In contrast, just 10 percent of whites 
are uninsured.\4\ Insurance coverage also differs across types of 
employment, with employer-sponsored insurance less likely to be 
available to part-time, seasonal, and short-term workers.
---------------------------------------------------------------------------
    \4\ Census Bureau, Health Insurance Coverage, 1999.
---------------------------------------------------------------------------
    The benefits of increasing participation in health insurance 
markets extend beyond those realized by the individuals themselves. 
First, even those without insurance receive publicly subsidized basic 
health care through emergency rooms--a very expensive way to provide 
care. Second, access to health care is important to control the spread 
of disease through immunizations or through early diagnosis and 
treatment. Third, greater participation in insurance markets allows 
broader pooling of health risks--the markets themselves work better.
Insurance Markets
    One important goal of health insurance is to reduce the risk to 
individuals of high medical expenses, trading the certainty of a known 
premium for the uncertainty of very unpredictable health care costs. An 
important element of insurance is thus the ``pooling'' of risk--people 
sign up for insurance before they know how much they will spend on 
health care, and then the premiums of those who have low expenses help 
subsidize spending on those with high expenses.
    Several things can interfere with the smooth functioning of this 
important insurance market. One is lack of choice and competition. 
Health insurance plans have little incentive to adapt to changes in 
medical care in order to compete for enrollees if the enrollees have no 
other options. Insurance markets with little or no competition are thus 
unlikely to keep up with innovations in health care, and without market 
discipline plans may encourage excessive care and inappropriate 
treatments. A second problem is ``adverse selection'': If individuals 
know their likely health insurance expenditures ahead of time, they can 
sign up for more generous insurance when they know their expenditures 
will be high, undermining the pooling of risk that is the key to 
insurance. Given a choice among plans, the healthiest people (with the 
lowest expected costs) can save money by pooling together in the least 
generous plan, or dropping insurance altogether, making the cost of the 
more generous plans rise as the expected costs increase.\5\ Just as 
individuals with higher expenses want more insurance, insurance 
companies want customers with lower expenses, and may cater their plans 
to appeal to those with low risk.
---------------------------------------------------------------------------
    \5\ This can again induce the healthiest remaining in the more 
generous plan to leave that plan. In extreme cases, this drives the 
most generous plans or those with the sickest members out of the market 
altogether.
---------------------------------------------------------------------------
    Both of these incentive problems can lead to premiums that are 
higher than they need to be, lower value care because efficient 
services are not offered, and increases in uninsurance because people 
conclude that the coverage is simply not worth the cost. The result of 
non-optimal coverage is inefficient health care use, with worse health 
outcomes and avoidable costs due to disease complications that could 
have been prevented with better coverage. The health insurance credit 
can improve the functioning of health insurance markets by addressing 
these problems.
    The vast majority of private health insurance in the U.S. is 
purchased through employers. An important reason is that these 
purchases are subsidized through the tax code: Employer contributions 
are not taxed, which provided an estimated $126 billion subsidy in 2000 
(including $85 billion through the exclusion of employer contributions 
from income taxation and another $32 billion through their exclusion 
from Social Security and Medicare HI taxes). This tax benefit is larger 
for those with higher incomes, since they face a higher marginal tax 
rate (see Figure 2).\6\
---------------------------------------------------------------------------
    \6\ Estimates include the likelihood of receiving employer-provided 
health benefits and the value of the tax benefit of employer-provided 
health insurance. Source: John Sheils, Paul Hogan, and Randall Haught, 
``Health Insurance and Taxes: The Impact of Proposed Changes in Current 
Federal Policy,'' October 1999, The Lewin Group, Inc.
---------------------------------------------------------------------------
                                Figure 2
                    Tax Benefits for the Purchase of
                      Employer-Sponsored Insurance
[GRAPHIC] [TIFF OMITTED] T9970A.003

    The current tax subsidy encourages provision of health insurance 
through employers. In addition, provision through employment forms a 
basis for risk pooling that is largely independent of health status, at 
least in most large firms.
    This is one of the main reasons that the health insurance available 
through individual (non-group) markets is often more expensive than 
comparable coverage through an employer: the people who choose to 
obtain such coverage are those who think they are likely to have higher 
health expenditures, raising premiums and making the insurance even 
less appealing to those with lower expected costs. Furthermore, the 
administrative costs associated with these non-group plans are often 
much higher. (These problems also afflict the market for small 
employers.) State measures to reduce the cost or increase the 
availability of insurance in the non-group market are discussed in more 
detail below. Unfortunately, some of the regulatory approaches intended 
to improve the availability of affordable coverage have often done more 
harm than good, in effect discouraging participation in insurance 
markets.
    In contrast, the health insurance credit will increase 
participation in these individual markets, increasing risk pooling and 
improving market functioning overall. An important question is the 
degree to which it would interfere with the functioning of employer-
sponsored group markets by inducing some employers to stop offering 
insurance and some employees to stop taking the employer-sponsored 
insurance (ESI) they are offered. In practice, the health insurance 
credit has been structured to complement employer-sponsored insurance 
markets.
Likely Effects on Insurance Purchases
    The Administration's health insurance credit would be available to 
people under 65 purchasing private health insurance coverage outside of 
plans offered by their employer or a spouse's employer. That is, both 
working and unemployed people who do not already have tax-subsidized, 
employer-provided insurance (or insurance through public programs such 
as Medicare or Medicaid) would be eligible.\7\ Workers who are laid off 
and lose their insurance would be able to take advantage of the credit 
regardless of whether or not COBRA continuation coverage was available 
to them.
---------------------------------------------------------------------------
    \7\ There are other restrictions: The credit cannot be applied to 
the purchase of ESI, and people may not contribute to Archer MSAs in 
the same year that they claim the credit. Plans must meet minimum 
benefit standards. Those participating in ESI or public programs may 
not use the tax credits, although in some circumstances states may 
provide an additional contribution to individuals who purchase private 
insurance through Medicaid or SCHIP purchasing groups. Those over 65 
(and thus eligible for Medicare) or anyone eligible for public 
insurance cannot claim the credit.
---------------------------------------------------------------------------
Individual Participation Decisions
    Evidence suggests that the decision to purchase health insurance is 
quite sensitive to its cost. The President's proposal provides a 
refundable tax-credit of up to $1,000 for a single person and up to 
$3,000 for a family with two or more children, with the credit phasing 
out between $15,000 and $30,000 for single filers and between $25,000 
and $60,000 for other filers purchasing policies for more than one 
person (or $25,000 to $40,000 if purchasing a policy for one person 
only). The effect of the credits on participation in individual 
insurance markets depends critically on the cost of the available 
insurance.
    Some reports have placed the ``mid-range'' cost of family health 
insurance at approximately $7,000 per year, large relative to a $3,000 
tax credit.\8\ This estimate is likely overstated: it reflects the 
average cost of plans offered, not the best offer available. In 
addition, many of these plans often provide near first-dollar 
coverage--that is, all expenses, even predictable periodic and routine 
expenses, are covered, and there are almost no copayments, coinsurance, 
or deductibles.
---------------------------------------------------------------------------
    \8\ See, for example, Center on Budget and Policy Priorities, 
``Unemployed Workers Need Help with Health Insurance,'' October 2001; 
General Accounting Office Report HEHS-00-104R.
---------------------------------------------------------------------------
    Expensive ``first dollar'' coverage may not make good economic 
sense. First, minimal copayments lead to a disconnect between cost and 
value in health care decisions, contributing to rising health care 
costs (and patient frustration with managed care plans meant to control 
costs). As health care costs rise rapidly, such policies will be even 
less sustainable. Second, reliance on minimal copayments in both 
private managed care and government health insurance plans has led to 
significant regulatory intrusions and price controls, all of which 
adversely affect doctor-patient decision-making. However well-
intentioned as an approach to limiting cost increases, such intrusions 
may make it more difficult for patients to get both appropriate 
treatment and protection from very high medical expenses. Third, 
patients will be much more likely to take an active interest in the 
value of the care they receive when they face at least a portion of the 
cost.
    Analysis by the Council of Economic Advisers finds that Preferred 
Provider Organization (PPO) policies with significantly lower premiums 
are almost always available. These plans, which are not ``first-
dollar'' plans but which provide effective health insurance assistance, 
are described in more detail in the Appendix. They typically cover all 
major types of medical services and treatment, have per person 
deductibles of $1,000 ($2,000 per family) while also covering 
preventive and emergency care, they generally provide significant 
discounts on all prescriptions and in-network services, and they 
support a full range of provider choices. The average premium for a 
plan of this type was less than $3,000, and was less than $1,000 for 
young individuals. For lower-income Americans, the proposed health 
insurance credit thus generally covers more than half of the premium 
the purchaser would face, and almost always covers more than a 
third.\9\ Moreover, these prices are representative of actual coverage 
in the population, not the premiums available to just a few very 
healthy people. A recent study by the health insurance distributor 
eHealthInsurance found that three-quarters of premiums for individual 
health insurance plans that it sold were less than $2,000 and three-
quarters of family premiums were less than $5,000.\10\ Similarly, 
another study found that people with all but the most serious chronic 
illnesses were able to get affordable individual market insurance 
offers in every market examined.\11\
---------------------------------------------------------------------------
    \9\ Low cost policies are substantially less common in states with 
community rating than in states without such regulation.
    \10\ eHealthInsurance is a leading national health insurance 
distributor of individual and small group plans, and in 2001 analyzed 
20,000 recently purchased policies. More than 80% of the policies sold 
had comprehensive coverage. 75% were PPO plans, and 71% of those PPO 
plans had deductibles of $1,000 or less. http://
www.ehealthinsurance.com/ehealthinsurance/eHealth2.pdf.
    \11\ Pollitz, Sorian, and Thomas, How Accessible is Individual 
Health Insurance for Consumers in Less-than-perfect Health, Kaiser 
Family Foundation, June 2001; and eHealthInsurance Services, Inc. The 
original Kaiser study investigated whether the mock applicants with 
different preexisting health conditions were rejected by any insurer, 
not whether they actually received offers, and reported average offers, 
not the best offer, which is more indicative of the cost that they 
would actually incur. All of the mock applicants received offers in 
every market tested, with the exception of an HIV positive applicant. 
The best offer was often not much more expensive than the offer for 
healthy mock applicants.
---------------------------------------------------------------------------
    The type of plans that those using the health insurance credit are 
likely to purchase have distinct economic advantages. The growth of PPO 
and similar plans in the private sector reflects patients' desires for 
more choice, and the health insurance credit would allow individual 
purchasers to have the same choices. These policies function well as 
true insurance, providing excellent protection against large 
unanticipated expenses caused by a severe illness or needed surgery, 
and assistance with access to the full range of modern health care 
treatments. Patients who prefer lower copayments could choose a Health 
Maintenance Organization-style plan that used more restrictive networks 
and tighter control of care to keep the premium down. The presence of 
the credit may encourage insurers to offer even more plans catering to 
new insurance market purchasers, such as plans with good catastrophic 
coverage but deductibles high enough to keep premiums in line with the 
size of the credit. These plans would not only encourage the use of the 
credits, but would encourage responsible and informed use of health 
resources.
    The analysis also documented substantial differences across 
geographic areas in the price of similar policies. This variation 
indicates that national averages can hide substantial heterogeneity in 
cost and may provide a poor representation of the market facing most 
families. One cause of this variation may be differences in the cost of 
care at the local level. (Another important source of variation is 
different state regulatory environments discussed below.) Having more 
involved and informed consumers of health care and greater individual 
participation may help reduce geographic disparities.
    In order to infer the effect of health insurance credits on the 
purchase of individual insurance policies, we need to know not only 
what insurance policies are available, but how sensitive individuals' 
decisions are to the price of the insurance that they face. Estimates 
of this price sensitivity are difficult to obtain, but some studies 
suggest that individuals are quite sensitive to large subsidies, and 
are thus much more likely to buy insurance when they receive a 50 to 90 
percent subsidy.\12\
---------------------------------------------------------------------------
    \12\ Marquis and Long, Worker demand for health insurance in the 
non-group market, Journal of Health Economics, v. 14 (1995).
---------------------------------------------------------------------------
    Several different studies have examined the likely effects of the 
health insurance credit on insurance purchases. Pauly, et al. (2001) 
find that a $1000 refundable tax credit would likely increase the 
participation rate among the uninsured by 21 to 85 percent.\13\ Gruber 
(2000) finds smaller effects, closer to 10 percent, but analyzes plans 
with premiums that are much more expensive than those described above. 
Other studies focus on average premiums, not the best offers available. 
Even with the most conservative assumptions, the health insurance 
credit would substantially increase participation in health insurance 
markets. If even 15 percent of those uninsured for a full year (or 10 
percent of those uninsured for part of a year or more) take advantage 
of the health insurance credit, 6 million people would be newly 
covered. In addition, the credits would encourage those already 
purchasing non-employer coverage to purchase more comprehensive 
policies.
---------------------------------------------------------------------------
    \13\ Note that their hypothetical credit had a somewhat different 
structure.
---------------------------------------------------------------------------
Likely Effects on Markets
    The health insurance credit would likely significantly increase 
participation in non-employer health insurance markets and increase the 
generosity of coverage selected. This increased, more generous 
participation would both increase the pooling of risk and reduce 
administrative costs.
Individual Health Insurance Markets
    The health insurance credit could increase the participation in 
individual markets of a wide cross-section of Americans. As shown in 
the Appendix, it would cover a lower percentage of the premium for 
individuals over 50 and those with chronic illnesses, for whom rates in 
the individual market are higher. While there is little evidence on 
this point, older and sicker people are likely less sensitive to the 
price of insurance and would value the credit more highly, so even 
though their premiums might exceed the maximum credit by more, they may 
increase participation in individual markets just as much as their 
younger, healthier counterparts. This broad increase in participation, 
especially of younger and healthier people, would improve the pooling 
of risk in the individual market (since insurers cannot perfectly 
underwrite individuals' health risks).
    There are several other regulatory reforms that affect the 
efficiency and availability of insurance through individual markets. In 
an effort to subsidize the insurance purchase of those with high 
expected medical expenses, some states have implemented regulations 
that limit or prohibit the extent to which insurers can vary prices 
based on expected expenses. Some of these regulations have the perverse 
effect of driving people out of individual insurance markets.
    States have several regulatory devices at their disposal, including 
restrictions on the variation in premiums (rating bands), requirements 
on the fraction of premium receipts that must be paid out in benefits 
(loss ratio restrictions), mandated benefits, restrictions against the 
exclusion of preexisting conditions, community rating and guaranteed 
issue. In community rated states, insurers must offer all purchasers in 
the same ``community'' the same rate.\14\ By prohibiting insurers from 
charging higher premiums to those in high-risk categories and in effect 
averaging costs of the high risk people with the lower risk people, 
this regulation is intended to hold down the premiums for those who are 
expensive to insure. States with guaranteed issue regulations require 
that insurers write policies for all comers. When coupled with 
community rating (such as in Maine, New Jersey, New York, and Vermont), 
this policy means that even those with very high expected health care 
costs will face the same price as healthy people. The drawback of these 
policies and many other forms of regulation is that the premiums facing 
most purchasers may be higher than they would be in the absence of 
regulation, since the premium collected must be sufficient to cover the 
expected expenses of the group. Given higher premiums, the healthiest 
individuals (those with low expected costs) may chose not to buy 
policies. Regulation thus provides another cause for adverse selection, 
and a spiraling upward of premiums.
---------------------------------------------------------------------------
    \14\ A community can be defined broadly, such as all individuals in 
the state, or more narrowly, with some differences permitted by age 
and/or geographical location, for example. Premiums in community rated 
states cannot vary with factors such as occupation or health status. 
Some states have modified community rating, allowing some, but only 
limited variation based on health factors.
---------------------------------------------------------------------------
    As an alternative to policies such as community rating, states can 
establish high-risk pools.\15\ These pools are often subsidized with 
general revenues or through taxes on insurance companies. Broadly 
funded high-risk pools can subsidize the insurance purchase of people 
with consistently high medical expenses, without making health 
insurance unappealing for others. Today, 29 states have adopted high-
risk pools (including some states, such as Kentucky and Washington, 
that used to have guaranteed issue but found that it severely 
undermined their individual insurance markets).\16\ States with 
adequate, broad-based funding for their risk pools are providing good 
insurance at affordable rates for people who would otherwise face high 
premiums in the individual market, and are doing so without driving up 
rates and reducing coverage.\17\
---------------------------------------------------------------------------
    \15\ The National Association of Health Underwriters found premiums 
for a 53 year old male in 14 states with high risk pools. The average 
premium in these 14 states was $5086. The average premium in our data 
for the 55 year old single male was $2597. The high risk policies 
sought had $500 deductibles and generally had more comprehensive 
coverage.
    \16\ Communicating for Agriculture, What is a Risk Pool?, 2002, 
www.cainc.org/riskpools/commonwealth.html.
    \17\ Communicating for Agriculture, op cit; Communicating for 
Agriculture/National Association of State Comprehensive Health 
Insurance Plans, Comprehensive Health Insurance for High-Risk 
Individuals, 1999.
---------------------------------------------------------------------------
    Finally, lower income people can also use Administration's health 
insurance credit in non-employer purchasing groups, including private 
affinity groups and state-sponsored purchasing pools. Many states have 
already established purchasing pools that allow individuals enrolled in 
their Medicaid or SCHIP programs to choose from competing private 
plans. All states have competitive purchasing pools for their state 
enrollees. Thus, states generally have an infrastructure in place to 
provide a group coverage option, giving people using the credit another 
option for obtaining affordable health insurance choices.
Employer-sponsored Insurance Markets
    The generosity of the credit would also influence the cost of the 
expansion of coverage. A very generous credit would induce more people 
to obtain coverage but, depending on its design, might also draw more 
workers away from current employer coverage, either by leading them to 
opt out of taking up coverage that their employers offer or by inducing 
employers to stop offering coverage. The result would be a relatively 
expensive incentive with relatively less net effect on coverage.
    Employees who are eligible for ESI may forgo employer insurance and 
voluntarily enter the non-group market if doing so allows them to 
select a policy that better meets their specific needs. Single, healthy 
individuals may wish to use their credit to purchase less generous 
coverage than the coverage offered by their employer. Employers may 
choose not to offer health insurance at all if many of their employees 
can take advantage of the credit and purchase insurance individually, 
and receive taxable wages in lieu of employer health insurance 
contributions. Insurance in the non-group market carries higher 
administrative costs, which implies that such an outcome would not be 
efficient in the short run. In the long run, as discussed above, 
increased participation in individual insurance markets may improve 
their functioning such that they have similar risk pooling and 
administrative costs as group markets.
    Such arguments suggest that a tax credit that is too large may 
disrupt the ESI market. In this case, the phase-out of the proposed 
health insurance credit and the cap on the maximum amount are important 
features to ensure that there are minimal disruptions to the ESI 
market. Those low-income Americans who are eligible for the largest 
credit are less likely to have employer-sponsored health insurance. 
About 80 percent of uninsured workers are not offered health insurance 
by their employers.\18\ Only 36 percent of people under age 65 with 
income below 200 percent of the Federal poverty line have ESI, while 77 
percent of those above do.\19\ Furthermore, employers make the decision 
to offer health insurance based on all of their employees, so they are 
unlikely to stop offering insurance simply because a minority of their 
employees become eligible for the health insurance credit. Most 
employees would be significantly better off with the uncapped, untaxed 
payments for their health insurance, and with the administrative 
savings of group plans, than with the capped credit and some additional 
taxable wages. Moreover, even if this minority of employees dropped 
employer coverage because they could get more affordable non-employer 
insurance, there would not be a large effect on overall employer health 
insurance costs. Consequently, the impact of the proposed credit on 
employer health insurance coverage would be minimal, and the majority 
of individuals taking up the proposed health credit would be those who 
were either previously uninsured or previously covered in the non-
employer insurance market.
---------------------------------------------------------------------------
    \18\ Garrett and Nichols, Workers without health insurance: who are 
they and how can policy reach them, Urban Institute, 2001, cited in 
Blumberg, Health insurance tax credits: potential for expanding 
coverage, Urban Institute, August 2001.
    \19\ Department of Health and Human Services tabulation of the 
March 2001 CPS, which includes data from 2000.
---------------------------------------------------------------------------
    By comparison, research indicates that 50 percent or more of those 
who became eligible for Medicaid in the expansions of the late 1980s 
and early 1990s lost private coverage, suggesting that providing near 
first-dollar coverage (even in a government insurance plan) requires 
much more substantial government funding to achieve comparable 
reductions in uninsured rates.\20\
---------------------------------------------------------------------------
    \20\ Cutler and Gruber, Does Public Insurance Crowd Out Private 
Insurance?, Quarterly Journal of Economics, 111(2), May 1996, 391-430.
---------------------------------------------------------------------------
    Some health policy experts and Members of Congress have proposed a 
broader-based refundable tax credit--one that would also provide 
significant new subsidies to all workers with employer-provided 
coverage. Because so many workers have employer coverage already, 
however, a tax credit for employer coverage would have a far greater 
budgetary impact, and a much larger share of its costs would go toward 
existing rather than new health insurance coverage. To limit the 
additional budgetary costs, many experts have proposed a gradual 
transition from the current tax exemption to a system of tax subsidies 
for employer coverage that relies more on credits. Although such a 
transition would probably encourage lower cost employer coverage and 
increase the takeup of employer coverage by lower income workers, it 
could have a significant impact on current employer plans, union 
negotiations, and other issues affecting worker compensation. Thus, it 
seems less likely to be effective as an incremental, immediate step to 
improve insurance coverage significantly.
Labor Markets
    Because this credit is available to all low-income uninsured 
Americans, it will provide both increased options for workers and an 
improved safety net for the unemployed. It can help ease transitions 
between employment, dislocation, and reemployment without distorting 
labor markets. Unlike employment-based insurance, part-time and 
seasonal workers will be able to keep the coverage they purchase with 
the health insurance credit even if their jobs change.
Conclusion
    The Administration's health insurance credit will allow millions of 
Americans to purchase good insurance through private markets. It will 
improve the functioning of individual insurance markets, and will 
encourage high-value, high-quality care.

                                 ______
                                 

      APPENDIX: THE COST OF HEALTH INSURANCE IN INDIVIDUAL MARKETS

    The Council of Economic Advisers performed quantitative analysis to 
document the likely effects of the health insurance credit on the 
purchase of health insurance. A key component of this is the cost of 
the insurance plans available through non-group markets.
Data Description
    To analyze the purchasing power of the proposed health insurance 
tax cut, we compiled a data set of sample premiums. Using the web site 
www.ehealthinsurance.com we collected data on premiums for low-cost 
traditional indemnity (i.e., Fee-for-Service or FFS) plans and low cost 
Preferred Provider Organization (PPO) policies, in which patients can 
see physicians outside their network, but with higher copayments. We 
obtained observations for one large and one small city in each state. 
In each case we priced policies for six hypothetical purchasers.\21\ 
Our total number of observations is 1020 (2 plans x 6 families x 50 
states x 2 cities, less missing values for cases in which we were 
unable to find policies that satisfied our criteria).\22\ Although the 
sample is small, it provides a starting point for an investigation of 
the affordability of insurance in the individual market. The purchaser 
and plan types included in the sample were:
---------------------------------------------------------------------------
    \21\ Plan premiums typically vary by age. We choose one ``young 
age'' and one ``old age.'' Premiums for family policies vary by the age 
of the adults.
    \22\ We were unable to obtain information on regulations in the 
District of Columbia. We found no individual policies available in 
Hawaii and no PPO plans in Maine, New Hampshire, or New Jersey.

----------------------------------------------------------------------------------------------------------------
                      Purchasers:                                         Plan Characteristics:
----------------------------------------------------------------------------------------------------------------
 55-year-old single male                          $1000 per person deductible
----------------------------------------------------------------------------------------------------------------
 25-year-old single male                          $2000-$3000 family deductible
----------------------------------------------------------------------------------------------------------------
 25-year-old couple                               covers office visits
----------------------------------------------------------------------------------------------------------------
 55-year-old couple                               covers emergency room care
----------------------------------------------------------------------------------------------------------------
 25-year-old mother and daughter                  20% coinsurance or $30 copayment
----------------------------------------------------------------------------------------------------------------
 25-year-old couple with two children
----------------------------------------------------------------------------------------------------------------


    We attempted to obtain quotes for plans with characteristics as 
close as possible to those listed above. While all the plans we sampled 
cover emergency room care and all but 12 (those in New York City) cover 
office visits, the deductibles and coinsurance/copayments are 
occasionally higher or lower than our specifications. Overall, 92 
percent of our single policies have deductibles of $1,000; 5 percent 
have higher and 3 percent have lower deductibles. Eighty-one percent of 
our family policies have deductibles of $2,000 or $3,000, with 8 
percent lower and 11 percent higher. All of the plans have coinsurance 
of 20 percent, except for the plans in New York City, which have no 
coinsurance, and the plans in Boston and Brockton, Massachusetts, which 
have 10 percent coinsurance. We also assumed that the individuals were 
in good health, with no preexisting conditions, and were not smokers.
Premiums and the Credit
    This section provides summary information on the types of policies 
available.\23\ The discussion highlights not only national averages, 
but also the distribution of premiums relative to the proposed health 
insurance credit.
---------------------------------------------------------------------------
    \23\ In the following, we focus on PPO premiums because they are 
lower and thus more likely to be selected by those helped by the tax 
credit. Also, PPOs are the most commonly offered type of plan by 
employers. In 2000, 75 percent of large employers offering health 
insurance coverage offered a PPO plan, compared to 25 percent for a 
traditional indemnity plan and 51 percent for an HMO (Mercer/Foster 
Higgins Mercer/Foster Higgins, National Survey of Employer-Sponsored 
Plans, 2000). Premiums for FFS plans follow the same pattern, but are 
higher.
---------------------------------------------------------------------------
    Premiums vary substantially across states and across types of 
purchasers. Table 1 has summary statistics for PPO premiums by family 
type and appendix table A1 shows PPO premiums for the two cities in 
each state by type of purchaser.\24\ For a family of four, annual 
premiums vary from $1,272 for Bloomington, Illinois to $9,675 in 
Boston, Massachusetts (the Boston policy has relatively generous 
benefits).\25\ The average price for a family of four is $3,287.\26\ 
Premiums for young single males are substantially lower, averaging just 
$975, or $25 below the proposed health insurance credit.\27\ Premiums 
for individuals in their 50s are much higher. The average premium for a 
55-year-old male is $2,749.
---------------------------------------------------------------------------
    \24\ These premiums are similar to premiums that were actually 
purchased. In the 1996 Medical Expenditure Panel Survey, the average 
premium paid by single policy holders for plans purchased in the non-
group market was $1573; half of the individual premiums were between 
$600 and $1,992. The average family policy was $2,651; half of the 
premiums were between $600 and $3650. (Accounting for the potential 
accidental reporting of supplemental plans by eliminating the lowest 5 
percent of premiums raises the average single plan cost for 18 to 39 
year olds by only $150.) There was substantial variation both by age 
and by specific plan. The average individual premium in the MEPS ranged 
from $1230 for those less than 40 years old to $1976 for those 55-64 
years old. (Statistics provided by Jessica Banthin at the Agency for 
Healthcare Research and Quality.)
    \25\ The average premium in 2001 for employer-provided health 
insurance was $2,652 for single plans and $7,056 for family plans 
(Kaiser Family Foundation, 2001 Kaiser/Health Research and Educational 
Trust Survey). The average yearly contributions for employees for whom 
some contribution was required was $840 for a single coverage and $2868 
for a family plan. Fifty percent of employees paid no contribution for 
single coverage but only 18 percent for family coverage (Mercer/Foster 
Higgins, National Survey of Employer-Sponsored Plans, 2000).
    \26\ Because deductibles are measured on a per person basis with 
annual family caps of $2000-$3000 it is possible for a family with 
these policies to have substantial out of pocket expenses. They are, 
however, protected against large expenses that might be incurred with a 
hospitalization, chronic condition, or serious illness.
    \27\ Although we did not conduct as thorough an analysis, premiums 
for young women appear to be only slightly higher on average 
(approximately $50 to $100 higher) and identical in some states (these 
policies typically do not include maternity coverage).

               Table 1: Mean Annual Premium for PPO Plans
------------------------------------------------------------------------
     Characteristic         Average     Median      Minimum     Maximum
------------------------------------------------------------------------
Younger Male                    $975        $772        $504       $4094
------------------------------------------------------------------------
Older Male                     $2749       $2464       $1524       $6722
------------------------------------------------------------------------
Younger Couple                 $2142       $1729       $1032       $7370
------------------------------------------------------------------------
Older Couple                   $5145       $4613       $2904      $12099
------------------------------------------------------------------------
Mother and Child               $1931       $1518        $852       $7224
------------------------------------------------------------------------
Family of four                 $3287       $2683       $1272       $9675
------------------------------------------------------------------------


    The differences in the prices faced by older and younger Americans 
are substantial: the average premium for an older couple is over $5,000 
compared to $2142 for a younger couple. These premiums are for a couple 
aged 55; older couples (not yet eligible for Medicare) would face 
higher prices.\28\ However, there is also evidence suggesting that 
older Americans may value health insurance more than younger Americans 
and may therefore be more willing to devote a larger fraction of their 
income to health insurance premiums, so that a $1,000-$2,000 tax credit 
would be sufficient to stimulate purchases.
---------------------------------------------------------------------------
    \28\ The fraction of employers providing retiree coverage has 
fallen sharply in recent years (Employee Benefits Research Institute, 
Health Benefits Data Book, Washington, DC, 1999).
---------------------------------------------------------------------------
    Prices vary substantially across cities and states. We examine the 
distribution of premiums with respect to the credit to which the 
purchaser would be entitled. Nearly three quarters of the PPO plans for 
young single men had premiums less than the proposed $1000 health 
insurance credit and over 90 percent cost less than $2000. Thus the 
health insurance credit would provide young men substantial assistance 
in purchasing a policy. In contrast, the subsidy covers much less of 
the policy premium for older single men: only 1 percent of plans have 
premiums below $1000 and just 17 percent of plans were less than $2000. 
Younger families fare much better than older Americans. A $3000 subsidy 
would cover half the PPO premium for a family of four in more than 90 
percent of the plans. If children in a low-income family are eligible 
for SCHIP or Medicaid, then a $2000 credit would cover all of the cost 
for the mother and father in more than 70 percent of the plans.
    These premiums are for plans that do not provide first-dollar 
coverage, yet as noted earlier, provide comprehensive coverage for 
large expenses. Plans with lower annual deductibles will be more 
expensive. To investigate the difference, we priced health insurance 
policies with a $500 deductible but coverage similar to our sample in 
other dimensions.\29\ We collected this information for families in 10 
states, and premiums were approximately 20 percent higher. The premium 
data presented assume that the individuals are in good health and are 
non-smokers. Just as premiums increase with age because expected 
medical expenses increase, plan availability and premiums also change 
with the underlying health of the beneficiary. There is also 
substantial variation in price across insurers as well as variation in 
the quality of service provided. For example, in Kansas City, Kansas, 
premiums for family policies that fit our criteria range from $182.50 
to $434. Consumers need to shop carefully for plans, comparing prices 
and coverage to find the plan that best suits their needs.
---------------------------------------------------------------------------
    \29\ The median deductible for in-network individual coverage for 
employer sponsored policies was $250 in 2000 (Mercer/Foster Higgins, 
National Survey of Employer-Sponsored Plans, 2000).
---------------------------------------------------------------------------

                                


    Mr. McCLELLAN. That study indicates that the credit would 
provide good, affordable coverage options for almost all 
persons who are eligible, particularly in conjunction with its 
use in high-risk pools and other purchasing group arrangements. 
Altogether, 6 million or more people who otherwise would be 
uninsured for some or all of the year would get coverage under 
this proposal.
    Moreover, the analysis by CEA, as well as the analysis of 
the credit by Treasury professional staff, indicate that the 
vast majority of persons who use the credits would be those who 
were either previously uninsured or those who are currently 
struggling to purchase nongroup health insurance on their own. 
About 16 million people in this country buy nongroup coverage 
today, and receive little or no assistance from the government 
to do so.
    Only a very small fraction of those with current employer 
coverage would use the credit. So while very attractive to 
those without good employer coverage today, the credit is 
generally not a better deal than the current uncapped tax 
subsidy of $120 billion per year for employer-sponsored 
coverage.
    This proposal is one key element in a broad set of 
Administration proposals to help us create a more patient-
centered health care system. The President believes that our 
private health system is the best in the world because it 
encourages and rewards innovation to get the best treatments to 
the patients who need them. He also believes that our health 
system faces serious problems today, problems of rising costs, 
problems of frustrations of doctors and patients that they are 
losing control to health maintenance organization (HMO) and 
government bureaucrats.
    He believes that the best way to preserve the best features 
of our private, innovative health system while addressing these 
challenges is to find solutions that are based on trust in 
patients working with health care professionals. By giving all 
Americans access to affordable health care coverage options, we 
will not only enable Americans to get up-to-date coverage that 
meets their needs, we will also encourage high-quality, high-
value care that is continuously getting better, and that has 
been the hallmark of our health care system.
    The Administration wants to work closely with Congress in a 
bipartisan fashion to make this vision a reality. At 
yesterday's event sponsored by the Robert Wood Johnson 
Foundation, there were many stories presented of what a 
difference good coverage options can make. Before coming to the 
Administration, while I was a Professor at Stanford, I also 
practiced in our internal medicine clinic there, and I saw many 
stories myself of patients with chronic illnesses and other 
health problems who had difficulty getting ongoing care because 
of lack of health insurance.
    We are pleased by the broad support in the community by 
groups on the right and left, and in this Committee, for 
proposals to move forward and to find common ground on 
addressing the problem of the uninsured now. I think the 
Nation's uninsured have good reason to be optimistic that help 
is coming soon. Thank you.
    [The prepared joint statement of Mr. Weinberger and Mr. 
McClellan follows:]
  Statement of the Hon. Mark Weinberger, Assistant Secretary for Tax 
 Policy, U.S. Department of the Treasury, and Hon. Mark B. McClellan, 
                  Member, Council of Economic Advisers
    Mr. Chairman, Congressman Rangel, and distinguished Members of the 
Committee, we appreciate the opportunity to discuss with you today the 
President's proposals for tax credits for the purchase of health 
insurance.
    Mr. Chairman, the Administration looks forward to working with 
Congress, in a bipartisan manner, to address the pressing need to 
expand access to health insurance for uninsured Americans. Almost 40 
million Americans are reported to go without health insurance coverage 
for an entire year, and as many as 20 million more are without health 
insurance coverage during some part of the year. In addition, millions 
more Americans are struggling to afford rising health insurance 
premiums, with little help from the government. The scope and 
persistence of this issue highlights the importance of our making 
progress this year.
    The President's proposals to introduce health credits for the 
purchase of health insurance will enable millions of Americans to 
purchase private health insurance, improving the functioning of private 
markets, empowering patients to make informed decisions, and increasing 
utilization of high quality health care. This proposal is part of a 
broader vision for promoting health care quality and access by 
developing flexible, market-based approaches to providing patient-
centered health care coverage for all Americans.
    Health insurance credits use the infrastructure of the tax system 
to expand access to health insurance. They are a common element of 
proposals from both Republicans and Democrats. Many of the 
distinguished Members of this Committee have supported such proposals 
and sponsored such legislation in prior sessions of Congress. We must 
seek to bridge partisan divides to come to agreement on this key issue 
which enjoys such wide bipartisan support. To help do so, the President 
has proposed health insurance credits that build on the best features 
of previous proposals, and that include new innovations to address past 
criticisms of tax credit proposals. And the President's budget backs up 
his agenda for using health insurance credits to improve access to good 
coverage with over $100 billion in funding. We hope that these steps 
forward will provide a foundation for decisive action in Congress this 
year to address the serious problem of health care affordability and 
the uninsured.
The Problem of the Uninsured
    In 2000, 14 percent of Americans reported that they were uninsured 
for the entire year. They may go without effective health care, or may 
rely on inefficient episodic care at hospital emergency rooms. As a 
result, our health system spends more than it should on complications 
of diseases that could have been prevented and on inefficient ways of 
delivering health care. Even worse, the absence of insurance makes it 
harder for Americans to work with health care professionals to stay 
healthy.
    The uninsured population does not consist only of the poor or the 
unemployed. In 1999, 81 percent of the uninsured population were in 
families with at least one full-time worker. Furthermore, while 36 
percent of the uninsured had incomes below the poverty line, a large 
fraction, 29 percent, had incomes between 100 and 200 percent of 
poverty. Nearly three-quarters of the uninsured below 200 percent of 
poverty are adults, many of whom do not live in households with 
children.
    Insurance coverage differs significantly by race and ethnicity. In 
2000, 32 percent of Hispanics were uninsured, compared to 20 percent of 
blacks and 19 percent of Asians. In contrast, just 10 percent of whites 
were uninsured.
    The benefits of increasing participation in health insurance 
markets extend beyond the ability to have more control over their 
health care and health realized by the individuals themselves. First, 
although some people without insurance could receive subsidized basic 
health care through emergency rooms, it is a very expensive way to 
provide care, and it is either paid at governmental expense or is 
uncompensated care that imposes higher costs on others. Second, 
improved public health through expanded health insurance coverage is 
important to control the spread of disease. Third, as discussed below, 
greater participation in insurance markets allows better pooling of 
health risks--the insurance markets themselves work better.
Problems in Health Insurance Markets
    The major goal of health insurance is to allow individuals to join 
together to reduce their risk of high medical expenses by sharing that 
risk. Individuals trade the uncertainty of very unpredictable health 
care costs for the greater certainty of a known premium and protection 
from very high medical expenses. An important element of insurance is 
thus the ``pooling'' of risk--people sign up for insurance before they 
know how much they will spend on health care, and then the premiums of 
those who have low expenses help subsidize spending on those with high 
expenses.
    Another important goal of health insurance is to make sure that 
Americans have access to the most innovative, high-value health care 
available. The American health care system leads the world in Nobel 
prizes and in the development of new drugs, devices, and other 
treatments to prevent and cure illnesses. To make sure these impressive 
medical breakthroughs translate into good care, health care coverage 
must be innovative as well. One need look no further than the lack of 
prescription drug coverage in Medicare to understand the consequences 
of out-of-date health care coverage. In the years ahead, far more 
breakthroughs are possible--such as customized treatments based on a 
clear understanding of an individual's genetic makeup, and specialized 
``disease management'' programs that rely on the Internet and other 
modern telecommunications technologies that allow patients with chronic 
illnesses not only to stay out of the hospital, but also out of the 
doctors office. Innovative health care coverage is essential for 
creating an environment for medical practice that encourages 
innovation, value, and continuous improvement in health care.
    Several problems can interfere with the ability of insurance 
markets to achieve these goals. A key problem is lack of choice and 
competition. As the President has said, our health care system works 
best when it is centered on helping patients work with health care 
professionals to decide the best possible treatments. To give control 
to patients, Americans need the opportunity to choose the health care 
coverage that is best for them. Without good choices, patients do not 
have the power to make sure that they are getting the best value from 
the health care system for their own needs. Instead, government or 
health plan bureaucrats effectively make decisions for them about what 
is covered, how their care is reimbursed, and how treatments are 
provided. In other countries, this has led to queues for treatments, 
poor quality, and lagging availability of innovative care. Our country 
has chosen another path: private sector health care based on trust in 
patients and their physicians. This path rewards innovation in 
delivering the best possible health care. But the tremendous potential 
of our health care system is threatened when patients do not have 
choices about how to get health care coverage. For this reason, the 
President strongly believes that we must take action to improve the 
health care coverage options available to Americans.
    A second problem is adverse selection. If only individuals whose 
health insurance expenditures are likely to be high sign up for 
insurance, then the pooling of risk that is the key to insurance is 
undermined. Just as individuals with higher expenses want more 
insurance, insurance companies want customers with lower expenses, and 
may design their plans to appeal to those with low risk.
    Health insurance credits can help solve these problems in health 
insurance markets by making more coverage options affordable, 
increasing participation, and reducing adverse selection. Greater 
affordability and participation will encourage competition to provide 
coverage that delivers high-value, innovative care. Thus, well-designed 
health insurance credits reinforce the best features of our private, 
highly innovative health care system.
    In the remainder of our testimony, we discuss the critical design 
issues in more detail. Design issues include the mechanics of how 
people actually use the credits to get assistance with health insurance 
purchases. To work effectively, especially for families with modest 
means, credits must be refundable, advanceable, and nonreconcilable.

     LRefundability means that the value of the credit does not 
depend on taxes owed; even persons who owe no taxes can still receive 
its full value.

     LAdvanceability means that those eligible for the credit 
have the option of using it when they are actually purchasing 
insurance, to reduce their monthly premium payments, rather than having 
to wait until they file their tax return at the end of the year.

     LNonreconcilability means that eligible persons do not 
have to wait until they know their actual income at the end of the year 
before they know exactly how much assistance they are eligible to 
receive. Rather, they can be confident that--as long as they are not 
committing fraud--they are entitled to the full value of an advanceable 
credit.

    Health insurance credits are not the only promising direction for a 
health care policy that helps patients get high-quality, innovative 
care. There is no single approach that can work with the best features 
of all of our health care institutions to help ensure that our health 
care system remains the best in the world. Given the need for a broad 
approach to this problem, the President supports both an immediate 
temporary health insurance tax credit for displaced workers, as 
contained in the economic security package, and a permanent new health 
insurance tax credit to expand health insurance coverage for others 
that is not dependent on employment status. The President's Budget also 
contains a number of other initiatives designed to expand health 
insurance coverage. These include: (i) an above-the-line deduction for 
the purchase of long-term care insurance; (ii) expanded flexibility of 
health flexible spending arrangements; (iii) reform and permanent 
extension of Archer Medical Savings Accounts, to permit Americans to 
set up health accounts to help them meet the out-of-pocket payments 
required in many health plans that do not restrict choices of doctors 
and treatments; and (iv) an additional personal exemption for home 
caretakers of family members.
    These proposals are designed to target a diverse group of people 
while improving the functioning of insurance markets. In addition, as 
the President outlined in an address on his health care agenda on 
Monday, the President's budget includes many other proposals to give 
all Americans access to high-quality, affordable options for health 
care coverage. Together, these proposals will provide health security 
and additional health insurance coverage for millions of Americans, 
while preserving the best features of our highly innovative health care 
system.
Permanent Health Insurance Credit for Americans Who Do Not Have 
        Employer-Provided Coverage
    Current law provides a number of tax incentives for individuals to 
obtain health insurance coverage. Employer-provided health insurance 
and reimbursements for medical care are generally excluded from gross 
income for income tax purposes and from wages for employment tax 
purposes. Active employees participating in a cafeteria plan may pay 
their employee share of premiums and other medical care expenses on the 
same pre-tax basis. In addition, for self-employed individuals who are 
not eligible for subsidized employer coverage, 70 percent of health 
insurance premiums are deductible for 2002, and 100 percent are 
deductible for 2003 and thereafter.
Proposal
    However, as noted above, millions of Americans still are without 
health insurance coverage. The refundable health insurance credit 
proposed in the President's Budget is designed to provide these 
incentives to assist uninsured individuals in purchasing health 
insurance.
    The credit is refundable, so even those without income tax 
liability can receive the benefit of the credit. In addition, the 
largest subsidies will be targeted to low-income families, and only 
individuals who are not covered by public or employer-based health 
insurance will be eligible for the credit. Therefore, the credit will 
be of most help to individuals who are most likely to be uninsured--
childless adults who are generally not eligible for public insurance 
and persons in families with incomes too high to participate in public 
insurance programs and too low to find affordable coverage options in 
the private market. The credit will help families who prefer the 
innovation and flexibility of private insurance options to public 
insurance, and will enable families to obtain coverage for the entire 
family from the same providers. The credit is also designed to be 
available at the time the individual purchases health insurance. That 
is, people eligible for the credit can receive it in advance, before 
filing their tax returns, to reduce their monthly checks for insurance 
premium payments. Finally, because the credit is based on income from 
the previous year, it is nonreconcilable--earning more income in the 
current year does not reduce the value of the credit. We believe that 
the availability and certainty of the advance credit will increase the 
credit's attractiveness, making it more effective in expanding health 
insurance coverage.
    The proposal would create a refundable, advanceable income tax 
credit for the cost of health insurance purchased by individuals under 
age 65. Individuals participating in public or employer-provided health 
plans would generally not be eligible for the tax credit. In addition, 
individuals would not be allowed to claim the credit and make a 
contribution to an Archer MSA for the same taxable year. Eligible 
health insurance plans would be required to meet minimum coverage 
standards, including coverage for high medical expenses.
    The credit would provide a subsidy of up to 90 percent of a capped 
amount of health insurance premiums. The maximum credit would be $1,000 
per adult and $500 per child for up to two children. The maximum 
subsidy percentage of 90 percent would apply for low-income taxpayers 
and would be phased down at higher incomes. While the subsidy 
percentage would be phased down with income, the maximum premium that 
could be taken into consideration in calculating the credit amount 
would be fixed at $1,111 for an adult and $556 for a child. These 
dollar amounts would be indexed by the Consumer Price Index for all-
urban consumers.
    Individuals with no dependents who file a single return and have 
modified Adjusted Gross Income (AGI) up to $15,000 would be eligible 
for the maximum subsidy rate of 90 percent and a maximum credit of 
$1,000. The subsidy percentage for these individuals would be phased 
down ratably from 90 percent to 50 percent between $15,000 and $20,000 
of modified AGI, and then phased out completely at $30,000 of modified 
AGI. For example, the maximum credit for these individuals would be 
$556 at $20,000 of modified AGI.
    All other filers (including single filers with dependents, heads of 
households, and joint filers) with modified AGI up to $25,000 would be 
eligible for the maximum subsidy rate of 90 percent, and the maximum 
credit of $1,000 per adult and $500 per child for up to two children. 
The subsidy percentage would be phased out ratably between $25,000 and 
$40,000 of modified AGI in the case of a policy covering only one 
individual, and between $25,000 and $60,000 of modified AGI in the case 
of a policy or policies covering more than one person.
    The maximum credit for these other filers would vary by income and 
the number of adults and children covered by a policy. For example, the 
maximum tax credit would be $3,000 for a low-income family with 
modified AGI up to $25,000 who obtained a policy covering two adults 
and two or more children. The maximum credit would be phased down to 
$1,714 as the family's modified AGI rose to $40,000. For a policy 
covering only two adults, the maximum credit would be $2,000 for 
families with modified AGI up to $25,000 and $1,143 for families with 
$40,000 of modified AGI.

    Examples of the maximum credit:
       (1) Individuals with No Dependents Filing a Single Return

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Modified AGI                          $15,000      $20,000      $30,000
Maximum Credit                         $1,000         $556           $0
------------------------------------------------------------------------

      (2) Other Filers Obtaining a Policy Covering Only One Adult

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Modified AGI                          $25,000      $30,000      $40,000
Maximum Credit                         $1,000         $667           $0
------------------------------------------------------------------------

        (3) Other Filers Obtaining a Policy Covering Two Adults

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Modified AGI                          $25,000      $40,000      $60,000
Maximum Credit                         $2,000       $1,143           $0
------------------------------------------------------------------------

 (4) Other Filers Obtaining a Policy Covering Two Adults and One Child

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Modified AGI                          $25,000      $40,000      $60,000
Maximum Credit                         $2,500       $1,429           $0
------------------------------------------------------------------------

(5) Other Filers Obtaining a Policy Covering Two Adults and Two or More 
                                Children

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Modified AGI                          $25,000      $40,000      $60,000
Maximum Credit                         $3,000       $1,714           $0
------------------------------------------------------------------------

    Individuals could claim the tax credit for health insurance 
premiums paid as part of the normal tax-filing process. Alternatively, 
the tax credit would be available in advance at the time the insurance 
is purchased. Individuals would reduce their premium payment by the 
amount of the credit and the health insurer would be reimbursed by the 
Department of Treasury for the amount of the advance credit. 
Eligibility for the advance credit would be based on the individual's 
prior year's tax return.
    The credit would be used for qualifying health insurance purchased 
in the non-group market. In addition, qualifying health insurance could 
also be purchased through private purchasing groups, state-sponsored 
insurance purchasing pools and state high-risk pools. At state option, 
effective after December 31, 2003, the tax credit would be allowed for 
certain individuals not otherwise eligible for public health insurance 
programs to purchase insurance from private plans that already 
participate in State sponsored purchasing groups, such as Medicaid, 
SCHIP, or state government employee programs.
    States could, under limited circumstances, provide an additional 
contribution to individuals who claim the credit in connection with 
purchases of private insurance through Medicaid or SCHIP purchasing 
groups. The maximum state contribution would be $2,000 per adult for up 
to two adults for individuals with incomes up to 133 percent of 
poverty. The maximum state contribution would phase down ratably 
reaching $500 per adult at 200 percent of poverty. Individuals with 
income above 200 percent of poverty would not be eligible for a state 
contribution. States would not be allowed to provide any other explicit 
or implicit cross subsidies.
    The health insurance tax credit would be effective for taxable 
years beginning after December 31, 2002.
Discussion
    This proposal contains a number of important and innovative 
features. First, the credit amount varies with family size and 
composition, reflecting the impact of these factors in the non-group 
market. For example, two adults face higher premiums, and will receive 
a larger credit, than a single adult. Likewise, families with children 
face higher premiums, and will receive a larger credit, than families 
without children. Second, the credit is ``advanceable,'' and 
eligibility for the advance credit is based on the individual's prior 
year's tax return. This design guarantees certainty of the amount of 
the credit and makes it available at the time individuals purchase 
health insurance; they do not have to wait until they file their tax 
returns after the year is over. Third, the proposal allows the credit 
to be used toward private insurance purchased through private 
purchasing groups, state-sponsored insurance purchasing pools and state 
high-risk pools. This provision will increase coverage options, achieve 
economies of scale, and encourage risk pooling in the non-employer 
market.
    In designing a policy to expand health insurance coverage to the 
uninsured, one concern is that the policy does not inadvertently 
decrease health insurance options to those presently insured. Some have 
suggested that if the purchase of health insurance outside of the 
employer market became sufficiently attractive, employers might stop 
providing health insurance coverage to their workers, potentially 
resulting in a net decrease in health insurance coverage among the 
population. Based on these concerns, the Administration's proposal has 
been carefully designed to avoid ``crowdout'' of subsidized employer 
coverage, and thus will expand coverage substantially. Several elements 
of the credit design contribute to this desirable result. Most 
importantly, low-income individuals and families, who are least likely 
to have employer-based health insurance, will receive the largest 
incentives under this proposal. In addition, the health credit subsidy 
rate decreases with income, requiring larger individual contributions 
for any given policy and making it a less attractive alternative to the 
employer-provided insurance at higher income levels. The health credit 
is further limited by a cap on the amount of premium eligible for 
subsidy. Although this capped premium amount is adequate for many 
individuals to purchase health insurance, it is typically less generous 
than most employer plans.
    The credit is also designed to be targeted to the individuals who 
are most likely to be uninsured during at least some part of the year. 
Approximately six million such individuals are expected to gain 
coverage as a result of the credit. Most of these individuals are 
neither offered employer-based insurance nor eligible for public 
programs over the course of their uninsured spells. The credit will 
provide a strong new incentive for these persons to find coverage in 
the individual market. It will also allow many families that are 
already purchasing coverage in the individual insurance market, and 
receiving very little government assistance in doing so, to obtain 
better coverage at a lower out-of-pocket cost.
    The credit will significantly increase participation and quality of 
coverage in non-group health insurance markets. These improvements will 
not come at the expense of employer group markets. Those low-income 
Americans who are eligible for the largest credit are less likely to 
have employer-sponsored health insurance. Around 80 percent of 
uninsured workers are not offered health insurance by their employers. 
Only 36 percent of people under age 65 with income below 200 percent of 
the federal poverty line have employer-sponsored health insurance, 
while 77 percent of those above do. Furthermore, the generosity of 
employer-sponsored insurance is determined by the tax benefits for the 
group of employees, not the attractiveness for low-income employees 
only. Tax benefits for employer coverage will remain large for the 
middle- and higher-income workers that make up most of the employees of 
most firms that offer generous employer-sponsored plans. Those workers' 
incomes are too high for them to get more attractive benefits from the 
proposed health credit. Thus, employer-provided coverage will remain 
more attractive for firms that offer generous coverage today. That is, 
the phase-out and cap on the credit ensure that employers will continue 
to offer insurance and that employees will continue to enroll. The 
proposed credit will simply eliminate an inequity in the current system 
that disadvantages workers without employer coverage, helping them to 
purchase the coverage that meets their needs.
    Recent research also suggests that the credit would provide good, 
affordable health insurance options for the vast majority of 
individuals who are eligible for the credit. This is the subject of a 
detailed analysis by the Council of Economic Advisers. The minority of 
less healthy persons who lack any insurance options and find insurance 
unaffordable or unavailable for their health status in the individual 
market could use the credit to buy into the state high-risk pool for 
which the premium is usually subsidized. The proposal also permits 
certain low-income individuals to purchase private insurance through 
other state-sponsored health insurance purchasing groups. Coupled with 
the Administration's other proposals for strengthening employer 
coverage and for providing more assistance to individuals with the 
greatest health care needs, the health credit is a critical part of our 
approach for ensuring that all Americans have good, affordable private 
health care coverage options.
    This proposal is part of a broader Administration goal of achieving 
more patient-centered health care by encouraging innovations in the 
financing and delivery of health care services. Market-based approaches 
such as this will encourage high-quality, high-value coverage by giving 
patients the ability to choose the coverage that best meets their 
needs. In turn, innovative coverage will permit Americans to benefit 
from the tremendous potential of our health care system in the 21st 
century.
Health Insurance Credit for Displaced Workers
    Because the permanent health insurance credit would not be 
effective until next year, the President continues to support the 
immediate health insurance credit for displaced workers, which was one 
component of the economic security bill supported by a bipartisan group 
of centrist Senators and passed by the House last December.
    The health credit for displaced workers is a refundable, 
advanceable tax credit that could be claimed by unemployed workers for 
a period of up to 12 months. The credit can be used to offset 60 
percent of the cost of health insurance premiums for unemployed workers 
and their families.
    The credit can be applied to the purchase of COBRA or ``super-
COBRA'' continuation coverage, and other types of qualified private 
non-employer health insurance. Eligible unemployed workers include 
those receiving unemployment insurance benefits and those who would be 
eligible for benefits except that their rights to benefits were 
exhausted or the period during which their benefits were payable ended.
    The design of the health credit for displaced worker reflects the 
President's goals of providing targeted, quick assistance to Americans 
who have lost their jobs in the recession. Because the proposal builds 
on the existing infrastructure of programs to assist displaced workers, 
and because it strengthens all of the coverage options available to 
displaced workers now, it can be fully implemented in a matter of a few 
months. In particular, state workforce agencies will certify 
eligibility for the health insurance credit when they certify that a 
displaced worker is eligible for unemployment insurance benefits. 
Almost all unemployed workers who lose their job involuntarily are 
eligible for unemployment insurance, at least initially. The 
Administration also supports emergency grants to states to enable them 
to quickly provide additional health insurance assistance, without the 
need for state legislative action. Displaced workers can claim an 
advance credit at the time of purchasing health insurance coverage by 
providing their insurer their certification along with the remainder of 
the premium. The insurer will be reimbursed by the U.S. Treasury for 
the amount of advance credits it provides.
    We believe the displaced worker credit offers a number of 
advantages over competing proposals that limit tax credits or subsidies 
to COBRA-only policies. Medicaid expansion is also not an ideal way to 
provide quick and efficient replacement insurance to the affected 
individuals.
    A COBRA-only credit would provide no benefit to 40 to 50 percent of 
displaced workers with health insurance, because they work for small 
firms not covered by COBRA or they purchase non-employer policies. The 
alternative of forcing workers not covered by COBRA into a State 
Medicaid plan would require these workers to drop their current 
insurance coverage and possibly change health care providers if they do 
not participate in Medicaid. Extending Medicaid to cover these 
displaced workers would require State legislation, and would 
necessitate delays before State legislatures were even in session to 
address this issue. Many States have made clear that, because of tight 
budgets, they cannot afford such unprecedented expansions beyond their 
core target populations anyway. Moreover, such expansions would take 
away resources from their ability to fund better coverage for their 
priority populations: low-income children, families, and seniors.
    In addition, a COBRA-credit would impose a costly new mandate that 
employers would be required to implement immediately. The mandates are 
most burdensome on smaller firms and those that have had significant 
layoffs--precisely the firms that need the most help now to prevent 
further job losses. Further, a COBRA-credit is poorly targeted to 
workers who lose their jobs because of the economic downturn. At least 
60 percent of those eligible for the COBRA-credit are workers who 
voluntarily leave their job, not displaced workers. According to 
independent estimates, twice as many workers who have lost their jobs 
in the recession would be helped by the health credit for displaced 
workers than by a COBRA credit or subsidy.
    As a result, for a similar budgetary cost (and at no budgetary cost 
to States), the health insurance credit for displaced workers would be 
available for a longer period of time, would be more efficiently 
targeted, would offer workers a greater choice among health insurance 
plans, and would not weaken employer incentives to continue to provide 
health insurance to their workers. The credit would also reduce adverse 
selection in both the employer market (because more healthy workers 
would choose to remain in COBRA coverage) and in the individual market 
(because many people who otherwise would have gone without health 
insurance will purchase coverage).
Conclusion
    The absence of health insurance coverage for some 40 million 
Americans is a problem calling for immediate solutions. The President's 
Budget sets forth a package of solutions, including most importantly a 
proposal for the use of tax credits to offset the cost of obtaining 
health insurance that has received broad bipartisan support. If 
enacted, this proposal can lead to a significant reduction in the 
uninsured population and at the same time lead to improvements in the 
market for individually purchased health insurance, greater choice and 
flexibility for individuals in determining the coverage that best fits 
their needs, and improvements in the quality and price of health care 
provided to all Americans. This Administration desires to work closely 
with Congress, in a bipartisan manner, to make this vision a reality.

                                


    Chairman THOMAS. Thank both of you very much, and I do 
compliment the Administration in moving the dollar amount on 
the credit from $2,000 to $3,000. I do find it ironic, though, 
that that dollar amount is in competition with an unlimited 
amount which requires no prioritizing whatsoever under the more 
traditional fringe benefit structure, but you are moving in the 
right direction.
    Second, I also want to compliment you on the flexibility 
that you have begun to add. The idea that we would limit the 
way in which the credit would be used is, I think, a valid 
criticism, and once again you have at least moved in responding 
to that concern.
    Statements were made in opening remarks, and others will 
make the statement that this is modest, it certainly doesn't 
cover that many folk. It seems as though if you don't have a 
solution for 40 million uninsured, you don't have a solution at 
all. Does the Administration have some numbers which indicate 
the number of uninsured that would be covered under this 
particular proposal, and if so, would you wish to present them 
to us?
    Mr. WEINBERGER. Yes. The numbers for the health insurance 
tax credit, our estimates are that 15.5 million would receive 
the credit. Six million of these individuals would have been 
uninsured for at least part of the year, and about 10 percent 
of the individuals taking the credit would otherwise have 
received employer-provided health insurance.
    Mr. McCLELLAN. So just to be clear, the vast majority of 
people who are covered under this credit now are either 
uninsured, that is 6 million, or not getting any assistance at 
all for purchasing nongroup health insurance, and so they will 
be able to afford better coverage. And the impact on the 160 
million employer market is negligible.
    Chairman THOMAS. I thank you. The gentleman from New York 
wish to inquire?
    Mr. RANGEL. Thank you. I want to thank both of you for your 
testimony. Mr. Weinberger, your opening statement was laced 
with remarks about bipartisanship and working together, and I 
wondered whether you know what Committee you were testifying in 
front of, because you have had a very limited experience of 
bipartisanship with this Committee.
    And it would seem to me that if these are the hopes and 
aspirations that you would like to see, that you in the 
Administration will have to dramatically do something in order 
to achieve these goals. It would seem to me that for openers 
you might consider having meetings with Democrats, people in 
the minority, and sharing these views, rather than having us 
come to hearings and finding out that the majority and the 
Administration have made up their minds as to what the health 
care should be.
    This is especially so when I know that you know that many 
people, including our leader, some that are very close to me 
physically if not politically, have claimed that one of their 
targets is the employer-based health care system, as opposed to 
expanding health care generally. Well, I am not opposed to 
people having political goals, but sometimes they interfere 
with bipartisanship, which I assume you can understand. And if 
indeed some of us are paranoid in believing that you are 
against employer plans and unions more than you would be for 
health coverage, that is something that should be discussed 
with honest people who have honest disagreements.
    But I would suggest to you if you are serious about this 
goal of bipartisanship, especially in an election year, we need 
outside help, and I hope you would consider deciding how you 
intend to bring about this goal, because I think that both 
parties can benefit in working together. There is enough to 
fight about in November, but health care should not be the 
subject of a partisan debate.
    So I thank you for coming here, and you, Mr. McClellan, and 
let me see where we go from here.
    Chairman THOMAS. I thank the gentleman. The gentlewoman 
from Connecticut wish to inquire?
    Mrs. JOHNSON OF CONNECTICUT. Thank you very much, Mr. 
Chairman.
    First of all, I think it is very important that you have 
developed a better mechanism of delivering a tax credit, and I 
think that I don't want that to be missed in this debate. For 
those of us who have long been interested in a tax credit as a 
means of reaching those who couldn't afford the premiums for 
health insurance, that issue of being able to deliver the 
credit in a way that doesn't require people to carry the cost 
until the end of the year and then deduct it, and to be able to 
deliver it to people who don't pay enough taxes to ever get the 
credit back, is very important.
    And could you describe for the Committee a little bit as to 
how that mechanism works, and as importantly, whether it would 
work as well if we used that mechanism for all the uninsured as 
opposed to just the unemployed uninsured?
    Mr. WEINBERGER. A clarification. Is your question with 
regard to the displaced worker credit or the health insurance 
credit, or both?
    Mrs. JOHNSON OF CONNECTICUT. Well, are you using the same 
mechanism Mr. McClellan mentioned, that the uninsured credit is 
also advanceable and refundable?
    Mr. McCLELLAN. Right.
    Mrs. JOHNSON OF CONNECTICUT. So if you are using the same 
mechanism in both instances, you need to talk a little bit more 
about the mechanism and why it would work with the larger group 
of the uninsured as well as with the smaller group. Because 
with the smaller group, when you are unemployed you go for 
unemployment benefits, so at that time you can also get the 
credit power.
    Mr. McCLELLAN. Right. Just to respond to the question about 
mechanisms, I want to talk about both the displaced worker 
credit mechanism and the health insurance credit mechanism, 
because they are not the same.
    From the standpoint of the user of the credit, though, they 
both have a similar effect. You can write your premium check 
for the portion of the health insurance cost that is not 
covered by the credit only, so when you are signing up for 
insurance, it is much cheaper. It is cheaper by the amount of 
the credit. You get it in advance.
    The actual mechanics for doing it are a little bit 
different for the two credits. For the displaced worker credit, 
the quickest way to identify the people who need help and to 
get help to them is to build on the strong existing 
infrastructure of unemployment benefits. That credit would be 
available through State and local work force offices, which is 
the first stop that people usually make when they lose their 
jobs, to find out about the income benefits available to them, 
the training opportunities, the job search opportunities and so 
forth.
    Under our credit proposal, people would qualify for the 
health insurance credit as soon as they qualify for 
unemployment insurance benefits. It is that simple. They would 
receive a number that they could write on their check, and they 
would send in the check for their portion of the premium, and 
the insurance company would get reimbursed directly from the 
government for the remainder, for the amount of the credit.
    For the health insurance credit, that is a credit that's 
value depends on income, so what is key there is a person's or 
a family's income in the prior year. At the end of the year 
when you file your taxes, you know how much money you had in 
that year. You let the Internal Revenue Service (IRS) know 
that, and the IRS will notify you or get you the information on 
how much of a credit you qualify for. And then once again you 
just write a check for the portion of the premium that you owe. 
The credit is paid directly to the insurer, so that you don't 
have to pay as much out of pocket for health insurance.
    Both of these mechanisms can be implemented very quickly. 
The displaced worker credit we think we can have operational 
within a few months of passage, and people in the meantime 
would have the confidence of knowing that they are going to get 
60 percent of their health care costs covered. The health 
insurance credit would be up and running next year.
    Mrs. JOHNSON OF CONNECTICUT. One of the reasons I think it 
is so important to move forward in the stimulus bill on this 
issue is that we can then pilot that mechanism. But I would 
hope that Members on both sides of the aisle would not allow 
the issue of who talks to who to interfere with all of us 
talking together to take advantage of this opportunity to have 
in the budget money for the uninsured, and work on a mechanism 
and try it.
    It is not going to be the sole solution, but we have all 
known, both sides of the aisle, it was a critical component. 
And we have a chance to move forward on that this year, and I 
hope anyone who is really interested will let us know and be 
part of the solution.
    Thanks. My time I think has expired.
    Chairman THOMAS. I thank the gentlewoman. The gentleman 
from California, Mr. Stark, wish to inquire?
    Mr. STARK. Thank you, Mr. Chairman. Mr. McClellan, have you 
read Professor Gruber's testimony?
    Mr. McCLELLAN. No, sir, I have not had a chance to read his 
testimony in full for today, but I have seen it and I am 
familiar with the main points in it.
    Mr. STARK. If you could, if you wouldn't mind answering 
this just with a note if you have, but he is suggesting that 
about 4 million people would leave employer-based coverage and 
that--I mean, he doesn't agree with your numbers. He says that 
health tax credits would reduce the number of uninsured by 
about 2 million. And economists can differ, and I would just 
like to know where your research differs from his.
    Ken Thorpe at Emory suggests that under this plan, the 
Federal cost for a newly insured person would be around $4,100, 
expanding the State Children's Health Insurance Program (SCHIP) 
would run to $2,300. So there is some difference here as to how 
many people would be in and how many would be out, and my guess 
is that a little more empirical work would get there.
    The line that I would like to follow with you guys is this: 
that there is no guarantee that there wouldn't be medical 
underwriting, right? And that is in the interest of the 
insurance company. There is nothing in this proposal to get the 
insurance companies to take people with any kind of preexisting 
condition, and they are pretty fussy about that. Bad back, a 
whole host of things, and those things are eliminated.
    The chart that we got from eHealthInsurance.com, from whom 
we will hear later, in trying to get the lowest policy 
available in each community for Members of the Committee, in 
round figures only Seattle got below $2,900 approximately for a 
premium. So what is out there today, lowest, now, for a family 
of four is about $3,000. For us in the Federal Employees 
Benefit system it is about $7,000 for the generous Blue Cross 
high option, which is in my opinion a pretty good policy.
    So there is no way that a $3,000 tax credit, which really 
drops to $1,700 for a family of four in the $40,000 income 
bracket, so we are not talking about $3,000 tax credit for a 
lot of people. And then all of these policies that I have on my 
list have between $1,000 and $2,000, most of them have $2,000, 
in Minnetonka it is a $6,000 deductible. What is in the water 
up there? But what I am--and many of them, 10 of them have no 
maternity benefits, five of them don't have a prescription drug 
benefit, two of them don't even cover emergency room.
    So I guess what I am getting at is that if we are going to 
cover people, the credit isn't adequate. Now, you can argue all 
over the place, but I would challenge you, either of you, and 
then I would stand corrected, shop for me in the market, in the 
individual market. You can get the rates. You can probably get 
them faster than I can.
    And show me in various communities what these people can 
get, because you really are talking about tax credits of 
$1,700, with two adults and one child, $1,400, one adult is 
$600. You aren't going to find much in the market that really 
covers people if they are not going to have to come up with 
$2,000 or $3,000 more, and if they lose their employer-based 
insurance, if that is correct, we haven't done much to help 
people.
    I have no quarrel with giving a tax credit, but there is 
another side to this. You have got to make the product 
available. And my question is, would the Administration support 
controls on the private insurance market to make sure that 
these policies are available? What do you suspect, Mr. 
McClellan?
    Mr. McCLELLAN. The Administration certainly supports 
additional steps to help private insurance markets make this 
available----
    Mr. STARK. But I said controls on the insurance industry, 
which would mean community rating or universal coverage non-
underwriter. Would you support those sorts of controls to make 
these products available at a reasonable cost?
    Mr. McCLELLAN. Our preference is to support the additional 
steps that will actually make more affordable insurance 
available to a wider number of people. I think the experience 
of States that have tried community rating coupled with 
guaranteed issue requirements has been that the resulting price 
of premiums available in the nongroup market is significantly 
higher, significantly higher not only than policies for 
relatively healthy people in other States, but significantly 
higher than policies in high-risk pools or other options that 
are available in other States.
    But I certainly would like to work with you and your staff 
on finding ways to reach the goal of making affordable health 
care coverage options available to everyone. We just think that 
there are probably some better ways to do it than restricting 
access to coverage.
    Mr. STARK. In Texas, for instance, a 55-year-old male 
smoker would pay $13,000 in the State's high-risk pool. You 
know, what good is this tax credit going to do that person? You 
could tell him to quit smoking. I would join with you in that.
    But my point is that high-risk for different insurance 
companies means a lot of different things, and there is no way 
that I can see that we can really say to the public we are 
giving them access to decent medical care at a price they can 
afford. Because when you add the deductibles and the other 
things that they will be out of pocket in the current market, 
without some controls on that market, you don't have a plan. 
And I would like to be proven wrong.
    Mr. McCLELLAN. Sure, sure. Well, to help address your 
concern, the Council of Economic Advisers did a study of policy 
availability in all 50 States, looking at multiple communities 
within each State, and that is included in the CEA document 
that you have available to you.
    These policies were not first dollar policies. They were 
typically preferred provider organization (PPO) plans that had 
preventive care coverage, maybe emergency care coverage, and 
they did have significant deductibles, but they gave people the 
option of going outside of network, getting rid of the managed 
care red tape, getting whatever treatments they thought were 
best for them, while still providing good catastrophic 
protection.
    In addition, there are also some reasonably priced network 
plans available that have much lower out-of-pocket payments----
    Mr. STARK. That is good, Mr. McClellan--if I could just 
finish, Mr. Chairman--for you and me. You are making more than 
$100,000. So am I. But I am talking about the family with two 
adults and two kids making $40,000. They don't have anything 
left for this high out-of-pocket. They get $1,700. And those 
are the people that we are not helping.
    Mr. McCLELLAN. Under our proposal, low-income families 
would generally get access to coverage that was, for the plans 
that we looked at, the average premium for a plan of this type 
was less than $3,000, less than $1,000 for young individuals. 
Family coverage similarly had more than 50 percent subsidies 
available.
    Mr. STARK. How much deductible, though, on top of the 
premium?
    Mr. McCLELLAN. Well, at most $1,000, if you buy an open PPO 
plan. If you prefer a network plan with lower co-pays and 
smaller deductibles, you can have more coordinated care at a 
lower out-of-pocket cost.
    Mr. STARK. You make my point. One more time. You make my 
point. $3,000 to buy the policy. You give them $1,700, so they 
are out $1,300 and another $1,000 to $2,000 deductible, and 
still----
    Mr. McCLELLAN. I think the bottom line here is that we end 
up getting 6 million more people covered who wouldn't have been 
covered otherwise. So go back to Dr. Gruber's analysis, and I 
have worked closely with Jon on many issues. His study, it 
looks like it is an analysis like one he did a year ago of a 
previous proposal that was even a little bit different from 
ours then. It had different income limits. It examined a very 
rich first dollar plan, which is not what we are aiming to 
provide affordable coverage.
    Mr. STARK. It is this proposal that he----
    Mr. McCLELLAN. It did not address advanceability and other 
issues to a significant degree. I am just saying his estimate, 
that he says is of this proposal, is very similar to his 
estimate of the previous proposal last year, which does not 
address issues such as the availability of lower-cost plans 
which are widely available; the income limits in our proposal; 
the effective advanceability mechanism in our proposal; the 
fact that some people want to get coverage for part of the 
year, not just the entire year. None of these things are 
covered in his model.
    And I put a lot of faith in the Treasury staff estimates of 
this kind of analysis. They have done very accurate and 
effective and comprehensive work on a very detailed model that 
has been in existence for many years and picks up a lot of 
subtleties in markets that are very hard. You know, I come from 
an academic perspective, too, and we try to do our best, but 
often we are working alone, without a dedicated professional 
staff.
    So I put a lot of faith in those estimates, and beyond 
that, in terms of crowd-out estimates, I just would point out 
that Dr. Gruber's research also shows that whatever you do for 
the uninsured, you need to be very careful about affecting 
employer coverage. For example, his research on Medicaid 
expansions indicates that over 50 percent of the new coverage 
is people who would have been covered elsewhere.
    Mr. McDERMOTT. Mr. Chairman----
    Chairman THOMAS. I would make a request both of Members and 
of the witnesses that the gentleman's 5 minutes became 9 
minutes and 40 seconds. However----
    Mr. McDERMOTT. Mr. Chairman, could we have the numbers that 
he has? I don't know if they are available. He said he has a 
set of numbers there that some of us haven't gotten copies of.
    Chairman THOMAS. If the gentleman has numbers and wishes to 
share them----
    Mr. McCLELLAN. There is a CEA analysis that should be on 
the table with the other documents for the hearing, and the----
    Chairman THOMAS. If the gentleman's staff would distribute 
the numbers. Last week it was charts, this week it is numbers. 
I do believe it is important that everyone have the material 
that we are discussing.
    And the Chair wants to make a point that one of the reasons 
the Chair allowed the gentleman from California the additional 
4 minutes was because the questions he was asking were 
important, and there was a line of questioning that he wished 
to pursue.
    However, the Chair wants to make it clear that if in fact 
the tax credit has some impact on the employer-based system, 
any other modifications would also have impact on the employer-
based system, and I believe Professor Gruber shows that 
modifications in a significant fashion on Medicaid would have a 
negative impact on the employer-based system. So if we are 
going to make a point, we need to make it on a broad basis, 
that any enhancement of any other program would obviously 
result in a modest negative impact.
    Also, we have to remember that we are not dealing with 
health insurance in a vacuum and that the Federal level is the 
one to make all of the changes, because frankly it is primarily 
a State-based question, and there are a number of States--this 
has guaranteed issue--there are a number of regulations at the 
State level that require adjustment.
    But the final point that the gentleman made I think is an 
excellent one. I talked about the fact that we moved from 
$2,000 to $3,000. That is a move in the right direction. I also 
underscored the fact that the employer-based system is open-
ended. One of the problems in this system, the Chair believes, 
is not that we are not spending enough money on health 
insurance, it is that it is maldistributed under the current 
structure.
    And if the gentleman wishes to enter into a discussion of 
capping the employer-based system at a reasonable amount and 
redistributing that to require this one to be slightly larger, 
a redistribution of the current tax benefits for health 
insurance, I think you will find we can move rapidly to a much 
more handsome program for those who now get nothing under the 
system. The gentleman from New York wish to inquire?
    Mr. HOUGHTON. Yes, Mr. Chairman, very briefly.
    You know, purchasing insurance--I would like to address 
this to Mr. McClellan if I could--purchasing insurance in the 
open market, as you know, is not easy. You know, many are 
denied coverage, restricted benefits, things like that. So I 
guess the question I have is, will adding a large tax subsidy 
and increasing the size of the individual market change any of 
this? In other words, will the cost go down?
    Mr. McCLELLAN. Yes, sir, it should help significantly with 
the costs of coverage available in the insurance markets 
generally. We have some analysis of this in the CEA study that 
I mentioned. The simple idea is that if you give people 
subsidies, those who are healthier and not participating in the 
insurance markets now would begin to do so. That improves the 
risk pool available for everyone and reduces the costs of 
coverage available.
    In addition, all of the people who are already purchasing 
in the individual market, as I mentioned, there are 16 million 
of them today, would generally have access to more affordable 
coverage as well. They would be willing to buy more generous 
plans than they have now in the case when they receive no 
subsidy at all.
    We provide big subsidies for employer coverage. We are 
starting to provide subsidies for the self-employed. But this 
group gets none of those subsidies, and that is one reason 
their benefit packages tend to be less. By providing a new 
subsidy, we move this entire market in the direction of more 
generous, affordable coverage.
    Mr. HOUGHTON. Thanks. That helps. Thank you.
    Chairman THOMAS. The gentleman from Washington wish to 
inquire?
    Mr. McDERMOTT. Thank you, Mr. Chairman.
    I sure hope that we can have a discussion about this tax 
credit business and not get the volume up too high. Mr. McCrery 
and I, like Mr. Stark and Mr. Armey, spent a lot of time 
talking about this. And certainly if you believe that private 
sector answers are the way to go, tax credits, you have got to 
look at them, one way or another. I happen to be somebody who 
believes that ultimately the government will provide the whole 
thing, but that is--we are getting to that.
    But when we were looking at this, and we couldn't figure 
out any way to do it without using community rating, now I 
don't think there is anybody in this room--there might be 
somebody so out of touch that they would think the insurance 
industry is going to let us or encourage us or be supportive of 
us going to community rating and demanding that, so that the 
individual market is anywhere reasonably available. I just want 
to take an example that I know.
    Boeing is in the middle of laying off about 30,000 people 
at the moment. These are aerospace mechanics who make somewhere 
between $40,000 and $60,000, depending on unemployment. They 
have a policy that is worth $7,000 under their COBRA, so if 
they want to go out and buy a COBRA policy, they have $7,000 to 
come up with. Unemployment benefits in Washington State, as in 
Massachusetts, are the best in the country, $450 a week. That 
means you get $1,800 a month to live on, and you are looking at 
a premium of about $600 to pay for your insurance.
    Now, that is the maximum. If you are from Mississippi, the 
average unemployment benefit is $190 a week. That means $800 a 
month to live on. And it is--I cannot see how you--I mean, that 
is what I said once in this Committee. I don't know if anybody 
has ever been unemployed.
    When you have rent--we had a hearing in Seattle about 2 
weeks ago, and a woman who was laid off, working for the Westin 
Hotel, is living on--she is living on the minimum benefit, 
which is around $800 or $900 a month in Washington. Her rent is 
$510 a month. Now, she is raising two daughters on $800 a 
month, or trying to, on that unemployment. And interestingly 
enough, if she works three shifts at the hotel, she gets 
insurance. If she works two shifts, she doesn't get insurance. 
So everybody is now working two shifts a week, if they are 
working at all.
    And when you take a benefit of $1,000 a month or whatever 
you might say, and then talk about a reasonable place to live, 
no subsidized housing, so you are now spending, in her case 
more than half her unemployment check goes for her rent. And I 
said to her, ``Well, how much do you spend on food?'' And she 
said, ``Well, I spend $100.'' I said, ``$100 a month?'' And she 
laughed and said, ``No, no, no. $100 a week for the three of 
us.''
    So now you have got $400 of food. Well, maybe you can cut 
that back. Maybe $50 a week, right? But there is no economic 
way you can make this possible for people, even if you give 
them all the money up front, if you are talking about $3,000. 
Now, Jim and I never could quite figure out what the figure 
was, or what percentage you had to subsidize, but this in my 
view does not work for unemployed people.
    And most of the uninsured people are not making more than 
$6 or $7 an hour. Most of them are somewhere around $25,000. 
They are not, they are also not in much of a position to go out 
and buy in the individual market. They don't even have the--
well, COBRA is really no advantage, because you get jumped up 
in how much you get.
    How did you pick $3,000? That is my question. Was that a 
number backed in to how many people you think are going to use 
it?
    Mr. McCLELLAN. The $3,000 figure for our health insurance--
--
    Chairman THOMAS. The gentleman's time has expired. If the 
gentleman will respond briefly to the question.
    Mr. McCLELLAN. Yes. The $3,000 maximum figure for the 
health insurance credit was done to balance the need to give 
access to affordable policies for lower-income families with a 
desire not to have too generous of a subsidy and disrupt 
employer coverage. That did it. That led to a very large number 
of people getting coverage.
    And I just would also add that we also support, as part of 
the economic stimulus legislation, assistance for workers who 
have lost their jobs to cover 60 percent of their health care 
costs, along with other benefits like emergency grants to 
provide additional assistance, and no cap on those benefits.
    Chairman THOMAS. The gentleman's time has expired. The 
gentleman from California, Mr. Herger, wish to inquire?
    Mr. HERGER. Yes. Thank you very much, Mr. Chairman.
    Mr. McClellan, I have several. I want to continue on this 
same line of questioning, but I want to allow you plenty of 
time to respond, if I could. As we are hearing, there are some 
that are concerned that the tax credits would not work because 
they believe it is so difficult to get insurance on an 
individual basis. A series of questions, if you could.
    Are those criticisms valid? And how does the President's 
proposal address these issues? And, finally, are the policies 
in the individual market affordable?
    Mr. McCLELLAN. Very good questions. Thank you, sir.
    The President's proposal includes a number of elements to 
make sure that virtually everyone has access to affordable 
policies. As I mentioned, we did a comprehensive analysis of 
all 50 States to examine the actual premiums available to 
people who are purchasing in the nongroup, the individual 
market. And, again, for the vast majority of people, the vast 
majority of low-income families would get 50 percent or more 
subsidy for the cost of their health insurance. And according 
to many academic studies, that level of subsidies is 
substantial enough to induce and allow most of them, to buy 
coverage.
    Beyond that, we also include a number of other elements to 
help workers or individuals who may need additional help with 
the costs of their health insurance. We allow the credits to be 
used in high-risk pools which, as Chairman Stark mentioned, in 
some States have very high premiums, but in many States where 
they are well-funded, broadly based, Minnesota and others, 
there is good coverage available for not much more than the 
cost of a general premium, certainly for much less than the 
cost of a community rating requirement State's policy.
    In addition, we also support the use of these credits in 
purchasing groups that States could set up. States often have 
the infrastructure in place through competitive approaches that 
they are taking in their Medicaid and SCHIP programs to do 
this, or through the employer plans that they have available to 
their own employees, another option for getting affordable 
coverage to people who may not have the best options available 
in the individual market.
    Altogether, we think this is a robust approach to making 
affordable coverage available to everyone who is now purchasing 
or has no other option besides purchasing in the individual 
insurance market. We need to make those options for those 
Americans much better, since people who are not offered 
employer coverage and since low-income people who are not 
eligible for public insurance have the highest uninsurance 
rates in the country.
    Mr. HERGER. Thank you very much, and I think that is the 
crux of what we are trying to do. We are attempting to help 
those who are currently unable to have health insurance be able 
to acquire health insurance. And I want to thank you and the 
Administration for, I believe, making a major step forward in 
attempting to do this.
    And I believe at the same time when we have--the more 
individuals we have out shopping around, I think that helps 
bring the prices down. It brings about more competition. So I 
think there is a number of side pluses that we have, as well as 
what you are doing. I commend you and I commend the 
Administration.
    I yield back the remainder of my time, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. The Chair wishes to 
note that there obviously are a number of Members engaged in 
the debate going on on the floor, and they may not be able to 
be here for a presentation of questions. They do, however, have 
questions, and Members can always submit those questions in 
writing. We will make sure they are available to you, and we 
would appreciate a prompt response to those questions that are 
submitted in writing.
    The gentleman from Wisconsin, Mr. Kleczka, wish to inquire?
    Mr. KLECZKA. Thank you, Mr. Chairman.
    A quick question of Mr. McClellan. Mr. McClellan, in your 
estimation, will the Administration proposal serve to 
strengthen or to diminish employer-sponsored health plans?
    Mr. McCLELLAN. The Administration's package of health care 
proposals will strengthen the employer market. As I mentioned, 
this particular proposal----
    Mr. KLECZKA. In what manner? How?
    Mr. McCLELLAN. The particular proposal we are discussing 
now is going to provide good options to people who do not have 
employer coverage. In addition, the Administration's budget 
also supports a number of proposals to strengthen employer 
coverage.
    For large employers, that are already offering a range of 
choices, we want to make it easier for people who are choosing 
plans that require significant out-of-pocket payments to meet 
those payments. We want to give them tax-free options for 
paying out-of-pocket costs, through rollovers of flexible 
spending accounts and through broader availability of----
    Mr. KLECZKA. Now, that is a totally inadequate answer. Let 
me address, Mr. Chairman, the audience, the people watching us 
on FAT NET, and that is the second camera over there. This is 
not an issue that we usually talk in this Committee, like 
alternative minimum tax (AMT) for businesses, right? And you 
can sit there and listen to that, and you folks over here can 
sit and write that, but that is for the next guy.
    This is an issue which directly affects everyone in this 
room and viewing this hearing who has employer-sponsored health 
insurance. And that is the plan where we are in a group, there 
are sick people, there are healthy people, there are young 
people, there are old people, and the employer says, ``Okay, 
you pay 20 percent of the premium, I'll pay the balance.''
    And that is the plan that about 177 million Americans have. 
It is a system that works. But we are being told today that we 
are going to replace that system, and you are going to hear 
comments, ``No, we're not. We're just taking care of the 
uninsured.'' That is baloney. That is nonsense.
    And I refer you to the comments of our esteemed Chairman, 
who indicated on December 14th that the current employer-based 
health care system is fatally flawed. Okay? He thinks it is 
broke. I have got employer-sponsored health care insurance. 
Works fine. Okay?
    The other comment that you should write about, folks, is 
that Mr. Thomas will offer a bill this year to jettison the 
entire employer-sponsored health care system. That is what this 
is all about today. And do you realize what a boon it would be 
to the employers if they didn't have to pay your 80 percent 
health insurance premium?
    If you thought the AMT, repealing the alternative minimum 
tax for companies was bad, and making that retroactive, having 
the effect of giving IBM a check for $1.4 billion, if you 
thought that was bad, take a real close look at this one, 
because this is better for the employers than that measly 
check. And what is going to happen to you folks? You are going 
to go on an individual basis to an insurance company and try to 
get coverage, versus the group plan where, again, you have 
sick, healthy, young, old.
    Now it is you alone. And just like in the National 
Basketball Association during halftime, they have this game 
called ``one-on-one,'' that is what we are doing. It is one-on-
one, the insurance company and you and your family. And who do 
you think is going to win that battle?
    Let's look at the premiums being offered by 
eHealthInsurance.com, and they will be testifying later, for 
the city that I hail from, Milwaukee, Wisconsin. All right. On 
average, the annual premium is going to be $3,000. The 
deductible is $1,000, so now that is $4,000.
    And what is covered? Maternity, optional. Prescription 
drugs, many of you have it in this room, not covered. Health 
insurance is for when you get sick, when you have an emergency. 
This policy being sold in Milwaukee, Wisconsin, does not cover 
the emergency room, one of the reasons you have it in the first 
place. And office visits, you have got a sick kid, you want to 
take them to see the doc, or yourself, you are not feeling 
well, office visits aren't covered.
    So know full well what we are doing today is not trying to 
cover some folks in this country who are uninsured, because the 
reason they are uninsured is, their employer don't offer it, if 
they are working, or they can't afford it. Based on the e-plans 
that we are sharing with you today, they are still not going to 
be able to afford it.
    And if you are unemployed and you are not able to have the 
government help you with some COBRA coverage, after your rent 
or your mortgage payment, your car and your bills and your food 
and your clothes for your kids, there ain't no money left in 
that unemployment check for health care coverage.
    So what we are doing today, my friends, is sounding the 
death knell for employer-sponsored health insurance, and make 
no mistake about it.
    Chairman THOMAS. The gentleman indicated that the Chair 
held certain positions, and then represented what those 
positions were. I think those that he appealed to, both 
visually and in the written media, need to understand what it 
was that he was saying.
    He said the Chair believes that the employer-based health 
system form of insurance is fatally flawed. The fatal flaw is 
that it doesn't cover everyone. The only people it covers are 
those that are employed. And if you were going to build a 
system, which we are now looking at, the ``uninsured,'' we are 
trying to deal with those who now do not have an employer-based 
system. If we got everyone health insurance through their 
employer, it still would be flawed because there are some folks 
who don't work.
    Mr. KLECZKA. Will the Chairman yield?
    Chairman THOMAS. No. The flaw is that the system is not a 
basis that can provide universal coverage.
    Second, the gentleman said that you have a group plan with 
an employer and an individual market if you don't. Who today, 
in trying to build a plan for all Americans, would say that we 
will allow those who are able to get up and go to work every 
day, carry out functions at the work place, the healthiest 
Americans get the cheapest price for their insurance? But those 
who are not able to get up every day and work have to pay the 
highest price for their insurance. No one would build a plan 
like that.
    If we were to propose that the group plan, the lowest rate 
would go to the healthiest Americans today, we would be 
absolutely opposed to that concept. Any economist will tell you 
that when you look at wages and fringe benefits, they are 
totally related. The more fringe benefits, the less in wages; 
the more in wages, the less in fringe benefits.
    Mr. KLECZKA. Will the Chairman yield?
    Chairman THOMAS. It all comes out of the employee's pocket, 
and that at some point----
    Mr. KLECZKA. Will the Chairman respond to the quote that he 
is going to jettison the entire----
    Chairman THOMAS. At some point employees need to realize 
that the benefits they are getting come out of their pocket, 
and that at some point an educated consumer perhaps would like 
to make slightly different judgments for themselves on health 
insurance, if it were available, than the employer makes for 
them.
    Those are the points I would like you also to include as 
you examine the system. What we are talking about here is a 
modest attempt to augment a flawed system. It immediately gets 
escalated to blowing up the employer-based system. I find it 
ironic that when we try to reach out, the response is not a 
different or better idea, it is once again fearmongering in 
terms of hanging onto a system----
    Mr. KLECZKA. Mr. Chairman, I object to that.
    Chairman THOMAS. That was and is fatally flawed.
    Mr. KLECZKA. Mr. Chairman. Mr. Chairman, a point of order.
    Chairman THOMAS. The gentleman's time has expired. The 
gentleman from Louisiana wish to inquire?
    Mr. KLECZKA. There is no fearmongering here. I am basing my 
comments, Mr. Chairman, on your statements. And you didn't 
respond in your last set of remarks to your comment about 
jettisoning the entire employer-based system,
    Chairman THOMAS. The gentleman is out of order.
    Mr. KLECZKA. That is what I am talking about. If that is 
fearmongering, then you were misquoted or you misstated your 
point.
    Chairman THOMAS. The gentleman is out of order. His time 
has expired. The gentleman from Louisiana wish to inquire?
    Mr. McCRERY. Yes, Mr. Chairman. I am going to begin my 
remarks, and I may have a question, I may not, but I am going 
to begin my remarks on a positive note and end my remarks on a 
positive note. I can't guarantee the substance in between.
    But I commend the Administration for your efforts to 
address the problem of the uninsured in this country. I do 
think that the problem of the uninsured is regrettable because 
of the lives of people who are damaged by their lack of health 
insurance. I think it is also regrettable because I think it is 
one of the things driving us toward a single-payer system. It 
is one of the things driving us toward a movement for the 
government to take care of everybody in terms of their health 
care.
    And Mr. Kleczka, I guess he has left, but he tries to set 
this up as a battle between the employer-provided health 
insurance advocates and those who want an individual market. I 
believe it is a much bigger and more important battle than 
that. I believe it is a battle between those who want a single-
payer system, they want the government to provide health 
insurance basically for everybody, and those of us who believe 
in a private market for the delivery of health care in this 
country.
    Both views are legitimate, and those who hold the views are 
good Americans and they want to do what is best, I believe. Jim 
McDermott is one of those, Pete Stark is another, who believes 
in the single-payer system, and most countries in the world 
have some sort of single-payer system, so who is to say that 
they are wrong and I am right. I believe we in the United 
States can find a better way to do it, to provide a better 
quality of health care for everybody than Great Britain or any 
number, Canada, other countries that have a single-payer 
system.
    But I believe that is the battle, and the thing that I find 
troublesome about the Administration's proposal is that it is a 
toe in the water. You are just going a little ways to solve the 
problem of the uninsured, and you are using tax credits to do 
it, and I believe it will fail. Yes, it will provide coverage 
for a few more people, but the whole concept of tax credits and 
the individual market will fail, and that will add fuel to the 
fire for a single-payer system.
    So I would like a much more ambitious program. Yes, I am 
one who thinks that the employer system is flawed and we ought 
to go, big time, from employer-provided health insurance to 
individually owned and provided health insurance. I think that 
is probably the only way we are going to avoid a single-payer 
system. But if we go just a little ways and we don't do 
insurance market reforms to make sure that the individuals have 
access to insurance, if we don't do reforms in terms of either 
government-mandated or government-provided information to the 
consumer so that they can make educated, informed choices for 
their health insurance, then we will fail, and the only outcome 
will be for the government to take over the program.
    So I am unabashed in my support of going toward an 
individual-based system and away from an employer-based system, 
and make no apologies about it. I am afraid, though, that what 
the Administration has proposed is too little. However, I 
commend you for trying.
    Mr. McDERMOTT. Mr. McCrery, would you yield to a question?
    Mr. McCRERY. Sure.
    Mr. McDERMOTT. I have some analysis by M.I.T., the 
Massachusetts Institute of Technology, and the Kaiser 
Foundation that says that under the tax credit proposal, more 
than two-thirds of those using the tax credit would be people 
who are already insured. Is that----
    Mr. McCRERY. I have no idea, but reclaiming my time, the 
biggest threat, I would say to Mr. Kleczka, to the employer 
system, employer-provided health insurance system, is cost. 
Cost.
    As cost continues to go up, and we are getting double-digit 
increases this year in employer-provided health insurance, as 
those costs continue to spiral upwards, you are going to have 
fewer and fewer employers choose to provide health insurance to 
their employees. And it is a choice. There is no government 
mandate. They don't have to do it, and as costs continue to go 
up, fewer employers will provide it and the employees will have 
to pay more and more of the costs for that health insurance. 
That is the threat to the employer-provided health insurance 
system.
    So what are we doing about cost? In this proposal, not 
much. Mr. McClellan has talked about, well, it should bring 
down premiums because you are going to give them these good 
risks in the system. I think that is a bunch of baloney. You 
are not going to get enough of them in the system to do much 
good overall on premiums.
    And my time has expired, and I could say a lot more. I need 
about another 20 minutes or so. But, Mr. Chairman, with that I 
will--and I wanted to end on a positive note. I do commend the 
President for----
    Chairman THOMAS. The Chair thanks the gentleman. Others 
don't feel constrained in that way. I appreciate the gentleman, 
but others haven't felt constrained in that way. The Chair 
hates to disrupt someone on a roll.
    Mr. McCRERY. I thank the Chairman for his consideration, 
but in view of the few number of people who are here, I will 
wait perhaps for a second round. Thank you.
    Chairman THOMAS. The gentleman from Minnesota wish to 
inquire?
    Mr. RAMSTAD. Thank you, Mr. Chairman, and thank you both 
for your appearance here today and the work you are doing on 
this important problem.
    We all know the statistics: 39 million Americans, or more, 
who don't have health insurance, 8 million of the uninsured 
being children. As Mr. McCrery just stated, an 11-percent 
increase in health insurance premiums. This really comes home 
to me when I go back to Minnesota every weekend.
    I know too many people in Minnesota who are unemployed 
because of the Bin Laden recession. I know too many families 
who are hurting. I know too many adults and children without 
health insurance in Minnesota, and they live in fear, true 
fear; fear of getting sick, serious illness; fear of getting 
injured and not having health insurance. These people live in 
real fear, and they express these feelings to me only too 
often.
    So I applaud the Administration, the President, those of 
you who are working with him in the Administration to address 
this problem. We have let it linger too long, the problem of 
displaced workers and the uninsured.
    The proposal that we are talking about today, one of the 
positive, very positive aspects I believe is the fact that it 
is a large umbrella. If you lose your job, you are still 
unemployed, you are covered. You don't lose your health 
insurance. Certainly Medicaid is not the answer. Forcing 
millions onto welfare would only discourage the unemployed from 
working and threaten welfare reform.
    I want to ask you--and again picking up where the gentleman 
from Louisiana left off, because I share his concerns--I 
certainly understand and agree with the concept of refundable 
tax credits in the way you are proposing it, the way we have 
tried to advance it here on the Committee. What about, to 
answer some of the criticisms affecting those people who are 
indigent, what about doing what the first Bush Administration 
did, not only including refundable tax credits but also 
vouchers for the uninsured who are indigent?
    Mr. McCLELLAN. Good question, Congressman. Just to 
highlight that many people who are low income or have limited 
means would be helped by our health credit proposals. The 
proposal for displaced workers would give immediate assistance 
to the families that you mention that you are seeing back in 
your district, who have lost their jobs and are struggling to 
continue their health insurance or having to go without it.
    All of them, all of them who have lost their jobs 
involuntarily would be eligible for our displaced worker 
credit. In addition, people who have low incomes would be 
eligible for up to $1,000 for each individual and $3,000 per 
family under our health credit proposal.
    Beyond these proposals, the President also has supported 
strengthening every other aspect of our health care system. It 
is not a one-size-fits-all health care system.
    Mr. RAMSTAD. Pardon me. Just to interject, just to digress, 
so that means people with no tax liability whatsoever----
    Mr. McCLELLAN. Absolutely, would get the full amount of the 
assistance, so people----
    Mr. RAMSTAD. Which is tantamount to a voucher.
    Mr. McCLELLAN. I don't know if I would call it that, 
because we are planning on having them, you know, just send in 
a check for their portion of the premium, but it amounts to a 
direct payment for a large part of their health insurance 
costs.
    Mr. WEINBERGER. Can I just add, Congressman Ramstad, the 
way that it is structured with the advanceability gives real-
time money so that these individuals when they go pay their 
premiums will get a subsidy amount that they will include with 
the premium payment, so they will pay a lower cost for those 
premiums. So that is advanceable. If they don't want to take it 
that way or for some reason they would also like to take it on 
their tax return, they are also allowed to do it that way.
    Mr. RAMSTAD. Well, I think this makes eminently good sense. 
The other element of the plan that is very appealing, the 
flexible spending accounts, the FSAs, I think again a very, 
very useful way to approach this problem. Could you just 
briefly elaborate on the FSAs? I think it is important to 
explain.
    Mr. McCLELLAN. Sure. The flexible spending accounts 
basically allow individuals to roll over $500 or to take that 
$500 out. The purpose of doing that, of course, is currently a 
``use it or lose it'' plan. So at the end of the year you find 
individuals making some expenditures they might not otherwise 
want to make or need to make, in order to use up that money in 
the account.
    And so we give them the ability to roll this de minimis 
amount over into a future year. It also, we hope, will increase 
the take-up rate, because then people don't have to try and 
target the amount that they want to put in these flexible 
spending accounts to the exact dollar that they otherwise would 
expect to spend.
    Mr. RAMSTAD. Well, thank you very much. Just a final brief 
comment. You know, some of the hyperventilating notwithstanding 
here today, I truly hope we can work in a bipartisan, pragmatic 
way and do something about this other than simply verbal 
exchange this year. There are a lot of people hurting and we 
need to address the problem. You are addressing it. Thank you. 
I yield back.
    Chairman THOMAS. I thank the gentleman. The gentlewoman 
from Florida wish to inquire?
    Mrs. THURMAN. Thank you, Mr. Chairman.
    Welcome, and we are glad you are here. I am going to go 
through a scenario, and I will tell you it came from the Center 
on Budget and Policy Priorities, but I think it sets it out in 
a kind of a way that Members might understand a little bit of 
what is going on and some of the concerns that we might have.
    And prefacing that and saying that I probably, like has 
already been mentioned, was one of those that thought we ought 
to give tax credits to farmers, tax credits to the self-
employed and those. I mean, I think we all have looked for ways 
to try to bring in the uninsured into a system that works for 
them. But I am very concerned that we are disrupting something 
that is already taking place in the marketplace, and really 
just looking at one system of where we just give it to people 
outside of the system or move outside of the system, instead of 
closing some gaps that we have in the system that is already 
there.
    So the story is, if you assume a company provides a 
comprehensive health insurance play to its two employees, John 
is 28 with a healthy family of three. The cost of the family 
coverage plan for John through the employer-based system would 
be $3,000. Mary is a 45-year-old woman with a family of three 
that has a history of chronic, serious medical problems. The 
cost of a plan for Mary is $12,000.
    However, because both workers are in the same health 
insurance pool, the health insurance cost through the company 
averages to $7,500 a year. Since the company subsidizes 80 
percent of the cost of health insurance, it would contribute 
$6,000 per year for the cost of health insurance and the 
workers would pay $1,500 a year.
    If John instead buys health insurance for his family in the 
individual market, he might be able to purchase a policy that 
costs about $3,600. It is a little bit more than the cost of a 
plan in the employer-based system, since individual insurance 
is usually more expensive than the employer-based coverage for 
the same level of coverage. Because he and his family are in 
excellent health, they can obtain a policy in the individual 
market.
    Under the Administration's proposal, with a tax credit of 
$3,000, John can save $900 a year by dropping his employer-
sponsored plan and buying a plan in the individual market. His 
net cost is $3,600 minus $3,000 or $600, while he currently 
pays $1,500 for his employer-based.
    But if John drops out of his employer's plan, then only 
Mary is left in her company's health insurance pool, and the 
average cost of insurance for the firm rises from $7,500 to 
$12,000. If the company continues to subsidize at 80 percent of 
the cost of health insurance, the employer contribution toward 
her insurance would rise to $9,600 because John is no longer 
there and available to bring the average cost of insurance 
down.
    Accordingly, Mary's premium would rise from $1,500 to 
$2,400. It is likely that Mary would be unable to afford the 
higher premium and continue to participate in her employer's 
health insurance plan. She and her family would be eligible for 
a $3,000 tax credit to buy health insurance in the individual 
market, but because of the medical problems obviously that 
would not work.
    And just in a note, there in Florida you might know they 
closed their high-risk pool. They were $100 million in deficit. 
Mary may live in Florida. She has no place to go at that point.
    But on the other hand, if Mary's company may be unable to 
increase its contribution to the cost of health insurance, it 
might just balk at increasing the company contribution by 
$3,600 per year, making it more likely that Mary would be 
unable to afford the employee contribution, or decide against 
offering health insurance altogether, which the company could 
do, knowing that Mary has a tax credit available to purchase 
coverage in that individual market.
    In this very simple example, John has used his tax credit 
to buy insurance in the individual market, but since he already 
had insurance, there is no net reduction in the number of 
uninsured people. On the other hand, it may become harder for 
Mary.
    I know that is a long thing, and I am sure that at some 
point--so the question is, you know, I understand why you are 
trying to do what you are doing, but why would you not open 
this up, instead of being disruptive to the total market, to 
the businessman? Why would you not put the incentive with the 
businessman as well to offer that insurance and to give that 
tax credit? Why would we just do it on an individual basis? I 
am very concerned about these kinds of stories that we are 
going to come back and hear because we have disrupted a market 
that is working.
    Mr. McCLELLAN. We totally agree with you about the 
importance of closing gaps in the system and strengthening all 
parts of the system. Just one factual point on that example you 
gave. John, the employee who would go outside of the pool and 
would take this additional income, would have to pay taxes on 
that income, so it is going to be worth substantially less. 
And, unless he was a very low-income worker, he is not going to 
get the full value of this tax credit.
    So the result of that is that there isn't very much 
crowding out of employer coverage. Around 1 percent of 
employees who have health care coverage now through their 
employers would take this option instead. It is a very small 
part of the pool, and that is because there are such big tax 
subsidies through the tax deduction for this unlimited into 
employer coverage, and there also are the benefits of employer 
contributions and the pooling that employers can provide.
    In addition to implementing this proposal, however, we 
agree with you that we ought to strengthen employer coverage. 
We have proposals like the flexible spending account proposal, 
so that people like Mary would have to pay less after tax in 
their out-of-pocket health care cost. We have other proposals--
--
    Mrs. THURMAN. But we already have a cafeteria plan. I mean, 
we can do that today.
    Chairman THOMAS. I thank the gentlewoman for showing some 
of the flaws in the current system. The gentlewoman from 
Washington wish to inquire?
    Ms. DUNN. Thank you very much, Mr. Chairman. And gentlemen, 
thank you for coming today. I have appreciated very much the 
work that we have all done together over the last year, the 2-
hour meetings that we have done through many, many weeks, and I 
think the consistency of your being available to answer our 
questions and work with us on a bipartisan basis needs to be 
noted for the record.
    I wanted to go back to something Mr. Kleczka was talking 
about. The President and other folks who are supporting tax 
credits to reduce the uninsured I think are on the right track, 
but I really would like your opinion on whether you believe 
that these tax credits might cause some employers to drop their 
health care coverage. And if you believe that that is where the 
incentives are headed, what can we do right now to prevent that 
sort of erosion?
    Mr. WEINBERGER. Congresswoman, as I think was discussed, 
the purpose and aim of this credit was to have minimal 
disruption of any insurance offered in the employer-provided 
market. When you expand any incentive to individuals, there is 
a risk that some might leave an incentive that they have 
somewhere else, like through the employer-provided system. The 
same would be true if you expanded Medicaid or any other type 
of proposal to cover people who currently don't have benefits 
or try to aim at that market.
    As we suggested, out of the 170 million people who are in 
the employer coverage--that was the number, I think, that Mr. 
Kleczka used--our estimate is that less than 1.5 million or 
less than, 1 percent, would actually leave the employer market. 
The vast majority of people that would take the benefit of this 
incentive, again which is aimed at those people who don't have 
the benefit of employer coverage in these cases, are 
individuals outside that market.
    And so, obviously this is an issue we have got to watch. It 
is important to look at how the effect of these individual 
incentives will affect the employer market. But we designed 
this in a way that it is targeted to those individuals who 
would least likely be in a position to leave the employer-
provided plan.
    Ms. DUNN. Good. That is important for us to note.
    I wanted to ask you a question having to do with my part of 
the country. I am from the Seattle area, and as you know, many 
folks out there are currently losing jobs, work for Boeing, 
Northrop, other companies, and so we are not in a great 
position right now. In fact, we are number two on the list of 
the highest unemployment numbers in States around the Nation, 
after Oregon.
    As we talk about the uninsured, I would like for you to 
reiterate in a way that is easy to understand, the difference 
between your policies and how you would approach the problems 
of the uninsured when it comes to coverage, and the unemployed.
    Mr. McCLELLAN. Can I highlight proposals that I think would 
be of great assistance in the immediate future for people in 
your district who have lost their jobs? And you are right, 
there are a huge number of them. The President spent some time 
out on the West Coast lately, and has seen firsthand how 
important it is that we do something right away to help them.
    Our displaced worker credit could be implemented within a 
few months, and as soon as it is implemented, those workers 
would know that they have got help on the way. They will know 
that premiums that they have to pay now are going to get 
reimbursed at the end of the year, 60 percent of the premiums 
will, and they will know that within just a few months they 
will able to pay much lower costs for continuing their health 
insurance because they can use the advanceable credit.
    Sixty percent of their costs of health insurance, while 
they are buying it, would be paid directly by the credit. And 
this would enable the vast majority of people, not only in your 
district but around the country, who have lost their jobs to 
continue health insurance coverage, whether it is COBRA 
coverage if that is what they prefer, or mini-COBRA coverage if 
they are in a State that has similar laws to COBRA, that are 
not the same as COBRA but that allow people in small firms to 
continue their coverage, like Washington does.
    And it would also allow people who are purchasing coverage 
outside of their employer. Many displaced workers do not have 
employer coverage to begin with. That is 10 percent of the non-
elderly with health insurance today don't have employer 
coverage to begin with. They would get help.
    So all of these displaced workers would get help quickly, 
without the need for further State legislation to come up with 
matching funds and set in place some new kind of unprecedented 
Medicaid expansion, and without the need for mandates on 
employers like Boeing that are facing enough problems right now 
without the government telling them yet more things that they 
have to do in a difficult economic time.
    Mr. WEINBERGER. Congresswoman, could I just underscore one 
thing that Mr. McClellan said, I think is important? Because 
the proposal we have for the displaced worker would help those 
at Boeing, but it would also help all the small businesses in 
your State as well. And that is one of the concerns we had 
about the COBRA credit. Where small businesses generally don't 
provide COBRA, they would not qualify for this immediate 
benefit.
    Ms. DUNN. I think that is very important, Mr. Chairman, and 
I think that needs to be reiterated, this business of being 
willing to cover COBRA payments that folks get when they work 
for big businesses, but the fact is, the small businesses can't 
provide that sort of coverage. For example, if you work for a 
company that has fewer than 20 employees and you try to get 
COBRA, as I once did, you can't get covered for anything. How 
do you suggest that we incentivize small businesses to provide 
affordable health insurance coverage?
    Mr. McCLELLAN. We have a number of proposals in our budget 
to help small businesses provide affordable coverage. One of 
them is our association health plan proposal, which would make 
it possible for small businesses to pool together just like 
large corporations do to offer a lower-cost range of health 
insurance options to their employees. This is a proposal that 
is strongly supported by the small business lobby, would enable 
groups like the Chamber of Commerce, other organizations, to 
serve as a conduit for health insurance for those.
    Chairman THOMAS. The gentlewoman's time has expired. The 
gentleman from Georgia wish to inquire?
    Mr. COLLINS. Yes, sir. Thank you, Mr. Chairman.
    You know, I very well understand the intent of what you are 
trying to do with your proposal on the tax credit. However, I 
have a real problem with the tax credit provisions, because as 
you issue a credit on one side, someone has to make it up on 
the other side if you are going to have a balance in your 
Treasury. And, two, to me you are creating an entitlement 
within the Tax Code, one that is means tested, based on income.
    So you have a situation where you are creating an 
entitlement for certain incomes to be able to get a credit, a 
refundable credit. Then you have others who will be paying the 
tax that covers that credit, based on a means test. I don't 
like that at all.
    It has been talked about the employer-based insurance, 
where the employer provides insurance, versus privately 
purchased insurance. There is a real difference in employer-
provided, whether it be all of the premium or part of the 
premium for the employee, because the employer gets to deduct 
that from the cost of operation. But if it is privately 
purchased insurance, the employee does not get to deduct from 
their taxable income.
    I will give you an example of a small business in a little 
town in Georgia. It is a sub S corporation, three employees. 
Two of those employees actually have other jobs also, and those 
two are covered under group insurance or insurance from the 
other employers. One employee is covered with a private policy 
paid for by that sub S, but at the end of the year the premium 
for that policy has to be added to the income of that employee, 
no deduction anywhere.
    And based on your means testing, your entitlement program 
that you are setting up through the tax credits, his income of 
he and his wife would just exceed what you are trying to do, so 
he has no assistance at all, but he will be paying additional 
income tax to help support what you are doing. I think you are 
totally wrong in your approach with the tax credit. I think 
what you need to look at is how you can assist an individual 
for their income, as far as a deduction for the cost of 
premiums.
    You know, there are all types of programs out there when it 
comes to health care. Some we are embarrassed to participate in 
because it may make us appear to be indigent or it may make us 
appear to be poor. But I am also concerned that we put in place 
programs that disincentivize a person's will to work because of 
increased, increased, increased government programs that offset 
that will.
    I would be very careful as to how I took an approach to 
this situation with tax credits. I am afraid the tax credits 
will come back to haunt you in the end. Thank you.
    Mr. McCLELLAN. Representative, we certainly appreciate your 
caution. I think a number of the comments here at the session 
today have indicated how difficult and careful we must be in 
approaching the problem of uninsurance, and also how there is 
not just a one-size-fits-all solution that is going to address 
every gap and problem with our health care system.
    We do think that health credits can provide important 
assistance for some individuals who are having trouble 
purchasing individual coverage today, but we don't pretend that 
this is our whole solution to the problem of uninsurance. We 
have a range of other proposals that will strengthen employer 
coverage and that will also help people like the individual you 
describe get more affordable coverage.
    For example, he could potentially be eligible for our 
health account proposal. This would allow him to deduct his 
out-of-pocket payments for health care and to get better 
protection at a lower cost for seeing the doctors that he wants 
and getting the treatments that he prefers. This is another 
part of our entire agenda on health care coverage. So we would 
very much like to take steps to help that kind of individual at 
the same time as we are helping lower-income families.
    A final point on this, on the refundable credit, is that it 
is not based on your current income. The advanceability is 
based on prior year's income, so that we are encouraging people 
to get help when they need it most and then to get back into a 
good job that can provide them coverage as well.
    Mr. COLLINS. Young man, take your blinders off and the 
plugs out of your ears and listen to what people are trying to 
tell you. Government can't do everything for everyone. It won't 
work. You are digging a hole that we can't get out of. We can't 
financially cover everything that you want to do.
    We are debating campaign finance reform today. The biggest 
problem in this town is, we use the Treasury to develop 
programs for voter base, and we are digging the hole deeper and 
deeper, and what you are doing with this is, you are using two 
shovels instead of one.
    I was at church Sunday. The pastor says, ``Man who doesn't 
work, doesn't eat.'' Don't put in place disincentives for man 
to work, that the government is going to take care of everyone 
from the womb to the tomb. It won't work, fella. Take your 
blinders off and the plugs out of your ears and listen to what 
people are trying to tell you, people who are paying the bill. 
That happens to be my business. That one person happens to be 
my brother-in-law. Thank you.
    Chairman THOMAS. I thank the gentleman.
    Several Members have indicated they would like a brief 
second round if possible, and if we can be brief in our 
questions and brief in our responses, we might be able to 
accommodate the Members.
    The gentleman from Washington?
    Mr. McDERMOTT. Thank you, Mr. Chairman.
    I have been sitting here thinking about my aerospace 
mechanic, so I am back to him. He is now unemployed, and he 
goes down to the unemployment office, and I heard you say that 
he fills out his application for his unemployment and while he 
is there, he fills out an application for some kind of a tax 
credit for his health insurance.
    Now, if he exercises his COBRA option and wants that money 
applied to what he already has with Aetna or whoever it is, you 
would send the money from the government directly to Aetna?
    Mr. McCLELLAN. Yes, sir, that is correct.
    Mr. McDERMOTT. And would you wait until his--where would he 
send his part of it? Would he have to send it to Aetna?
    Mr. McCLELLAN. He would send, just like he would do 
otherwise, he would send his check to the insurance company for 
his part of the premium, and the credit would make up the 
difference.
    Mr. McDERMOTT. So if he missed a payment and it ended his 
insurance, how would you know when you should stop sending your 
checks to Aetna because he isn't covered anymore?
    Mr. McCLELLAN. Well, there would be a reconciliation 
mechanism in place to make sure that the employee is still 
eligible for unemployment insurance and also is still making 
the actual payments on his health insurance. The insurance 
company couldn't get reimbursed by the government for a policy 
that they are not providing.
    Mr. McDERMOTT. So that would be one way you would get it 
back. Now, let's suppose he gets down the road and something 
happens and he says, ``Wait a minute, I can't afford $7,000 a 
year, so I've got to reduce my costs here, and the jobs don't 
seem to be coming back, so I want to go out and get one of 
these programs on eHealth or whatever I can find somewhere for 
$3,000.'' Now, can he come back and change it with you?
    Mr. McCLELLAN. Yes.
    Mr. McDERMOTT. And so you are perfectly willing to allow 
him to take a lesser coverage?
    Mr. McCLELLAN. Well, our goal is to help the people get the 
coverage that they most prefer, the coverage that best fits 
their needs. So if individuals are not eligible or are not 
offered good COBRA options, then they would be able to use the 
credit for other coverage choices, as well.
    Mr. McDERMOTT. So if this, you are essentially saying that 
if this chart from eHealthInsurance is anywhere close to 
correct, you would be willing to pay for a policy where there 
was no guaranteed set of benefits, just you are going to send a 
premium out for $3,000 for something that might not cover the 
emergency room or doctor's visits or anything else.
    Mr. McCLELLAN. There are some coverage requirements in the 
proposal and in the bill that passed the House, and they are 
consistent with a broad health insurance plan. Again, we think 
it is in the best interest, especially these workers, as you 
mention, they are on limited income, they are between jobs, and 
they need coverage that fits their unusual current 
circumstances. So we would prefer to put our faith in them to 
choose the coverage that is best for them, subject to the 
health insurance standards in the bill.
    Mr. McDERMOTT. One thing I didn't understand, though. You 
said the bill that passed the House had some coverage 
requirements. Which bill was that?
    Mr. McCLELLAN. This was the economic stimulus bill.
    Mr. WEINBERGER. Yes, you are referring, Congressman, to the 
Displaced Worker Credit which was part of the stimulus bill, so 
that was the one.
    Mr. McDERMOTT. And there was coverage requirements in 
there?
    Mr. McCLELLAN. Yes, there were HIPAA, Health Insurance 
Portability and Accountability Act 1996, standards of coverage.
    Mr. McDERMOTT. Where were they? I mean, does anybody know?
    Chairman THOMAS. Yes, there were standards that are 
currently in the law----
    Mr. McCLELLAN. Accepted benefits that are currently in the 
law, in HIPAA. It's the same as current law, correct.
    Mr. McDERMOTT. So they covered major medical and doctor's 
office and so forth?
    Mr. McCLELLAN. They are the standards in law for private 
health insurance premiums, for private health insurance plans.
    Mr. McDERMOTT. But that was only a guaranteed issue 
question, wasn't it? Were there actual standards beyond that in 
terms of what had to be covered?
    Mr. McCLELLAN. The HIPAA legislation describes what 
constitutes a health insurance plan for purposes of the 
legislation. It excludes, you know, disease-only plans, narrow 
cap benefit plans, things like that.
    Mr. McDERMOTT. Okay. Thank you.
    Chairman THOMAS. The gentlewoman from Connecticut wish to 
inquire?
    Mrs. JOHNSON OF CONNECTICUT. Just briefly, I want to put on 
the record very clearly because I think we forget, this 
Committee, this Nation provides $118 billion in subsidies to 
employer-provided health plans. There is no one listening to 
this hearing that has an employer-provided insurance program 
that isn't Federally subsidized, and a lot of us only want that 
same subsidy to go to Mac Collins' brother-in-law and people 
who don't have health insurance.
    Under my bill if you are at certain incomes it is a credit, 
at higher incomes it is a deduction. Everyone ought to have the 
same access to the subsidy of health insurance that we 
currently provide to people who work, have employer-provided 
plans.
    Now, I do not agree that we should get away from the 
employer-provided program. I like that. Employers do a lot of 
good bargaining, a lot of protection. You know, there are some 
good aspects to that. And I like the Administration's emphasis 
on allowing new groupings, so individuals can use their tax 
credits or deductible status to move into new groupings.
    But I want to--I am going to assume you are going to answer 
this question in the affirmative, because I want to really get 
to the other question. I want you to take a look at my bill 
that does provide tax credits and then deductions. I know we 
can't afford it now, but it is the direction we need to go.
    And then I want to just point out, in terms of the 
uninsured, and actually in terms of the uninsured as a general 
problem, Mr. McDermott proposed a bill with a 30 percent credit 
with a lot of Democrat cosponsors from this Committee.
    What we are talking about for the unemployed, and this is 
what I want, really want to get to, on the floor we have an 
opportunity to provide a 60 percent premium subsidy, double the 
subsidy that has ever been proposed and more generous than my 
tax credit, I believe, for unemployed people without health 
insurance. This is a 60 percent premium subsidy, so this is a 
powerful assist to the uninsured and unemployed. And I just 
hope that we won't lose track of what we are doing here.
    And what I want to ask you is, what is the comparison 
between our 60 percent subsidy for essentially all the people 
that are unemployed, versus their subsidy for just those who 
have COBRA or have Medicaid coverage? Now, a lot of people who 
are working don't want to go on a welfare program, and Medicaid 
is a welfare program. And a lot of States can't afford to 
increase their welfare spending right now anyway.
    So this is a big difference, and we are going to be out 
there on the floor this week or next week. We are going to have 
the chance to vote to give people who are struggling with 
unemployment the opportunity to have a 60 percent premium 
subsidy, whether they work for a company who offers COBRA or 
whether they don't. And I think you need to give us a little 
better insight into the power of the proposal you are 
recommending we work on, that we have developed, versus the 
alternative that is going to be on the floor, that is going to 
help many fewer people with a much less powerful subsidy. Now, 
that is my question.
    Mr. McCLELLAN. Congresswoman, we couldn't agree more about 
the need for bold action right now, and we think the proposal 
that the House has developed, has already passed once, ought to 
become law to provide this kind of assistance to people who 
have lost their jobs. We think it is a far more effective 
proposal than others that have been put forth.
    The President really laid out two goals for us on what our 
objectives should be in providing assistance with health care 
costs for workers. We need a proposal that can be implemented 
quickly, we need a proposal that can be targeted to all people 
who have lost their jobs involuntarily, and this proposal wins 
on both counts.
    COBRA subsidies are not only difficult to implement because 
they impose new mandates on businesses, they are also poorly 
targeted to people who have lost their jobs involuntarily. Most 
of the people who would be eligible and most of the subsidies 
under the COBRA proposal would go to people who did not lose 
their jobs involuntarily.
    The Medicaid proposals are not the right medicine for 
people who want to continue their coverage, their private 
insurance coverage, but don't happen to be eligible for COBRA. 
It cannot be implemented quickly. As Chairman Thomas pointed 
out, most States are not in a position to expand coverage to 
populations that are not their core Medicaid populations, the 
low-income families and low-income seniors that really do need 
help now, and that we really want to help the Medicaid and 
SCHIP programs focus on.
    So this is a far more effective way to get help to people 
who need it quickly, and we appreciate your support for seeing 
it become law.
    Mrs. JOHNSON OF CONNECTICUT. Thank you.
    Chairman THOMAS. The Chair notes that we are under second 
bells on a vote on the floor. Any other Member wish to inquire 
briefly? The gentleman from Louisiana?
    Mr. McCRERY. Yes, Mr. Chairman, just to continue on my 
concern about the cost of health care, and I know that you all 
have thought about that because I have had discussions with you 
about health care costs and where they are going, and what we 
can do to try to stem the upward spiral of health care costs. 
And I notice that in your tax credit proposal, not for the 
unemployed but in general, you do cap that by income, so you 
limit that subsidy to low-income folks, or really not low-
income folks, but at least you cut it off at $60,000 for a 
family, and that is a start.
    The fact is that the tax subsidy that Mrs. Johnson spoke 
about for employer-provided insurance is not the only subsidy 
that those employees get. They also get a subsidy from their 
employer. So not only do they get a tax break, and depending on 
your tax bracket, I mean, it could average say 25 percent that 
you are going to get, a cut on the cost of the premiums from 
the tax subsidy, but you are also getting 50 percent, 75 
percent subsidy from your employer.
    So the employee that is getting that tremendous subsidy for 
his health insurance has no idea generally what it costs, 
really, so he has no price sensitivity in the marketplace. He 
doesn't care generally how much health care costs. He knows it 
is covered, so he gets it.
    When you subsidize something, you get more of it, and you 
are going to subsidize more health insurance so we are going to 
get more health insurance. But you are also subsidizing health 
care, and you are going to get more health care when you 
subsidize it more.
    I am just wondering, since the Administration put in your 
proposal some cap here for your general tax credit, did you 
consider and would you consider some cap on the tax subsidy 
that we provide, so that we can start to bring some price 
sensitivity back into the marketplace for health care?
    Mr. WEINBERGER. Well, we have not, as you know, designed 
this proposal to look at the employer system. We have designed 
this proposal to reach out to those people who are generally 
not covered by the employer system, and the cap that we have 
was aimed at actually trying to minimize to some degree what 
others have raised, which was having employees leave the 
employer market in this circumstance.
    What you are talking about, Mr. McCrery, obviously is a 
much broader reform proposal, and we are certainly willing to 
sit down and talk about that, but this proposal was not 
designed with that type of a thought process in mind.
    Mr. McCLELLAN. I would also like to add that the President 
certainly shares your goal of helping make sure that people 
have affordable coverage options and they are not just given, 
you know, one plan that provides very generous coverage and no 
other choices. The President laid out on Monday, in his speech 
about his agenda for the future of health care, the importance 
of giving all Americans a range of choices about how to get 
their coverage, and it is through that kind of competition that 
our private health care system can find innovative and more 
cost-effective ways of delivering coverage. We need to 
encourage choice and competition. We need to encourage better 
information. I think your ideas go very far in that direction.
    Chairman THOMAS. The Chair does find it ironic that the 
Administration, as the way you put it was that you put a cap on 
a provision for those who do not have insurance so that we 
wouldn't undermine a system in which there is no limit on the 
availability and therefore, as the gentleman from Louisiana 
said, no discretion in price sensitivity. Some folks find that 
pretty ironic.
    The Chair would indicate that we have a short time on this 
vote, but thank you very much for your attendance and your 
indulgence. The second panel requires some degree of electronic 
set-up, and to allow that to occur, the Committee will stand in 
recess until 1:30, at which we will then enter into the 
presentation and a discussion with the second panel. The 
Committee stands in recess.
    [Recess.]
    Chairman THOMAS. The Chair thanks the Members of the panel. 
Members will be coming back from the vote. As you may know, 
there is a degree of construction going on, and we are 
currently running a gauntlet trying to get back and forth.
    This panel will consist of Dr. Stuart Butler, Vice 
President, Domestic and Economic Policy Studies, Heritage 
Foundation; thanks for being with us. Iris Lav, Deputy 
Director, Center on Budget and Policy Priorities; Jeff Lemieux, 
Senior Economist, Progressive Policy Institute, and Vip Patel, 
Founder and Chairman of eHealthInsurance, Inc., in Sunnyvale, 
California.
    Due to the antiquated wiring in this room, any attempt to 
go electronically produces a reverb back through the system. 
And so to assist Members, although logically we would probably 
like a general discussion and then some specific examples, the 
Chair will request that the other Members allow us to allow Mr. 
Patel to go first, so that if there are any questions of his 
presentation, we can conclude that and then perhaps turn that 
system off so that Members would not get the reverberation back 
through their microphones.
    Each of you have a written statement. We will accept the 
written statement for the record, and within the time allowed, 
you may respond to us in any way you wish to present your 
arguments or position. Mr. Patel, nice to see you again, and 
would you please begin the panel?

STATEMENT OF VIP PATEL, FOUNDER AND CHAIRMAN, EHEALTHINSURANCE, 
                  INC., SUNNYVALE, CALIFORNIA

    Mr. PATEL. Mr. Chairman, Mr. Rangel, Mrs. Johnson, Mr. 
Stark, and Members of the full Committee, over the last 5 years 
the process for individuals seeking to purchase their own 
health insurance has gone through a dramatic positive 
transformation, and in these next few minutes I would like to 
contrast the old, inefficient way of purchasing individual 
health insurance, a process which took weeks, to a new way of 
shopping online, a process that could take as little as an hour 
and in which the consumer is much more empowered.
    The old way versus the new way. First, in just finding a 
broker, many people don't know where to go to find a broker. In 
the old way, people might turn to their friends for a referral 
and possibly schedule a meeting with a broker days later. In 
this new way, people search on Yahoo or their favorite search 
engine. They are presented with a wide variety of resources for 
health insurance shopping, from insurance carriers themselves 
to thousands of health insurance brokers with Web sites, to 
national marketplaces like www.ehealthinsurance.com.
    In this example I am entering the zip code of Congressman 
Stark's district in California, which also happens to be the 
headquarters of eHealthInsurance. A full list of policy options 
will be presented without entering any personally identifiable 
information, and only the ages of those to be covered, so let's 
input a family of three. Please note the convenience of Web 
sites operating around the clock, 24 by 7, and you can talk to 
a licensed professional on a toll-free number.
    Number two, comparison shopping across a wide range of 
insurance companies. In the old way, some brokers specialize in 
only one or two insurance companies. For example, a broker may 
emphasize a policy from Blue Shield because they could win that 
special trip to Hawaii, and that may not be in the optimal 
interest of their customer. Hence, a consumer may need to see 
several brokers to explore a broad selection of options. But in 
this new way, consumers can explore a wide array of options 
with one stop shopping. Take a look at this first column here, 
a highly competitive marketplace with a number of insurance 
companies fighting for your business.
    Number three, getting an unbiased look at all the price 
alternatives. In the old way, a broker may ask about your 
employment and budget to qualify which insurance products to 
recommend to you, and of course the higher the price, the more 
commission made by the broker. But in the new way, the full 
range of insurance products of each company is presented to the 
consumer, and at eHealthInsurance this is done by showing the 
lowest price all the way to the highest price products, and I 
think here there is a 7X delta between the lowest and the 
highest. We believe consumers want unbiased presentation where 
they can sort by factors important to them, and here we will 
sort by deductible.
    Number four, obtaining a clear, apples-to-apples comparison 
of what you are buying. You know, health insurance is full of 
confusing, industry-specific jargon, and in the old way 
comparing options is made even more difficult when you are only 
able to see the benefit information across a few policies on 
several different pieces of paper. But in this new way there 
are online glossaries to instantly explain unfamiliar terms, 
such as the definition of an HMO or a PPO.
    And then most powerfully, with the click of a few buttons, 
a number of different policies can be compared by a wide range 
of features for apples-to-applies comparison. Consumers can 
pick from HMOs, PPOs, MSAs (medical savings accounts), 
indemnities, etcetera, but in this example let's narrow our 
focus to comparing three different PPOs that all have a $1,000 
deductible, that all have 20 percent co-pay, to see what really 
makes them different, and I think the details will be easier to 
see in the handout that you have been given.
    But in this example we find that if you are anticipating 
the need for prescription drugs or maternity care, maybe the 
Health Net or the Blue Shield products may be good, but if you 
are a single healthy male, the Blue Cross PPO could be the best 
value. However, the deciding factor could be whether your 
favorite doctor is part of the plan, and in most cases health 
plans make their physician directories available right online.
    Finally, in the old way versus the new way of completing an 
application, it is no surprise that applying online gets the 
consumer health insurance faster than communicating by mail.
    Now, every day people approach eHealthInsurance with the 
misperception that health insurance is prohibitively expensive, 
but when they see the range of options, starting with some with 
very low prices, many of them find that they can in fact afford 
health insurance. And of course many more people could afford 
health insurance if the government were to provide economic 
assistance.
    No one solution will solve the entire problem. Although 
some of the unhealthy and impoverished uninsured need specific 
solutions, I do believe honestly that tax credits represent one 
of the most impactful solutions for the working uninsured and 
the newly displaced uninsured, which together make up over two-
thirds of the 40 million uninsured population.
    eHealthInsurance just performed an analysis of 20,000 
single policies sold, not just random quotes as you might find 
in some of these documents, the actual sold policies in the 
United States representing 93 percent of the U.S. population. 
So this new data shows that the average price of a policy was 
$159 per month or $1,900 per year, with the majority of these 
policies carrying less than $1,000 deductible.
    And even more revealing is the average price by age bracket 
compared to the percentage of the uninsured in each age 
bracket. If for example under the Bush proposal you were able 
to offer a $1,000 tax credit, then two-thirds of the uninsured, 
those 34 and younger, could get a policy for the balance close 
to $50 per month, and 80 percent of the uninsured, those 44 and 
younger, could get a policy for the balance of $100 a month.
    And with the recently passed House proposal, where the 
government pays for 60 percent of the premium, all age brackets 
could be covered with a balance close to $100 per month, and 
you could feel good about the fact that they are getting fairly 
comprehensive policies with modest deductibles. With that type 
of impact in your reach, now I'm not sure why anyone would be 
against a tax credit that could help such a large segment of 
the uninsured.
    [The prepared statement of Mr. Patel follows:]
             Statement of Vip Patel, Founder and Chairman,
              eHealthinsurance Inc., Sunnyvale, California
Introduction

     LMr. Chairman and Congressman Rangel, thank you for the 
opportunity to testify today and let me thank you both, and the Members 
of this Committee, for your interest in, and work on behalf of the 
nation's uninsured. I am present today to tell you about the experience 
of eHealthInsurance and, to whatever extent possible, provide 
information to you to help you address the pressing need to assist the 
uninsured in obtaining health care coverage.

     LYet first I want to briefly explain my background and 
more specifically, my passion for addressing the problem of the roughly 
40 million uninsured Americans today. Studies show that we need to help 
the uninsured because they allow their health to deteriorate before 
seeking medical assistance. I understand this first hand, having waited 
until suffering painful internal hemorrhaging before visiting a health 
facility, only to be turned away to a county facility because I was 
without health insurance. Studies also show that we need to help the 
uninsured because they face significant life disruption when they are 
caught seriously ill without health coverage. Again, I understand this 
vividly having watched my maternal uncle, a then-uninsured member of my 
own family and recent U.S. citizen encounter the life disruption of 
returning back to India to obtain treatment after a stroke.

      LThese personal experiences helped fuel my entrepreneurial spirit 
in becoming the Founder of eHealthInsurance.

eHealthInsurance Helping Real People in Need
     LeHealthInsurance is a nationwide marketplace for 
individuals, families and small businesses to research a wide range of 
insurance companies and then purchase the health insurance that best 
fits their needs. Surprisingly, 40% of the people who complete 
applications with eHealthInsurance state on their application that they 
have been uninsured for a significant period of time--yes, 40% of 
eHealthInsurance applicants come from the uninsured. A number of people 
approach eHealthInsurance with the misperception that health insurance 
is prohibitively expensive, but when they see the range of options, 
starting with some very low prices, many of them find they can afford 
health insurance. Of course, many more people could actually afford 
health insurance if the government were to provide economic assistance 
to overcome the affordability barrier.

    Just as important as my own story are the stories of people who 
have used eHealthInsurance to overcome their challenges of becoming or 
staying insured. Here are some of their actual statements (taken from 
TV news story transcripts):

    1. LDonna Johnson of Sacramento, California is a 35-year old single 
mom with 12-year-old son named Paul. She works as a manicurist, and 
Paul had asthma for most of his life. The two were without health 
insurance for 11 years, and paid more than $15,000 in medical bills 
out-of-pocket.

      LTo not have health insurance, and to have either you be sick or 
your children be sick and have to go to the doctor, you're scared, 
you're afraid that the doctors are going to turn you away, you're 
afraid the hospitals are going to turn you away because you're not 
insured.''

      L``It's the worst thing to have your kid in a hospital, hooked up 
to wires and machines and you don't have any money to pay for any of 
this. I didn't know what I was going to do.''

      LWhen she heard about eHealthInsurance, Johnson went online to 
see if she could get health insurance, even though she didn't really 
think she could. To her surprise, Johnson and her son were approved for 
coverage through eHealthInsurance in a few weeks. She now pays $225/
month and is fully covered, even with son Paul's pre-existing 
condition.

      L``I was just so overwhelmed by everything I had been through, 
all of the years that I had gone through without the insurance, all the 
money that I paid, (when I received the cards in the mail) I sat in my 
chair and I cried, because it was just the best feeling that I had had 
in a lot of years.''

    2. LVenus Campanelli of Chicago, Illinois is married, works part 
time, and has two children. Her husband is self-employed.

      L``We know now that we can afford (health insurance), we don't 
have to worry about that payment every month, and say `Oh, my God, this 
is taking a big bite out of our budget every month.' ''

      L``We got a cheaper deductible by half and the payments went down 
by half, for basically more coverage.''

      L``Especially when you have little ones, they fall, they cut 
themselves. My son had stitches, so (insurance) is important.''

    3. LJohn Fritz, of San Jose, California was laid off from his job 
in 2001. He is married, with two children under the age of four.

      L``(My) company did offer COBRA, but with the HR person rolling 
her eyes saying, `if you really want COBRA, here it is' . . . ``but 
it's bloody expensive.'' The company's COBRA premium would have been a 
little more than $1200/month for Fritz's family of four.

      L``When you've got two kids, you've got immunizations and who 
knows what else to worry about,'' Fritz said.

      LHe went to eHealthInsurance.com and found comparable coverage to 
his COBRA plan for only $150/month with the doctors they wanted.

      L``It wasn't three weeks before we had to put it to use when my 
newborn daughter got pneumonia. So that covered the costs right 
there.''
Real Data to Assist Policy Makers

     LThe employees of eHealthInsurance, whom I am representing 
here today, come from all parts of the political spectrum. Hence, 
eHealthInsurance is non-partisan. Over the last several years, 
eHealthInsurance has advanced a challenge to numerous policy makers to 
cut the uninsured by half by the year 2010. We've met with Democratic 
and Republican leaders in the Senate, House and with both the Bush and 
Clinton Administrations. Along with issuing the challenge, 
eHealthInsurance is prepared to help and to work alongside the Congress 
to accomplish this worthwhile objective.

     LWe discovered that policy makers and influencers seeking 
to help the uninsured are in real need of accurate information about 
the expense and comprehensiveness of health insurance purchased by 
individuals and families. Because of eHealthInsurance's national reach 
and volume, offering 10,000 different plans from 100 different 
insurers, with licenses to sell insurance in all 50 states and the 
District of Columbia, we are in perhaps we are in a relatively 
exclusive position to provide such information.

     LThat leads us to some new information we would like to 
share with the Committee today. In January 2002, eHealthInsurance 
pulled a recent sample of 20,000 individual (single) sold policies from 
its database of customers to better understand the cost and 
comprehensiveness of health insurance policies purchased by 
individuals. The following data shows the costs of the plans actually 
selected and benefits received by individuals buying on the private 
health insurance market. The purchasing behavior is representative of 
what people purchase in a health insurance plan when they pay for it 
themselves.
                               __________
Premiums Within Reach Across Most of the Country
    The average individual (single) premiums that consumers in this 
sample purchased is $159 per-member-per-month (PMPM) (which is slightly 
higher than the average family policy at $110 PMPM). On an annual 
basis, this individual premium amount equates to $1,900 per-person-per-
year. This amount is substantiated when compared to the average PMPMs 
of some of the nation's largest individual health insurance carriers. 
Such premiums are available to states representing 93% of the U.S. 
population. Almost two-thirds of the uninsured population fall in age 
brackets with an average annual premium of less than $1700, which is 
even below the overall average of individual premiums.
Health Insurance Premiums for Single Policies by Age Bracket

----------------------------------------------------------------------------------------------------------------
                                                                                                 65 and
                                                   age <18  age  18- age  25- age  35- age  45-  older     all
                                                               24       34       44       64      (4)      ages
----------------------------------------------------------------------------------------------------------------
Average monthly premium per single (1)                $102     $123     $138     $182     $262      N/A     $159
Average annual premium per single                   $1,226   $1,481   $1,658   $2,178   $3,144      N/A   $1,908
% of uninsured population by age (2)                   24%      18%      21%      17%      19%       1%     100%
% of U.S. population by age (3)                        25%      10%      14%      16%      22%      12%     100%
----------------------------------------------------------------------------------------------------------------
(1) Source: eHealthInsurance, Inc. 2001, 20,000 single policies across states representing 93.5% of the U.S.
  population
(2) Source: Health Insurance Coverage, US Census Bureau, issued Sept 2000
(3) Source: U.S. Census Bureau, Census 2000, with extrapolation
(4) Age 65 and older are covered under Medicare


----------------------------------------------------------------------------------------------------------------
                                                                  Avg.     Avg.
                                                                monthly   annual
                                                         % of   premium  premium                       Community
                 State                    Population     U.S.     per      per    Average  Guaranteed    Rating
                                                         Pop.   single:  single:    age     Issue (2)     (3)
                                                                   all      all
                                                                  ages     ages
----------------------------------------------------------------------------------------------------------------
California                                 34,501,130    12.1%     $143   $1,718       30
----------------------------------------------------------------------------------------------------------------
Texas                                      21,325,018     7.5%     $143   $1,716       32
----------------------------------------------------------------------------------------------------------------
New York                                   19,011,378     6.7%     $266   $3,198       35        Yes        Yes
----------------------------------------------------------------------------------------------------------------
Florida                                    16,396,515     5.8%     $287   $3,448       33
----------------------------------------------------------------------------------------------------------------
Illinois                                   12,482,301     4.4%     $174   $2,088       32
----------------------------------------------------------------------------------------------------------------
Pennsylvania                               12,287,150     4.3%     $164   $1,962       31
----------------------------------------------------------------------------------------------------------------
Ohio                                       11,373,541     4.0%     $153   $1,837       33
----------------------------------------------------------------------------------------------------------------
Michigan                                    9,990,817     3.5%     $161   $1,934       32
----------------------------------------------------------------------------------------------------------------
New Jersey                                  8,484,431     3.0%     $203   $2,436       38        Yes        Yes
----------------------------------------------------------------------------------------------------------------
Georgia                                     8,383,915     2.9%     $127   $1,521       30
----------------------------------------------------------------------------------------------------------------
North Carolina                              8,186,268     2.9%     $121   $1,450       34
----------------------------------------------------------------------------------------------------------------
Virginia                                    7,187,734     2.5%     $148   $1,778       32
----------------------------------------------------------------------------------------------------------------
Indiana                                     6,114,745     2.1%     $136   $1,633       31
----------------------------------------------------------------------------------------------------------------
 Washington                                 5,987,973     2.1%     $129   $1,545       34
----------------------------------------------------------------------------------------------------------------
 Tennessee                                  5,740,021     2.0%     $155   $1,866       33
----------------------------------------------------------------------------------------------------------------
 Missouri                                   5,629,707     2.0%     $172   $2,066       31
----------------------------------------------------------------------------------------------------------------
 Wisconsin                                  5,401,906     1.9%     $174   $2,090       33
----------------------------------------------------------------------------------------------------------------
 Maryland                                   5,375,156     1.9%     $166   $1,986       31
----------------------------------------------------------------------------------------------------------------
 Arizona                                    5,307,331     1.9%     $139   $1,672       34
----------------------------------------------------------------------------------------------------------------
 Minnesota                                  4,972,294     1.7%     $165   $1,975       31
----------------------------------------------------------------------------------------------------------------
 Louisiana                                  4,465,430     1.6%     $166   $1,995       30
----------------------------------------------------------------------------------------------------------------
 Alabama                                    4,464,356     1.6%     $133   $1,602       27
----------------------------------------------------------------------------------------------------------------
 Colorado                                   4,417,714     1.6%     $151   $1,816       32
----------------------------------------------------------------------------------------------------------------
 South Carolina                             4,063,011     1.4%     $137   $1,650       31
----------------------------------------------------------------------------------------------------------------
 Oregon                                     3,472,867     1.2%     $135   $1,625       30
----------------------------------------------------------------------------------------------------------------
 Oklahoma                                   3,460,097     1.2%     $133   $1,597       34
----------------------------------------------------------------------------------------------------------------
 Connecticut                                3,425,074     1.2%     $153   $1,838       37
----------------------------------------------------------------------------------------------------------------
 Iowa                                       2,923,179     1.0%     $144   $1,723       34
----------------------------------------------------------------------------------------------------------------
 Mississippi                                2,858,029     1.0%     $170   $2,038       31
----------------------------------------------------------------------------------------------------------------
 Kansas                                     2,694,641     0.9%     $121   $1,446       33
----------------------------------------------------------------------------------------------------------------
 Arkansas                                   2,692,090     0.9%     $146   $1,751       35
----------------------------------------------------------------------------------------------------------------
 Utah (1)                                   2,269,789     0.8%      $93   $1,117       28
----------------------------------------------------------------------------------------------------------------
 Nevada                                     2,106,074     0.7%     $166   $1,995       35
----------------------------------------------------------------------------------------------------------------
 New Mexico                                 1,829,146     0.6%     $164   $1,972       36
----------------------------------------------------------------------------------------------------------------
 Nebraska                                   1,713,235     0.6%     $185   $2,223       29
----------------------------------------------------------------------------------------------------------------
 Rhode Island                               1,058,920     0.4%     $181   $2,174       32
----------------------------------------------------------------------------------------------------------------
 Montana                                      904,433     0.3%     $173   $2,073       31
----------------------------------------------------------------------------------------------------------------
 Delaware                                     796,165     0.3%     $165   $1,980       31
----------------------------------------------------------------------------------------------------------------
 South Dakota                                 756,600     0.3%     $165   $1,986       42
----------------------------------------------------------------------------------------------------------------
 Alaska                                       634,892     0.2%     $216   $2,592       32
----------------------------------------------------------------------------------------------------------------
 District of Columbia                         571,822     0.2%     $143   $1,713       31
----------------------------------------------------------------------------------------------------------------
 Wyoming                                      494,423     0.2%     $128   $1,537       35
----------------------------------------------------------------------------------------------------------------
Totals                                    266,211,318    93.5%     $159   $1,907       32
Not Included:                            ............  .......  .......  .......  .......  ..........  .........
Massachusetts                               6,379,304     2.2%      N/A      N/A      N/A        Yes
----------------------------------------------------------------------------------------------------------------
 Kentucky                                   4,065,556     1.4%      N/A      N/A      N/A        Yes
----------------------------------------------------------------------------------------------------------------
 West Virginia                              1,801,916     0.6%      N/A      N/A      N/A
----------------------------------------------------------------------------------------------------------------
 Idaho                                      1,321,006     0.5%      N/A      N/A      N/A        Yes
----------------------------------------------------------------------------------------------------------------
 Maine                                      1,286,670     0.5%      N/A      N/A      N/A        Yes        Yes
----------------------------------------------------------------------------------------------------------------
 New Hampshire                              1,259,181     0.4%      N/A      N/A      N/A        Yes        Yes
----------------------------------------------------------------------------------------------------------------
 Hawaii                                     1,224,398     0.4%      N/A      N/A      N/A     employer mandate
----------------------------------------------------------------------------------------------------------------
 North Dakota                                 634,448     0.2%      N/A      N/A      N/A
----------------------------------------------------------------------------------------------------------------
 Vermont                                      613,090     0.2%      N/A      N/A      N/A        Yes        Yes
----------------------------------------------------------------------------------------------------------------
                                           18,585,569     6.5%
----------------------------------------------------------------------------------------------------------------
Total US                                  284,796,887
 
----------------------------------------------------------------------------------------------------------------
(1) Sample skewed young; age bands averaged
(2) Law requires all applicants to be issued a policy regardless of health
(3) Law requires policies to be priced independent of age and/or health

Several States Outside the Norm
    In several states such as New York, uncompetitive market conditions 
can cause significantly higher premiums across all age brackets.

                                      Health Insurance Premiums for Single Policies by Age for Three Largest States
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                          # of
                                                                       Avg.      Avg.      Avg.      Avg.      Avg.     Carriers
                                                              % of    single    single    single    single    single    Actively               Community
                     State                       Population   U.S.    monthly   monthly   monthly   monthly   monthly   Pursuing   Guaranteed    Rating
                                                              Pop.   premium:  premium:  premium:  premium:  premium:  Individual   Issue (2)     (3)
                                                                     all ages   age 18-   age 25-   age 35-   age 45-   Business
                                                                                  24        34        44        64         (1)
--------------------------------------------------------------------------------------------------------------------------------------------------------
California                                        34,501,13   12.1%     $143      $107      $132      $175      $238           7         No         No
                                                          0
--------------------------------------------------------------------------------------------------------------------------------------------------------
 Texas                                            21,325,01    7.5%     $143      $108      $124      $160      $228           7         No         No
                                                          8
--------------------------------------------------------------------------------------------------------------------------------------------------------
 New York                                         19,011,37    6.7%     $266      $243      $267      $282      $271           1        Yes       Yes
                                                          8
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1) Number of insurance companies responding positively to offer from eHealthInsurance for expanding members in individual market
(2) Law requires all applicants to be issued a policy regardless of health
(3) Law requires policies to be priced independent of age and/or health

Modest Deductibles and Co-payments
    Data from this sample shows that there is a clear consumer 
purchasing preference for lower deductibles. As shown in the chart 
below, greater than two-thirds of all

plans purchased have a deductible of $1000 or less, and close to half 
have deductibles of $500 or less. Additionally, two-thirds of policies 
have office visit co-payments of $20 or less.

------------------------------------------------------------------------
                                       % of                      % of
            Deductible               Policies      Co-Pay      Policies
                                    Purchased                 Purchased
------------------------------------------------------------------------
 $500 or less                            43.5%           $0        36.7%
------------------------------------------------------------------------
 $501 to $1000                           25.9%           $5         0.0%
------------------------------------------------------------------------
 $1001 to $1500                           7.5%          $10         9.3%
------------------------------------------------------------------------
 $1501 to $2000                           7.8%          $15         9.2%
------------------------------------------------------------------------
 $2001 to $3000                          10.0%          $20        20.1%
------------------------------------------------------------------------
 Over $3000                               5.3%          $25         6.2%
------------------------------------------------------------------------
 Total                                    100%          $30        10.7%
------------------------------------------------------------------------
                                                        $35         4.7%
------------------------------------------------------------------------
                                                        $40         1.2%
------------------------------------------------------------------------
                                                        $45         1.8%
------------------------------------------------------------------------
                                                      Total         100%
------------------------------------------------------------------------

Solid and Accessible Benefits
    87% of policies purchased by individuals can be considered 
``comprehensive'' in coverage, where comprehensiveness is defined to 
include: Inpatient + Outpatient + Labs&Tests + Prescription Drugs 
(85%). Consumers purchased mainstream health insurance plan types that 
are relatively unencumbered with utilization restrictions (e.g., HMO 
gatekeepers) or non-mainstream, minimal-coverage products.

 
Benefit Levels of Policies Selected     Product Choices by Individual
                                                  Customers
 
                            % of                                 % of
   Benefit Coverage       Policies        Product Type         Policies
                         Purchased                            Purchased
 
 Comprehensive (1)              87%   PPO                            78%
 Basic                          13%   HMO                            10%
  Total                        100%   Indemnity/Other                11%
                                       Total                       100%
 
(1) Comprehensive = Inpatient + Outpatient + Labs&Tests + Prescription
  Drugs (85%)

Tax Credits in the Individual Market: How Far Can They Go?

     LIn order to be effective in addressing the uninsured 
issue, we must identify realities of the various segments of the 
uninsured population. I find it helpful to distinguish between the 
impoverished uninsured, working uninsured, unhealthy uninsured and 
newly displaced uninsured or displaced workers. They all require 
approaches unique to their population. Let me be clear. No one solution 
will solve the entire problem.

     LAlthough a tax credit is not the only solution for all of 
the uninsured, I believe it is one of the most impactful opportunities 
for the working uninsured (25 million) and newly displaced uninsured, 
which together make up over two-thirds of the 40 million uninsured 
population.

     LBy subsidizing the health insurance premiums in the form 
of $1,000 per person such as proposed by President Bush, or 60% of 
overall premiums as recently passed by the House, most of those 
eligible will be able to afford the discretionary income to pay the 
remaining balance. Their hard earned money together with government 
assistance will get many people over the finish line.

     LIf you were able to offer the uninsured a $1000 tax 
credit, then two-thirds of the uninsured (those age 34 and younger) 
could get a policy for the balance of $50/month. And 80% of the 
uninsured (those age 44 and younger), could get a policy for the 
balance of $100/month. With the alternative proposal of the government 
paying for 60% of the premium, all age brackets could be covered with a 
balance close to $100/month. Beyond this, we can feel good about the 
fact that in most cases they are getting fairly comprehensive policies 
with modest deductibles. With that type of impact, I'm not sure why 
anyone would be against helping a large portion of the uninsured 
purchase tax credits for health insurance.
Appeal for Incremental Progress on All Segments of the Uninsured

     LAllow me to end briefly by sharing an observation from my 
experience with health care policy, even if it is nothing more than an 
``outside perspective.'' I have encountered among proponents of 100% 
consumer based, employer based or government based health care plans a 
recurring ``all or nothing'' mentality. As policymakers strive towards 
such ends, I have found the result for the uninsured to be more of 
paralysis than progress. I do not believe that any one of these 
approaches is the only solution to the 40 million uninsured. In fact, I 
would suggest that because consumer, employer and government based 
health care plans make up our insured population today and each will 
continue to be necessary components in an appropriate way of a solution 
that will make significant progress on toward reducing the number of 
uninsured.

     LThe two largest segments of the total uninsured 
population are the impoverished uninsured and the working uninsured. 
The impoverished uninsured segment consists of 23 million out of 40 
million individuals, 26% of which are below 100% of the Federal Poverty 
Line (FPL) and 31% at 100-200% of the FPL. The working uninsured 
comprise 25 of the 40 million. Obviously some of the ``impoverished 
uninsured'' are also found in this segment. The largest portion of this 
population is found among small businesses with less than 25 employees.

     LThe smaller yet no less critical significant segments of 
the total uninsured population include unhealthy uninsured and newly 
displaced uninsured, both comprising approximately 2 million out of 40 
million individuals. Although the focus of our discussion today is the 
broad set of uninsured, it is helpful to identify some of the possible 
unique solutions needed to address these segments of the uninsured 
population.

     LFor the 23 million individuals classified as impoverished 
uninsured, I was surprised at the number of people below 100% of the 
FPL that aren't covered by Medicaid. Perhaps Medicaid ought to be 
available to all individuals under the FPL to guarantee health care 
coverage to the poorest of the poor. Furthermore, I am eager to work 
with states to simplify SCHIP eligibility checking with an online 
approach that we call ``Inline with What's Online.'' Legislative 
directive and funds for online eligibility verification at the national 
level can ensure more effective distribution of SCHIP allotments.

     LIn order to address the larger segment of working 
uninsured, another place to focus may be the regulations that cause 
insurers to reject individual coverage for employees receiving 
assistance from an uninsured employer. Shouldn't small businesses that 
can't afford to purchase or administer a group plan be allowed and 
encouraged to reimburse employees to purchase an individual policy? 
Also, the working uninsured is a rich environment for implementation of 
tax credits with meaningful amounts to assist with the cost of premiums 
in the individual market.

     LThe segment of unhealthy uninsured represents those 
individuals with preexisting health conditions that cause insurers to 
deny them coverage. As I learned more about our health care system, I 
discovered high risk pools which are functioning in 28 states to offer 
guaranteed access for these ``uninsurable'' individuals. High risk 
pools subsidize the premiums for high cost individuals while causing 
little or no economic disruption to the market. Yet the greatest 
criticism of these plans is severe underfunding. Perhaps the federal 
government should assist those states struggling under the financial 
burden of high risk pools. And perhaps the federal government should be 
active in helping these pools to develop in the remaining states.
Conclusion

     LAs the data I have presented today illustrates, while 
perhaps not the answer for all of the uninsured, we believe a tax 
credit will allow a large segment of the uninsured to put the cost of a 
private health insurance policy within easier reach. Yet even as one of 
its advocates, I remind you that it is only one component of a multi-
oriented approach to a complex problem of the uninsured. I remember the 
words spoken to me in a conversation with a senior Senator regarding 
such complex issues: do the easy things first for incremental progress. 
If we turn away ideas because they won't solve the problem in its 
entirety, there is a strong chance no one will be helped. Again, thank 
you for giving me the opportunity to share these thoughts with you 
today and for your work on behalf of the uninsured.
[GRAPHIC] [TIFF OMITTED] T9970A.004

[GRAPHIC] [TIFF OMITTED] T9970A.005

    [An Attachment Is Being Retained In The Committee Files.]

                                


    Chairman THOMAS. Thank you very much.
    Dr. Butler.

STATEMENT OF STUART BUTLER, PH.D., VICE PRESIDENT, DOMESTIC AND 
          ECONOMIC POLICY STUDIES, HERITAGE FOUNDATION

    Dr. BUTLER. Thank you, Mr. Chairman, for the opportunity to 
testify on the proposal to use refundable tax credits to make, 
in my view, a real start on the task of eliminating the chronic 
problem of uninsurance. Drawing from my testimony, I would like 
to emphasize three points to the Committee.
    First, there is a long history of bipartisan support for 
refundable tax credits as one critical ingredient in the 
solution for the problem of uninsurance. Several Members of 
this Committee, as you have mentioned, right across the 
spectrum, have in recent years supported or introduced bills to 
enact health tax credits, not just you and Mrs. Johnson, Mr. 
Chairman, but Mr. Stark, Mr. McDermott, and many others. A 
bipartisan coalition in the Senate also supports the approach, 
and of course the President supports it.
    To be sure, most Members who have introduced such 
legislation emphasize it is not the total solution. In 
particular, they emphasize that steps have to be taken to make 
group coverage more available to the uninsured. I agree, and 
have included some suggestions on this in my testimony, and I 
would be happy to discuss those further when we get to 
questions. But the bottom line is that there is in fact wide 
acceptance of tax credits as one critical step toward a 
solution, so I urge you to enact that step now and move on to 
the other steps.
    Second, I would urge the Committee to be skeptical about 
many of the objections to tax credits leveled by critics. The 
claim that helping the uninsured with a tax credit will somehow 
cause the meltdown of the employer-based coverage system is 
especially misplaced. If a tax credit would cause a degree of 
so-called crowding-out, then of course exactly the same 
objection can be made against any help to the uninsured, such 
as allowing uninsured families to enroll in Medicaid or State 
children's health insurance programs (CHIP). In fact, studies 
by Professor Gruber and others show that poorly designed 
Medicaid expansions or State health programs can lead to as 
much as a one-for-one reduction in private insurance.
    The critical task, then, is to design a tax credit, or 
indeed any form of help to the uninsured, in ways that are 
least likely to reduce good coverage at the place of work. I 
urge the Committee to look carefully at the Breaux-Jeffords-
Snowe REACH Act in the Senate. Their bill includes an 
additional smaller credit for workers with employer-based 
coverage. That provision is designed to remove any incentive 
for employed workers to try to drop out of their employer's 
plan. Any tax credit program enacted by Congress also in my 
view should deny the credit to a worker who drops out of an 
existing employer-sponsored plan.
    Another claim is that the proposed credit is not enough. I 
do have to agree that a larger credit will have more impact 
than a smaller credit. Nevertheless, the evidence indicates 
that the credits being proposed would have a significant 
impact, enabling many of the uninsured to afford a basic plan. 
And of course the Federal credits could be supplemented by 
State assistance. It is also worth noting that many States have 
artificially raised the price of coverage through unwise 
coverage mandates, and they should be encouraged to permit less 
expensive, more basic coverage to be offered.
    There remains the need, however, to make affordable group 
coverage more available to families with poor medical 
histories. Washington should continue to work with the States 
to address that. As I mention in my testimony, Congress can 
help by making such vehicles as association plans and an 
expanded Federal Employees Health Benefits Plan (FEHBP) 
available within States. I would note that Mr. Stark's 1999 
bill would have made the FEHBP available to the uninsured.
    My third and final point, Mr. Chairman, is to urge the 
Committee to apply what I might call the Enron test to every 
proposal. What would the proposal mean for the thousands of 
Enron workers who have just lost their jobs? The Enron test 
indicates why proposals that would merely subsidize COBRA 
payments, either directly or with a restricted tax credit, are 
not the way to go. Such proposals in effect say, ``If you are 
fired, we will help you pay for the health insurance, but only 
if you get it through the same company that just threw you out 
on the street.''
    Mr. Chairman, a tax credit for the unemployed must allow 
laid-off workers to get insurance that they can afford, and get 
it through an organization that they can trust. Moreover, let's 
also remember that 60 percent of low-income families do not 
even qualify for COBRA coverage if they are laid off. 
Restricting help to COBRA coverage would do nothing for them.
    Mr. Chairman, it is not often that there is such a broad 
political support in Congress and the White House for a tax 
measure that would make such a difference to the daily problems 
of ordinary Americans facing economic distress. I strongly urge 
the Committee not to let this opportunity slip by.
    [The prepared statement of Mr. Butler follows:]
    Statement of Stuart Butler, Ph.D., Vice President, Domestic and 
              Economic Policy Studies, Heritage Foundation
    Thank you Mr. Chairman for the opportunity to testify before the 
Committee on this important subject. My name is Stuart Butler. I am 
Vice President for Domestic and Economic Policy Studies at The Heritage 
Foundation. My testimony represents my personal views on the issue of 
health care reform, and should not be construed as representing any 
official position of The Heritage Foundation. After decades of debate, 
there is broad bipartisan agreement that action must be taken to 
address the problem of the uninsured. There is also a growing 
recognition that although the traditional employment-based health 
insurance has in many respects been very successful in achieving good 
insurance coverage for million of Americans, for many workers that 
system does not assure stable, continuous coverage. For example:

     LThere are very high rates of uninsurance among the 
employees of small firms. According to a recent survey by the Kaiser 
Foundation, while 99 percent of large firms offer insurance, only 55 of 
firms with fewer than 10 employees do so. Among low-wage workers 
(defined as those who earned less than $7 an hour in 1996), 45 percent 
are not offered insurance.\1\ One reason for this is that employers 
trying to offer coverage to very small groups tend to face high 
administrative costs. According to data collected by the Congressional 
Budget Office, overhead costs for providing insurance can be over 30 
percent of premium costs for firms with fewer than 10 employees, 
compared with about 12 percent for firms with more than 500 
employees.\2\
---------------------------------------------------------------------------
    \1\ Kaiser Commission on Medicaid and the Uninsured, Uninsured in 
America: Key Facts (Washington, D.C.: Kaiser Family Foundation, 2000).
    \2\ Congressional Budget Office, The Tax Treatment of Employment-
Based Health Insurance (Washington DC, 1994), p. 8.

     LThe tax laws effectively force workers to accept coverage 
from their employers. The current tax system excludes from taxable 
income (federal and state income tax, and payroll taxes) all 
compensation provided in the form of employer-sponsored insurance. The 
lack of virtually any practical tax relief or similar assistance for 
the vast majority of workers without such coverage helps explain the 
high uninsurance rate among employees of smaller firms and those 
between jobs. The absence of such assistance has also discouraged the 
growth of insurance offered through large organization with which 
workers may have along term affiliation, such as their union or their 
---------------------------------------------------------------------------
church.

    Spurred by these general concerns and by the more immediate issue 
of families without insurance due to the economic slowdown and the 
direct effects of September 11th, Congress has three broad approaches 
before it. Namely:

     LApproach 1: Expand government programs to include 
millions more working families. It has always been the goal of some 
politicians and organizations to achieve a national single payer health 
system, and this would be a step towards it. But besides the chronic 
problems besetting Medicaid as well as national systems in Canada, 
Britain and elsewhere, there is strong resistance to this approach 
among Americans, as well as within Congress and the Administration.

     LApproach 2: Link any assistance to families remaining 
with their former employer's plan. Some proposals, such as that offered 
recently by the Senate Democratic leadership, would provide assistance 
to laid-off workers, but only if they continued to purchase coverage 
under COBRA. This, of course, does nothing for workers without a plan 
offered by their current or former employer. Moreover, in many cases 
laid-off workers cannot afford, or do not want, plans offered through 
their former employer--an employer in many cases who has abandoned them 
and may be in dire financial straits. Under this approach a former 
Enron worker--who has just lost his or her job and pension--would be 
told they could get help for insurance but only if they used it to buy 
coverage through the bankrupt firm that had thrown them onto the 
street.

     LApproach 3: Offer a refundable tax credit for those for 
whom employer-sponsored insurance is not a viable or sensible option. A 
number of proposals, including one from the Administration, one passed 
by the House, and plans offered in both chambers by a remarkably 
bipartisan group of members, would provide a refundable tax credit for 
the purchase of insurance. These approaches make far more sense. They 
would allow a parallel ``third way'' system to develop alongside 
employer-sponsored and government-sponsored coverage for those 
Americans who want private insurance but also want the stability and 
control that comes with a plan chosen by the family and organized 
through an organization they trust--much as members of Congress are 
able to do through the FEHBP.

        LAs important as the technical merits, a tax credit approach is 
also the most practicable option today precisely because it commands 
wide support in Congress and the Administration, and so can be 
achieved. To be sure, design issues need to be addressed and choices 
made. A refundable tax credit for health insurance can--and should be--
enacted by Congress and signed into law by President Bush.
Key Design Issues for a Tax Credit Program
    There are several desirable elements for an effective tax credit, 
especially for laid-off workers and for low-income, uninsured 
populations
1) LEligibility ideally should include those with employer-sponsored 
        coverage.
    Ideally some level of credit should be available regardless of job 
status--i.e. available to the working uninsured and insured, and to 
unemployed workers. With a properly designed credit, this eligibility 
criterion would eliminate any bias against employer-sponsored coverage 
by providing the equivalent level of help to those with or without that 
option. I suggest the committee examine Senate legislation offered by 
Senator Jeffords and others (the REACH Act, S 590). This contains a 
lower credit for employees with employer-sponsored plans. When combined 
with the exclusion, this lower credit is designed to provide a level of 
subsidy for the out-of-pocket costs of insured employees that is 
equivalent o the full credit available for the uninsured.
2) The credit should be refundable and advanceable.
    To be meaningful to lower-income families, refundability is 
necessary. So is a credit, rather than a deduction, is needed in order 
that families with low marginal tax rates receive adequate help. A 
credit also should designed to be available ``up front'' instead of 
requiring the family to wait until the end of the year. This can be 
achieved simply enough through the tax withholding system for employed, 
taxpaying individuals--in the same way that other tax benefits, such as 
the mortgage deduction or child care credit, are ``advanced.'' In 
addition, if the credit can be ``assigned'' to a health plan in return 
for a lower premium (much like federal employees receive their 
government subsidy in the FEHBP), that would make a simple alternative 
method available for workers who do not file a tax return or do not 
wish to use the withholding system. Assignment can be organized easily 
for a fixed or percentage credit with no income phase out. Income 
adjusted credits pose small complications but can be reconciled through 
the tax system.
    An unemployed person with an assigned credit similarly would face a 
reduced premium. Alternatively, a tax credit for unemployed workers 
could be paid through the unemployment insurance system. This would 
require a funds transfer between the Treasury and the Department of 
Labor, with the money then distributed to state unemployment offices 
(similar to the supplemental benefit programs delivered in this way 
since 1958). The state unemployment offices could take on 
responsibility for remitting premium payments to insurers. Unemployment 
offices would be required to inform the unemployed individuals about 
the tax credit and to provide necessary participation forms. 
Unemployment offices, which are already responsible for verifying 
unemployment, would be required to verify worker eligibility for the 
credit.
3) Different forms of credit will have different impacts.
    There are several forms of tax credits, each of which have subtly 
different effects. One is a fixed dollar credit, as proposed by the 
President and others, such as Senator Jeffords, Representative Armey, 
and in 1999 legislation by Representative Stark. This is simpler, 
making calculation of the after-credit premium cost easy for the 
insurer and recipient. Assignment of the credit would also be easy. For 
a given budgeted amount, moreover, the fixed credit does concentrate 
the assistance to those most financially needy. On the other hand, 
individuals with greater health care costs would face 100 per cent of 
additional out-of-pocket costs if they needed elaborate coverage.
    Another approach is a percentage credit, such as that included in 
the House stimulus package and in legislation offered in the past by 
several lawmakers, including Representative McDermott. This approach 
would be more expensive if it also included a minimum at least equal to 
the fixed credit, but it would help families with higher health care 
costs by reducing the marginal after-tax premium cost. In addition, by 
making it more affordable for younger, healthier individuals to 
purchase more comprehensive plans, it would reduce adverse selection 
concerns.
    Recent unpublished research by Emory University professor Ken 
Thorpe suggests that there would be very little adverse selection at 
all with a credit equivalent to the FEHBP subsidy (approximately 75 per 
cent).
4) LEmployers may be the best location through which most families get 
        coverage, even though employers are not necessarily the best 
        sponsors of coverage.
    Most people in America pay their taxes through a place of work. 
This is a very convenient system under which employers withhold income 
and Social Security taxes and send the money to the government. In 
addition, employees typically adjust their withholdings to take 
advantage of any tax breaks for which they may be eligible (for 
example, the mortgage interest deduction). Employers thus facilitate 
the tax system, but they do not in any sense design or ``sponsor'' the 
tax code. They could more appropriately be considered a clearinghouse 
for tax payments.
    The place of employment would also is likewise particularly 
convenient and efficient for handling health insurance payments. With 
individual tax credits available, employers who do not currently 
sponsor insurance could still carry out the critical clearinghouse role 
for plan choices, tax adjustments, and premium payments. In other 
words, smaller employers could handle the mechanical aspects of 
arranging for payroll deductions and premium payments (similar to their 
role in the tax collection system) without having to sponsor a plan. 
With individual credits, eligible employees could join any plan 
available in their area, not just one sponsored by their employer, and 
still obtain tax benefits. Thus, very small employers could play a very 
important role in facilitating coverage without having to organize 
coverage.
5) Avoid minimum benefits requirements.
    Some argue that any tax credit should be conditioned on the 
eligible family purchasing a health plan with a federally determined 
comprehensive benefits package. This would be a mistake. A federally 
mandated comprehensive plan would be very expensive, putting it out of 
reach for many families, and yet in many cases still would not included 
certain benefits required by some families (this has, after all, been a 
constant feature of Medicare). A comprehensive federal benefits package 
(which would be the ceiling as well as the floor for most lower-income 
families) would also invite provider lobbying to include often-marginal 
benefits. This pattern, seen at the state level, could make insurance 
prohibitive to lower-income families, as the experience of state 
mandates has demonstrated.\3\
---------------------------------------------------------------------------
    \3\ Melinda Schriver and Grace-Marie Arnett, ``Uninsured Rates Rise 
Dramatically in States with Strictest Health Insurance Regulations,'' 
Backgrounder 1211,(Washington: The Heritage Foundation, August 14, 
1998).
---------------------------------------------------------------------------
    If Congress unwisely insists on a benefits package, it should be 
for a minimum package, primarily catastrophic insurance protection, and 
not comprehensive coverage. It should also be in the form of broad 
areas of coverage, such as hospitalization and major medical, similar 
to the requirements for plans in the FEHBP or the California Public 
Employees' Retirement System (CalPERS), rather than a precisely defined 
set of specific benefits, such as Medicare fee-for-service.
6) LWashington should work with states to make new forms of groups and 
        intermediaries available as vehicles for insurance.
    The individual market does not have to be the only choice for 
coverage. Indeed, with a tax credit reducing the obstacles to new forms 
of group emerging, it is likely that other purchasing options--in some 
cases similar in structure to employer-based coverage--would begin to 
emerge. This development can be hastened through government action.
    Four types of groups are particularly attractive additions to 
traditional employer-sponsored coverage.

     LAffinity groups. Several common institutions in American 
communities are well placed to serve this function for insurance and as 
intermediaries negotiating with insurers on behalf of families. For 
example, unions as ``friendly societies,'' have had a long history of 
involvement in health care. In addition, many religious denominations 
also have a long history of providing insurance services for their 
congregations. For lower-income African Americans and others, churches 
are a far more stable institution in the community than local public 
health and small employers, and one that has the long-term social 
welfare of families firmly in mind. These groups acting as insurers 
themselves, any more than the Mailhandlers union does in the FEHBP, but 
instead as buying agents that reach agreements with insurance plans 
that actually shoulder the risk.

     LAssociations. Various employment-related associations 
have arisen to group people together to obtain insurance without the 
employer directly sponsoring coverage. These include health purchasing 
cooperatives and coalitions and multiple-employer welfare arrangements 
(MEWAs), and they also face strict restrictions at the state level that 
affect their insurance arrangement and benefits. There have been 
proposals in recent years to create new kinds of associations that 
would be free from many state restrictions, particularly state benefit 
mandates.

     LThe Federal Employee Health Benefits Program (FEHBP). 
While technically an employer-based system, the FEHBP actually serves 
the equivalent of a small country (with nearly 10 million covered 
individuals) and offers a broad choice of plans. While a federal 
worker's immediate employer does not sponsor plans, the place of 
employment is still the ``entry point'' for selecting plans. FEHBP 
plans are regulated at the federal level, through a combination of 
general statutory and administrative regulation supplemented by a 
process of negotiations between the Office and Personnel Management, on 
behalf of the federal government, and plans wishing to market through 
the FEHBP. There have been several proposals to open up the FEHBP to 
non-federal workers under various conditions, typically using a 
separate insurance pool. On a small scale, this model could be 
implemented by states using their state employee plans.

     LLarge corporate health plans available to non-employees.

        LTax credits to individuals would remove the current tax 
barrier to large corporations' marketing their health plans widely to 
non-employees. This could mean major and attractive new options, 
especially for the uninsured and for the workers employed by very small 
firms.

        LIt is quite common for large firms to take products developed 
initially as an internal service to the firm and market them to 
external customers. For example, General Motors formed the General 
Motors Acceptance Corporation (GMAC) out of its huge automobile loan 
service and markets a broad range of financial services to non-
employees. It is even possible for people with no connection to General 
Motors to finance their house with a mortgage from GM. But this does 
not happen with health insurance, principally because the tax code 
provides no tax benefits to families buying health insurance from a 
corporate plan that is not their employer

        LAn individual tax credit would remove this obstacle, allowing 
families to join any health plan while claiming the credit. This would 
dramatically change the incentives in the current market, opening up a 
potentially large new market for existing corporate plans and an 
opportunity for many working families to obtain coverage under these 
plans.

        LOne firm whose activities hint at what could happen in a more 
liberalized environment is the John Deere Company. Intent on improving 
the health care of its own employees while reducing costs, the company 
several years ago created its own Health Maintenance Organization 
(HMO). It then began to offer coverage to other employers and purchased 
health operations to serve its new market. The company, however, has 
not confined itself to offering its expertise and facilities only to 
employer groups. Its for-profit health division, John Deere Health 
Care, also has offered coverage to individuals as a Medicare HMO and 
provides managed care Medicaid services in several states. The Deere 
Plan is also available to some federal workers under the FEHBP. Out of 
more than 400,000 enrolled in Deere plans in the Midwest and Southeast, 
less than 20 percent are John Deere employees. The tax code, however, 
makes it very uneconomic for Deere to offer coverage to groups of 
working families (except federal workers) other than through their 
employer.

    The federal government should work with the states to foster new 
forms of purchasing arrangements, in addition to the high-risk pools 
and other vehicles already being for high-risk individuals. To do this, 
Congress could enact legislation to permit a range of new kinds of 
groups, such as opening the FEHBP system to groups of the uninsured in 
each state, and new forms of purchasing groups. The federal government 
could then enter into discussions with each state to create a federal-
state package of new forms of group insurance, selected from a ``menu'' 
of the federal options combined with state measures.
Problems with Other Approaches
    Some alternative proposals before Congress would do not adequately 
provide targeted assistance for the low-income, uninsured populations. 
Among them:

     LMedicaid/SCHIP expansion. Extending Medicaid eligibility 
for the uninsured population raises a number of concerns. For one thing 
it segregates the uninsured population further from the rest of society 
with private coverage. Over 85 percent of the uninsured are in working 
homes. It makes little sense to require these families to seek coverage 
from a welfare program rather than to help them afford coverage they 
prefer. Moreover, if the family income rises and they become ineligible 
for Medicaid, there would be another break in coverage. And further, 
states are already facing severe budget shortfalls. Some 37 states 
overspent their Medicaid budgets in FY 2001, and this year Medicaid is 
already over budget in 23 states according to a survey of state budget 
officers.\4\ States are looking to keep health costs down, not burden 
themselves financially by expanding eligibility.
---------------------------------------------------------------------------
    \4\ Medicaid Budgets Under Stress: Survey Findings for State Fiscal 
Year 2000, 2001 and 2002, (Washington DC, Kaiser Family Foundation, 
2001), p. 12

     LCOBRA-only subsidies. Subsidizing only COBRA coverage, 
through direct subsidies or a tax credit, raises several problems. 
First, many unemployed workers, especially low-income workers, do not 
qualify for COBRA. Some 42 million unemployed workers are ineligible 
for COBRA and 60 percent of low-income families do not qualify.\5\ 
Second, it would give many families only the ``choice'' of a still-
unaffordable comprehensive plan when their economic conditions would 
make only a leaner plan affordable even with a subsidy. And third there 
is the ``Enron problem.'' It makes little sense to condition a subsidy 
on remaining in coverage organized by the former employer who fired the 
worker and has no other connection to the family, and who may also be 
facing severe financial problems that could lead to coverage cutbacks.
---------------------------------------------------------------------------
    \5\ Michelle Doty and Cathy Schoen, Maintaining Health Insurance 
During a Recession: Likely COBRA Eligibility (New York, NY: The 
Commonwealth Fund, 2001), p. 2

     LSubsiding the employer. Some proposals see to expand 
coverage by subsiding employers who offer coverage. But this would be 
like pushing on a string. Credits or other subsidies for employers do 
not make small firms turn into good risk pools. Even though a subsidy 
would help to offset the high administrative costs borne by small 
employers, it would not make administration more efficient or 
sophisticated, nor would it likely lead to a choice of plans. A subsidy 
would also not deal with the ``hassle factor'' that causes so many 
small-business owners to compete for workers by giving them cash 
instead of complex benefits.
Two Common Criticisms
    Critics of tax credits raise a number of arguments, two of which 
are widely heard:
Argument 1: The proposed credit is not sufficient to afford coverage 
        and so the take-up rate would be low.
    To be sure, a large tax credit would make insurance affordable to 
more families than a small credit would, just a public program with a 
large budget would cover more people than one with a small budget. If 
Congress were to raise the budget devoted to a tax credit program it 
would certainly be more effective. But there are good reasons to 
believe that the Administration and Hill proposals for credits would 
have a significant impact on the uninsured.
    First, the individual market may not be as inaccessible as 
perceived. An E-Healthinsurance survey shows that there are quite 
affordable coverage options available in most states, especially those 
who do not impose a high level of mandated benefits.
    Second, a federal tax credit should be considered a foundation upon 
which other financing bricks are added. Put another way, a $3,000 
federal credit puts the family $3,000 closer to obtaining affordable 
coverage. Under current law, and with waivers from the federal 
government, state governments can provide families with SCHIP and other 
funds to subsidize the purchase of private coverage. The federal 
government should combine a tax credit program with an aggressive 
waiver initiative designed to complement the federal credits. In 
addition, if workers could join large pools utilizing a credit, many 
small employers in a competitive labor market would have the incentive 
to make contributions on behalf of their employee's coverage as well, 
especially those employers who do not offer coverage because of the 
administrative cost.
    Third, the take-up rate of coverage is likely to be greater than 
some estimates, even at the credit levels now under discussion. A 
recent study by Pauly and Herring, for instance, estimates that a fixed 
tax credit equal to 50 percent of the cost of a standard plan would 
lead to a 48 percent reduction in the number of uninsured.\6\ 
Determining the take-up rate is difficult--as it is with, say, 
expansions of Medicaid. Two contributing factors are illustrative. If 
alternative government programs (and emergency room care) is 
inexpensive to families, this has the effect of ``crowding out'' tax 
credit-subsided coverage, leading to lower take-up rates. But if these 
alternatives are less available or more costly the take-up rate would 
be much higher. The ease of obtaining the subsidy and signing up for 
coverage is also a significant influence. With assignment and automatic 
enrolment at the place of work, take-up rates likely would be quite 
high. Evidence from pension plans indicates that an automatic 
enrollment system for health insurance could have dramatic effects on 
sign-up rates.\7\
---------------------------------------------------------------------------
    \6\ Mark Pauly and Bradley Herring, ``Expanding Coverage Via Tax 
Credits: Trade-Offs and Outcomes,'' Health Affairs, volume 20, no. 1, 
January/February 2001, p. 16
    \7\ A recent study found that automatic enrollment for 401(k) plans 
boosted participation rates from 37 percent to 86 percent for such 
voluntary pensions, with even sharper increases for young and lower-
paid employees. See Brigitte Madrian and Dennis Shea, The Power of 
Suggestion: Inertia in 401(k) Participation and Savings Behavior, 
National Bureau of Economic Research Working Paper No. 7682, May 2000, 
p. 51.
---------------------------------------------------------------------------
Argument 2: A credit would ``crowd out'' traditional employer-sponsored 
        plans.
    Some critics maintain that providing a tax subsidy to the uninsured 
is inefficient because many employers currently providing insurance 
would drop their employees' coverage.
    The simplest response to this charge is that it applies, of course, 
to any proposal to help the uninsured, including expansions of public 
programs. Indeed, there have been a number of studies of ``crowd out'' 
in Medicaid and other programs, and these indicate a significant 
substitution effect. Cutler and Gruber, for instance, found a range of 
crowd out effects for Medicaid expansions in the late 1980s and early 
1990s, depending on exactly what was measured. The decline in private 
coverage, as a share of the persons who enrolled in Medicaid directly 
as a result of the expansions was as much as 50 percent.\8\ A new study 
of state-based expansions of coverage, by Kronick and Gilmer, indicate 
a variety of crowd-out effects depending on the design of the program. 
Oregon and Washington, for example, reduced uninsurance with very 
little crowding out of private insurance, while in Tennessee almost 
half of the increase in publicly covered individuals resulted from a 
decline in private coverage. In Minnesota almost all the enrollment in 
the new public plan ``was accompanied by a decline in the number of 
privately insured persons and virtually no change in that of uninsured 
persons.'' \9\
---------------------------------------------------------------------------
    \8\ David M. Culter and Jonathan Gruber, ``Medicaid and Private 
Insurance: Evidence and Implications,'' Health Affairs, volume 16, no. 
1 (January/February 1997) pp. 194-200.
    \9\ Richard Kronick and Todd Gilmer, ``Insuring Low-Income Adults: 
Does Public Coverage Crowd Out Private?'' Health Affairs, volume 21, 
no. 1 (January/February 2002), p. 235.
---------------------------------------------------------------------------
    The answer is not to do nothing, of course, but to recognize that 
tax credits are no different from other approaches in having some 
substitution effects. In some cases substitution is actually desirable. 
It is beneficial, for instance, if it means workers using a tax credit 
can obtain permanent coverage through a large non-employer group, 
rather than using the tax exclusion to obtain impermanent coverage 
through a small employer that does not meet their needs is very costly. 
Steps should be explored to reduce unwelcome crowding out, however. The 
smaller credit available in the Jeffords REACH act for individuals with 
employer-sponsored coverage likely would reduce crowding out, for 
instance. In addition, it would be wise to include a prohibition 
against workers dropping out of an employer-sponsored pool and claiming 
the credit--not just to discourage crowding out but to prevent the 
employer's risk pool being undermined.
    In conclusion, it is vital that Congress seizes the opportunity 
before it to make a real down payment on helping the uninsured through 
a mechanism that has strong support in each chamber and in the White 
House. A tax credit for insurance not provided through the place of 
employment is a sensible step that Congress could take this year, while 
it also take steps to improve the availability of group coverage 
throughout the states. Taking this step would be consistent with the 
objective shared by both conservatives and liberals of achieving a 
health system in which a family's access to health care and coverage, 
and the help they get to afford care, does not depend on where they 
work.

                                


    Chairman THOMAS. Thank you very much. Ms. Lav? The mikes 
are very unidirectional, so you probably need to get fairly 
close to it and talk directly into it.

 STATEMENT OF IRIS LAV, DEPUTY DIRECTOR, CENTER ON BUDGET AND 
                       POLICY PRIORITIES

    Ms. LAV. Thank you. Thank you, Mr. Chairman. I am Iris Lav, 
Deputy Director of the Center on Budget and Policy Priorities. 
The Center is a nonprofit policy institute here in Washington 
that specializes in both fiscal policy and in programs and 
policies affecting low- and moderate-income families, and I 
appreciate the invitation to be here today.
    My testimony largely focuses on the Bush Administration's 
proposal to provide a refundable tax credit to families and 
individuals who do not participate in employer-based coverage 
for the purchase of private health insurance. We welcome the 
Administration's commitment of significant resources to 
insurance coverage, but we view a tax credit as the wrong 
approach for solving the problems of the uninsured.
    There are three major problems: the weakening of the 
employer-based system through which the large majority of 
insured Americans currently obtain quality health insurance 
coverage; the vagaries of the individual insurance market for 
anyone except the young and healthy; and the inadequate size of 
the credit relative to the cost of insurance for low- and 
moderate-income families. None of these problems can be solved 
in the context of a tax credit approach without causing other 
problems or taking actions that I think all of us would agree 
are not politically feasible.
    First, the tax credit would lead some employers to drop or 
not offer coverage. Employers will feel that employees can use 
the credit to buy coverage on their own. The credit also will 
draw younger, healthier workers away from employer coverage 
into the individual market. This leaves older, sicker workers 
in employer insurance pools, driving up the average cost of 
coverage. In response, employers will raise employee 
contributions, leading more younger, healthier workers to opt 
out. This insurance death spiral, in which employers ultimately 
cannot afford to offer insurance, would leave older and less 
healthy workers to find insurance on the individual market.
    The nature of this individual market is the second problem. 
In the individual market, insurers generally can vary premiums 
based on age and medical history and can deny coverage 
altogether, yet many of the uninsured are in the very 
categories for whom insurance in the individual market is 
unavailable or prohibitively expensive. Over half of all 
uninsured adults have a history of serious medical conditions 
such as cancer, heart disease, and diabetes, or they smoke, or 
they are obese. Moreover, two-thirds of lower income uninsured 
adults above age 50 have been diagnosed with a chronic 
condition. So, you know, when you look at the CEA data, they 
are talking about the cost for a healthy person. They are not 
talking about these people who are uninsured.
    The third issue is whether the proposed tax credit can make 
insurance affordable for the populations that it is intended to 
reach. A healthy family of four with income of $25,000 that 
receives a $3,000 tax credit would have to spend more than 17 
percent of the family's gross income to purchase a mid-range 
policy on the individual market.
    One might consider ways to fix these tax credit problems, 
but unlike some of my colleagues, I don't think such fixes are 
practical. For example, one could mandate employers to offer or 
administer insurance, or mandate States to implement reforms in 
the individual market, but that is probably not in the cards.
    Moreover, a tax credit is highly inefficient. Professor Jon 
Gruber of M.I.T., who has been discussed greatly this morning, 
did look at this proposal in testimony submitted for this 
hearing, and found that 10.5 million people would take up the 
Administration's tax credit, but because of employers dropping 
and employees switching, the net reduction in the number of 
uninsured ends up being only 1.9 million out of that 10.5.
    What is a better approach? Expand the programs we already 
have in place for low- or moderate-income populations, where 
the bulk of the uninsured are. A number of States already have 
expanded to include parents, and some include other adults, 
under SCHIP, and others would do so if funding were provided. 
This approach provides quality insurance that does not exclude 
people with medical problems.
    Finally, I would like to say a few words about the 
proposals to cover workers who have become uninsured in this 
economic downturn. The House stimulus proposal for a tax credit 
for unemployed individuals eligible for unemployment insurance, 
that they could use to either purchase COBRA or health 
insurance in the individual market, raises some of the same 
questions with respect to the individual market.
    Consider a 55-year-old laid off construction worker who 
worked for a company too small to offer COBRA. If he has a 
history of heart problems, he probably would not be able to use 
the tax credit to access insurance in the individual market, 
and certainly not at an affordable price. And there would be no 
help under the proposal for those not eligible for unemployment 
insurance, which includes a lot of low- and moderate-income 
people.
    A better approach would be to provide a deeper COBRA 
subsidy coupled with a largely Federally paid option for States 
to cover unemployed workers under Medicaid. This would provide 
quality insurance, either employer-provided or the 
comprehensive Medicaid benefit, regardless of age or health 
status. It also would be likely to cover more workers than the 
House plan. The Congressional Budget Office estimates 7 to 9 
million workers could be covered, depending on the Federal 
Medicaid matching rate.
    Thank you, Mr. Chairman.
    [The prepared statement of Ms. Lav follows:]
  Statement of Iris Lav, Deputy Director, Center on Budget and Policy 
                               Priorities
    I appreciate the invitation to testify today. I am Iris Lav, deputy 
director of the Center on Budget and Policy Priorities. The Center is a 
nonprofit policy institute here in Washington that specializes both in 
fiscal policy and in programs and policies affecting low- and moderate-
income families. The Center does not hold (and never has received) a 
grant or contract from any federal agency.
    My testimony today largely focuses on the Bush Administration's 
health insurance coverage initiative in the fiscal year 2003 budget: a 
proposal to provide a refundable tax credit for the purchase of private 
health insurance to families and individuals not covered by employer-
based coverage. This proposal would cost $89 billion over 10 years and 
would account for the vast majority of the new resources the 
Administration is proposing in the health insurance coverage area.
    While we welcome the Administration's commitment of significant 
financial resources to provide assistance to the 39 million Americans 
without health insurance, we view a tax credit as the wrong approach 
for solving the problems of the uninsured. The Administration's tax 
credit proposal suffers from a number of significant flaws, including 
likelihood that it will materially weaken the employer-based health 
system through which the large majority of insured Americans currently 
obtain quality health insurance coverage. While it might be possible in 
theory to design a tax credit that would better address this and other 
concerns about the Administration's proposal, it is highly unlikely 
that such a tax credit would be politically viable at this time because 
it would require some combination of mandates on employers to offer 
insurance, states to reform individual insurance markets, and/or 
individuals to remain in employer-provided insurance.
    This testimony also suggests that there is a superior alternative 
to a tax credit in covering the uninsured: an expansion of Medicaid and 
the State Children's Health Insurance Program (SCHIP).
    In addition, a section of this testimony addresses approaches to 
helping the unemployed maintain health insurance during the current 
economic downturn. Subsidizing the purchase of COBRA insurance would 
help maintain coverage for substantial numbers of unemployed people who 
otherwise could not afford to pay the pay the COBRA premiums. A tax 
credit for purchase of insurance in the individual market would be of 
limited help to low-income or older and sicker unemployed workers. 
Moreover, if such a credit were extended beyond the unemployed, it 
would post the same risks as the Administration's plan.
    Finally, the appendix to this testimony addresses another health 
initiative in the Administration budget that, like the health insurance 
tax credits, threatens to undermine employer-provided insurance. This 
is the proposal to expand Medical Savings Accounts.
Tax Credit for the Purchase of Health Insurance in the Individual 
        Market
    The Administration is proposing to provide a refundable tax credit 
to individuals and families not participating in employer-based health 
insurance or public health insurance.\1\ Families with two or more 
children could receive a tax credit of up to $3,000 annually to pay for 
health insurance primarily in the individual market, so long as the 
subsidy does not exceed 90 percent of the premium cost. Individuals 
could receive a credit of $1,000. (The tax credit also could be used 
for individual health insurance purchased through private purchasing 
pools or state high-risk pools where such pools exist). The credit 
would not be available to families with incomes above $60,000, and the 
subsidy would begin to phase down once a family's income reached 
$25,000. (Similarly, individuals making $30,000 would not be eligible 
for the credit, with the subsidy beginning to phase out when an 
individual's income reached $15,000.)
---------------------------------------------------------------------------
    \1\ U.S. Department of Treasury, General Explanations of the 
Administration's Fiscal Year 2003 Revenue Proposals (February 4, 2002), 
p. 18-21.
---------------------------------------------------------------------------
    Under the proposal, the credit could be issued in advance (rather 
than waiting until a family or individual filed a tax return after the 
year was over); insurers would reduce the premium cost by the size of a 
family's credit and be reimbursed by the Federal Government. States 
would also have the option of letting certain tax credit recipients 
purchase coverage in their Medicaid or SCHIP managed care plans (or 
through their state employees' health plan if no managed care plans are 
available), but there would be no requirement that states do so.
     Likely Weakening of the Employer-Based Health Insurance System
    The principal concern with the Administration's tax credit proposal 
is that the availability of the tax credit could lead some employers to 
cease providing coverage to their workers and induce new employers not 
to offer coverage.
    Analysts from M.I.T., the Kaiser Family Foundation, and the Urban 
Institute all have written that enactment of a tax credit of this 
design (open to individuals currently eligible for employer-based 
coverage) could encourage firms not to offer health insurance coverage 
to their employees because firms would know their workers could now get 
a tax credit to purchase coverage in the individual market.\2\ For 
example, new research by Professor Jonathan Gruber at M.I.T. shows that 
the Administration's proposal would draw four million people out of 
employer-provided insurance. Gruber's research shows that 2.4 million 
people would be dropped from group insurance by their employers--one 
million of which will move to nongroup insurance and 1.4 million of 
which will become uninsured. Overall, the research shows that for every 
person gaining insurance under this proposal, two persons will be 
leaving the group insurance market.
---------------------------------------------------------------------------
    \2\ Jonathan Gruber, Tax Subsidies for Health Insurance: Evaluating 
the Cost and Benefits, National Bureau of Economic Research (February 
2000); Judith Feder, Cori Uccello, and Ellen O'Brien, The Difference 
Different Approaches Make: Comparing Proposals to Expand Health 
Insurance, Kaiser Family Foundation (October 1999); Leonard E. Burman 
and Amelia Gruber, First Do No Harm: Designing Tax Incentives for 
Health Insurance, National Tax Journal (May 2001); Linda Blumberg, 
Health Insurance Tax Credits: Potential for Expanding Coverage, Urban 
Institute (August 2001).
---------------------------------------------------------------------------
    Substituting the purchase of health insurance in the individual 
market for group coverage through an employer is particularly 
troublesome. It could seriously disadvantage older and less healthy 
workers, many of whom would not be able to obtain coverage or could 
obtain coverage only at exorbitant costs. In most states, insurers can 
vary premiums for health insurance policies offered in the individual 
market on the basis of age and medical history and can refuse to cover 
people entirely. If employers that otherwise would offer coverage 
decline to do so because of the availability of a tax credit of this 
nature, the consequences could be serious for many older and less 
healthy workers, who generally would have to pay far more than the tax 
credit would provide to secure coverage in the individual market. 
Moreover, the individual market often denies insurance entirely to 
people with certain health conditions.
    Aggravating this problem is the fact that under the 
Administration's proposal, some workers whose employers do offer 
coverage and ask their employees to pay a share of the premium could 
opt out of employer-based coverage and use the tax credits instead to 
purchase insurance in the individual market. Such a move could be 
attractive to young, healthy employees. These young and healthy workers 
could have a double advantage. Because they are a low risk, the policy 
they could buy in the individual market may be cheaper than the average 
cost of the employer-provided coverage, especially if they choose more 
limited coverage. In addition, if the tax credit covers 90 percent of 
this cheaper coverage, the tax credit subsidy may be larger than the 
premium subsidy their employer provides. Thus these young and healthy 
workers could find it financially advantageous to opt out of employer 
coverage and move into the individual market. Professor Gruber's 
research indicates that approximately 1.5 million persons would 
voluntarily switch from their group policies to nongroup policies.
    But if these workers--largely those who would get the lowest cost 
policies in the individual market--opt out of employer coverage, the 
pool of workers remaining in employer plans would become older and 
sicker on average, which in turn would drive up the costs of employer-
based insurance. This phenomenon is known as ``adverse selection.'' 
Once adverse selection starts and the cost of employer-based insurance 
begins to rise, additional younger, healthier workers would be induced 
to abandon employer-based coverage and use their tax credit instead, 
because they now could personally do better in the individual market 
using the tax credit.
    In this way, a vicious cycle--sometimes called an insurance death 
spiral--could be set in motion. The increase in premiums for employer-
based coverage that ultimately could occur could induce many employers 
either to cease offering health insurance or to increase substantially 
the amounts their employees must pay for insurance. The end result 
would likely be that many older and less healthy individuals would 
eventually lose their employer-based coverage and become uninsured or 
underinsured or have to pay exorbitant amounts for decent coverage.
    Intensifying the risk that many firms might not offer coverage is 
the recent return of a high rate of inflation in health care costs, 
which are now rising at double-digit rates in many areas. Institution 
of the tax credit could provide a rationale for some employers seeking 
to cut costs to drop or not to institute coverage.
    On balance, M.I.T. professor Jonathan Gruber finds that 10.5 
million people would take up the credit. Of those, roughly one-third, 
3.3 million people, would have been uninsured. But because the credit 
would cause a lot of churning in employer-provided insurance, some 
people become newly uninsured. The net reduction in the number of 
uninsured is only 1.9 million people.\3\
---------------------------------------------------------------------------
    \3\ Jonathan Gruber, Written Testimony before the House Ways & 
Means Committee (February 13, 2002).
---------------------------------------------------------------------------
    Some tax credit supporters have argued that additional changes to 
this type of tax credit could lessen the likelihood that the tax credit 
would weaken the employer-based health insurance system. For example, 
the credit could be limited only to those persons not currently 
eligible for employer-based coverage. Changing the design in this way 
would not, however, eliminate the incentive for employers to drop 
existing coverage. Employers that know their workers can turn to a tax 
credit to obtain coverage in the individual market may be more 
reluctant to offer coverage. In addition, it is difficult to imagine 
how a credit limited to those not eligible for employer-provided health 
insurance could be administered. It would require the Internal Revenue 
Service to determine whether a person is eligible for insurance through 
their employer or their spouse's employer. Administering such a credit 
would require massive new reporting requirements for employers and an 
entirely new--and arguably inappropriate--burden for the IRS.
    Going in the opposite direction, one could say the credit could be 
used by employees to pay for their contribution to the cost of health 
insurance. Such a proposal could help uninsured employees who are 
offered insurance but cannot currently afford their premiums obtain 
coverage through their employers. However, these credits could also 
encourage firms to lower their contributions, and thereby substitute 
public money for employer contributions. Since a ``maintenance of 
effort'' requirement for employers would not be popular and would be 
impossible to administer, employers--rather than the employees for whom 
insurance is not affordable--could reap the benefit of such a credit.
    There is a design of a tax credit that arguably could avoid the 
type of damage to the employer-based system discussed above. It would 
include a mandate on employers to offer coverage--so employers would 
not be tempted to drop coverage--and a mandate on individual workers 
with employer-based coverage to use their tax credit solely for the 
purchase of insurance through their employer's group--so healthy 
employees would not opt out of employer coverage to save money. Such 
requirements certainly are not politically feasible. Moreover, they 
would result in the substitution of public funds for employer 
contributions and thus would constitute a much more expansive, and 
costly, credit than the Bush Administration has proposed.
                Limited Access in the Individual Market
    The Administration envisions that most tax credit recipients would 
primarily use the credit to purchase health insurance in the individual 
market. However, many of the uninsured face significant barriers to 
obtaining insurance in the individual market. More than one quarter of 
all uninsured adults suffer from serious medical conditions such as 
cancer, heart disease and diabetes and over half (53 percent) have a 
history of serious medical conditions, smoke, or are obese.\4\ One 
quarter of non-elderly uninsured adults are over 45 and among lower-
income uninsured adults above age 50, some 39 percent reported a 
limited disability and 66 percent had been diagnosed with a chronic 
condition.\5\ All of these are people for whom insurance in the 
individual market is either expensive or unavailable. By contrast, only 
a small segment of the uninsured population, 15 percent, are young 
adults ages 19-34 who do not have children and lack problematic health 
conditions.\6\
---------------------------------------------------------------------------
    \4\ CBPP analysis of Health Interview Survey, 1997.
    \5\ U.S. Census Bureau, Health Insurance Coverage: 2000 (September 
2001); Elisabeth Simantov, Cathy Schoen and Stephanie Bruegman, Market 
Failure? Individual Insurance Markets for Older Americans, Health 
Affairs (July/August 2001).
    \6\ CBPP.
---------------------------------------------------------------------------
    As noted, these sicker and older individuals who constitute such a 
large percentage of the uninsured likely would be unable to access 
adequate health insurance in the individual market without paying 
exorbitant amounts. This is because the individual market is generally 
unregulated. The individual market generally permits individual medical 
underwriting, that is insurers can vary premiums based on age and 
medical history and can deny coverage entirely. For example, according 
to the Commonwealth Fund, only 16 states require that insurers provide 
a plan to most applicants--and that does not necessarily mean an 
affordable plan.\7\
---------------------------------------------------------------------------
    \7\ Lori Achman and Deborah Chollet, Insuring the Uninsurable: An 
Overview of State High-Risk Health Insurance Pools, Commonwealth Fund 
(August 2001).
---------------------------------------------------------------------------
    A recent Kaiser Family Foundation study used hypothetical families 
and individuals to apply for coverage in the individual health 
insurance market (the hypothetical applicants were structured to test 
the medical underwriting process through 60 applications in eight 
geographic markets). The study found, as expected, that older and 
sicker people are often unable to obtain coverage in the individual 
market.\8\ This means that under the Administration's proposal, a 
family containing older or sick members could find itself excluded from 
coverage or charged premiums that are unaffordable, even with a tax 
credit. Alternatively, such a family could be offered a plan that is 
affordable but does not provide coverage for a variety of medical 
conditions. For example, the Kaiser study used the hypothetical 
``Crane'' family, consisting of two adults and two children. In this 
family, while one child, ``Cindy,'' is in excellent health, the older 
brother, ``Colin,'' has asthma. The family received an offer of 
insurance under each application in every market but 15 percent of the 
offers excluded coverage of Colin entirely and more than half excluded 
coverage of Colin's asthma.
---------------------------------------------------------------------------
    \8\ Karen Pollitz, Richard Sorian and Kathy Thomas, How Accessible 
is Individual Health Insurance for Consumers in Less-than-Perfect 
Health?, Kaiser Family Foundation (June 2001).
---------------------------------------------------------------------------
    In addition, many plans in the individual market do not offer 
comprehensive coverage required by older and sicker families and 
individuals. For example, they may require high deductibles of $1,000 
or more and may not cover maternity care, preventive benefits, and 
mental health services. Others may set limits on prescription drug 
coverage.
    The Administration purports to respond to this concern by allowing 
tax credit recipients to buy coverage through high risk pools as well 
as other private purchasing pools. However, according to the 
Commonwealth Fund and other researchers, the success and scope of these 
mechanisms has been limited.\9\ While more than half the states operate 
high-risk pools, participation is low--only 105,000 people participated 
in 1999. Such pools also often impose high premiums, deductibles and 
other cost-sharing that limit affordability and may provide limited 
benefits (for example, excluding mental health and maternity care or 
capping prescription drug costs). Participants may also face a 
preexisting condition exclusion for some period of time.
---------------------------------------------------------------------------
    \9\ Achman and Chollet. See also Sally Trude and Paul B. Ginsburg, 
Tax Credits and Purchasing Pools: Will This Marriage Work?, Center for 
Studying Health System Change (April 2001).
---------------------------------------------------------------------------
    The Administration also suggests that that certain low-income 
individuals would be permitted to use their tax credits to buy into 
comprehensive public coverage. It is uncertain how many states would 
elect this option and open their Medicaid and SCHIP managed care plans 
to tax-credit recipients. Furthermore, the persons most in need of 
these buy-ins to public coverage are sicker, high-risk individuals who 
cannot otherwise obtain coverage in the individual market. Adding these 
individuals to the current Medicaid and SCHIP managed care risk pools 
(which currently tend to include healthier families and children, 
rather than the elderly and disabled who cannot be enrolled on a 
mandatory basis in managed care), could raise Medicaid and SCHIP costs 
significantly.
    Alternatively, reforms to the individual health insurance market 
could be added to the Administration's tax credit proposal. In other 
words, the federal government could mandate that states enact certain 
insurance reforms to ensure access for tax credit recipients including: 
guaranteed access (insurers have to offer coverage to all applicants), 
minimum benefits (all plans provide at least some standard 
comprehensive coverage), and community rating (premiums cannot vary by 
age, medical history, or both or can vary only within certain limits). 
While some states have adopted some of these market reforms, it seems 
politically unlikely that the federal government at this time would 
require all states to take these steps.
                   Inadequate Size of the Tax Credit
    The tax credit is of inadequate size to make health insurance 
affordable for many low- and moderate-income families. Health insurance 
can be expensive. According to the General Accounting Office, the mid-
range premium for family insurance in the non-group market exceeded 
$7,300 in 1998.\10\ Nevertheless, even without factoring in the 
increases in health insurance premium costs since 1998 for the GAO 
estimate, a family of four with income of $25,000 that receives a 
$3,000 tax credit would have to spend $4,300 in health insurance 
premiums ($7,300 minus $3,000). That would constitute more than 17 
percent of the family's gross income to purchase insurance at this 
price. The family would have additional out-of-pocket costs for 
deductibles and co-pays before they could receive any benefit from 
having the insurance.
---------------------------------------------------------------------------
    \10\ U.S. General Accounting Office, Private Health Insurance: 
Potential Tax Benefit of a Health Insurance Deduction Proposed in H.R. 
2990, GAO/HEHS-00-104R (April 2000).
---------------------------------------------------------------------------
    Similarly, the Commonwealth Fund looked at premiums for relatively 
comprehensive individual health insurance with a $250 deductible for a 
single healthy adult age 60 in 15 cities. The median annual premium was 
$5,688.\11\ Even with a tax credit of $1,000, a 60 year-old with income 
of $15,000 would still have to pay over 30 percent of his gross income 
to obtain insurance. Of course, a less healthy person is likely to pay 
even more, if they are not excluded entirely from the individual 
market. Furthermore, in some high-cost geographic areas, higher 
premiums could consume still-greater percentages of family income. 
Studies indicate that such expenditure levels are beyond what most low- 
and moderate-income families can afford.
---------------------------------------------------------------------------
    \11\ Simantov.
---------------------------------------------------------------------------
    Some supporters of the Administration's tax credit proposal may 
argue that family coverage in the individual market is far more 
affordable than GAO determined. According to a study by an online 
health insurance broker, the average premium cost was estimated to be 
between $3,600 and $4,500 for families of three who have actually 
obtained coverage in the individual market through the broker.\12\ That 
average, however, is likely to have been skewed downward considerably 
by the better risks associated with younger, healthy individuals who 
are most able to access insurance in the non-group market as well as 
the potentially less generous benefits provided. For example, this 
average is not the average premium offer made; applicants that turned 
down the offer of health insurance because it was too expensive would 
not be factored into the average cited by the study. (And it does not 
indicate the number of applicants who were denied coverage entirely.)
---------------------------------------------------------------------------
    \12\ eHealthInsurance, The Cost and Benefits of Individual and 
Family Health Insurance Plans (June 2001). Based on the study's cost-
per-member-per-month estimates.
---------------------------------------------------------------------------
    One could argue that the problem could be solved by increasing the 
size of the credit. Increasing the size of the credit, however, 
involves a trade-off. While a larger credit could make health insurance 
in the individual market more affordable for some tax credit 
recipients, it also would intensify the likelihood that the adverse 
effects on the employer-based system would occur. This is because a 
larger credit would make it more attractive for employers to cease 
offering health insurance coverage, as well as increase the probability 
that young, healthy individuals would prefer to leave employer-based 
coverage.\13\
---------------------------------------------------------------------------
    \13\ Burman.
---------------------------------------------------------------------------
      Continued Timing Problems for Advance Payment of the Credit
    A number of studies have pointed out that to be effective--
especially for low- and moderate-income families--the credit must be 
available at the time the insurance premiums are due rather than at the 
end of the year when taxes are filed. Low-income families on tight 
budgets would have difficulty paying health insurance premiums during 
the year and then waiting until the tax filing season in the following 
year to be reimbursed through a tax credit.\14\ The Administration 
proposes to address this timing problem by permitting advance payment 
of the tax credit. Insurers would discount premiums paid by tax credit 
recipients and be reimbursed for the discount by the federal 
government. Eligibility for the advance credit would be based on the 
taxpayer's prior year tax return.
---------------------------------------------------------------------------
    \14\ Blumberg.
---------------------------------------------------------------------------
    There is a drawback to basing eligibility for an advance credit on 
the prior year's tax return. The incomes of low- and moderate-income 
families fluctuate significantly during the course of a year due to 
changes in family situation, job losses or changes, overtime pay and 
other variables. Consider a taxpayer with prior year income that is too 
high to qualify for the credit this year. This year, his work hours are 
reduced considerably with the result that he no longer qualifies for 
health insurance coverage through his employer. His income has declined 
sufficiently to be eligible for the tax credit, but he is not eligible 
for the advance credit. Since he likely has many obligations to meet 
with his reduced income, he is unlikely to be able to purchase health 
insurance and wait for a reimbursement at the end of the year. He 
probably would remain uninsured.
    Alternatively, one could base eligibility for advance payment of 
the credit on this year's income. This creates a different set of 
problems. A person could purchase insurance using an advance payment 
now, but later in the year find that increases in income have made him 
ineligible for the credit based on his annual income. If a 
reconciliation process is then required at tax time, this person would 
owe--up to $3,000--to the IRS. Based on experience with advance payment 
of the Earned Income Tax Credit, fear of owing money to the IRS at tax 
time would likely deter most families from using the advance payment 
option. Without the financial resources necessary to pay for premiums 
up-front, such families would not benefit from the tax credit.
                       Lack of Cost Effectiveness
    In addition to the significant concerns with the tax credit 
proposal, as discussed above, the tax credit proposal is not likely to 
be a cost-effective way to reduce the ranks of the uninsured, since the 
large majority of those who would use the credit are expected to 
already have insurance. Analysts from M.I.T. and the Kaiser Family 
Foundation have estimated that under somewhat similar tax credit 
proposals, more than two-thirds of those using the tax credit would be 
people who already were insured.\15\
---------------------------------------------------------------------------
    \15\ Gruber, Written Testimony; Feder et al.; Memorandum from Joint 
Committee on Taxation to the Senate Finance Committee (September 13, 
2001).
---------------------------------------------------------------------------
    For example, as noted above, Jonathan Gruber of M.I.T. projects 
that 10.5 million persons would take up the Administration's tax 
credit. On its face, this appears to be a large population receiving 
assistance through the tax credit. However, only 3.3 million people 
would have been previously uninsured; more than two-thirds of tax 
recipients would have already had insurance. In addition, under his 
estimates, employer dropping would cause 1.4 million people formerly 
with employer-based coverage to be unable to find coverage and become 
uninsured. The net reduction in the number of uninsured ends up being 
only 1.9 million (which constitutes only 18 percent of the total number 
of recipients).\16\
---------------------------------------------------------------------------
    \16\ Gruber, Written Testimony.
---------------------------------------------------------------------------
    As a result, relatively little of the benefit of the credit would 
go to reducing the ranks of the uninsured. Instead, a large share of 
the credit's substantial cost would go either to provide people who 
already are insured in the individual market with a tax cut or to shift 
people from their current insurance arrangements (primarily through 
employer-sponsored coverage) to different insurance arrangements.
A Better Alternative: Expansion of Public Programs
    As I have discussed, the tax credit proposed by the Administration 
could threaten the stability of the employer-based health insurance 
system through which the overwhelming majority of Americans obtain 
coverage. In addition, the tax credit would favor young, healthy 
families and individuals over older, sicker persons who most need 
comprehensive and affordable health insurance coverage.
    An effective alternative that avoids these pitfalls is an expansion 
of the State Children's Health Insurance Program (SCHIP). For example, 
bipartisan legislation introduced in this Congress would provide $50 
billion in new SCHIP funds to states to expand Medicaid and SCHIP 
coverage to the low-income parents of children eligible for those 
programs. In 2000, some 34 percent of parents--6.9 million--in families 
with incomes below 200 percent of the poverty line ($29,260 for a 
family of three) were uninsured. This is partly the result of limited 
coverage within the Medicaid program; the Medicaid income eligibility 
level in the median state is only 69 percent of the federal poverty 
line (about $10,000). Just as SCHIP facilitated coverage expansions for 
low-income children, additional federal SCHIP funds could be provided 
for states to expand Medicaid and SCHIP coverage to parents. While 
suffering from a slow start, the SCHIP program is now highly 
successful. As the Department of Health and Human Services announced 
last week, a total of 4.6 million children were enrolled in SCHIP last 
year which constitutes a 38 percent increase from 2000 (3.3 million 
children were enrolled in fiscal year 2000).\17\
---------------------------------------------------------------------------
    \17\ Centers for Medicare and Medicaid Services, ``The State 
Children's Health Insurance Program Annual Enrollment Report'' 
(February 6, 2002).
---------------------------------------------------------------------------
    A number of states such as Arizona, California, New Jersey, Rhode 
Island, and Wisconsin have already used SCHIP to expand coverage to 
parents, as well as other adults. However, the ability of states to 
continue to expand coverage, as the Administration has urged states to 
do, is threatened by a lack of sufficient SCHIP funding. The Balanced 
Budget Act of1997 instituted a 26 percent reduction in federal SCHIP 
funding for the fiscal years 2002, 2003 and 2004--a reduction of over 
$1 billion each year. Because of this reduction, in the 
Administration's budget, OMB projects that SCHIP enrollment will 
decline by 900,000 people, mostly children, between 2003 and 2006.\18\ 
While the Administration has appropriately proposed to extend SCHIP 
funds scheduled to expire in the next two years which will help delay 
or avert some of these enrollment declines, it is likely states will 
have insufficient funding over the long-term to further expand 
coverage. As a result, states need additional funding under the SCHIP 
program. This public expansion proposal would provide a number of 
advantages:
---------------------------------------------------------------------------
    \18\ Office of Management and Budget, Analytic Perspectives 
(February 4, 2002), p.297.

     LA public expansion will not substantially encourage 
individuals to drop employer-based coverage, nor will it induce 
employers to no longer offer health insurance to their workers--
especially as compared to the likely effects of the Administration's 
tax credit proposal. Research has found that only a modest percentage 
of the additional individuals covered through public expansions had 
employer-based coverage.\19\ For example, an examination of Minnesota's 
Medicaid expansion to adults and children found that only seven percent 
of enrollees gave up private insurance (both employer-based and 
individual market) to join the program, of which less than half 
previously participated in employer-based coverage. In Wisconsin, which 
expanded coverage to parents up to 185 percent of the federal poverty 
line through its BadgerCare program, only 6 percent of the 25,000 
families screened had access to employer-based coverage prior to 
enrolling in the SCHIP program..
---------------------------------------------------------------------------
    \19\ Lisa Dubay, Expansions in Public Health Insurance and Crowd-
Out: What the Evidence Says, Kaiser Family Foundation (October 1999); 
Kathleen Call et al., ``Who Is Still Uninsured in Minnesota? Lessons 
from State Reform Efforts,'' Journal of the American Medical 
Association (October 8, 1997), p.1191-95; Leighton Ku, Marilyn Ellwood 
et al., ``The Evolution of Medicaid Managed Care Systems and 
Eligibility Expansions,'' Health Care Financing Review (Winter 2000); 
Jeremy Alberga, Wisconsin's BadgerCare Program Offers Innovative 
Approach to Family Coverage, Robert Wood Johnson Foundation (January 
2001); Amy Lutzky and Ian Hill, Has the Jury Reached a Verdict? States' 
Early Experiences with Crowd-Out Under SCHIP, Urban Institute (June 
2001); Richard Kronick and Todd Gilmer, Insuring Low-Income Adults: 
Does Public Coverage Crowd-Out Private?, Health Affairs (January/
February 2002).

     LThe coverage will be accessible and affordable to the 
populations served. Unlike the individual health insurance market, 
public programs are open to any eligible individual irrespective of 
their age or medical history. In addition, both the Medicaid and SCHIP 
programs have limits on premiums, deductibles and cost-sharing to 
ensure that participating families and individuals can afford out-of-
pocket costs. For example, SCHIP families are not permitted to incur 
---------------------------------------------------------------------------
cost-sharing that exceeds 5 percent of family income.

     LPublic coverage would provide comprehensive benefits that 
would meet the needs of older and sicker families and individuals. Both 
programs establish federal benefits standards that are intended to 
provide comprehensive health insurance coverage. Under Medicaid, states 
must provide certain minimum benefits such as hospital and physician 
coverage. Under SCHIP, separate state programs must generally provide a 
benefits package that is equivalent to several benchmarks including the 
Blue Cross-Blue Shield Standard Option under the Federal Employees 
Benefits Health Plan (FEBHP).

     LExpanded coverage of parents would also have the added 
benefit of increasing coverage of children who are currently eligible 
for, but not enrolled, in the Medicaid and SCHIP programs. Although 
nearly 95 percent of uninsured children in families with incomes under 
200 percent of the federal poverty line are now eligible for Medicaid 
and SCHIP, substantial numbers of eligible children remain 
uninsured.\20\ Research has found that extending health insurance to 
low-income parents in the same programs boosts coverage of their 
children. In states that have expanded publicly funded coverage to 
include working parents, enrollment rates among children are 
significantly higher.\21\
---------------------------------------------------------------------------
    \20\ Matthew Broaddus and Leighton Ku, Nearly 95 Percent of Low-
Income Uninsured Children Now Are Eligible for Medicaid or SCHIP, 
Center on Budget and Policy Priorities (December 2000).
    \21\ Leighton Ku and Matthew Broaddus, The Importance of Family-
Based Insurance Expansions: New Research Findings about State Health 
Reforms, Center on Budget and Policy Priorities (September 2000); 
Jeanne Lambrew, Health Insurance: A Family Affair, Commonwealth Fund 
(May 2001); Lisa Dubay and Genevieve Kenney, Covering Parents Through 
Medicaid and SCHIP: Potential Benefits to Low-Income Parents and 
Children; Kaiser Family Foundation (October 2001); Elizabeth Gifford, 
Robert Weech-Maldonado and Pamela Farley Short, ``Encouraging 
Preventive Health Services for Young Children: The Effect of Expanding 
Coverage to Parents,'' Pennsylvania State University, presentation at 
the Academy for Health Services Research and Health Policy Conference, 
Atlanta, June 12, 2001.
---------------------------------------------------------------------------
Insurance for the Unemployed
    The House of Representatives late last year passed an economic 
stimulus proposal that included a tax credit certain unemployed 
individuals could use to purchase COBRA coverage or health insurance in 
the individual market. The tax credit would be equal to 60 percent of 
the cost of health insurance. Only workers currently eligible for 
unemployment insurance could receive the tax credit. If the tax credit 
is used in the individual market, the worker must have previously had 
insurance for 12 months.
    Many workers who become unemployed do have difficulty affording the 
COBRA continuation coverage for which they are eligible. With the costs 
of a family health insurance policy under COBRA averaging more than 
$7,000, it is unlikely that many unemployed workers--particularly those 
with low or moderate incomes--could afford to maintain their insurance. 
A 60 percent tax credit subsidy, however, still leaves the necessity to 
pay 40 percent of the COBRA premium. A family getting by on 
unemployment insurance is quite likely to find an average after-credit 
premium cost of $2,800 (in addition to deductibles and co-pays) 
unaffordable. So this proposal is most likely to help families that are 
unemployed, receive unemployment compensation, but also have sufficient 
resources from savings or another worker in the family that can be used 
to pay these health insurance premiums.
    The aspect of the plan that would make the tax credit available for 
the purchase of insurance in the individual market is even more 
problematic. As noted above, the individual market is largely 
unregulated and lacks the advantages of group insurance purchased 
through employers. Many plans sold on the individual market impose high 
deductibles and offer limited coverage. Furthermore, premiums in the 
individual market can vary based on risk factors such as age and 
medical history. The new proposal lacks substantive insurance-market 
reforms to ensure that individual health insurance policies that 
provide adequate coverage will be made available at affordable prices 
to unemployed workers in the individual health insurance market. Under 
the proposal, states would have to guarantee that some form of 
individual coverage is made available to laid-off workers who 
previously had employer-based coverage, but similar requirements are 
part of current law and most states comply with them simply by allowing 
individuals who otherwise cannot secure coverage to purchase insurance 
through high-risk pools. As described above, policies sold through 
high-risk pools generally are unaffordable and the coverage provided is 
usually limited; as a result, few individuals purchase insurance 
through these pools.
    Only individuals who are receiving Unemployment Insurance payments 
would be eligible for the tax credit included in the House stimulus 
bill. This would leave out a substantial number of low-income 
unemployed workers, including most part-time workers and more recently 
employed workers, many of whom have recently left welfare for work.
    A better proposal would provide a deeper COBRA subsidy--delivered 
through a direct payment arrangement with insurers and employers so 
those without minimal up-front resources could use it--coupled with an 
option for states to cover under Medicaid (with a 90 percent federal 
match) those unemployed persons who do not have COBRA coverage or who 
cannot afford their share of the COBRA premium. This is similar to the 
proposals included in the Senate Finance Committee stimulus package. 
This alternative proposal covers a significantly larger proportion of 
the unemployed, since it is not limited solely to those covered by 
Unemployment Insurance.
    In addition, a COBRA plus Medicaid option assures that most older, 
sicker unemployed persons can access the comprehensive insurance they 
need. For example, a 55 year old construction worker who becomes 
unemployed may have worked for a company too small to be required to 
offer COBRA. If he has a history of heart problems or any one of a 
number of other serious conditions, he probably would not be able to 
access insurance in the individual market. But he could be eligible for 
comprehensive insurance through the Medicaid program.
    The tax credit approach to helping the uninsured has still one more 
drawback. If the tax credit in the House stimulus bill is enacted, 
subsequent efforts almost surely will be made to broaden this credit 
into a general individual health insurance tax credit--of the type 
included in the Administration's budget--that can be used to purchase 
insurance in the individual market by employed as well as unemployed 
individuals. As described at length above, such a general individual 
health insurance credit could have deleterious effects on insurance 
coverage.
Conclusion
    The tax credit that the Administration proposes poses a threat to 
the employer-based health insurance system. While this proposal may 
expand coverage to some currently uninsured Americans, many others who 
have insurance through their employers may lose their coverage and 
become uninsured. It is theoretically possible to design a tax credit 
that does not have as many negative effects, but doing so would require 
substantial reform of the individual insurance market and some 
combination of mandates on employers, states, and/or individuals--all 
of which is not likely to be politically acceptable. A far better 
alternative to address the problem of the uninsured would be to provide 
states additional federal SCHIP funds to expand coverage to parents of 
children eligible for public programs. That has the side benefit of 
encouraging enrollment of eligible children who are not currently 
enrolled in those programs.
    For the immediate problem of helping the unemployed maintain health 
insurance coverage, the House-passed proposal for a tax credit for 
people receiving unemployment insurance would reach only a limited 
group of the unemployed and, given the problems with the individual 
insurance market, would fail to provide many older and sicker workers 
with the insurance they need. A deeper COBRA subsidy delivered directly 
through insurers and employers coupled with a largely federally-paid 
option for states to cover unemployed workers under Medicaid could 
provide better coverage to more unemployed workers.
                                APPENDIX
Expansion of Medical Savings Accounts
    The Administration's fiscal year 2003 budget proposal includes 
additional tax proposals related to health care, including a proposed 
expansion of Medical Savings Accounts.\22\ In this appendix, I would 
likely to briefly address concerns with the MSA proposal, which like 
the tax credit, is likely to weaken the conventional employer-based 
health system.
---------------------------------------------------------------------------
    \22\ These proposals are analyzed in the following papers. Edwin 
Park, Health Insurance Proposals in Administration's Budget Could 
Weaken the Employer-Based Health Insurance System, Center on Budget and 
Policy Priorities (February 2002); Edwin Park, Administration's Budget 
Includes Additional Health Tax Cuts That Primarily Benefit Higher-
Income Individuals, Center on Budget and Policy Priorities (February 
2002).
---------------------------------------------------------------------------
    Established under a limited demonstration project scheduled to 
expire at the end of this year, MSAs are tax-advantaged personal 
savings accounts available to the self-employed and employees at small 
businesses who are covered by high-deductible health insurance 
policies. Funds in MSAs may be used to pay for a wide range of out-of-
pocket health care costs. They also may be retained in the MSA accounts 
and placed in investment vehicles such as stocks and bonds, with the 
investment earnings accumulating tax-free in the accounts. The funds 
may be withdrawn for non-medical purposes upon retirement. As a result, 
MSAs can be used as a tax shelter.
    Despite the findings of an array of analyses by respected research 
institutions that widespread use of MSAs could destabilize the health 
insurance market (findings the demonstration project has failed to 
dispel), the Administration is proposing a package of MSA changes that 
have long been pushed by insurance companies that sell MSA policies and 
conservative policy institutions. The Administration proposes to repeal 
most current protections and limitations on MSAs, to make MSAs more 
lucrative as tax shelters for affluent, healthy individuals (and hence 
more attractive to such individuals), and to allow unlimited expansion 
of MSAs across the country.\23\ The risks of such a course are great.
---------------------------------------------------------------------------
    \23\ U.S. Department of Treasury, General Explanations of the 
Administration's Fiscal Year 2003 Revenue Proposals (February 4, 2002), 
p. 26-29.
---------------------------------------------------------------------------
   Adverse Selection and Its Effect on Conventional Health Insurance
    Research by the RAND Corporation, the Urban Institute, and the 
American Academy of Actuaries has found that premiums for conventional 
insurance could more than double if MSA use becomes widespread.\24\ 
This is because of the extensive ``adverse selection'' in the health 
insurance market that would likely ensue. If MSAs become broadly 
available, substantial numbers of healthy, affluent individuals may opt 
for them in lieu of conventional, employer-based group insurance 
policies. As a result, those remaining in group insurance would be less 
healthy, on average, and premiums for conventional group insurance 
would have to increase.
---------------------------------------------------------------------------
    \24\ Emmett B. Keeler, et al., ``Can Medical Savings Accounts for 
the Nonelderly Reduce Health Care Costs?'', Journal of the American 
Medical Association (June 5, 1996), p.1666-71; Len M. Nichols et al., 
Tax-Preferred Medical Savings Accounts and Catastrophic Health 
Insurance Plans: A Numerical Analysis of Winners and Losers, Urban 
Institute (April 1996); and American Academy of Actuaries, Medical 
Savings Accounts: Cost Implications and Design Issues (May 1995).
---------------------------------------------------------------------------
    High deductible policies and MSAs are most attractive to younger, 
healthy individuals, because such individuals do not expect to incur 
significant health costs and thus can anticipate accumulating 
significant amounts in their tax-advantaged MSA accounts. MSAs can be 
particularly attractive to higher-income individuals, a group that also 
tends to be in better health than people with lesser incomes, since 
they can benefit handsomely from the tax sheltering advantages of MSAs, 
which are worth the most to those in higher tax brackets. The 
attraction of MSAs to healthy, affluent individuals would be 
significantly enhanced under the Administration's proposal, which would 
alter the rules governing MSAs in ways that would make the accounts 
more lucrative as tax shelters. While evidence is very limited, in a 
preliminary survey of insurers in 1998, the General Accounting Office 
found evidence that MSAs may indeed be encouraging adverse selection in 
health insurance markets.\25\
---------------------------------------------------------------------------
    \25\ U.S. General Accounting Office, Medical Savings Accounts: 
Results from Surveys of Insurers (December 1998), GAO/HEHS-99-34.
---------------------------------------------------------------------------
    The increase in premium costs that would be expected to result if 
use of MSAs becomes widespread and significant numbers of healthy 
individuals withdraw from employer-based plans could lead many 
employers either to cease offering coverage or to raise the percentage 
of premium costs that their employees must pay. Such steps would make 
insurance less affordable and likely cause more people to become 
uninsured.
                 Increased Use of MSAs as a Tax Shelter
    The Administration's proposal would also make MSAs more attractive 
as a tax shelter to healthy, affluent individuals by removing or 
weakening many safeguards Congress enacted to prevent MSAs from turning 
into a significant tax shelter opportunity.
    MSAs are similar to tax-deductible Individual Retirement Accounts 
in that the deposits an individual makes in these accounts are tax 
deductible and the earnings that accumulate in the accounts are tax-
free. (The funds in the account are never taxed as long as they either 
remain in the account or are withdrawn for medical purposes; the funds 
are subject to taxation if withdrawn for non-medical purposes, just as 
funds in tax-deductible IRAs are subject to taxation when they are 
withdrawn.) MSAs differ, however, from IRAs in one key respect--there 
are no income limits on MSAs that prevent wealthy people from making 
tax-deductible contributions to them. Indeed, the higher an 
individual's income, the greater the tax benefit an MSA provides. By 
opening MSAs for widespread use and eviscerating a number of the 
current limitations and safeguards on MSAs, the Administration's 
proposal would essentially enable high-income individuals to circumvent 
the IRA income limits by using MSAs for the same purpose--as tax 
shelters to accrue substantial assets over time on a tax-advantaged 
basis. At retirement, funds can be withdrawn from MSAs penalty-free for 
non-medical purposes. In the same GAO survey of insurers, there were 
indications that MSAs were in fact being marketed primarily as tax-
sheltered savings vehicles rather than as sources of tax-sheltered 
funds for reimbursement of medical expenses. The report stated that 
insurers were targeting certain segments of the insurance market such 
as highly-paid professionals, farmers, ranchers, partnership firms and 
association groups.\26\
---------------------------------------------------------------------------
    \26\ GAO.
---------------------------------------------------------------------------

                                


    Chairman THOMAS. Thank you, Ms. Lav.
    Mr. Lemieux?

STATEMENT OF JEFF LEMIEUX, SENIOR ECONOMIST, PROGRESSIVE POLICY 
                           INSTITUTE

    Mr. LEMIEUX. Thank you, Mr. Chairman.
    The Progressive Policy Institute (PPI) has long argued that 
tax credits should be a cornerstone for a renewed push toward 
universal health coverage. That is not to say that tax credits 
alone are enough to do the job. They are not. We will also need 
expanded safety net programs and greatly improved purchasing 
pools or other purchasing arrangements, so that people can use 
their tax credits in an efficient, fair, and secure market, but 
tax credits are a very important building block.
    I think that past efforts to get universal coverage have 
failed mostly because they caused uncertainty about the fate of 
employer-based coverage, which workers value very highly. 
However, I think that universal coverage can be achieved in the 
coming years, in this decade, perhaps, in a series of 
responsible, practical steps that enhance rather than threaten 
work-based coverage.
    I think the first step, as you have already been working 
on, is to help the newly unemployed maintain their coverage. By 
preventing those with insurance from losing it when they lose 
their jobs, we can at least stop the number of uninsured from 
rising.
    The second step is to actually reduce the number of 
uninsured by making certain that all Americans have good 
choices of health insurance at reasonable group rates; that 
they can exercise those choices in the most convenient and 
secure setting possible, that is usually their place of 
employment; and that financial assistance based on tax credits, 
like we have been discussing today, is provided to help those 
with low incomes.
    And we have heard from virtually every witness, I think, 
and many Members, that to be effective at reducing the 
uninsured tax credits have to be both refundable and available 
in advance, when people need the money to purchase their 
coverage. Both the House-passed proposal for temporary tax 
credits for displaced workers and the Administration's proposed 
permanent tax credits for individual coverage pass those tests 
of refundability and payment in advance.
    The temporary tax payments for displaced workers also seem 
to me to pass the crucial test of not threatening employer-
based coverage. However, I believe the Administration's 
proposal for permanent tax credits for individual health 
coverage would in fact still disrupt employer-based coverage, 
in spite of their new mentions of purchasing groups in this 
year's version, and therefore shouldn't be enacted in its 
current form.
    I have some suggestions to improve both proposals. They are 
very technical. They are explained in more detail in my 
prepared statement.
    Some of the highlights: I encourage Committee Members to 
consider increasing the percentage subsidy for the temporary 
tax credits for displaced workers from 60 percent to a higher 
number, say 75 percent or more. I think that would better 
ensure that very few workers actually lost their health 
coverage when they were unemployed. And, perhaps surprisingly, 
I think that could help reduce employers' overall health costs 
by virtually eliminating adverse selection in the COBRA market.
    Furthermore, I think we need to make sure that those 
temporary tax credits follow people to their new job for a 
time. Even if you get a new job, you might not be eligible for 
health insurance for a long period, and those tax credits, if 
they were to follow people to their new job, that would provide 
a good incentive to help people go ahead with their job search.
    Second, the Administration's proposal for permanent credits 
for individual health insurance needs to be expanded to include 
employment-based coverage, and should be made available through 
payroll deduction at the workplace. And with the balance of my 
time, let me try and explain that last point, why the 
Administration's tax credit should be extended to people with 
employer-based coverage.
    I think the biggest flaw in the Administration's proposal 
there is that it doesn't allow people who get health coverage 
at work to receive tax credits even if their incomes are very 
low. First, that is unfair, since low-income people who already 
struggle to afford work-based coverage would get nothing. They 
would have an incentive to drop out of their employer's 
coverage and switch to other, often higher paying jobs that 
didn't offer coverage because in general, as we know and as you 
have said, Mr. Chairman, businesses that don't offer benefits 
like health insurance can afford to grant higher wages instead.
    Under the Administration's proposal, low-income workers 
would have a particularly strong incentive to take higher wages 
instead of the employment-based health benefits, and then use 
the tax credit to purchase individual coverage if they can. To 
save their employees the hassle of switching into no-benefit 
jobs to take advantage of the credits, and to retain valued 
employees in some cases, some small businesses would just stop 
offering coverage in the first place.
    I believe the better path toward universal coverage is to 
make mainstream group coverage available through tax credits, 
and easily affordable through tax credits, and easily available 
at every workplace, whether or not the employer offers to help 
pay for that coverage. And I am heartened by the fact that even 
our friends at the Heritage Foundation, which has previously 
proposed some individualized health insurance reform proposals, 
they are now publishing papers that go through exactly how we 
can get tax credits available at the employer level, and I 
think that is extremely helpful.
    To sum up, the PPI strongly supports the effort to make 
refundable tax credits an integral part of health reform and 
covering the uninsured. The tax credits shouldn't favor 
employer coverage or individual coverage. The right policy 
would be a better balance than the policies the Administration 
has put forward. Tax credits should be available in both 
markets so that both markets are strengthened, but one market 
shouldn't be favored over the other. Thank you.
    [The prepared statement of Mr. Lemieux follows:]
    Statement of Jeff Lemieux, Senior Economist, Progressive Policy 
                               Institute
    Thank you, Mr. Chairman, Representative Rangel, and committee 
members, for inviting me to testify on using tax credits to increase 
the number of Americans with health insurance. My name is Jeff Lemieux, 
and I am the senior economist for the Progressive Policy Institute 
(PPI). Prior to this position I worked for the Bipartisan Medicare 
Commission, the Congressional Budget Office, the Health Care Financing 
Administration (HCFA), and an economic forecasting firm then known as 
DRI/McGraw-Hill.
    Universal health coverage is a national imperative. It can be 
achieved in a series of responsible, practical stages, and the PPI has 
long argued that tax credits should be a cornerstone of that effort. 
The first step is to help the newly unemployed maintain their health 
insurance. By preventing those with insurance from losing it when they 
lose their jobs, we can at least prevent the number of uninsured from 
rising.
    The second step is to reduce the number of uninsured Americans by 
making certain that all have good choices of health insurance at 
reasonable group rates, that they can exercise those choices in the 
most convenient and secure setting possible (usually their place of 
employment), and that financial assistance (based on tax credits) is 
provided to help those with low incomes.
    After a few general comments, my remarks focus on two specific 
proposals: the temporary tax credits targeted to displaced workers 
receiving unemployment insurance that the House passed in December as 
part of the debate on economic ``stimulus,'' and the proposal for 
permanent means-tested tax credits for individual health insurance that 
was included in the President's budget.
    By tax credits for health insurance, I am referring to tax credits 
that are both refundable--that is, fully paid even to those whose 
incomes are so low that no income tax liability is owed--and available 
``in advance,'' when the insurance is purchased. Otherwise, low-income 
workers most at risk of being uninsured would be unable to take 
advantage of the credits. Both the House-passed proposal for displaced 
workers and the Administration's tax credits for individual coverage 
pass those tests.
    Two of the greatest strengths of the U.S. economy are our work 
ethic and the flexibility of our labor markets. Now more than ever, 
Americans move into and out of the workforce and particular jobs, 
sometimes working part-time and sometimes overtime, sometimes working 
for large or small firms or several firms at once. Freelance and 
independent work is common.
    Labor market flexibility is both economically efficient and 
socially helpful. It allows us to tailor our skills and work styles 
closely to our social and family needs. However, we need to do much 
more to adapt benefits like health insurance to the realities of the 
modern workplace. Specifically, we should strengthen the bond between 
work and health insurance, and ensure all Americans have a fair chance 
to obtain good coverage, no matter how or where they work.
    The foundation of health coverage in the U.S. is subsidized group 
health insurance, arranged through employers. Past pushes for universal 
coverage have failed primarily because of uncertainty about the fate of 
work-based health coverage, which people value very highly.
    The main reasons for the success of employment-based health 
insurance are the subsidies and the group insurance pools. Subsidies 
provided by employers make health insurance desirable even for the 
young and healthy, and group pooling makes coverage fair and 
affordable, even for those who are older and more likely to need 
extensive health care services. Getting health coverage through 
employers is also convenient and reassuring. Employers handle the 
paperwork and payroll deduction of premiums, and can help resolve 
disputes with health plans.
    The one major problem with employment-based coverage is choice: Too 
few workers have a wide choice of health plans. Employers may switch 
health plans abruptly, severing employees' relationships with health 
providers. And workers routinely have to switch health plans when they 
change employers.
    On the other hand, the market for individual health insurance is 
small, fragile, and problematic. Although availability varies from 
state to state, individual coverage can be hard to get or even 
unaffordable, especially for people with health problems--precisely 
those who most need health coverage. Fear that only persons with hidden 
illnesses will apply for coverage causes insurers offering individual 
coverage to ``load'' premiums with extra amounts to hedge against 
unseen risks.
    In sum, the market for employment-based coverage is robust, but 
often lacks choices, which can thwart continuity of health care. The 
market for individual coverage is weak and unpredictable--in ways that 
also reduce choice and continuity.
    Ideally, public policy should help employers offer a wide menu of 
health insurance choices. That would allow workers to stick with a plan 
they like, even if they switch jobs. Since more and more workers are 
self-employed, we must also improve individual coverage. That market 
needs the best features of employer coverage: It should be more 
predictable, affordable, fairly priced, and available to all.
    The best policy would be a combination of tax credits and new group 
purchasing arrangements. That would help inject choice into the market 
for employer coverage, and would bring choice, subsidies, and group 
coverage to people who can't get work-based coverage.
    Ideally, tax credits shouldn't favor employer or individual health 
coverage. The current tax law favors employment-based coverage, but the 
Administration's proposal of permanent tax credits only for individual 
coverage is an overreaction, favoring individual coverage, especially 
for lower-income workers. The right policy is a balance. Tax credits 
should be available in both markets, so that both markets are 
strengthened.
Temporary Tax Credits for Transitional Health Coverage
    The House-passed bill would give a 60 percent, uncapped tax credit 
for either COBRA continuing health coverage or individual coverage. In 
general, displaced workers receiving unemployment benefits would be 
eligible for up to 12 months.
    The PPI has argued that tax credits for COBRA coverage would be 
beneficial not only to displaced workers, but also to employers. Under 
COBRA, most workers who are laid off are allowed to remain in their 
employer-based health plan for up to 18 months, provided they pay the 
full premium (their share plus the employer share) and a small 
administrative fee. The problem is, the full premium for employment-
based coverage averages about $200 per month for self-only coverage or 
around $600 per month for family coverage.
    Since COBRA coverage is very expensive, many laid-off workers 
choose to remain uninsured, gambling that they won't get sick before 
they find another job. However, workers who already have a chronic 
health condition generally accept COBRA coverage, despite the high 
cost. Otherwise they would have no protection against high medical 
bills they know they will face.
    In the jargon of health insurance, employers offering COBRA 
coverage experience ``adverse selection,'' that is, healthier-than-
average ex-workers decline the continuing coverage, and sicker-than-
average workers accept. Even though the workers who accept coverage pay 
the full premium, their costs are actually higher than average, which 
drives up the premium for the employer's whole group. Although only a 
small fraction of ex-employees accept the coverage--approximately 25 
percent--it still drives up employers' health costs.
    Based on past estimates from the Congressional Budget Office, over 
half of laid-off workers would accept COBRA coverage with a 60 percent 
subsidy. In my opinion, that would certainly reduce adverse selection 
by drawing younger and healthier workers into COBRA pools. It could 
even reduce employers' overall costs because the reduction in costs 
associated with adverse selection could be enough to offset the 
additional cost of increased participation.
    However, there is one way to be sure: raise the subsidy rate from 
60 percent to 75 percent or more. As the subsidy increases, it is 
reasonable to assume that each subsequent person enticed to purchase 
coverage is a little healthier than those who would have purchased at a 
lower subsidy. At a 75 percent subsidy, most unemployed workers could 
afford to stay on COBRA, adverse selection would probably be very 
small, and employers' overall costs would be more likely to decline.
    The House-passed proposal also allows the tax credits to be used 
for individual coverage. That is important, because firms with fewer 
than 20 employees are not required to offer COBRA coverage, and workers 
laid-off from those firms would not be able to continue their employer-
based coverage in any event. The bill also allows workers eligible for 
COBRA to use the tax credit for individual coverage instead.
    Allowing workers eligible for COBRA to use the credit for 
individual coverage doesn't change the relative price of health 
insurance they face. Previously, a laid-off worker could choose COBRA 
or individual coverage with no subsidy. With a percentage subsidy of 
any amount, the relative price doesn't change. Economists would say 
that the substitution effect in that case is zero--because the price of 
COBRA didn't change with respect to the price of individual insurance, 
there is no reason for people to change their decision between the two.
    However, there also could be a so-called income effect. That is, 
the presence of a subsidy gives the worker a higher net income after 
purchasing health insurance--that effect can also impact purchasing 
decisions. In this case, I think it is reasonable to assume laid-off 
workers would be very concerned about holding on to their familiar 
employer-based health coverage. Although any income effect in this case 
would probably be faint, I believe it would work in the direction of 
people choosing COBRA coverage.
    In sum, under current law a laid-off worker eligible for COBRA 
faces a choice of COBRA or individual coverage with no subsidy. Most go 
uninsured. With a subsidy of 75 percent or more, most would choose 
insurance. Those who would have purchased COBRA without any subsidy 
would almost certainly choose COBRA over individual coverage if equal 
percentage subsidies were offered. Those who would have purchased 
individual coverage would probably stick with that too, although some 
may switch to COBRA if subsidies were offered.
    We don't know whether COBRA-eligible workers who otherwise would 
have been uninsured would choose COBRA or individual coverage after a 
tax credit was offered. Some would probably choose individual coverage. 
Therefore, the improvement in adverse selection in the COBRA market 
would not be as great if subsidies were also available for individual 
coverage--as in the House-passed bill--compared with proposals that 
would restrict the subsidy to COBRA coverage alone.
Permanent Tax Credits for Individual Coverage
    The Administration proposes to give low-income people who can't get 
health coverage at work a refundable tax credit of up to 90 percent of 
their premium up to limits of $1,000 per covered adult and $500 per 
child, up to two children. Therefore, the maximum credit would be 
$3,000 for a two-adult, two-child family. The proposal would allow the 
tax credits to be used for individual coverage, or coverage obtained 
through a purchasing group or high-risk pool.
    These tax credits would be available in full for single people with 
annual earnings of $15,000 or less, or families with earnings of 
$25,000 or less. The credits would phase down to zero for individuals 
with annual incomes of $30,000, one-adult families with incomes of 
$40,000, or two-adult families with incomes of $60,000 a year.
    The proposal would use a novel procedure to make the credits 
available in advance: People would prove their eligibility based on 
their previous year's tax data. Individuals would present their earlier 
tax forms to an insurance company or purchasing group to demonstrate 
eligibility; then the credit would be deducted from their premium. That 
is an unwieldy procedure--it requires insurance companies or purchasing 
groups to adjudicate eligibility based on personal tax returns. 
However, workers would not be obliged to ``reconcile'' the tax credits 
they received in that manner on their end-of-year tax forms in order to 
calculate their tax credits with greater precision and up-to-date 
income data.
    The biggest flaw in the Administration's proposal is that it does 
not allow people who could get health coverage at work to receive tax 
credits, even if their incomes are very low. That is unfair, since low-
income people who can't afford coverage at work (or who struggle to 
afford work-based coverage) would get nothing. They would have an 
incentive to switch to other (often higher paying) jobs that don't 
offer coverage.
    In general, businesses that don't offer employee benefits like 
health insurance can afford to grant higher wages instead. When they 
decide to hire or retain a worker, businesses focus on the cost of the 
total compensation package, not the split between cash wages and non-
wage benefits. Of course, individual workers may not always be able to 
trade benefits for wages, because they may not have a wide choice of 
jobs with different mixes of compensation available to them at any one 
time. But in the overall economy and over a sufficient period of time, 
the choice of health benefits versus higher wages is very real.
    Under the Administration's proposal, low-income workers would have 
a particularly strong incentive to take higher wages instead of 
employment-based health benefits, and then use the tax credit to 
purchase individual coverage. To save their employees the hassle of 
switching into no-benefit jobs to take advantage of that incentive (and 
to retain valued employees), some small businesses would just stop 
offering coverage in the first place. That would reverse the recent 
trend toward more small employers offering coverage to their employees.
    Second, because its tax credits would cover up to 90 percent of a 
premium, the Administration's proposal could spawn the development of 
inferior insurance plans for low-income people. For example, the 
Administration's plan would give an individual purchasing a $1,000 
policy a tax credit of $900 (90 percent of $1,000). Similarly, someone 
purchasing a really cheap $500 policy would get a tax credit of $450 
(90 percent of $500). The Administration's tax credit would pay 90 
percent for premiums costing up to roughly $1,110 (the maximum $1,000 
credit is approximately 90 percent of $1,110). The problem is: any 
coverage valued at $1,110 or less is probably pretty meager coverage. 
(For example, the average premium for self-only coverage purchased 
through employers is about $2,400.) Low-rate insurance would be better 
than nothing, but it might not really solve the core problem: getting 
everyone access to high-quality medical care.
    One simple way to improve the Administration's proposal may seem 
counterintuitive: reduce the maximum percentage of a health insurance 
premium the tax credit could cover from 90 percent to 50 percent across 
the board. That would give people incentives to purchase full 
coverage--for example, a person wishing to obtain the full $1,000 
credit would have to purchase health insurance worth $2,000, which is 
closer to the value of mainstream coverage. Those wishing to purchase 
cheaper, less generous coverage could still do so, but they wouldn't 
get the maximum $1,000 credit, and the credit couldn't cover more than 
half of the premium in any case. Because young and healthy workers 
could not get the full credit for cheap, barebones coverage outside the 
workplace, they would have a stronger incentive to stick with employer-
based coverage (and their employers would have a much weaker incentive 
to drop coverage on their behalf).
    On the downside, fixing the Administration's tax credit so that it 
could cover at most 50 percent of the premium would reduce the number 
of very young or healthy people who would be induced to purchase 
insurance. It would give them an incentive to purchase more expensive 
coverage with a richer set of benefits than might otherwise be 
available.
    However, we should not try to get health insurance to young, 
healthy people by discouraging employer-based coverage or encouraging 
low-rate benefits. The better path toward universal coverage is to make 
mainstream group coverage affordable and easily available at every 
workplace (whether or not the employer helps pay for coverage) and in 
every state.
    Therefore, a second way to improve the Administration's proposal 
would be to allow low-income workers to use the credits toward the 
purchase of employer-based coverage. Since employer-paid health 
premiums are already excluded from employees' incomes, the caps on tax 
credits for employer-subsidized coverage should be lower than those for 
individual coverage. That would keep the tax treatment of employer 
coverage and individual coverage roughly equal, and thereby eliminate 
incentives tilted toward one form of coverage.
    Finally, the tax credits should be administered--at least as an 
option--through the workplace. All employees, on their first day on the 
job and each year thereafter, should receive an enrollment form for 
health insurance. At the very least, that enrollment form should 
contain a menu of options. States should take on the role of ensuring 
that options for reasonably priced group coverage were available, 
ideally through purchasing groups. A special version of the Federal 
Employees Health Benefits program could be used as a backup, if states 
didn't ensure a choice of coverage was available.
    Employers who sponsor coverage would deduct premiums from 
employees' paychecks, as they do now. In addition, they would add back 
to an employee's pay the tax credit for which the employee was 
eligible, up to the amount of the employee's share of the premium. In 
effect, companies would give tax credits to their employees as they 
purchased coverage, right on their paychecks. The government would pay 
employers back contemporaneously, through bookkeeping adjustments in 
the amounts withheld and sent to the federal government for employees' 
tax payments.
    Employers who do not sponsor coverage would nevertheless give their 
employees enrollment forms for at least one menu of health plans. 
(Those employers could provide options from other insurance companies 
or groups, but at the very least would supply a form for a menu of 
health plans put together by the state.) Like firms that sponsor 
coverage, they would handle payroll deduction of premiums, forwarding 
those payments to the purchasing group. They would also add back to 
employees' paychecks the tax credits for which the employees were 
eligible. Again, the company would be reimbursed for the tax credits 
via its business tax arrangements.
    How would employers know whether or not an employee was eligible 
for a tax credit? The employee's hourly wage could be used as a 
guideline. A schedule of hourly wages could be drawn up to match the 
Administration's annual earnings limits.
    Tax credits provided on employees' paychecks should probably also 
be reconciled on their end-of-year tax returns. At the end of the year, 
the company would show the amount added to workers' pay from the tax 
credit on their W-2 forms. Then workers would file for the tax credit 
on their tax returns; that would be the final determination of exactly 
how much they would receive. The IRS could add a worksheet on the W-4 
form so that employees with multiple jobs or a spouse who works could 
figure an appropriate amount to add to their pay.
    Reconciling tax credits advanced through the workplace or health 
insurers could reduce the number of people willing to take them in the 
first place, if they feared having to pay the money back at the end of 
the year. But it would also allow workers whose employers paid 100 
percent of the premium for health insurance (and received less in wages 
as a result) to share in the credit. That is the only truly fair way to 
distribute tax credits, and it would ensure there were no incentives 
for employers to reduce the share of health premiums they pay.
Conclusion
    While the latest economic indicators signal improvement, I believe 
for several reasons that the economic recovery is likely to be weak, 
and unemployment will keep rising for some time. Meanwhile, after a 
long period of slow growth, health insurance premiums are increasing 
rapidly. The combination of a slow economic growth and rising health 
premiums will cause the number of the uninsured to rise, perhaps 
significantly.
    The PPI strongly supports the effort to make refundable tax credits 
an integral part of a renewed drive toward universal health coverage. I 
encourage committee members to increase the subsidy level of the 
temporary tax credit for displaced workers from 60 percent to 75 
percent or more, to better ensure that few workers would lose health 
coverage and that employers' health costs would be reduced. The 
Administration's proposal for permanent credits for individual health 
insurance should be expanded to include employment-based coverage, and 
should also be made available through payroll deduction at the 
workplace. In any event, the percentage of the premium for those tax 
credits should be reduced from a high of 90 percent to a flat 50 
percent to encourage comprehensive coverage.

                                


    Chairman THOMAS. Thank you very much. So what I am hearing, 
Mr. Lemieux, is that the mechanism is okay, it is just the 
mechanics surrounding it, the way in which it is utilized. But 
the tax credit itself, if it is done correctly, is a model that 
your group would support.
    Mr. LEMIEUX. Yes, sir. Tax credits should be a cornerstone 
for the drive toward covering the uninsured.
    Chairman THOMAS. Thank you.
    Ms. Lav, in describing the potential horrors of this 
system, I am not quite clear, do you believe that the Federal 
law would preempt State law that is now in place?
    Ms. LAV. No, I don't think we would go in that direction at 
all.
    Chairman THOMAS. Okay.
    Ms. LAV. I mean, I think that that is one of the problems, 
you know, that you cannot. It is very difficult to fix this 
individual insurance market, and that is the reason you can't 
rely on it. I was saying we certainly are not going to mandate 
States to do this.
    Chairman THOMAS. All right. Then do you know that the 
provision that we proposed has guaranteed issue in it?
    Ms. LAV. Well, you know, guarantee issue is, you know, as 
under HIPAA is one thing, but it is guarantee issue at what 
price? And when we are talking about credits for low- and 
moderate-income people, you know, if somebody is willing to 
issue them a policy at an exorbitant price, it is not any real 
benefit or choice for them at all.
    Chairman THOMAS. And do you understand that the legislation 
was not a fixed dollar amount, but rather a percentage of the 
cost of the premium with no cap on it?
    Ms. LAV. You are talking about the displaced worker?
    Chairman THOMAS. Yes.
    Ms. LAV. Yes.
    Chairman THOMAS. So that that argument I believe is much 
less significant if you are provided with a percentage of the 
cost with no cap.
    Ms. LAV. Well, I think if you are living on unemployment 
insurance, you are going to have trouble paying the other 40 
percent----
    Chairman THOMAS. No, no. No, I understand all that, but the 
way you presented it, it was as though if people didn't realize 
what was in the legislation and it was a fixed dollar amount.
    The other thing that I find interesting is the current 
State laws in all 50 States have guaranteed renewal provisions. 
And if I were to take the time and go through and look at what 
States currently provide, all 50 States, for example, require 
approval of product design, consumer protections, premiums, the 
provisions which encourage pooling. I just have a very 
difficult time, for someone who in criticizing it could 
certainly criticize it because it doesn't do enough, but that 
what you have done is created some arguments which I don't 
believe are valid, and that you immediately then shift to doing 
more of the same.
    Do you agree with Professor Gruber that if you were to 
enhance Medicaid as you indicated, that it would in fact also 
undermine the employer-based system?
    Ms. LAV. I believe that Professor Gruber has been misquoted 
here this morning. I am sorry he was not at this hearing to 
speak for himself, since his name has been invoked so much.
    But as I understand it, his data suggest that there is no 
more than 20 percent displacement from Medicaid expansions, and 
that the larger data, what has been cited is from a study that 
was counting people who actually--as being part of the 
displacement who actually were not eligible for Medicaid, 
parents of the children. So I think that data that has been 
quoted here is not----
    Chairman THOMAS. Do you believe it is realistic to assume 
that most States in their current fiscal condition would raise 
the percent of poverty to cover many of these displaced workers 
who, as we have discussed, are not really low-income people? Is 
that a realistic possibility?
    Ms. LAV. Well, you know, the Senate Finance Committee 
proposal was talking about a 90 percent match and, I mean, some 
people were even talking about a 100 percent match. I think the 
real issue is how do you get some insurance to these people 
that is insurance that they actually can use, that is not going 
to cost them an amount that people cannot afford when they are 
on unemployment insurance, and that will be available to them 
even if they happen to have diabetes or some other problem 
which hasn't prevented them from working, but will prevent them 
from getting insurance. And so I think there has to be a very, 
very generous or even a full Federal contribution, but I think 
the mechanism is a much better one than throwing people onto 
the individual market.
    Chairman THOMAS. And if you provided a 100 percent--I find 
it ironic that you would use ``match'' in reference to 100 
percent--if you gave the insurance away, would that not have an 
impact on the employer-based system?
    Ms. LAV. For unemployed people? No. I mean, you know, if 
you are talking about people who are unemployed. It would 
certainly if you were doing it on the, for the----
    Chairman THOMAS. Uninsured.
    Ms. LAV. Regular credit, but if you are doing it for the 
displaced worker--and you would have to have, you know, an 
income cap. You couldn't let States decide to do it up to 450 
percent of poverty. You would have to do it, you would have to 
place a cap on it, but that certainly is possible.
    Chairman THOMAS. Indeed, there would be a number of 
mandates.
    Ms. LAV. But I think 90 percent is what the Center was 
advocating.
    Chairman THOMAS. There would be a number of mandates that 
you would have to place on States to make it work.
    Dr. Butler, thank you very much. I do believe that the 
Progressive Institute has also matured in its thinking, in 
terms of the way----
    Dr. BUTLER. I am glad to see they have come along so well.
    Chairman THOMAS. Yes. But it is a pleasure to have both of 
you with us.
    In terms of the eHealth, Mr. Patel, if we are talking about 
a credit which is now going to be built into the system, how 
difficult would it be to modify the software so that people 
could see what their actual out-of-pocket cost would be, if in 
fact that were available?
    Mr. PATEL. That is a fairly straightforward exercise. It is 
an additional column that would, under individual single 
policies, show a minus $1,000. And if they were able and 
willing to put in their income bracket, then we could show how 
that scales based on that. But the computational logic in the 
display is pretty straightforward.
    Chairman THOMAS. And is someone able to kind of reverse 
engineer a plan? That is, if I were looking for one that did 
prescription drugs in some way but didn't cost more than X 
dollars a month, can you input parameters for a plan and then 
see if any match it?
    Mr. PATEL. We made it simple for people to put in 
parameters such as deductibles, co-pays, and they can sort on 
deductibles, premiums, and other items. When it comes to line 
item benefits, and that is where our apples-to-apples 
comparison chart may get pretty straightforward, but not as 
simple as simply typing in the word ``maternity.''
    Chairman THOMAS. Thank you. Also, I note that there are 
some folks, perhaps even some on this panel, who are not as 
computer literate as either they would like to be, or perhaps 
many people out there. The argument is that this is still very, 
very exotic stuff, and we are dealing with a limited number of 
people. One of the terms of the art are a number of hits on a 
particular site. I mean, obviously if 2,000 or 3,000 people a 
month access this, it is a pretty limited universe. What are we 
looking at in terms of the number of hits on eHealth?
    Mr. PATEL. If you don't mind me modifying the question, 
``hits'' sometimes are misconstrued because the numbers become 
inflated. Unique visitors to our site are approximately half a 
million per month.
    Chairman THOMAS. Well, that is significantly different 
because unique visitors could in fact visit the site several 
times, making different comparisons, and under the normal 
``hit'' terminology each of those would be counted as a hit. 
You are talking about unduplicated counts. Is that another way 
of saying it?
    Mr. PATEL. We have a mechanism to screen out duplicated 
visits from the same computer. Hence, these are truly unique 
visits from unique computers. Hits sometimes include different 
graphics and different pages----
    Chairman THOMAS. Yes. Absolutely.
    Mr. PATEL. And again, it is just misconstrued.
    Chairman THOMAS. So you are talking, if we could say this 
in a rough way, and perhaps it is too distorted, but I mean 
half a million head of households kind of thing looking at it, 
which then when you add up the number of people that could be 
impacted by this, gets into possibly the millions fairly 
quickly, and this is something that I think will only grow 
exponentially. So I do want to thank you for your 
presentations, all of you.
    The gentleman from California wish to inquire?
    Mr. STARK. I would be glad to yield to Mr. McDermott.
    Chairman THOMAS. The gentleman from Washington is elevated 
to the top of the list.
    Mr. McDERMOTT. I was certainly counting on Mr. Stark to 
lead this off.
    Chairman THOMAS. Does the gentleman wish to defer to 
someone on this side?
    Mr. McDERMOTT. No, I have a couple questions.
    Chairman THOMAS. Okay.
    Mr. McDERMOTT. As you might guess. On the eHealth stuff, I 
thought the last witnesses were a little bit--well, I don't 
know--I felt misled a bit, in their talking about these health 
care plans for which you would pay. And they said, well, the 
definition is in the bill we passed last year, so I went and 
got it. And it says, ``Qualified health insurance means 
insurance which constitutes medical care.'' Now, I don't think 
you would call that a defined benefit program. That is about as 
wide-open a definition, as unmeaningful a definition of health 
care, as I can imagine your paying for.
    So when I looked at the eHealth, I looked at the Blue Cross 
of California for $127, and I suspect, and I don't know enough, 
I need some help, that you line up these $127 policies for 
young people. I mean, those would be people who say, ``I 
haven't got enough money for health insurance, so here is a 
change, and I'm going to go get this.'' But I notice one thing 
about it is that it doesn't have any maternity benefits, just 
exactly what you would expect young people to probably need at 
some point.
    And then you get over into things like pharmaceutical 
benefits, and you are talking about formularies and a whole 
bunch of things here. Most people don't--I mean, and that is 
for $470 a month. I keep thinking about my laid-off Boeing 
worker--and the Chair is gone. The Chair says you are going to 
get 60 percent. Now, do I understand that means if it is a 
$7,000 policy, you get 60 percent of that? You get $4,200? And 
that somebody in another company that is getting a $3,000 
policy, they get $1,800? Is that it? So we are going to have 
all kinds of levels of benefits, depending on how well people 
guess about what their health is going to be. Am I seeing how 
you are constructing this? It is a guaranteed payment, not a 
guaranteed benefit package, is what I am getting at.
    Mr. PATEL. Mr. McDermott, if I can address the pieces that 
I understand, specifically about the quotation, we put in two 
40-year-old adults as well as a child, and so the prices you 
are seeing reflected in this chart are about 40 year olds. And 
they have a choice. It is a 40-year-old male--actually it is a 
42-year-old male, a 41-year-old female, and a child that is 5 
years old. Here what we are demonstrating is that there are 
options----
    Mr. McDERMOTT. Are they assumed to be absolutely healthy? 
No medical underwriting in this at all?
    Mr. PATEL. Yes. At that point the quotation is typically on 
what is called Tier 1 pricing data, so it is unadjusted average 
prices that the health plans actually sell. But I should point 
out that some of the plans don't include maternity. The first 
one doesn't, the much lower priced one at $127 per month for 
all three individuals, but the $457 policy as well as the $470 
policy do include maternity benefits. They are much more robust 
policies.
    And what I am pleased to report to you today actually is, 
you know, we have an affiliate relationship with the union 
organization that serves those specific Boeing employees that 
you mentioned, the SCPEA union, southern California 
Professional Engineering Association, and off of their own web 
site they have a pointer to eHealthInsurance, understanding 
that sometimes COBRA policies can be very expensive, and they 
would like their people to be empowered to go and shop and find 
a policy that is right for them. And so I am happy that we are 
able to serve some of those constituents in the Boeing area.
    Mr. McDERMOTT. But you do recognize that they are going to 
have less benefits when they come to your--when they leave that 
Boeing contract and come down onto your Web site, they are 
looking at less benefits.
    Mr. PATEL. I haven't done the comparison.
    Mr. McDERMOTT. But it wouldn't surprise you.
    Mr. PATEL. It wouldn't surprise me if there is a 
difference. But this is a fairly robust policy, when we look at 
the $450 per month for three people. It includes most aspects 
of a plan that----
    Mr. McDERMOTT. One week of your unemployment would pay for 
it, but of course you are going to get this six times, 60 
percent of $7,000. You get $4,200 from the government, so you 
have only got to make up $3,000, huh? If you can do that.
    Mr. PATEL. Yes, for the COBRA policy. That is challenging. 
For a policy that someone might buy on their own, I think this 
would equate to----
    Mr. McDERMOTT. So you are really suggesting it would be 
better to leave the Boeing COBRA policy and go down and get one 
of these individual policies.
    Mr. PATEL. It would be cheaper for some people to do that. 
For those that have health conditions, and where the policies 
might be more expensive, it is better for them to stay with the 
COBRA.
    Mr. McDERMOTT. Thank you.
    Mr. McCRERY. [Presiding.] Mr. Houghton?
    Mr. HOUGHTON. Thank you very much.
    I am sorry I wasn't here for your testimony, Mr. Patel, but 
you know one of the criticisms of allowing people to purchase 
individual policies outside the employer structure is that 
there aren't good policies available on the market, and yet I 
think you had mentioned something like 87 percent of the 
policies that you served were sort of comprehensive. I mean, is 
this sort of representative of the general outside market, or 
it is just something that you are involved with?
    Mr. PATEL. No, I believe what we are demonstrating here is 
statistically significant and representative of the majority of 
the United States. You know, on our site we have 10,000 
different plans across 100 different health insurance 
companies, and so the information that we release, when we 
actually look at the data, we wanted to know, are these bare-
bones policies or are they of real substance?
    And that is where we found that, you know, two-thirds of 
the policies had less than a $1,000 deductible and that 87 
percent of them are what we considered comprehensive. And that 
is a very vague term, but it is where we used kind of the 
equivalent of what is in Medicare A, Medicare B, and some med 
supplement with prescription drugs to constitute what is 
comprehensive, and we found that 87 percent of these policies 
were in fact meeting the definition.
    Mr. HOUGHTON. Good. Well, that is helpful. Thank you very 
much.
    Mr. McCRERY. Mrs. Thurman?
    Mrs. THURMAN. Hello, and thank you for being here today and 
giving us an opportunity to kind of discuss the issues versus 
just--you know, so we can see where some of the problems are 
and where potentially we could actually do things to help.
    Mr. Patel, I am very familiar with your information and 
have worked with you, and anything that can give somebody an 
opportunity to look and be able to see what might be available 
to them I think is a good idea. You mentioned, though, in your 
model that you had a 41-year-old, a 42-year-old, and a child. 
What was the average income? Was there an income in that?
    Mr. PATEL. No, we don't have income data. When we ask 
people to apply for health insurance, they don't share that 
information.
    Mrs. THURMAN. So part of the problem that we have might 
even be as to understanding, with the tax credits that were 
being talked about, there may be several of these people that 
would never be able to, really be able to use that because of 
the income level that they are at. I mean, we may find that, 
which I think is quite frankly one of the issues we even have 
with the uninsured issue of unemployed, because it is based on 
last year's salary, not this year's, and you have a Boeing 
employee that was at $30,000 who would not have an opportunity 
to participate, in my estimation, with any of this.
    Mr. PATEL. I could say absolutely yes. I wanted to be very 
clear that this is not the solution for everyone, and that 
impoverished individuals will absolutely need a specific 
solution. And this would represent people in my own family, it 
would represent people that I have worked with as a Big 
Brother, that they will need certain programs to help them 
overcome the affordability barrier. They have not a single 
dollar of discretionary income to provide toward health 
insurance. And I have been shocked to find that in some places 
people below 100 percent of the Federal poverty level even 
don't qualify for Medicaid.
    Mrs. THURMAN. The other question that I have, and maybe 
this is to Dr. Butler, you know, as I talked about earlier, 
certainly the issue that is going on in Florida, we have not 
taken a new high-risk person in since like 1991, somewhere 
around there. They have got a $100 million deficit. But one of 
the other things that we are hearing is there is very limited, 
if any, ability to go out on an outside market as an 
individual. Maybe in what Mr. Patel is looking at, which is a 
PPO, is an HMO, managed care, but there are several areas of 
this country, as we know, that don't have even those 
instruments available to them.
    What kind of research have you done in looking at this tax 
credit that shows that even if you had a tax credit, that you 
would have an insurance instrument available to you as an 
individual?
    Dr. BUTLER. I think there are two ways of responding to 
that. The first is just to amplify what Mr. Patel said, that 
one of the advantages of a credit that is available for people 
to go outside say COBRA coverage or any other insurance is that 
they then can look and they can seek the kind of coverage that 
is available, that fits their needs.
    The second point is that once you provide a subsidy in some 
way, the market will change, just as the market changed for 
employer-based coverage once the IRS ruled that you could get a 
tax exclusion for it. In other words, once you start to put 
money in people's pockets, then other kinds of markets begin to 
develop. I am not suggesting that we take a laissez faire 
approach. I have suggested in my testimony that----
    Mrs. THURMAN. Can I ask something in there?
    Dr. BUTLER. Yes.
    Mrs. THURMAN. In the self-employed, is there a cap on their 
tax credit? Could they only make up to a certain amount? I 
don't know the answer to that.
    Dr. BUTLER. You mean under current law?
    Mrs. THURMAN. Yes, under current law. If they made $80,000 
a year, can they still get the----
    Dr. BUTLER. I believe it is a straight deduction. Yes, it 
is a deduction, I believe, without any limit. A credit is much 
more advantageous for people at the lower income level.
    Mrs. THURMAN. And then maybe you two all can give me some 
ideas of what you are finding out there on the open market for 
individual instruments of insurance.
    Ms. LAV. I mean, unlike the eHealth or the CEA, there was a 
Kaiser study which looked at people that had--and went beyond 
the surface to the individual underwriting with people that 
actually had real life problems, which as I said, half of the 
uninsured and two-thirds of the low-income older uninsured 
have. And they found lots of refusals, lots of exclusions, 
downright refusals, lots of exclusions of whatever that 
person's problem was, which may be why they need the insurance, 
and insurance premiums that were two or even three times the 
basic premium that we are talking about here today. So I think 
that is really what you would find in the real world.
    Mr. McCRERY. I am sorry. I am going to try to get Rob 
Portman in before we go vote, and then Pete Stark.
    Mr. Portman.
    Mr. PORTMAN. Thank you, Mr. Chairman, and thank you for 
your testimony today and your patience in waiting for us. I 
guess I have a couple more elementary questions. First, Mr. 
Patel, I would appreciate your talking a little bit about some 
of the current opportunities out there, and maybe the 
additional opportunities that would come with a more vigorous 
individual market.
    And I think Dr. Butler is right, I think the market will 
change. How much it changes is uncertain in health care. We 
have seen that, and that is one reason we have a problem today, 
is that the market hasn't adjusted as some of us thought it 
might, even in the current configuration, particularly for 
smaller businesses. And, you know, I have constituents back 
home who are coming to me now and telling me woes that sound a 
lot like 1992, 1993 and 1994. You know, in my own town of 
Cincinnati we have had a pretty aggressive HMO health care 
market, and now we are seeing 11, 12, 15, 20 percent increases 
for smaller businesses.
    The first question I would have is really for anybody, but 
Dr. Butler may be the most qualified to answer it, and that 
would be, what are other countries doing in terms of the 
individual market? Most countries have more of a socialized or 
nationalized system, I suppose, that are developed countries. 
But do you have any comparative information on this development 
of an individual market that might be successful?
    Dr. BUTLER. Well, I don't have it off the top of my head. 
In the British market about 10 percent of people are involved 
in the individual market, or small groups, based on the place 
of employment. In Switzerland there is in fact an interesting 
combination of a national program and national subsidy and a 
requirement for insurance, with private plans being made 
available to people.
    Mr. PORTMAN. Is it like the British system, where you opt 
out of the national plan, or is it something you do 
concurrent----
    Dr. BUTLER. Unfortunately, in the British system you don't 
opt out in the sense of getting your money back. You have to 
buy twice.
    Mr. PORTMAN. Right.
    Dr. BUTLER. But some people, many people choose to do that 
because of the deficiencies of the government-sponsored system 
in Britain.
    Mr. PORTMAN. I guess the question I would have is, is there 
any experience in any other country that we have where we have 
gone to an individual market and we have been able to see the 
kinds of affordable health care for individuals that we all 
like to see in this country? I know you have some ideas about 
pooling, and particularly among small business----
    Dr. BUTLER. Well, I would look at the--I think a good 
equivalent of what you are talking about is the very health 
plan that you are in, the Federal employees system, which 
although it is technically an employer-based system, it is in 
fact 10 million people shopping as individuals for plans. That 
is what it actually is.
    Mr. PORTMAN. Right.
    Dr. BUTLER. And we see a very rich market there and a very 
effective market.
    Mr. PORTMAN. But that market, that depends on a very 
healthy subsidy as well.
    Dr. BUTLER. I don't disagree with that, but all I am trying 
to point out is that there is a very strong market there for 
what is a subsidized individual system, and that if you were to 
provide a subsidy certainly at the 75 percent level, which is 
what we are talking about in the FEHBP, I think you would solve 
almost all the problem. If you are not going to get that far, 
you are obviously not going to solve as much of the problem.
    I am just making the point that a market has developed, a 
very effective market, in the FEHBP system, based on 
subsidizing people directly and having advanceability, because 
you get a lower premium and the plan itself gets a direct 
payment, which is exactly what the Administration is arguing 
for. So I think you actually have in place, right before you, 
the basic structure of a market that would develop if you did 
provide this subsidy.
    Mr. PORTMAN. There was discussion earlier about the 
efficiencies in various plans, and I think it was Ms. Lav who 
talked about some of the inefficiencies in an individual 
market, and yet there are a lot of inefficiencies in the 
current system. And when you think about it, the way in which 
we subsidize now through the employer-based system, there are 
obviously some plans that get a larger Federal subsidy than 
others based on the kind of plan that is offered.
    And the question is, on the individual market, can you 
overcome some of those inefficiencies by providing more of a 
blanket subsidy, in essence, or caps on the kinds of plans that 
are being offered, so you don't have a Cadillac plan and a Ford 
plan and then some with no plan at all, all of which are 
subsidized by the Federal government. Do you have a response to 
that?
    Ms. LAV. Well, while there are inefficiencies in almost all 
of these systems, I think what you are doing is making it worse 
with the individual market, because in the employer plan, in 
the FEHBP, you are not saying some people can get insurance if 
you are healthy and some people, if they are not healthy and 
you really need it, don't get insurance. And so I think that is 
the ultimate in efficiency, which is what is throwing people on 
the individual----
    Mr. PORTMAN. But we have built safeguards into the system 
already, and we could always do more, correct?
    Ms. LAV. I am sorry?
    Mr. PORTMAN. We have already built in safeguards with 
regard to preexisting conditions and other prohibitions on 
exclusions. Couldn't you build that into a system?
    Ms. LAV. Not unless you are willing to go to some kind of 
community rating or price control so people could actually 
afford it if they are sick, because insurers always will have 
the advantage, if they can, to shed the individuals who they 
think are going to cost them money. And they won't want to take 
them up, and unless they have to take them up, just as in the 
FEHBP the insurers have to take all comers, then it is not 
going to work.
    Mr. PORTMAN. Right. Thank you, Mr. Chairman.
    Mr. McCRERY. Mr. Stark?
    Mr. STARK. I guess I will just have to ask you to raise 
your hands, but I am going to guess that we could provide 
Medicare for the under-65 population for probably $3,000 a 
year. It was $4,000 for the 55 to 65, for the buy-in, so I am 
extrapolating. Kids are only about $1,000, so you can fuss with 
me about the $3,000, but I am pretty close.
    If you add a maximum co-pay of $1,000, one exposure to the 
hospital, and $100 for the doctor, you are talking about at 
most $4,000 for a plan that--I handed out this list of benefits 
that I got off the e-group--that is probably just as good as 
that, and most of those had a $3,000 premium and a $1,000 co-
pay. So you could have Medicare with completely open enrollment 
and community rating, and why would anyone therefore object if 
using this tax credit, we allowed people to purchase Medicare 
as an alternative?
    That is all we would need to keep the insurance companies 
honest. If they want to compete, let them compete. And we 
already have it for the seniors, where obviously the private 
insurance didn't want to compete. And so I would be perfectly 
willing to say, ``Okay, let's do it,'' but just let Medicare 
offer a plan at budget net and cost as we do now, with the 
subsidy for part B no higher, and go at it that way. Who would 
object to that?
    Dr. BUTLER. I think you would immediately see, of course, 
the adverse selection against Medicare, which is one of the big 
concerns with that. The people who would quickly and 
immediately take that option would be the people with the 
highest cost.
    Mr. STARK. Yes, but our first concern is the guy who 
doesn't get any insurance through the highest market.
    Dr. BUTLER. I understand that. I am just trying to point 
out that the cost of providing that coverage----
    Mr. STARK. It is interesting to see how the conservatives 
always worry about the poor people and the sick people first, 
that they are jamming it to us rich healthy people. I like 
that, Stuart. You are true to form. Always worry about the rich 
people, never give a hoot for the poor. At least you are 
consistent.
    Dr. BUTLER. Well, I think my record is very clear on that, 
Congressman.
    Mr. STARK. Yes, your record is very clear. You don't give a 
rat's behind for the poor and the indigent. All you worry about 
is rich people getting their tax breaks.
    Dr. BUTLER. Congressman, I----
    Mr. STARK. Your career is outstanding in that regard.
    Dr. BUTLER. If you look at the proposals that I have 
actually put forward, you will find that in fact I, like Mr. 
McDermott and Mr. McCrery have been more radical than most in 
terms of saying we should in fact remove the subsidy almost 
entirely from the rich people who get the current exclusion, 
and provide it almost entirely to middle--and low-income 
people, and I am on the record as saying that.
    Mr. STARK. Well, all I have to say to you is, ``Bunk.''
    Mr. McCRERY. I have a related question to Ms. Lav, kind of 
the flip side of this. Ms. Lav, I appreciate your objections of 
a subsidy or a tax credit with respect to very low-income 
people, that a tax credit is not going to do them any good if 
they have to come with $1,000 or $2,000 out-of-pocket to make 
it, to pay the full premium. My question to you, though, is 
would you be willing to cap the current tax subsidy for 
employer-provided health insurance in order to finance more 
generous tax credits for low-income people?
    Ms. LAV. I don't think that particular tradeoff would be a 
very good one, because----
    Mr. McCRERY. Why not?
    Ms. LAV. Even though I am saying that the tax credit is 
inadequate, my written testimony reflects this, I am not really 
willing to say that there should be a bigger tax credit, 
because the larger the tax credit, the more you are pulling 
away from the employer-provided system. I actually would like 
to see----
    Mr. McCRERY. Okay. Well, let's say we are going to expand 
Medicaid. Let's say we are going to expand Medicaid. That costs 
money, too. How about capping the tax subsidy on employer-
provided health insurance to pay for the increase in the 
Medicaid program? Would you be in favor of that?
    Ms. LAV. I actually have not analyzed that trade-off, so I 
am not really prepared to----
    Mr. McCRERY. So you are saying you could maybe live with a 
cap on the tax subsidy for health insurance?
    Ms. LAV. I am not saying that. I am saying that, you know, 
I think we do not want to ruin the part of the health insurance 
system that works well, and I think that is the employer-
provided system. So I think we would have to go very, very 
cautiously there. We don't want incentives for employers not to 
provide insurance, and they already are having incentives not 
to. You know, we already have very rapidly rising health care 
costs right now, and so I don't think this is the time to 
necessarily dump on employers in that way.
    I mean, I know economically it is passed on to the 
employees, you know, in the long run in the trade-off for 
wages. But I think that in the first instance right now I think 
employers would look at it as a problem. So I am not willing to 
say that, you know.
    I mean, I think if we were ever getting to the point where 
we were looking at a comprehensive solution to, you know, to 
try and move toward universal coverage, that would be one among 
many, many elements that could be considered.
    Mr. McCRERY. So you wouldn't reject that out of hand?
    Ms. LAV. That would be one among the elements in a 
comprehensive solution.
    Mr. McCRERY. Thank you very much for that concession, and 
thank you all very much for the work that you have done and 
continue to do on this problem of the uninsured. Mr. Patel, I 
think if for no other reason we should thank you for 
illustrating very clearly how providing very coherent, cogent 
information to consumers is possible, and certainly we do that 
through the Medicare Program, through Medicare+Choice. You have 
done it for your company. And so it is possible to provide that 
kind of good information to consumers so they can make good 
choices.
    Thank you all. This hearing is concluded.
    [Whereupon, at 2:35 p.m., the hearing was adjourned.]
    [Questions submitted from Mr. Doggett to Mr. McClellan and 
Mr. Weinberger, and their responses follow:]

                                  Council of Economic Advisors, and
                                    U.S. Department of the Treasury
                                                     Washington, DC
                                                       May 23, 2002

Question 1
    I was pleased to hear that the Administration is concerned about 
the plight of the uninsured, yet I was disappointed to learn that its 
proposal relies too heavily on individual insurance coverage. In many 
states, there are no ``guaranteed issue'' or ``community rating'' 
requirements on private insurers, so consumers looking for individual 
coverage, even with a tax credit, will pay higher than average rates or 
face denials and exclusions for preexisting conditions.
    (a) How does the President's proposal ensure that affordable and 
comprehensive policies are available for those uninsured consumers 
using your proposed tax credit to purchase coverage in the individual 
health insurance market?
    (b) The Kaiser Family Foundation, the Center for Studying Health 
System Change, Consumers Union and others conclude that without 
substantial reforms, health coverage in the individual market is often 
prohibitively expensive or inadequate, particularly for low-income 
individuals in poor health. Would you support individual health 
insurance market reforms--such as a ``guaranteed issue'' requirement 
already adopted in some states--to ensure that uninsured individuals 
can actually receive coverage in the individual market?
    (c) Please provide me with any evidence you have that refutes the 
claim made by Dr. Jeff Lemieux, in his testimony at the February 13, 
2002 hearing, that ``Because [the Administration's proposed] tax 
credits would cover up to 90 percent of a premium, the Administration's 
proposal could spawn the development of inferior insurance plans for 
low-income people.''
    (d) Please provide any evidence you have that conclusively 
demonstrates that individuals with low-income or poor health can find 
comprehensive insurance--with prescription drug coverage and modest 
cost-sharing--in the individual health insurance market.

    1a) Analysis by the Council of Economic Advisers finds that 
Preferred Provider Organization (PPO) policies with significantly lower 
premiums are almost always available. These plans are not ``first-
dollar'' plans, but they provide effective health coverage. They 
typically cover all major types of medical services and treatment, have 
per person deductibles of $1,000 ($2,000 per family) while also 
covering preventive and emergency care, they generally provide 
significant discounts on all prescriptions and in-network services, and 
they support a range of provider choices. The average premium for a 
plan of this type was less than $3,000, and was less than $1,000 for 
young individuals. For lower income uninsured Americans, the proposed 
health insurance credit thus typically covers more than half of the 
premium the purchaser would face, and generally covers more than a 
third. Such affordable policies are substantially less common in states 
with community rating than in states without such regulation. This 
analysis is supported by an independent survey of its clients by 
eHealthInsurance, and by a survey of the actual inquiry and purchasing 
behavior of persons who seek policies in the individual market by the 
Coalition for Affordable Health Insurance.
    These affordable policies aren't just for those in perfect or good 
health. Analysis by the National Association of Health Underwrititers 
(NAHU) found that individual health insurance was available and 
affordable for those with various chronic conditions, including people 
with allergies, past surgeries, depression, and heart conditions.
    1b) First, this interpretation of the Kaiser study is misguided. 
The National Association of Health Underwriters (NAHU) participated in 
that research and has issued a written response disagreeing with 
Kaiser's interpretation of the data http://www.nahu.org/news/Kaiser-
NAHU--Analysis.doc) While Kaiser focuses on the fact that average 
premium offers are higher for people with chronic or preexisting 
conditions, the lowest offer that the applicants received in each of 
the geographic areas that was studied was actually not much higher than 
the rate for healthy applicants. Except for the one person who was HIV-
positive each of the individual received an offer of insurance. 
Furthermore, many states have high-risk pools that would help those who 
could not get affordable insurance in the individual market.
    This does not suggest that guaranteed issue regulations are 
effective in expanding coverage. States with guaranteed issue 
regulations require that insurers write policies for all comers. When 
coupled with community rating (such as in Maine, New Jersey, New York, 
and Vermont), this policy means that even those with very high expected 
health care costs will face the same price as healthy people. The 
drawback of these policies and many other forms of regulation is that 
the premiums facing most purchasers may be higher than they would be in 
the absence of regulation, since the premium collected must be 
sufficient to cover the expected expenses of the group. Given higher 
premiums, the healthiest individuals (those with low expected costs) 
may chose not to buy policies. Regulation thus provides another cause 
for adverse selection, and a spiraling upward of premiums. In fact, in 
many states with guaranteed issue the premiums for people with the many 
of the preexisting conditions studied by Kaiser would face much higher 
premiums than they would in individual markets without such 
regulations. According to NAHU, ``almost all of the applicants [with 
chronic conditions] would have faced vastly higher health insurance 
costs'' in states with guaranteed issue and community rating. We are 
currently studying proposals for improving high-risk pools. These pools 
canprovide access to insurance for persons with pre-existing conditions 
without excessively raising costs for healthy persons, and are 
functioning well now in many states.
    1c) The health insurance tax credit proposal has coverage 
requirements that exceed current HIPAA standards. Our standards would 
require coverage of catastrophic expenses for in and out patient care. 
These standards of coverage are consistent with benefits included in a 
broad health insurance plan and with the plans described in the CEA 
Health Insurance White Paper. Our standards ensure that policies that 
did not provide meaningful coverage of serious illness would not be 
eligible for the credit. Just because the plans are less expensive and 
do not provide first-dollar coverage does not mean that they are 
inadequate. Covering large expenses is the most important aspect of 
insurance, and the health insurance credit would work in conjunction 
with existing markets to enable millions more to have this kind of 
protection. Moreover, in addition to protection against the cost of 
major medical needs many of the policies examined also provide for 
inexpensive periodic screening and access to discount services should a 
medical problem arise.
    1d) As discussed above, for lower-income Americans, the proposed 
health insurance credit typically covers more than half of the premium 
the purchaser would face for insurance that provides access to the 
private market, and generally covers more than a third. Please refer to 
the CEA Health Insurance White Paper's appendix on this point. A recent 
study by the health insurance distributor eHealthInsurance (of people 
purchasing their policies) found that three-quarters of premiums for 
individual health insurance plans that it sold were less than $2,000 
and three-quarters of family premiums were less than $5,000. Many cost-
effective plans include some prescription drug coverage. A Kaiser 
study, analyzed carefully by the National Association of Health 
Underwriters, found that even hypothetical applicants with chronic 
conditions could generally get health insurance in every market they 
surveyed and that it wasn't that much more expensive. The NAHU analysis 
is supported by a recent study by the Council for Affordable Health 
Insurance, Real People, Real Coverage, which surveyed Member companies 
and found that 81 percent of actual applicants got a policy and 70 
percent got their policies at standard rates.
Question 2
    In Texas, the Medicaid and SCHIP programs have had some success in 
ensuring that low-income families have access to medical care, 
including care for preexisting illnesses and disabilities. In your 
testimony at the February 13, 2002 hearing, you questioned the accuracy 
of estimates by Dr. Jon Gruber concerning the cost-effectiveness of tax 
credits relative to expansions of public insurance.
    (a) On a per-insured-individual basis, is the tax credit you 
propose more or less expensive than an expansion of existing public 
insurance programs?
    (b) How many previously uninsured individuals would your proposal 
cover?
    (c) Under your proposal, how many currently insured individuals 
would move from employer (group) coverage to individual (nongroup) 
coverage?
    (d) How do your estimates from the preceding three questions 
compare to those estimates of proposals to expand public insurance 
programs?
    (e) Please provide any evidence you have to support your answers to 
the preceding four questions.

    2a) A February 2002 Kaiser study estimates the annual public cost 
of the tax credit per newly insured person is $2,757. There are several 
reasons that this estimate may be much too high. For example, an author 
of the Kaiser study noted that he assumes policies cost $10,000 in the 
individual market. When the authors follow more standard assumptions 
and allow for access to less expensive health insurance (with premiums 
more in line with the range we find available in the marketplace), many 
more previously uninsured people take up health insurance and the cost 
per newly insured person is only $1,527. Even a narrow expansion of 
public insurance, such as expanding Medicaid to parents (mandatory 
Medicaid/CHIP expansion to parents with incomes up to 200% of the 
Federal poverty level), would be more costly, at $2,974 per newly 
insured person, than the tax credit proposal. This is true even though 
Medicaid plans typically provide limited choices of providers and 
treatments, and documented problems in access to care in many states. 
And most uninsured Americans would not even be eligible to benefit from 
that proposal.
    2b) Research and independent analysis by Treasury experts indicates 
that the tax credit will allow 6 million or more Americans who would 
otherwise be uninsured during the year to gain one or more months of 
coverage. The credit covers a substantial portion of the premium most 
currently uninsured people would face in the private individual 
insurance market, thus increasing participation in and enhancing the 
efficiency of the individual market for health insurance.
    2c) According to the estimates of the Department of Treasury's 
professional staff, approximately 15 percent of those using the credit 
would be individuals who move from employer to individual (nongroup) 
coverage. This amounts to about 1 percent of those currently with 
employer coverage. The credit is designed to minimize such crowdout; as 
noted below, however, crowdout is a substantial problem for Medicaid 
expansions.
    2d) The current estimates of switching from employer to public 
health insurance coverage in Professor Gruber's most recent work (in 
reports sponsored by Kaiser and by the Center for Budget and Policy 
Priorities) and in the larger Kaiser study which he references, most 
likely underestimates the amount of switching that would occur in a new 
public insurance expansion. There is a large body of academic economic 
research that finds considerable amounts of such switching in Medicaid 
expansions. Much of that research has been done by Professor Gruber 
himself; in his study that was peer-reviewed and published in an 
academic journal (David Cutler and Jon Gruber, Does Public Insurance 
Crowd Out Private Insurance?, Quarterly Journal of Economics, 111(2), 
May 1996, 391-430), Professor Gruber found that at least 48 percent and 
up to 75 percent of the takeup of Medicaid expansions represented 
replacement of private health insurance coverage. In a recent review, 
Kronick and Gilmer conclude that most studies find about 20 percent, on 
average, of the increase in Medicaid enrollments from past Medicaid 
expansions came through the crowding out of private insurance. They 
find relatively more crowdout for Medicaid expansions to relatively 
high income levels, between 100% and 200% of the federal poverty line 
than at lower income levels.. Moreover, individual state measures 
intended to prevent this crowding out were ineffective [Kronick and 
Gilmer (Jan/Feb 2002) ``Insuring low-income adults: Does public 
coverage crowd out private?'' Health Affairs 21.1, 225-240]. Thus, it 
is likely that further Medicaid expansions to higher income levels than 
those observed in the past would result in even greater crowdout of 
employer coverage.
    Furthermore, measures intended to reduce crowd out in public 
programs such as requiring a previous lack of insurance, run the risk 
of encouraging individuals to go without insurance in order to qualify 
for a benefit. In contrast, the health insurance tax credit provides a 
broad incentive to immediately purchase insurance before an injury or 
illness occurs.
Question 3
    3. RAND, the Urban Institute, the American Academy of Actuaries, 
Consumers Union and others, conclude that expansions to MSAs will 
undermine access to health insurance and lead to the creation of 
lucrative tax shelters.
    (a) Please provide any evidence or quantitative analyses you have 
that refutes the claim made by Iris Lave, in her testimony during the 
February 13, 2002 hearing, that the ``Administration's proposal would 
made MSAs more attractive as a tax shelter to healthy, affluent 
individuals by removing or weakening many safeguards Congress enacted 
to prevent MSAs from turning into a significant tax shelter 
opportunity.''
    (b) What actions do you propose to prevent such exploitation of 
MSAs?
    (c) How many previously uninsured individuals would obtain coverage 
through the Administration's MSA proposal?
    (d) What tis the per-insured-individual cost of the 
Administration's MSA proposal?
    (e) Please provide any evidence you have to support your answers to 
the preceding three questions.

    3a) Lowering the eligible deductible for MSAs will make them more 
appealing to families at all income levels including moderate income 
families. Currently about one-third of returns reporting an MSA 
deduction reported AGI of $50,000 or less. Lowering the deductible will 
make the MSA plans more attractive to families with moderate health 
expenses and will thus reduce the possibility that ``adverse 
selection'' between MSA plans and conventional insurance will be a 
problem. Indeed, many Americans are now purchasing plans with 
deductibles in line with our proposed MSA requirements, and also with 
coverage of basic and preventive health care, even though they are 
receiving little assistance from the government with these out-of-
pocket costs.
    3b) As indicated above, lowering the minimum MSA deductible will 
most likely make these plans much more attractive to moderate income 
individuals. The amount that can be contributed to an MSA under the 
President's proposal cannot exceed the maximum annual deductible, 
($2,500 in the case of a single policy). The cap on the maximum 
contribution limits the extent to which a high income individual will 
contribute more than a moderate income individual to an MSA and limits 
the extent to which an MSA can be used as a tax shelter for healthy 
high income individuals. Rather, the proposal is designed to enable the 
millions of Americans who are facing rapidly rising out-of-pocket costs 
in their insurance plans to get access to the same tax-favored status 
for those costs as already exists for employer payments toward health 
insurance premium payments. In addition, according to the Congressional 
Research Service, higher-income individuals tend to be older and to use 
more medical service, futher mitigating the extent to which MSAs can be 
used as a tax shelter. Indeed, since tax-free contributions cannot 
exceed the policy deductible, the allowable contributions into the MSAs 
will be reduced (and are more likely to be consumed by even modest use 
of medical services), rendering MSAs an even less effective tax 
shelter.
    3c) The primary proposal for expanding private health insurance is 
the refundable, advanceable tax credit, targeted to lower and moderate 
income families. The primary purpose of the permanent extension and 
expansion of MSA is to provide additional opportunities to employers 
and employees to find cost effective ways to provide insurance and 
choice. We also support proposals to expand public insurance coverage.
    3c) Under the current law forty percent of the MSA accounts appear 
to have been opened by individuals who had been previously uninsured. 
And all remaining individuals are able to purchase policies with more 
affordable protection against high expenses, and they also get new tax 
subsidies for out-of-pocket expenses.
    3d) As explained above the primary purpose of the MSA proposal is 
to provide greater choice and to make coverage more affordable for the 
millions of Americans with employer coverage who are facing rapidly 
rising out of pocket costs. In addition, the proposal provides greater 
tax equity for families who choose cost effective coverage, and 
families who choose coverage with broad provider networks (and higher 
out-of-pocket payments) rather than narrow, closed-panel HMO plans with 
low out-of-pocket costs.
Question 4
    Nearly one-quarter of the uninsured have access to employer-
sponsored coverage but do not purchase it. Despite a subsidy from their 
employers, many of these individuals cannot afford the premiums for 
coverage.
    (a) What does the Administration's proposal do to assist these 
uninsured individuals?
    (b) Would you support a tax credit that is available in both the 
individual and employer-sponsored insurance markets?

    4a) First, many of these low-income uninsured individuals will be 
eligible for the Health Insurance Tax Credit and thus will have the 
option of purchasing insurance with the credit. Second, we encourage 
the development of high-risk pools, state-sponsored pools, and other 
targeted assistance programs. Most states already have such programs, 
and additional Federal support as envisioned in the House-passed 
economic stimulus bill would enable those who faced high premiums on 
the individual market to purchase affordable coverage.
    4b) Plans to subsidize the purchase of insurance through employers 
are very expensive, on top of an unlimited tax deduction worth a total 
of $120 billion a year already. Several studies have shown that 
extending a health insurance credit to those who choose to purchase 
health insurance through their employers is very expensive and does not 
result in a large decrease in the uninsured per dollar spent. For 
example, one PPI proposal was estimated by the proponents to cost $40 
billion per year Such a credit could result in simply shifting the 
burden of health insurance premiums from employers to the Federal 
government.
Question 5
    The Administration's proposed FY2003 budget for the Department of 
Health and Human Services reveals contradictions in spending 
priorities. While there is a modest increase for Community Health 
Centers (CHCs) and the National Health Service Corps (NHSC), there are 
severe cuts to funds for medical professionals' training as well as 
funds for coordination among health providers. In fact, cuts to the 
Health Professions Nurse Loan Program and the Community Access Program 
alone are more than twice as large as the meager funding increase for 
CHCs and the NHSC. According to the Administration's budget data, that 
represents approximately $398 million in cuts compared to $158 million 
in funding increases. This is on top of the Administration's decision 
to allow significant cuts in Medicaid funding aimed at providers 
serving large numbers of the uninsured.
    (a) At a time when hospitals face significant staff shortages, how 
do your proposals address the concern that the same Community Health 
Centers supported by the Administration are unable to find sufficient 
medical staff?
    (b) As the President stated during his February 11 speech at the 
Medical College of Wisconsin, Medicaid and SCHIP play vital roles in 
providing medical care to vulnerable families. However, many states 
face financial constraints that threaten the vitality of these two 
crucial programs. What actions do you propose the Administration take 
to help states avoid detrimental cuts in both benefits and eligibility 
for Medicaid and SCHIP?

    What the Congressman refers to as allowing ``significant cuts in 
Medicaid funding aimed at providers serving large numbers of 
uninsured'' is actually the closing of a loop-hole that allowed States 
to bill the Federal government inappropriately for billions of dollars 
in excess Federal matching funds. The Medicaid law prohibits State 
financing practices that increase Federal Medicaid spending beyond 
statutory matching rates. Recent studies by the Inspector General of 
the Department of Health and Human Services and by the Congressional 
Budget Office have identified provider payment policies that have 
allowed billions of dollars in Federal Medicaid funds to be used for 
purposes other than that intended including nonhealth expenditure. It 
was clearly not the intent of Congress as expressed in the Medicaid law 
to allow states to collect such excess funds. The Administration has 
taken steps to increase State accountability while also increasing 
State flexibility, and will continue to work to implement the Medicaid 
law effectively.
    5a) The Administration supports several proposals to encourage 
people to enter the medical professions and to target more medical 
professionals to underserved areas. The Budget significantly increases 
funding to finance scholarships for health professionals from 
disadvantaged backgrounds, and to encourage additional providers to 
locate in medically underserved areas. The Budget includes $99 million 
to help boost the supply of nurses by providing grants to schools of 
nursing.
    5b) Medicaid and SCHIP are valuable programs that bring health 
insurance to millions of low-income families. The Federal government 
already pays a large share of the costs of these programs and matches 
States' spending between 50 and 76 percent for Medicaid and 65 and 83 
percent for SCHIP. Finally, in the FY 2003 budget, the Administration 
has proposed allowing States to keep $3.2 billion in SCHIP funds, which 
were set to return to the Treasury at the end of this fiscal year and 
the next. This additional funding will assist states in maintaining 
their current coverage levels, and will ensure that no state has 
insufficient Federal matching funds to expand their SCHIP program if 
they wish to do so. The Administration is eager to work with any state 
that wants to take advantage of these matching funds, and has proposed 
a range of initiatives such as the ``HIFA Model Waiver'' for quick 
approval of any new state proposals to assist lower income populations.

                                


    [Submissions for the record follow:]
Statement of Cori E. Uccello, Senior Health Fellow, American Academy of 
 Actuaries, and Roderick E. Turner, Chairperson, High-Risk Pools Work 
           Group, Task Force on Health Insurance Rate Filing
    The American Academy of Actuaries is the public policy organization 
for actuaries practicing in all specialties within the United States. A 
major purpose of the Academy is to act as the public information 
organization for the profession. The Academy is non-partisan and 
assists the public policy process through the presentation of clear 
actuarial analysis. The Academy regularly prepares testimony for 
Congress, provides information to Federal elected officials, comments 
on proposed federal regulations, and works closely with state officials 
on issues related to insurance. The Academy also develops and upholds 
actuarial standards of conduct, qualification and practice, and the 
Code of Professional Conduct for all actuaries practicing in the United 
States.

Introduction

    The American Academy of Actuaries appreciates the opportunity to 
comment on issues related to providing tax credits to decrease the 
number of uninsured. The Academy was asked to address three issues 
related to options for expanding health insurance to displaced workers 
and the expansion of high-risk pools: (1) whether a tax credit would 
result in a corresponding increase in premiums on the policies that 
displaced workers could purchase, (2) whether costs would increase for 
employers and/or insurers if displaced employees were not required to 
complete their COBRA eligibility before they could purchase a HIPAA 
qualified health plan in the non-group market using their government 
subsidy, and (3) the level of funds necessary to provide a premium buy 
down for participants in high-risk pools. We will address each of these 
issues in turn.

Will Insurers Increase Premiums in Response to Tax Credits for 
        Displaced
Workers?

    Whether insurers will increase premiums in response to providing 
tax credits for displaced workers depends on the duration of the 
credit, whether the credit is temporary or will be available to all 
future displaced workers, and any underwriting restrictions imposed on 
non-group insurers. Generally, credits of limited duration (e.g. 12 
months) likely will have less effect on premiums than credits of longer 
or unlimited duration. Similarly, credits that are temporary (i.e. 
available only to workers displaced within a given time frame) will 
have less effect on premiums than credits available to all future 
displaced workers. Premiums for non-group insurance issued on a 
guaranteed basis may be more affected by tax credits than premiums for 
non-group insurance that is underwritten.
    H.R. 622 would provide tax credits equal to 60 percent of premiums 
for up to 12 months for workers losing their jobs between March 16, 
2001 and December 31, 2003. Credits can be applied to the 2002 and 2003 
tax years. Non-group coverage is available to displaced workers on a 
guaranteed issue basis if they are HIPAA eligible,\1\ but the only 
plans available on a guaranteed issue basis are the HIPAA plans in 
their state of residence. Given this scenario, it is unlikely that 
insurers would significantly increase premiums if tax credits were 
provided to these displaced workers.
---------------------------------------------------------------------------
    \1\ The bill changes the prior coverage requirement to be HIPAA 
eligible from 18 months to 12 months for these people.
---------------------------------------------------------------------------
    Most non-group policies are written on an individual policy form. 
These policies are regulated by state insurance departments that must 
approve the rate levels. The insurance departments have criteria that 
these types of policies must meet before the department will approve a 
rate increase. These criteria are based on the experience of the 
contract and are compared against required loss ratios (incurred claims 
divided by earned premiums). They would not allow for a rate increase 
without justification based on claims experience. Generally, states use 
past claims experience, but expected future changes in experience may 
be submitted in some instances. In other words, companies are not free 
to set the rates at whatever level they choose. Furthermore, all 
policyholders of similar demographics must be charged the same premium. 
In other words, one person could not be charged a higher premium than 
another person with similar demographics simply because he's a 
displaced worker. For these reasons, individual policies would not see 
a significant increase in premium if a tax credit were made available.
    In some states, policies that are not regulated like individual 
policies can be sold in the non-group market. These are written using a 
trust vehicle. The rates on these products can be set by the company 
without approval from the insurance department. However, much like any 
other industry, competition will act to keep rates low. If Company A 
raises its rates above Company B, it risks losing its customers.
    Some states do not use a high-risk pool for the HIPAA guaranteed 
issue mechanism. If for any reason a certain company in such a state 
would get a disproportionate amount of HIPAA eligibles, the company 
could affect its overall claims experience enough for it to require an 
increase in rates. The increase needed would depend upon the proportion 
of HIPAA eligibles it obtains compared to what it had planned for in 
its pricing. Even if this rate increase should be needed, it likely 
would be much lower than the level of the 60 percent tax credit. In 
these states, both HIPAA eligible and non-eligible people are subject 
to extra premium surcharges based on their health conditions.
    In states that use high-risk pools as the HIPAA mechanism, an 
increase in the number of insureds in these mechanisms may increase the 
amount of funding required. This could increase the assessments made to 
insurance carriers. Currently, the level of assessment is usually 
around 1 percent of total premiums charged by the carriers. Even if the 
assessments doubled or tripled over time, which would seem unlikely, 
the rate increase this would cause would be minimal compared to the 60 
percent tax credit.

What is the Impact of Eliminating the Requirement That COBRA 
        Eligibility
Be Exhausted Before HIPAA Non-group Eligibility?

    Currently, HIPAA requires that individuals exhaust their COBRA 
eligibility before becoming eligible for a HIPAA qualified plan in the 
non-group market. One option being considered in conjunction with 
providing tax credits to displaced workers is eliminating this 
requirement. In other words, displaced workers would be allowed to use 
tax credits for either COBRA coverage or non-group coverage, or they 
could move to a HIPAA qualified policy at any point during their COBRA 
coverage period, including immediately at termination of the group 
coverage.
    Currently, COBRA suffers from adverse selection and premiums 
collected from COBRA participants fall below claims for these 
participants. In 2000, average COBRA costs exceeded the average costs 
for active employees by 54 percent.\2\ Although people are more likely 
to elect COBRA coverage if they are unhealthy, demographics can also 
explain part of the difference in costs between active workers and 
COBRA participants. COBRA participants are older than active 
participants,\3\ presumably because younger COBRA eligibles can find 
less expensive coverage in the non-group market, especially if they are 
healthy. COBRA coverage can be an attractive option, however, for older 
COBRA eligibles.
---------------------------------------------------------------------------
    \2\ Charles D. Spencer & Associates, Inc. ``2000 COBRA Survey: One 
in Five Elect Coverage, Cost is 154% of Active Employee Cost.'' Spencer 
Research Reports (Chicago, IL, August 25, 2000): 329.04.-1.
    \3\ Paul Fronstin. ``Health Insurance Portability: COBRA Expansions 
and Job Mobility.'' EBRI Issue Brief No. 194 (February 1998).
---------------------------------------------------------------------------
    An important issue is whether costs would go up, compared to the 
current environment, for employers and/or non-group insurers if 
displaced workers were not required to complete their COBRA before 
being eligible for a HIPAA qualified plan in the non-group market. To 
help address this question, it is useful to consider the insurance 
options for workers terminating employment.
    Workers terminating employment can be assumed to be in one of two 
categories based upon health. They either can or cannot qualify for a 
medically underwritten health insurance policy in the non-group market. 
For each of these health categories, displaced workers today can go to 
one of three insurance status categories after losing employment 
(assuming that they do not get another employer based plan or go to a 
government program). For people who can pass underwriting, the three 
insurance categories are: COBRA, a non-group policy, or uninsured. For 
people who cannot pass underwriting the three insurance categories are: 
COBRA, HIPAA eligible plan (after exhausting COBRA eligibility), or 
uninsured.
    For people who could qualify for a non-group policy, the effect of 
a tax credit would be to make coverage more affordable. As a result, 
many people who chose to go uninsured in the absence of a tax credit 
would be encouraged to purchase coverage. This influx of relatively 
more healthy people initially into both COBRA plans and the non-group 
marketplace would improve the experience of both plans. In addition, in 
the current environment, some people who would pass underwriting may 
choose to purchase more limited and inexpensive plans in the non-group 
market rather than the more expensive COBRA plans which often have 
richer benefits than people choose to buy in the non-group market. A 
tax credit may induce some of these people to stay with their COBRA 
plan rather than go to the non-group market. This may especially occur 
among younger displaced workers. This would improve the experience of 
the COBRA plan, but could worsen the non-group experience by removing 
some of the better risks.
    On the other hand, some of the unhealthy people who went uninsured 
in the absence of a tax credit would now purchase a COBRA plan or a 
HIPAA eligible plan. This influx of relatively unhealthy people could 
worsen the experience of both COBRA and HIPAA non-group plans. It is 
also possible that some relatively unhealthy people currently enrolled 
in a more limited non-group plan would instead choose to stay in COBRA 
if it offers more comprehensive coverage. While this would happen with 
less frequency than the other situations it would shift some of the 
poorer risks from the HIPAA non-group plans to the COBRA plans.
    The net effects on the COBRA and non-group markets of a tax credit 
for displaced workers, combined with an elimination of the requirement 
of exhausting COBRA eligibility before HIPAA eligibility, are unclear. 
In particular, it is unclear whether the influx of healthy participants 
would offset the higher costs of new unhealthy participants. To answer 
this question, we would need more information on the relative share of 
the displaced worker population that is unhealthy and the effect of 
reducing premium costs on the COBRA and non-group purchasing behavior 
of displaced workers by health status and other demographics, 
especially age.

Subsidizing High-Risk Pools

    We have been asked to estimate the funds needed to provide a 
premium buy-down for participants in state high-risk pools. 
Specifically, how much it would cost the Federal Government to provide 
a subsidy to all states if the subsidy were predicated on reducing the 
premium to a level lower than normally associated with high-risk pools 
today. In particular, H.R. 622 would provide states grants of up to 50 
percent of the losses they incur in connection with the operation of a 
pool, if premiums charged under the pool were restricted to no more 
than 150 percent of the premium for applicable standard risk rates. 
Although the Academy could not estimate the specific cost to the 
Federal Government for such a proposal within the timeframe required 
for this statement, we can provide some insights into this issue.
    Communicating for Agriculture prepares periodic reports that 
provide detailed information on state risk pools, including operating 
statistics. According to the most recent report published in 2001, 29 
states have created high-risk pools, including 24 that use the risk 
pool for portability under HIPAA.\4\ Total enrollment in these pools in 
2001 exceeded 127,000 individuals, and continues to grow. In 2000, risk 
pool expenditures totaled $691 million, including $651 million in 
incurred claims and $40 million in administrative costs. Premiums, 
however, covered only $391 million of expenditures, with the remaining 
funding coming from assessments on health insurers or other entities 
($250 million) and from state appropriations.
---------------------------------------------------------------------------
    \4\ Communicating for Agriculture, Inc. Comprehensive Health 
Insurance for High-Risk Individuals: A State-by-State Analysis, 
Fifteenth Edition, 2001/2002, Fergus Falls, MN: Communicating for 
Agriculture & the Self-Employed (2001).
---------------------------------------------------------------------------
    State risk pools provide a source of health insurance coverage to 
individuals who might otherwise be unable to purchase insurance due to 
health conditions. Premiums charged for coverage under these pools 
exceed the standard rates for healthy individuals in the non-group 
market, but fall below what would be charged in the non-group market in 
states that allow for higher premiums for unhealthy individuals. Most 
states cap premiums for coverage in high-risk pools at no more than 200 
percent of average standard rates. Indeed, for the risk pool to qualify 
as the HIPAA portability option, premiums must be capped at 200 percent 
of the standard rates, or less. However, several states cap risk pool 
premium rates at lower amounts. For instance, Minnesota, Oregon, and 
California cap premiums at 125 percent of standard rates. Many other 
states cap premiums at 135 to 150 percent of standard rates.
    An important consideration regarding the costs associated with 
lowering the premium cap is how the costs associated with individuals 
entering the pool at the lower premiums compare to the costs for those 
already entering the pool at the higher premiums. If premiums are 
reduced, some individuals who do not buy a high-risk pool product due 
to the expense would likely buy one in the future. It is possible that 
the experience of these people would not be as bad as the current high-
risk pool population. They would, however, be expected to generate 
claims in excess of their premium in most cases. This would create 
additional dollar losses for the program that would not have existed 
before the subsidy. To induce states to lower their premium caps, it is 
likely that an additional subsidy would be needed to cover these new 
losses, as well as the subsidy needed for the current population.
    One potential method of assessing the extent to which experience of 
the new entrants would differ from the current pool is to examine how 
the loss ratios of risk pools with higher premium caps differ from loss 
ratios of risk pools with lower premium caps. Presumably, if lower 
premium caps encourage a broader, relatively more healthy, risk pool, 
loss ratios for states with low premium caps would be lower than those 
with high premium caps. An examination of loss ratios for state risk 
pools, however, reveals no clear trend between loss ratios and premium 
cap percentages. The lack of any discernable trend may reflect 
differences in the calculation of the base rates to which the premium 
cap percentages are applied. In addition, some state pools actually 
charge rates lower than the maximums prescribed, some states charge 
different rates to HIPAA-eligible vs. other pool insureds, and some 
states have a low-income subsidy program. Other differences may also 
contribute to the lack of correlation between loss ratios and premium 
caps, including how eligibility for the pool is defined and whether the 
enrollment is capped. All of these differences would need to be 
considered when determining the relative risk of new entrants if 
premiums were lowered.
    Estimating the Federal subsidy required to encourage risk pools to 
lower their premium caps would also need to consider additional 
factors. First, the incremental growth in pool enrollment that may be 
experienced when premium caps are reduced would need to be estimated. 
These estimates need to recognize that even without changes in premium 
cap percentages, enrollment in most risk pools is growing, in part due 
to the economic downturn. Perhaps more important, enrollment growth 
would also need to be estimated for pools that have capped enrollment. 
Second, increases in health care costs will further increase the 
difference between premiums paid to risk pools and the claims incurred. 
Finally, how the Federal Government defines risk-pool losses will 
affect the amount of subsidy. Defining losses broadly as the difference 
between claims and administrative costs less premiums will require 
higher Federal subsidies than if losses are defined as net of 
assessments. However, the more narrow definition of loss will penalize 
states that partly fund their risk pools through assessments rather 
than solely through state appropriations, which might lead them to 
reduce or modify their assessment methodology.

                                


         Statement of the Communicating for Agriculture and the
              Self-Employed, Inc., Fergus Falls, Minnesota
           COMMUNICATING FOR AGRICULTURE URGES CONGRESSIONAL
        SUPPORT FOR REFUNDABLE TAX CREDITS FOR HEALTH INSURANCE
  CA Calls on Congress to also Extend Health Insurance Deductions for
 Individuals; Strengthen Association Health Plans; Support Risk Pools;
                          Increase Competition
WASHINGTON, D.C.--In calling for support for the President's position 
on refundable, advanceable tax credits for the purchase of health 
insurance, Wayne Nelson, president of Communicating for Agriculture and 
the Self-Employed (CA), reminded Congress that any legislative solution 
must address not only the problems of those who have employer-based 
insurance, but also those who purchase individual health insurance 
policies.
    ``We have long supported refundable tax credits to assist those 
nearly 40 million Americans who are now uninsured,'' said Nelson. 
``And, a great many of this 40 million will not have access to 
employer-based insurance and must look for assistance in the individual 
marketplace.''
    Nelson said his organization, which represents farmers, ranchers 
and small rural businesses all across the country, initiated a Campaign 
for Consumer Choice and Lower Health Costs last year specifically 
designed to support legislative changes that would level the playing 
field for those Americans who purchase individual health care coverage. 
In addition to refundable tax credits, the Campaign calls for:

     LExtending the health insurance deduction to 100 percent 
for all self-employed AND individuals who pay for their own insurance;

     LStrengthening and expanding association health plans for 
individuals;

     LCreating risk pools serving as health safety nets in 
every state to support workable access guarantees for those who 
otherwise would not be covered in the individual insurance market;

     LContinuation and expansion of MSA accounts to offer more 
choices and help lower health costs for individuals and the self-
employed; and

     LRestoring competition and choice to make health insurance 
more affordable for individuals and the self-employed.

    Communicating for Agriculture and the Self-Employed is a 30-year-
old national, non-profit, rural membership organization long known for 
its work on health care reform, tax reform, and rural and agricultural 
policy issues. CA is made up of farmers, ranchers, small businesses and 
other self-employed members in all 50 states. For more information on 
CA contact the Web site at SelfEmployedCountry.org.

                                


     Statement of Jonathan Gruber, Ph.D., Professor of Economics, 
    Massachusetts Institute of Technology, Cambridge, Massachusetts
    I am pleased to have this opportunity to provide an analysis of the 
implications of the President's proposed health insurance tax credit 
for health insurance coverage and public sector costs. I am a Professor 
of Economics at MIT and have been doing research in health economics 
for more than a decade. I am an Associate Editor of the Journal of 
Health Economics, the leading journal of the Health Economics field, 
and a co-editor of the Journal of Public Economics, the leading journal 
in the field of taxation and public finance. I am also a Faculty 
Research Fellow at the National Bureau of Economic Research, where I 
direct the Program on Children.
    Over the past few years, through work with the Kaiser Family 
Foundation, I have developed a microsimulation model to analyze the 
implications of tax credits for health insurance. In this testimony, I 
would like to discuss the results of using this model to analyze the 
President's budget proposal. These results are part of an ongoing 
project with the Kaiser Foundation to estimate the effects of tax 
credits and public program expansions designed to expand coverage for 
the uninsured; the full results from that project will be publicly 
released soon.
Background on the Model
    The results that I discuss below come from a very detailed 
microsimulation model of health insurance decisions. This model takes 
what the we know about individual, firm, and insurer behavior, and uses 
that to predict what will happen to health insurance coverage, and 
public sector costs, when insurance policy changes. This approach is 
broadly similar to the approach used by the Congressional Budget Office 
or Joint Tax Committee in scoring legislation, although there are of 
course many differences in the particulars of execution.
    This model takes as its base the 1999 Current Population Survey, 
updated to 2001 dollars. This nationally representative survey that 
allows me to estimate, for the entire nation, the impact of policies 
such as tax credits. On to that data I have matched information on the 
cost of both group and nongroup insurance from publicly available 
sources, in order to estimate the baseline from which policy changes 
would move us.
    The core of the model is a set of ``behavioral responses'' which 
map changes in insurance prices (due to subsidies) to individual, firm, 
and market behavior. These behavioral responses are developed through a 
careful reading of the health economics literature, incorporating both 
my research and that of others, and through careful consultation with a 
range of experts in academia, the private sector, and the government.
    This model has been used extensively to analyze a variety of tax 
policy options. The results from some of this analysis was presented in 
``Tax Subsidies for Health Insurance: Costs and Benefits,'' Health 
Affairs, 19(1), January/February 2000, pages 72-85. The model has been 
continually developed and updated since that earlier work.
The President's Proposal
    The purpose of this letter is to present my results from analyzing 
the President's proposal for a health insurance tax credit in his FY 
2003 budget. I am not analyzing or incorporating any other of the 
President's health proposals. The salient details of the tax credit 
are:

     LThe credit is a refundable tax credit towards the 
purchase of nongroup health insurance. It may not be used for public or 
employer-sponsored health insurance purchases.
     LFor single filers, there is a credit of up to 90% of the 
costs of the nongroup plan, with a maximum credit amount of $1,000. 
This credit amount is available up to $15,000 of modified AGI; it then 
phases out fully by $30,000 of AGI.
     LFor joint filers, there is a credit of up to 90% of the 
costs of a nongroup plan, with a maximum credit of $1,000 per adult and 
$500 per child, up to $3,000 total. This credit is fully available up 
to $25,000 of family income, and then phases out fully by $40,000 of 
family income (if only one adult purchases insurance) or $60,000 of 
income (if more than one adult or any children purchase insurance).
     LThe credit can be used either retrospectively or in 
advance; in the latter case, the Treasury Department would pay the 
credit directly to the insurer.
     LThere are future provisions to allow the credit to be 
used to purchase into group insurance pools. I do not model those here, 
as they presume the availability of pooling mechanisms that would need 
to be developed for this purpose. I focus only on the effectiveness of 
this credit in the context of the nongroup insurance market.

    This credit structure is very similar to that analyzed in my 
earlier work. In that work, I raised the crucial issue of 
advanceability. Since most of the uninsured have low incomes, and low 
asset holdings, it will be quite hard for them to pay in advance the 
costs of insurance and then be reimbursed for those costs more than one 
year later when they get their tax refunds. The President proposes to 
solve this problem through the advanceable credit described above.
    An important question is how effective this approach will be in 
practice. There are two reasons to be skeptical that this will be fully 
effective. First, if individuals who claim the credit in advance, and 
whose incomes then turn out to be higher than expected, are asked to 
``repay'' the advance credit amount at tax time, this could deter many 
individuals from claiming advance credits. Second, even if there is no 
``reconciliation'' of this form, there may be wariness about using 
advance credits. The experience of the Earned Income Tax Credit (EITC) 
is informative here. Advance payment of the EITC is available, and for 
almost all taxpayers this would be more sensible than getting the 
refund in a lump sum the next year. Moreover, safeguards are in place 
so that individuals are very unlikely to ``overclaim'' their EITC (e.g. 
that there is little odds of a reconciliation problem). Yet, fewer than 
1% of EITC claimants do claim their credit in advance.
    As a result of these limitations, I find it highly unlikely that 
advanceability will be fully effective. In my estimates below, I 
therefore make the assumption that it is half-effective: that is, for 
half of individuals, the credit is treated as advanceable, but for the 
other half, it is not.
Results of Analysis
    The results of this analysis are presented in Table 1, which shows 
the aggregate impacts of the tax credit. The first row of the table 
shows the aggregate costs. The next panel shows the takeup (in persons 
in the first column, and as a percent of group size in the second 
column) and costs by previous (before policy change) insurance status 
groups. The next panel shows the change in the size of each insurance 
group due to the policy. The final row shows the revenue cost per newly 
insured person.
    My analysis suggests that:

     LThis policy will cost $5.2 billion per year.
     LThere will be 10.5 million persons who takeup the credit. 
Of those, roughly one-third (3.3. million) are the uninsured.
     LThere will be a very sizeable movement of almost 4 
million persons out of employer-provided insurance. A total of 2.4 
million persons will be dropped from group insurance by their 
employers. Of those, one million will takeup nongroup insurance, but 
1.4 million will become uninsured. And 1.5 million persons will switch 
from their group policies to nongroup policies.
     LWith 3.3 million previously uninsured taking the credit, 
but 1.4 million persons who previously had employer-provided coverage 
becoming uninsured, there will be a net reduction in the number of 
uninsured of 1.9 million.
     LThe net result is a public cost per newly insured person 
of almost $2,800.

    Thus, the tax credit does have its intended effect of significantly 
increasing the purchase of nongroup insurance by the uninsured. But it 
also has an unintended effect of slightly eroding the group insurance 
market, so that the net reduction in the uninsured is fewer than 2 
million, or 5% of the existing number of uninsured.
Sensitivity to Insurance Cost Assumptions
    One of the key debating points about those modeling tax credits for 
health insurance is the extent to which individuals will find low cost 
nongroup plans on which they can use their tax credit. This is an 
important issue because the costs of nongroup insurance plans are so 
high. For a 40 year old male in excellent health, the average cost of 
nongroup insurance is roughly $2,000 per year. But these costs rise 
dramatically with age and poor health status. Indeed, in my data, for 
the typical uninsured family the cost of a nongroup policy is estimated 
to be roughly $10,000.
    My estimates assume that individuals and families who purchase 
nongroup insurance will pay these average market prices for that 
insurance. But some claim that the individuals will use this credit to 
avail themselves of new, low cost insurance options. This claim is hard 
to evaluate without the policy actually being passed, but it merits 
consideration.
    Thus, Table 2 summarizes the results of my analysis under the base 
case, and under two alternative assumptions about nongroup policy 
costs. The first assumption is that half of all persons are able to 
obtain nongroup policies at 25% below the average cost in the market. 
The second is that half of all persons are able to obtain policies at 
50% below their average cost in the market. This second assumption in 
particular is fairly extreme. Even for a healthy 40 year old male, 
obtaining a policy for $1,000 would involve a deductible on the order 
of $3,000, a 20% copayment, a $5,000 out of pocket maximum, 20% 
coinsurance on drug costs, and no coverage of mental health or other 
professional services (according to actuarial analysis done for the 
forthcoming Kaiser Family Foundation project).
    This first two columns of the table shows that there would be a 
modest effect of a 25% premium reduction. The reduction in the number 
of uninsured increases from 1.9 to 2.2 million, with only a small 
increase in costs to $5.4 billion per year. But there is a much larger 
effect of assuming a 50% premium reduction, as shown in the second two 
columns. In that case, the number of uninsured falls by 3.6 million, 
with costs rising to $6 billion per year. There is also a much larger 
displacement of the employer insured, with the number of employer 
insured falling by 6.9 million (1.9 million of whom end up uninsured).
Discussion
    The results from this analysis suggest the advantages and 
disadvantages of the President's tax credit proposal. The main 
advantage is that this proposal delivers benefits to a large number of 
taxpayers (at least 10 million) at a relatively low cost ($5 billion 
per year). This helps reduce the inequities of the existing system of 
tax subsidies, whereby those with employer-provided insurance (and the 
self-employed) receive tax subsidized insurance and others do not.
    The main disadvantage is that this policy has a very modest impact 
on the number of uninsured in the U.S. My central estimates suggest 
that the number of uninsured will be reduced by fewer than 2 million, 
or 5% of the existing number of uninsured. This amount equals roughly 
the rise in the uninsured estimated to be caused by the recent rise in 
unemployment, according to a recent analysis by myself and the Kaiser 
Family Foundation (available at http://www.kff.org/content/2001/6011/
6011.pdf). Thus, this proposal on net does not reduce the number of 
uninsured from where it was one year ago.
    The other disadvantage of this approach is that it displaces, 
rather than supplementing, the group insurance market. The group 
insurance market remains the most effective way to delivering insurance 
benefits, through its use of large pools to minimize the variation in 
health risk to insurers. My estimates suggest that for every one person 
gaining insurance coverage, two persons will be leaving the group 
insurance market.
    The limited impacts of this credit should not be surprising, given 
that it covers such a small share of the costs of insurance in the 
nongroup market. As a result, this credit does much more to help pay 
the costs of those already buying insurance than to raise insurance 
coverage; roughly two-thirds of those taking the credit in all my 
analyses are those who already have private insurance coverage.
    A central question is the extent to which the effectiveness of this 
credit will be boosted by the availability of ``low cost'' insurance 
options. As shown above, if half the population is able to find an 
insurance policy that lowers the cost of their insurance by half, the 
reduction in the uninsured almost doubles at very little additional 
cost. But I am quite skeptical of claims that low cost policies can 
raise the effectiveness of this tax credit, for two reasons. First, if 
such low cost policies exist today, why are there still 40 million 
uninsured Americans? The answer is that most Americans do not want 
catastrophic-type coverage; they apparently would rather be uninsured 
than buy low premium, high out-of-pocket-cost policies. The enormous 
out of pocket costs that are typically associated with these low cost 
policies make them unattractive to the uninsured.
    Second, the very reason that such policies can be low cost is that 
they are only purchased by the very healthiest individuals for whom 
they are affordable; in other words, there is ``virtuous selection,'' 
as opposed to ``adverse selection.'' If a credit allows less healthy 
persons to purchase these policies, they will have to raise their 
prices to adjust for this higher cost risk pool. In other words, low 
prices on these policies today do not guarantee low prices in the world 
of a health insurance tax credit; it seems likely that those low price 
policies will increase in price once more ``typical'' persons are 
buying them.
    I would also like to emphasize the central nature of two aspects of 
this tax credit policy. First, this credit is refundable. Roughly half 
of the uninsured do not pay taxes, so that a nonrefundable credit does 
them no good. Indeed, my model suggests that the number of uninsured 
would fall by less than half a million persons if this credit were not 
made refundable. Given debates over tax credit refundability in other 
contexts, it is important to recognize the importance of making any 
health insurance credit refundable.
    Second, this credit is very tightly targeted to the lowest income 
families in which most uninsured reside. Increases in income limits 
would do very little in terms of increasing the impact of this policy, 
but would dramatically raise costs. For example, I have reestimated 
this model for the same proposal as that included in the President's 
budget, but raising all income limits by 50% (e.g. the credit for 
singles phases out from incomes of $22,500 to $45,000). The results of 
doing so, illustrated in Table 3, are striking. The takeup by the 
previously uninsured goes up from 3.3 to almost 4 million. But there is 
a very large rise in the erosion of the group market, including an 
increase in those moving from group insurance to uninsured of over 
600,000. As a result, there is almost no impact on the net change in 
insurance coverage; the reduction in the number of uninsured goes only 
from 1.9 to 1.95 million. But costs go up by over one-third, to almost 
$7 billion per year.
    Thus, raising the income limits actually had pernicious effects on 
the insurance market on net: the reduction in the uninsured was 
unchanged, but there was a much larger net movement from group to 
nongroup insurance. As a result, the total cost of the policy rose by 
over one-third with no gain in insurance coverage. This finding 
highlights how important it is to keep tax policies tightly targeted. 
If the tight targeting proposed by the President is loosened at all as 
this bill becomes law, it will greatly reduce its public policy 
benefits.
                                 ______
                                 

           Table 1: Refundable Credit for Non-Group Insurance
------------------------------------------------------------------------
                                    Number of    Percent of    Net Cost
                                     Persons     Insurance      ($2001
                                    (Millions)    Category    Millions)
------------------------------------------------------------------------
Total Cost in $2001                                              5231
------------------------------------------------------------------------
Total Takeup of Subsidy             10.47         4.4            --
------------------------------------------------------------------------
  Previously non-group               4.25       43               3066
------------------------------------------------------------------------
  Previously uninsured               3.3          7.5            3263
------------------------------------------------------------------------
  Previously employer-insured        2.57         1.6            -958
------------------------------------------------------------------------
  Previously Medicaid                0.35         1.9            -140
------------------------------------------------------------------------
Total Change in Population Size
------------------------------------------------------------------------
  Non-group                          6.19        62.6            --
------------------------------------------------------------------------
  Uninsured                         -1.89        -4.3            --
------------------------------------------------------------------------
  Employer-Insured                  -3.99        -2.5            --
------------------------------------------------------------------------
    Firm dropped to non-group            1.03          0.7       --
------------------------------------------------------------------------
    Firm dropped to uninsured            1.36          0.9       --
------------------------------------------------------------------------
    Switch to non-group                  1.54          1         --
------------------------------------------------------------------------
    Uninsured due to decreased           0.05          0         --
 Contributions
------------------------------------------------------------------------
  Medicaid                          -0.35        -1.9            --
------------------------------------------------------------------------
Cost per Newly Insured ($2001)                                  $2772
------------------------------------------------------------------------

                                 ______
                                 

               Table 2: Refundable Credit for Non-Group Insurance--25% and 50% Premium Reductions
----------------------------------------------------------------------------------------------------------------
                                                                25% Premium Reduction     50% Premium Reduction
                                                             ---------------------------------------------------
                                                               Number of     Net Cost    Number of     Net Cost
                                                                Persons       ($2001      Persons       ($2001
                                                               (Millions)   Millions)    (Millions)   Millions)
----------------------------------------------------------------------------------------------------------------
Total Cost in $2001                                                            5404                      6017
----------------------------------------------------------------------------------------------------------------
Total Takeup of Subsidy                                        11.91           --        15.45           --
----------------------------------------------------------------------------------------------------------------
  Previously non-group                                          4.37           3119       4.48           3128
----------------------------------------------------------------------------------------------------------------
  Previously uninsured                                          3.84           3755       5.56           4833
----------------------------------------------------------------------------------------------------------------
  Previously employer-insured                                   3.26          -1253       4.79          -1546
----------------------------------------------------------------------------------------------------------------
  Previously Medicaid                                           0.44           -217       0.63           -398
----------------------------------------------------------------------------------------------------------------
Total Change in Population Size
----------------------------------------------------------------------------------------------------------------
  Non-group                                                     7.4            --        10.68           --
----------------------------------------------------------------------------------------------------------------
  Uninsured                                                    -2.16           --        -3.62           --
----------------------------------------------------------------------------------------------------------------
  Employer-Insured                                             -5.01           --        -6.9            --
----------------------------------------------------------------------------------------------------------------
    Firm dropped to non-group                                       1.7        --             2.55       --
----------------------------------------------------------------------------------------------------------------
    Firm dropped to uninsured                                       1.63       --             1.88       --
----------------------------------------------------------------------------------------------------------------
    Switch to non-group                                             1.58       --             2.3        --
----------------------------------------------------------------------------------------------------------------
    Uninsured due to decreased
      Contributions                                                 0.05       --             0.06       --
----------------------------------------------------------------------------------------------------------------
  Medicaid                                                     -0.44           --        -0.63           --
----------------------------------------------------------------------------------------------------------------
Cost per Newly Insured ($2001)                                                $2503                     $1663
----------------------------------------------------------------------------------------------------------------

                                 ______
                                 


    Table 3: Refundable Credit for Non-Group Insurance High Phaseout
                Scenario: 50% Increase in Phaseout Levels
------------------------------------------------------------------------
                                    Number of    Percent of    Net Cost
                                     Persons     Insurance      ($2001
                                    (Millions)    Category    Millions)
------------------------------------------------------------------------
Total Cost in $2001                                              6981
------------------------------------------------------------------------
Total Takeup of Subsidy             12.47         5.3            --
------------------------------------------------------------------------
  Previously non-group               4.58        46.3            3806
------------------------------------------------------------------------
  Previously uninsured               3.98         9.1            4234
------------------------------------------------------------------------
  Previously employer-insured        3.54         2.2            -922
------------------------------------------------------------------------
  Previously Medicaid                0.37        2               -137
------------------------------------------------------------------------
Total Change in Population Size
------------------------------------------------------------------------
  Non-group                          7.86        79.6            --
------------------------------------------------------------------------
  Uninsured                         -1.95        -4.4            --
------------------------------------------------------------------------
  Employer-Insured                  -5.6         -3.5            --
------------------------------------------------------------------------
    Firm dropped to non-group            1.64         1          --
------------------------------------------------------------------------
    Firm dropped to uninsured            1.97          1.2       --
------------------------------------------------------------------------
    Switch to non-group                  1.91          1.2       --
------------------------------------------------------------------------
    Uninsured due to decreased           0.07          0         --
 Contributions
------------------------------------------------------------------------
  Medicaid                          -0.37       -2               --
------------------------------------------------------------------------
Cost per Newly Insured ($2001)                                  $3581
------------------------------------------------------------------------


                                


 Statement of Mary R. Grealy, President, Healthcare Leadership Council
    The Healthcare Leadership Council (HLC) is a coalition of chief 
executives of the Nation's leading health care companies and 
organizations representing all sectors of health care. Our members are 
committed to advancing a market-based health care system that values 
innovation and provides affordable, high-quality health care. HLC would 
like to thank the Committee for focusing today on tax credits for the 
uninsured and for the opportunity to submit this statement.
    The HLC believes there is no greater health care priority in this 
Nation than the over 40 million individuals who are without health care 
coverage. The health consequences to those not having health insurance 
are well documented. They tend to get sick more often because they do 
not receive the preventive and diagnostic care that so many of us take 
for granted. They miss more time on the job and statistics tell us they 
will die too early. In addition, we must consider the consequences to 
our Nation's overall well-being from having such a large population of 
uninsured, including productivity losses and the strain on health 
providers caused by uncompensated care. The President and the Congress 
should be highly commended for giving the issue of the uninsured the 
attention it deserves.
    The HLC supports a three-pronged approach for the uninsured. This 
includes: (1) refundable tax incentives to encourage the purchase of 
insurance of the consumer's choice, including employer-offered 
coverage; (2) improvements in the current Medicaid program and State 
Children's Health Insurance Program (S-CHIP), including enrollment of 
those currently eligible and using program dollars to expand private 
coverage; and (3) increased efforts to facilitate awareness of the 
importance and availability of health insurance, especially among small 
businesses.
    President Bush has demonstrated a strong commitment to the 
uninsured by including more than $90 billion in his recent budget to 
begin mapping the way to coverage for a significant number of the 
uninsured. The majority of this funding would provide a health tax 
credit to help families purchase insurance plans in the non-group 
insurance market. The HLC believes this is a significant first step 
toward a universal, market-based health care system. It is our goal to 
work with the Administration and Congress to encourage the development 
and expansion of this proposal. The HLC also supports the President's 
proposed medical savings account and flexible spending account 
amendments which will make these products more effective coverage 
options.
    These proposals, as well as proposals to increase funding for 
community health centers, assist hard-to-insure families and 
individuals in purchasing coverage from state risk pools, and maximize 
use of existing S-CHIP funds, are all indicative of the 
Administration's resolve to strip away the diverse array of access 
barriers encountered by the uninsured.
    The members of HLC are committed, as well, to raising awareness of 
this national problem and bringing solutions to those lacking health 
coverage. In June of 2001, we formed the national Health Access America 
campaign because we believe that all Americans should have access to 
today's modern medical miracles and life-enhancing technologies and 
treatments. Under this campaign, HLC members have committed their 
leadership, energies and resources to help solve the Nation's uninsured 
crisis.
    In addition to our Health Access America campaign, the HLC 
continues to highlight model programs throughout the country that 
promote health coverage and access, presenting them with our ``Honor 
Roll For Coverage'' award. In 2001, we recognized Virginia's model 
waiver program, that allows S-CHIP funds to be used for employer 
coverage, and South Carolina's Communi-I-Care program, which provides 
care to individuals who are not eligible for public assistance or 
employer-based insurance. In May 2002, the HLC will present our fifth 
Honor Roll for Coverage award to Sacramento County in California. 
Sacramento has based its program on that of a previous HLC Honor Roll 
awardee, and works with small employers to increase access to coverage 
for their employees.
    The HLC is also committing resources to continued research on the 
characteristics of the uninsured and potential solutions to reduce the 
number of uninsured. Some of our findings and observations that will 
bring a critical perspective to the topic of today's hearing include:

    Characteristics of the Uninsured. Four out of every five uninsured 
persons are in families with at least one employed family member. In 
other words, 15 percent of the Nation's population is uninsured and 
only a small percent of these people--16 percent--are in families where 
no members are employed. Of the uninsured in working families, 39 
percent turn down an offer of insurance from an employer--usually 
because they can not afford it, and 61 percent are not offered employer 
insurance. These striking figures suggest that refundable tax 
incentives could serve to bridge the premium gap between what an 
employer and employee are each able to pay for a health insurance 
policy. Such tax incentives could encourage many employers not now 
offering coverage to do so, and will also aid those not offered health 
insurance by their employer.

    True tax equity. For low income workers, the current levels of tax 
credits being discussed for the purchase of non-group insurance are 
greater than the value of the current exclusion from Federal income 
taxes of average health insurance benefits paid by an employer. A 
commonly-discussed health insurance tax credit amount for families is 
$3,000. However, for families with income levels between 200 to 300 
percent of the Federal poverty level ($35,000 to $53,000 for a family 
of four), the tax exclusion for employer-paid health insurance is worth 
only about $661. For families between 300 and 400 percent of poverty, 
the exclusion is worth only about $802. Thus a refundable health tax 
credit would be particularly valuable for low income workers, even 
those who are offered insurance by their employers.

    Maintenance of employer offers of insurance. The cost of tax 
incentive proposals to reduce the uninsured presents a challenge. This 
is especially true for proposals that allow tax incentives to be used 
for those with employer offers of insurance. This is because 
legislative ``scorers'' (Joint Tax Committee, Congressional Budget 
Office, Office of Management and Budget) incorporate assumptions that 
many of those already receiving employer-based insurance will be 
``bought out'' with Federal dollars and current employer expenditures 
will cease. However, employers are paying for benefits given to workers 
as a form of wages. The extent to which employers will reduce their 
contributions toward health insurance for employees when a subsidy such 
as a tax credit is offered can be demonstrated by looking at economic 
studies examining experiences with wage subsidies. HLC has examined two 
studies (Katz, 1996 and Witte et. al, 1998) in which general wage 
subsidies and child care subsidies from the government did not reduce 
overall benefit spending efforts by employers.
    An additional consideration in regard to employer maintenance of 
effort for health benefits is raised when targeting credits to only 
lower income employees. It is unlikely that employers would 
discriminate by reducing their premium contributions only for low-
income workers receiving the subsidy, while maintaining the current 
contributions for higher income workers not eligible for the subsidy.

    Limits of the S-CHIP and Medicaid programs. Evidence suggests that 
we are reaching the limits of effectiveness in reducing the number of 
uninsured through the S-CHIP and Medicaid programs. While S-CHIP and 
Medicaid have proven valuable for providing health care to very low 
income populations, only about half of individuals currently eligible 
for Medicaid and S-CHIP actually participate. A number of reasons have 
been cited for low participation rates including the fact that 
participation rates of means-tested public insurance programs decline 
as incomes rise. A large number of those not participating are those 
who became eligible upon the inception of S-CHIP, when more children in 
families with higher income levels were offered public insurance. This 
pattern of lower participation among higher income persons is also 
evident in other government health care subsidy programs, including the 
Qualified Medicare Beneficiaries (QMBS) and Specified Low-Income 
Medicare Beneficiaries (SLMBs) programs. Researchers have concluded 
that substantial outreach is necessary to overcome barriers to 
participation, such as the possible stigma associated with public 
programs.
    These data suggest that eligibility alone, without considerable 
investment to remove existing barriers to participation, will not 
efficiently increase insurance coverage. Many eligible individuals in 
the higher income categories of Medicaid and S-CHIP, as well as income 
categories under consideration for Medicaid and S-CHIP expansions, are 
connected to the workforce. Therefore solutions involving employer 
insurance may be more effective in increasing coverage rates for these 
populations.

    Careful targeting. All Americans deserve access to affordable 
health coverage options. However, current budget constraints may 
require a phased-in approach for covering all the uninsured. As 
coverage rates increase, the marginal cost of each newly-insured 
individual increases because greater numbers of the uninsured are 
dispersed within populations of already covered persons. However, 
carefully targeted tax incentives to reach limited populations can 
bring down the costs per newly-insured. For example, targeting the 
credits toward populations less likely to already have coverage such as 
low-income families or workers in small businesses or even a 
combination of these can help to reduce the cost of such an approach 
and still reach many currently-uninsured persons. The HLC has modeled a 
number of targeted tax incentive policies and would be happy to share 
them with the Committee.
    Another population to consider targeting with tax incentives is 
dependents of lower income workers not eligible for S-CHIP or Medicaid. 
Small and medium sized businesses offering insurance to their employees 
contribute, on average, 48 percent of the premium amount for employees, 
and only about 24 percent for dependents of employees. Not 
surprisingly, in many cases, low income employees frequently cannot 
afford insurance for their dependents. Policy makers should take this 
fact into account when designing targeted tax incentives policies for 
the uninsured.

Conclusion

    Mr. Chairman, the Healthcare Leadership Council appreciates your 
substantial efforts on the uninsured this past year and applauds you 
for your ongoing work to find ways to solve the Nation's most pressing 
health care issue. The uninsured must be our national health care 
priority for 2002. This multi-faceted problem will require a variety of 
approaches and we look forward to working with you and the 
Administration to find concrete solutions.
    Thank you for the opportunity to share HLC's views today. We stand 
ready to assist this Committee in any way as you work toward solutions 
that will allow all Americans to enjoy the benefits of our Nation's 
health care system.

                                


      Statement of the National Association for the Self-Employed
    The National Association for the Self-Employed (NASE) is pleased to 
have the opportunity to submit the following statement for the official 
record. We thank Chairman Bill Thomas, Ranking Member Charles Rangel, 
and Members of the Committee for addressing the issue of health care 
tax credits.
    The National Association for the Self-Employed (NASE) is a 
bipartisan, non-profit small business trade association founded in 1981 
that represents over 200,000 members nationwide. Ninety percent (90%) 
of our membership consists of small businesses with five (5) or fewer 
employees. The NASE's primary goal is to help the self-employed meet 
the challenges of making their businesses successful and one of the 
self-employed community's largest challenges is obtaining access to 
affordable health coverage.
    Below are various statistics of which I am certain the Members of 
this Committee and witnesses of this panel are aware.

     LThere are approximately 24 million small businesses in 
our Nation. They account for 99.7 percent of America's employers and 
employ 53 percent of the private workforce.
     LThere are approximately 43 million uninsured Americans in 
our Nation and that number increases as the unemployment rate 
increases. Approximately 62% or 24.5 million of the uninsured have a 
family head that is self-employed or working in a firm with fewer than 
100 employees. (Source: Employee Benefit Research Institute data from 
the Census Bureau's March 1998 Current Population Survey).
     LAccording to the General Accounting Office's October 2001 
report on Private Health Insurance, only 36% of employers with fewer 
than 10 workers offered health coverage to their employees despite the 
fact that they represent about 61% of small employer establishments. 
The report cited the primary reason small employers gave for not 
offering coverage was cost.

    These statistics are telling us is that Congress and the 
Administration must focus their efforts on small business access to 
affordable health care in order to effectively reduce the number of 
uninsured in our Nation.
    The National Association for the Self-Employed strongly believe 
that health care tax incentives including tax deductions and tax 
credits for the self-employed are necessary to provide affordable 
health coverage.

Self-Employment Health Insurance Tax Deduction

    Tax credits and deductions are a viable solution to begin 
addressing the existing insurance inequities in the Tax Code. A new 
idea in tax policy is to create parity between employer provided health 
insurance and health insurance for the self-employed.
    Currently, premiums for an employer who sponsors health coverage 
for his/her employees are not subject to FICA withholding tax (Social 
Security and Medicare). Employees that utilize an employer sponsored 
health plan are also not subject to FICA withholding tax (Social 
Security and Medicare) and thus enjoy health insurance premiums free 
from income tax and FICA tax. However, self-employed individuals are 
subject to the self-employment tax (Social Security and Medicare) on 
health insurance premiums for themselves and their dependents. The 
result is that the self-employed pay a tax premium on health insurance 
of up to 15.3% of the cost of that insurance.
    To explain this further here is an example:
    John works for Widget Company, a small business with only two 
employees, including the owner. Widget Company provides employer paid 
health insurance for it's two employees and their dependents. Widget 
Company appropriately deducts in total, the cost of the employee health 
insurance on its business tax return as an ``ordinary and necessary'' 
business expense as authorized by the Internal Revenue Code. Further, 
none of the health insurance premiums are included in the employee's W-
2 income and are therefore free from Federal income tax and FICA 
withholding tax (Social Security and Medicare). The preferential tax 
treatment of the health insurance premiums provides a significant tax 
benefit Widget Company and for employee John. Since John does not 
include the value of the premiums anywhere in his taxable income, he 
has received a tax benefit of up to 35% of the insurance cost. Note 
that Widget Company has not paid any income tax or FICA tax on the 
premiums either.
    John leaves Widget Company and becomes self-employed doing the same 
types of business processes he did for Widget. The cost of health 
insurance premiums are not deductible as an ``ordinary and necessary'' 
business expense and are therefore subject to Federal income tax and 
self-employment tax (Social Security and Medicare). The health 
insurance premiums may qualify for a limited deduction from gross 
income as a ``self-employed health insurance deduction'' on page 1 of 
John's individual income tax return (Form 1040). Even if John can 
utilize the income tax deduction for 70% of the premiums, he must still 
pay income tax on 30% of the premiums. In addition, John must pay self-
employment tax (Social Security and Medicare) on 100% of the premiums. 
In total John has a tax detriment for purchasing health insurance of up 
to 25% of the premium cost.
    This process is another example of the current inequities in the 
Tax Code that are detrimental to the self-employed. By allowing the 
self-employed to claim their health care premiums as a business expense 
the net cost health insurance premiums will be reduced by up to 25%, 
which is a significant reduction. Note that allowing premiums to be an 
``ordinary'' business expense would not affect current income tax 
deductions after 2002.

Acceleration of 100% Deductibility of Health Insurance

    Acceleration of 100% deductibility of health insurance for the 
self-employed is another important tax deduction that would greatly 
assist the self-employed community. Currently it will be phased in by 
2003. However, the NASE feels that sooner is better than later. We 
would like to see 100% deductibility available in years beginning after 
2001.

Refundable Tax Credit

    A tax incentive such as a refundable tax credit should be made 
available for the purchase of health insurance coverage for all 
individuals. It would cover 100% of the cost of health insurance 
coverage for up to $500 for individuals and $1,000 for families. The 
refundable tax credit should be made available to those individuals 
whose employer does not sponsor or contribute to an individual or 
family health plan for their employees and for the unemployed. Self-
employed individuals would have the opportunity to utilize either the 
self-employed health insurance deduction or the refundable tax credit 
but not both.

Conclusion

    We here in Washington D.C. discuss issues through facts, figures 
and legislative solutions. But there is also a personal face to the 
current health care issues that plague the self-employed and small 
business community. Recently, NASE member, Lance Kisby, a Pediatric 
Dentist in Needham, Massachusetts had contacted the NASE office to tell 
his story on how the high costs of health care are affecting his small 
business. Dr. Kisby informed us that his health insurance premiums have 
changed from $522 per month to $945 per month. These increases have 
forced him to pass along some of the cost to his patients by raising 
his fees 5% and to work longer hours to cover the loss of profit due to 
the higher health care costs. Dr. Kisby remarks, ``As a self-employed 
person, I recognize that there are so many hours in a week and that I 
can only raise my fees so much and still be competitive while also 
having money to feed my family.''
    Dr. Kisby's story characterizes the plight the self-employed face 
in attempting to acquire and provide affordable health coverage for 
themselves and their employees. Health care tax incentives would go a 
long way to solve not only the problem of small business access to 
affordable health care but to also alleviate the growing ranks of the 
uninsured.

                                

      
     Statement of Sister Karin Dufault, Ph.D., Chair of the Board, 
 Providence Health System; Seattle, Washington; PeaceHealth, Bellevue, 
   Washington; Providence Services, Spokane, Washington; and Swedish 
                  Health Services, Seattle, Washington
    Thank you, Chairman Thomas and Members of the Committee for 
accepting our statement on the issue of health care tax credits to 
decrease the numbers of uninsured individuals and families in the 
United States. As a coalition of non-profit health care systems with 
hospitals, nursing homes, physician groups, a health plan and other 
facilities in the states of Alaska, Washington, Oregon, Montana and 
California, we are gravely concerned about the harmful effects of so 
many people in the communities we serve who live without adequate 
access to basic health care because they are uninsured or under-
insured.
    According to recent estimates, as many as 21 percent of 
Californians have no health insurance; Montana and Alaska's rates of 
uninsured are nearly 20 percent, and Oregon and Washington's rates of 
uninsured are at 14 and 13 percent, respectively.i These 
estimates do not account for likely increases as a result of the 
economic recession and the corresponding rash of job layoffs in our 
communities.
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    \i\ Kaiser Family Foundation, ``State Health Facts On-line.''
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    As health care providers, we experience the impact of this problem 
on a daily basis, as many of the uninsured receive their only health 
care in our emergency departments. While it goes without saying that 
this is not good medicine for these individuals, the societal 
implications of this situation are even more profound: many of our 
emergency rooms are functioning now at full capacity 24 hours a day and 
are increasingly forced to divert patients to other hospitals nearby as 
a result of too much patient volume. The increasing number of uninsured 
individuals seeking care in hospital emergency rooms threatens access 
for everyone who needs serious emergency care, regardless of health 
insurance status.
    As such, we applaud President Bush and the Members of this 
Committee for your efforts to address this issue that is critical to 
our communities and the people we serve. We support any initiative that 
will achieve greater coverage in a manner that is equitable for all 
Americans and is an efficient use of government resources.
    However, our support for the Bush Administration's tax credit 
proposal as a mechanism to expand coverage must be qualified by some 
critical concerns:

    1) LWe believe the amount of the tax credit proposed by the White 
House will not lead to significantly expanded coverage for low-income 
uninsured; in order to truly reach the most people, the tax credit 
should be considered as one component of a package of policy changes, 
along with an expansion of eligibility and Federal funding for public 
health insurance programs, such as Medicaid or SCHIP.
    2) LAs currently proposed, the tax credit will not improve the 
opportunity for coverage for those people who are currently unable to 
obtain insurance in the individual market due to a combination of age, 
chronic illness or other expensive medical needs--who might otherwise 
be able to afford a standard insurance package.
The Benefits of a Health Insurance Tax Credit
    In addition to opening the door to coverage for at least a portion 
of the uninsured, a tax credit for individuals to purchase health 
insurance offers some desirable potential consequences. These are: 1) 
greater equity between the effective cost of insurance purchased on the 
individual market as compared to employer-sponsored coverage; 2) 
improved choice for individuals among health insurance plans; and 3) a 
potential improvement in the affordability of individual coverage.

    Equity--Under current law, individuals (those who aren't self-
employed) purchasing coverage on the individual market must pay taxes 
on the income used to purchase insurance, whereas those who have 
employer-sponsored coverage escape taxation on the benefit. With a tax 
credit, individuals would receive some offset to their income taxes 
analogous to the benefit received by those in the group market.

    Choice--By offering a tax credit to purchase individual coverage, 
the penalty for a person opting out of his or her employer plan is 
lessened. Assuming the individual is not otherwise in the 
``uninsurable'' category, this would potentially increase the number of 
plans from which an individual could choose.

    Potentially Improved Affordability of Individual Coverage--Assuming 
the tax credit is large enough to encourage enough people to purchase 
coverage, the greater numbers of new enrollees would serve to help 
plans spread risk and improve their medical loss ratio in their 
individual products. If sufficient numbers of new enrollees--estimates 
suggest as many as 18 million--armed with a tax subsidy enter the 
individual market, market forces could serve to make such coverage more 
affordable.ii This would be enhanced by options for pooling 
risk in state employee benefit programs and other programs (SCHIP, 
etc.) as proposed by the Bush Administration.
---------------------------------------------------------------------------
    \ii\ Statement of Mark V. Pauly, Ph.D., Professor, Health Care 
Systems, Wharton School, University of Pennsylvania, Philadelphia, 
Pennsylvania. Testimony before the Subcommittee on Health of the House 
Committee on Ways and Means, April 4, 2001.
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Problems with a Health Insurance Tax Credit
    While a health insurance tax credit offers some potential benefits, 
it also has some weaknesses as an approach to significantly reducing 
the number of uninsured. First, in order for a tax credit to stimulate 
significant take-up rates by low-income persons, it must cover between 
25 and 50 percent of premium costs.iii The level of subsidy 
proposed by the Bush Administration, based on research of average 
premiums in the individual market, would not achieve that level for 
most people outside the large group market. Second, creating such a tax 
credit is administratively complex and raises questions about how 
subsidies would be determined and distributed. Third, individuals with 
chronic illness or other medical conditions that require expensive 
treatment and/or pharmaceutical costs find individual coverage 
prohibitively expensive or simply not available at present.
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    \iii\ Pauly, testimony before the Subcommittee on Health of the 
House Committee on Ways and Means, April 4, 2001.

    Achieving Affordability--Professor Mark Pauly of the Wharton School 
at the University of Pennsylvania, a proponent of tax credits, noted in 
testimony before the House Ways and Means Subcommittee on Health last 
year that ``there is a very pronounced `notch' or `threshold,' below 
which credits have small effects and above which effects become much 
larger. For example, we estimate that a credit of half the premium for 
an average policy will reduce the number of uninsured by half, whereas 
a 25 percent credit will only affect a few people, primarily those who 
aren't wage workers.'' iv
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    \iv\ Pauly, testimony before the Subcommittee on Health of the 
House Committee on Ways and Means, April 4, 2001.
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    According to research by the advocacy group Families USA, the 
average annual premium for individual coverage in four of the states we 
serve--Alaska, California, Oregon and Montana--ranges from $2,191 for a 
healthy, non-smoking 25-year-old woman to $5,280 for a healthy, non-
smoking 55-year-old woman.v Based on these premiums, the 
Bush proposed $1,000 tax credit for individuals and $3,000 for families 
would likely fall short of meeting the 50 percent for even the 
healthiest individuals and families. Moreover, out-of-pocket costs, 
which can reach as high as $10,000, are not factored into this 
equation.vi
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    \v\ FamiliesUSA, ``A 10-Foot Rope for a 40-Foot Hole: Tax Credits 
for the Uninsured,'' September 2001.
    \vi\ FamiliesUSA, September 2001.
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    Professor Pauly, in his Health Subcommittee testimony, also bemoans 
the characteristics of the individual market: ``The most problematic 
feature of proposals to make credits available for private insurance is 
the current rather unimpressive state of the private individual 
insurance market in the United States . . . the main problem in this 
market is that administrative costs are high.'' Pauly states that a 
significant number of new buyers in this market would likely increase 
quality and reduce risk screening and premium costs.vii 
However, there is no assurance that sufficient numbers would take up 
individual coverage at the level of the President's tax subsidy.
---------------------------------------------------------------------------
    \vii\ Pauly, testimony before the Subcommittee on Health of the 
House Committee on Ways and Means, April 4, 2001.

    Complexity in Administration--Ensuring that recipients of a tax 
credit aimed at low-income individuals and families utilize the credit 
in large numbers requires that it be designed to account for a range of 
circumstances. For example, the tax credit, even if designed as a 
refund, must be available to recipients such that they have enough 
liquidity to pay monthly premiums. Low-income families and individuals 
often don't have enough money available with each paycheck to cover the 
cost of premiums, even if they know they will receive a refund of part 
of the cost at year-end. Fluctuating income--a common characteristic of 
low-income workers--also may create problems in their ability to pay 
for monthly premiums. Addressing these concerns and others will place 
new burdens on the Treasury, which administers and enforces the federal 
tax code and would therefore be responsible for administrating the tax 
credit. Finally, such an approach would add complexity to the already 
Byzantine tax code. The sheer complexity of the tax code may serve as a 
barrier to take-up rates on the part of low-income individuals and 
families.
    Access to Coverage for ``Uninsurable'' Individuals--The effects of 
market forces and phased-in options to allow the tax credits for 
purchasing coverage through state-sponsored purchasing groups or 
government employee programs will likely improve access for some of the 
uninsured. However, many people eligible for the tax credit will remain 
uninsured under the Bush proposal due to their poor health status. Even 
those who are currently able to enroll in a state high-risk pool face 
prohibitive premium costs. For example, the annual individual premium 
range for Washington State's high risk pool is $1,370 to $8,734 per 
person; in Oregon it is $1,620 to $6,120 per person; in California it 
is $1,300 to $10,284 per person; in Alaska it is $1,394 to $12,188 per 
person and in Montana it is $2,127 to $5,762 per person.viii
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    \viii\ Lori Achman and Deborah Chollet, Mathematica Policy 
Research, Inc., ``Insuring the Uninsurable: An Overview of State High-
Risk Health Insurance Pools,'' August 2001.
---------------------------------------------------------------------------
    In a recent research paper on state high-risk pools, Lori Achman 
and Deborah Chollet of Mathematica Research, Inc. conclude that ``the 
small size of pool enrollment is attributed to their high premiums and, 
in many states, to the very limited benefits they offer. Moreover, 
because all states must find ways to cover shortfalls between premiums 
earned and costs incurred, some have capped enrollment; most do not 
conduct extensive advertising or outreach to attract enrollment.'' 
ix
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    \ix\ Achman and Chollet, August 2001.
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Conclusion: Tax Credits Combined with Public Program Expansion
    In our view, tax credits for health insurance are one piece of what 
should be a package of legislative proposals designed to bring about 
incremental reductions in the number of uninsured in the United States. 
Because the Bush tax credit proposal is likely to prompt only a 
fraction of the uninsured to purchase coverage, we urge that Congress 
and the White House consider one or more of the following additional 
steps to expand coverage for the poorest and the most difficult to 
insure. These are:

     LMEDICAID/CHIP EXPANSION. Expand eligibility under 
Medicaid and/or CHIP for all persons below 150 percent of the Federal 
poverty level, including legal immigrants. States should have the 
option of implementing this expansion either as an extension of the 
existing Medicaid program or as a separate program with a private 
insurance benefits package (e.g., subject to minimum benefits 
requirements).

     LEXPANSION OF THE FEDERAL EMPLOYEES HEALTH BENEFITS 
PROGRAM (FEHBP). Permit individuals without access to employer-
sponsored coverage to obtain benefits through FEHBP. FEHBP 
participating plans are required to cover all eligible applicants 
without pre-existing condition exclusions regardless of health status 
during annual open enrollment periods for persons who have maintained 
continuous coverage for at least one year. Allowing individuals to 
access this risk pool would reduce their premium burden and further 
spread risk for the FEHBP.

     LOUTREACH AND ENROLLMENT FOR MEDICAID/CHIP COVERAGE. 
Remove barriers to enrollment in Medicaid and CHIP and expand outreach 
to special populations.

     LFUNDING TO STRENGTHEN THE HEALTH CARE SAFETY NET. Even 
with significant improvements in levels of coverage, many will continue 
to go without health insurance for various reasons. As such, it is 
critical that funding be increased for community health care safety net 
providers. We recommend Congress and the White House provide $500 
million annually in grants to local communities to enhance 
collaboration and cooperation among safety net hospitals and clinics.

    We applaud the members of this committee and the White House for 
pursuing in earnest strategies to improve access to health care and 
basic social justice for our nation. We look forward to working with 
our Congressional representatives and the White House in this vital 
endeavor.