[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
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].
______
References
Achman, Lori and Deborah Chollet. Insuring the Uninsurable: An Overview
of State High-Risk Health Insurance Pools. The Commonwealth Fund,
http://www.cmwf.org, August 2001.
Blumberg, Linda J. ``Health Insurance Tax Credits: Potential for
Expanding Coverage.'' The Urban Institute, Health Policy Briefs No.
1, http://www.urban.org, August 2001.
Duchon, Lisa, Cathy Schoen, Michelle M. Doty, Karen Davis, Erin Strumpf
and Stephanie Bruegman. Security Matters: How Instability in Health
Insurance Puts U.S. Workers at Risk. The Commonwealth Fund,
December 2001.
Feder, Judith, Larry Levitt, Ellen O'Brien and Diane Rowland.
``Covering the Low-Income Uninsured: The Case for Expanding Public
Programs.'' Health Affairs (20) 1, January/February 2001.
Families USA. ``The Health Care Safety Net: Millions of Low-Income
People Left Uninsured,'' http://familiesusa.org, July 2001.
Families USA Foundation. A 10-Foot Rope for a 40-Foot Hole: Tax Credits
for the Uninsured, http://familiesusa.org, September 2001.
Garrett, Bowen, Len M. Nichols and Emily K. Greenman. Workers Without
Health Insurance: Who Are They and How Can Policy Reach Them? The
Urban Institute for the W.K. Kellogg Foundation, http://
www.communityvoices.org.
Greenstein, Robert and Richard Kogan. ``New House Stimulus Proposal
Dominated by Multi-Year or Permanent Tax Cuts,'' Center on Budget
and Policy Priorities, http://www.cbpp.org, December 26, 2001.
Gruber, Jonathan. ``Tax Subsidies for Health Insurance: Evaluating the
Costs and Benefits,'' National Bureau of Economic Research Working
Paper #7553, http://www.nber.org/papers/w7553, February 2000.
Guenther, Gary. RL30762: Tax Subsidies for Health Insurance for the
Uninsured: An Economic Analysis of Selected Policy Issues for
Congress, Congressional Research Service, Long Report for Congress,
January 2001.
Hoffman, Catherine and Alan Schlobohm. Uninsured in America: A Chart
Book, Second Edition, The Kaiser Commission on Medicaid and the
Uninsured, http://www.kff.org., May 2000.
Kaiser Commission on Medicaid and the Uninsured. Health Insurance
Coverage In America: 1999 Update, http://www.kff.org, December
2000.
Kaiser Commission on Medicaid and the Uninsured. Medicaid's Role for
the Disabled Population Under Age 65, Fact Sheet, http://
www.kff.org, April 2001.
Kaiser Commission on Medicaid and the Uninsured. The Uninsured and
their Access to Health Care, Fact Sheet, http://www.kff.org,
January 2001.
Kaiser Family Foundation. ``Medicare At a Glance,'' Fact Sheet, http://
www.kff.org, June 2001.
Kaiser Family Foundation. ``Rising Unemployment and the Uninsured,''
http://www.kff.org, December 2001.
Kaiser Family Foundation and Health Research and Educational Trust,
Employer Health Benefits 2001 Annual Survey, http://www.kff.org,
September 2001.
Lambrew, Jeanne M. How the Slowing U.S. Economy Threatens Employer-
Based Health Insurance. The Commonwealth Fund: Task Force on the
Future of Health Insurance, November 2001.
Lyke, Bob. Tax Benefits for Health Insurance: Current Legislation,
Congressional Research Service, CRS Issue Brief, December 2001.
Meyer, Jack A. and Elliot K. Wicks, eds. Covering America: Real
Remedies for the Uninsured. Economic and Social Research Institute,
June 2001.
Mills, Robert J. ``Current Population Reports: Health Insurance
Coverage: 2000,'' U.S. Department of Commerce, Economics and
Statistics Adminisration, U.S. Census Bureau, http://census.gov,
September 2001.
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.
---------------------------------------------------------------------------
\i\ Kaiser Family Foundation, ``State Health Facts On-line.''
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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
---------------------------------------------------------------------------
\iv\ Pauly, testimony before the Subcommittee on Health of the
House Committee on Ways and Means, April 4, 2001.
---------------------------------------------------------------------------
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
---------------------------------------------------------------------------
\v\ FamiliesUSA, ``A 10-Foot Rope for a 40-Foot Hole: Tax Credits
for the Uninsured,'' September 2001.
\vi\ FamiliesUSA, September 2001.
---------------------------------------------------------------------------
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
---------------------------------------------------------------------------
\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
---------------------------------------------------------------------------
\ix\ Achman and Chollet, August 2001.
---------------------------------------------------------------------------
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.