Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
June 16, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4179 words
HEADLINE:
TESTIMONY June 16, 1999 CHARLES N. KAHN III HOUSE WAYS AND
MEANS RETIREMENT AND HEALTH RELATED TAX PROPOSALS
BODY:
Statement of CHARLES N. KAHN III President HEALTH INSURANCE
ASSOCIATION OF AMERICA Before the HOUSE COMMITTEE ON WAYS AND MEANS U.S. HOUSE
OF REPRESENTATIVES Health Insurance Tax Initiatives June 16,
1999 Introduction Chairman Archer, members of the Committee, I am Charles N.
Kahn 111, President of the Health Insurance Association of
America (HIAA). HIAA represents 269 member health, long-term care, disability
income, and supplemental companies providing insurance coverage to over 115
million Americans. I appreciate this opportunity to speak to you today about the
critical role tax initiatives could play in making private health
insurance more affordable for all Americans and further expanding
access to private long-term care insurance. Despite Expanding Economy and
Success Controlling Costs, A Growing Number of Uninsured In response to
double-digit health care inflation in the 1980s, employers became much more
aggressive purchasers of health coverage. As a result, the nation has
experienced a dramatic decline in the growth of health
insurance premiums over the past ten years. Double-digit inflation in
excess of 20 percent in the late 1980s dropped dramatically to low single digit
rates in the late 1990s, more in line with general consumer price index trends.
This decline in premium growth during the 1990s coincides with dramatic
increases in market penetration of managed care. Enrollment in PPOs, 11MOs, and
other forms of managed care has tripled during the past 10 years from 29 percent
in 1988 to 86 percent in 1998. It is estimated that the impact of lower
insurance prices resulting from the growth of managed care and other private
sector innovations saved consumers between $24 billion and $37 billion in 1996,
and that this savings will grow to over $125 billion by the year 2000. These
savings are critically important because the cost of insurance relative to
family income is the most important factor in determining whether people will be
insured. Without these savings, some employers would not have been able to
afford private insurance and would have been forced to discontinue coverage for
their workers. In fact, it is estimated that there would be 3 to 5 million
additional uninsured Americans right now were it not for these lower premium
trends during the past few years. Despite this progress, however, the number of
Americans without health insurance coverage has continued to
increase during the last decade. It is relatively unprecedented for the ranks of
the uninsured to be growing at a time when our nation's economy is expanding and
health insurance premium trends are moderating. There are
nearly 170 million non-elderly Americans who currently enjoy the security of
private health insurance, and the vast majority receives its
coverage at the workplace. But for too many Americans, private health
insurance is unaffordable, and often, government programs like Medicaid
do not cover these adults. Affordability is the key deciding factor when
purchasing health insurance. Almost six of every ten uninsured
individuals live in families with incomes less than 200 percent of the federal
poverty level. In addition, the number of people with insurance has declined as
health care inflation has continued to outstrip the growth in real family
income. There are over 44 million Americans without health
insurance, and by the end of the next decade that number will grow to
at least 53 million - one in every five non-elderly Americans. If health care
costs increase at a faster than projected rate, and the economy experiences a
downturn, the number of uninsured could rise to 60 million - or one in four
working-age Americans.' Clearly, this is a disturbing trend that we, as a
nation, cannot afford to let continue. HIAA's InsureUSA Initiative Last month,
the HIAA Board of Directors approved InsureUSA, a major initiative to help
expand health insurance coverage. Building on the success of
employer-based health coverage, this plan would increase health coverage through
a combination of targeted subsidies, tax incentives, cost-control measures, and
education. We already have provided a copy of our plan to all members of
Congress, including members of this Committee. In addition, we have developed a
special website, www.InsureUSA.orsal that provides detailed information about
the plan and about the uninsured. And, of course, HIAA staff would be happy to
meet with members of Congress at any time to discuss the proposal. HIAA's member
companies developed InsureUSA after nearly one year of deliberations. The plan
was shaped considerably by research data prepared on behalf of HIAA by William
S. Custer, Ph.D., as well as other research on the uninsured. There are five
basic precepts underlying the InsureUSA initiative. The time is ripe for action.
Despite expansions of the employment- based health insurance
market in recent years, the number of Americans without health
insurance coverage will continue to grow by about I million people per
year. As noted previously, one in every four working age Americans could lack
coverage by the end of the next decade if steps are not taken immediately to
stem this tide. Having said that, the individual components of InsureUSA could
be phased-in over a number of years. In addition, because the proposal attacks
the core causes of uninsurance, specific elements of the proposal could be
enacted first, without jeopardizing others. To increase coveri2e. health
insurance, must be more affordable for more Americans. The main reason
that Americans are uninsured is because they cannot afford health
insurance coverage. Many well-intentioned attempts at insurance market
reform have had the effect of increasing the cost of coverage and increasing the
net number of individuals without health insurance. Reform,
therefore, should both reduce the costs of health insurance and
provide financial support for those who otherwise cannot afford coverage.
Multifaceted problem requires multifaceted approach. While affordability is the
primary reason people lack health coverage, there are many reasons people lack
coverage. Rather than advocating a singular approach to insuring more Americans,
we are advocating a diverse program designed to attack the underlying reasons
that people are uninsured. A strong, vibrant private health
insurance market should remain a cornerstone of our health care system.
Expanded coverage must be achieved through means that do not threaten the
coverage of other Americans or damage the existing private market. Competitive
markets remain the most efficient and responsive mechanisms to provide consumers
with coverage. Regulations that stifle innovation, flexibility, and
responsiveness to consumers should be strongly discouraged. Reforms should make
health coverage more affordable within the context of t he employment-based
private health care system. rather than undermining it. Nine in every IO
Americans with health coverage get their health insurance
through their employer. And while coverage has declined overall, the percentage
of Americans with employment-based health coverage has increased during the past
few years. Therefore, InsureUSA would build upon this base, by providing
targeted subsidies and incentives for those who are less likely to benefit from
employment-based coverage. For the purposes of today's hearing, I would like to
highlight the tax initiatives proposed in the InsureUSA plan. As I mentioned
earlier, affordability is a key factor for many Americans when purchasing
health insurance, and tax incentives will help make affordable
coverage a reality for those who do not have insurance. In addition, these tax
initiatives will help provide greater equity in the purchase of health
insurance for small business owners, the self-employed and individuals
without access to employer- sponsored health insurance. The
cost of these tax incentives is large, but HIAA estimates that they would
broadly benefit over 100 million Americans who experience inequity under the
current tax code. Targeted Tax Credit for Small Businesses
First, I would like to discuss the proposal's tax credits for
small businesses. Studies show that firm size is one of the major factors
affecting the cost of health insurance. Smaller employers face
higher costs when providing health benefits than larger firms because their size
limits their ability to (1) spread risk, (2) self-insure and avoid expensive
state mandates and taxes, and (3) manage high administrative costs incurred
because of a lack of staff devoted to health benefits. The smallest firms tend
to have low-wage employees who live in low-income families. In fact, 90 percent
of the uninsured whose family head works for an employer with fewer than 10
employees also live in families whose income is less than 200 percent of the
federal poverty level , Therefore, InsureUSA would like to propose a tax
credit for small employers that could be phased-in beginning with the
smallest firms: 40 percent credit for employers with fewer than IO employees 25
percent credit for employers with 10-25 employees 15 percent credit for
employers with 26-50 employees These credits could help the nearly 39 million
Americans who belong to families whose head of household works for a company
with ten (or fewer) employees. If eligibility for such credits was extended to
all companies with 50 or fewer employees, the total would rise to 71 million
Americans. Furthermore, InsureUSA proposes that all employee contributions for
health insurance be excluded from taxable income (even if not
made through a section 125 cafeteria plan). This would primarily benefit small
employers for whom it is often administratively difficult to set up cafeteria
plans. Individuals and the Self-Employed InsureUSA also includes tax incentives
that target individual health insurance purchasers and the
self-employed. It is a fact that people without access to employer-sponsored
plans have a higher likelihood of being uninsured. Nearly a quarter (24 percent)
of self- employed Americans are uninsured, and almost three out of ten (28
percent) non-elderly Americans in families headed by an unemployed individual
lack health care coverage. Under current tax law, individuals cannot deduct
their out of pocket health insurance premiums until their
medical costs exceed 7.5 percent of their income, and the self- employed will
not have full deductibility until 2003. HIAA's proposal would extend full tax
deductibility of premiums to everyone purchasing individual health
insurance policies and would take effect upon the date of enactment
rather than 2003. As a result, coverage would become more affordable for over 12
million self-employed workers and for nearly 25 million Americans living in
families headed by a non- worker. Medical Savings Accounts (MSAs) While there
has not been significant enrollment in medical savings accounts (MSAs) under the
demonstration authorized by the Health Insurance Portability
and Accountability Act of 1996 (HIPAA), statistics compiled by the Department of
Treasury show that a large proportion of those with MSAs were previously
uninsured. Therefore, InsureUSA proposes that Medical Savings Accounts (MSAs) be
made more attractive by: simplifying the MSA rules under HIPAA, eliminating the
"sunset" provision for MSAs available to the self- employed and small employers,
extending availability to large employers, permitting both employees and
employers to contribute to MSAs, and making it easier for PPOs and other
network-based plans to offer MSAs. Cost of Insure JSA Tax Incentives Overall,
HIAA estimates that changing the current tax system to encourage greater
health insurance coverage and make health
insurance more affordable for over 100 million Americans, would cost
approximately $30 to $36 billion annually. We estimate that 71 million people
(20 million of whom are currently uninsured) would be eligible for the
tax credit, either through their employer or the employer of
their family head. As a result of this credit, between 2.6 and 4.1 million
uninsured will gain coverage at a cost in revenue expenditures of between $23.8
and $29.3 billion annually. These figures are broken down by firm size in the
table below. An additional 1.5 and 3.5 million individuals would gain coverage
through the individual market. Costs to the Federal government would be between
$7.8 and $8.7 billion in annual lost income tax, and the previously uninsured
would account for between $670 million and $1.5 billion. The uninsured have many
faces, and tax initiatives will not benefit all of them. These incentives that
FHAA is proposing are part of a broader initiative that includes government
program expansion to low-income individuals, subsidies for the working poor, and
a series of actions that would lower health care costs and educate consumers.
Polling Data HIAA released a public opinion survey showing that more than 4 out
of 5 Americans support the elements of the InsureUSA proposal and that 7 out of
10 believe the large number of uninsured Americans is a significant national
problem requiring immediate action. While not all were in support of new taxes,
most (43 of the 70 percent) felt that, regardless of new taxes, the government
must act. Of the 83 percent of Americans who favor the proposals in InsureUSA,
60 percent say they would still favor the plan even if they were required to pay
an extra $ 1 00 annually in new taxes. Based on these polling results, it is
apparent that the majority of Americans believe the time is right for the
government to address the growing uninsured problem, but more importantly, they
are confident in the InsureUSA proposal, and feel that it meets the challenge.
Long-Term Care In addition to the critical need to curb the growing number of
uninsured Americans, policymakers must address what many people consider to be
the most pressing financial problem - long-term care coverage. Long-term care is
the largest unfunded liability facing Americans today, and despite the
tremendous need for long- term care protection, there is a clear lack of
adequate planning for it. The long-term care insurance market is growing, and
the policies that are available today are affordable and of high quality. There
is a critical role for private insurance to provide a better means of financing
long-term care for the vast majority of Americans who can afford to protect
themselves. Continued growth of the market will alleviate reliance on scarce
public dollars, enhance choice of long-term care services for those who may need
them in the future, and promote quality among providers of long- term care. HIAA
estimates reveal that today over 100 companies have sold over 6 million
long-term care insurance policies, and the market has experienced an average
annual growth of about 20 percent. These insurance policies include individual,
group association, employer- sponsored, and riders to life insurance policies
that accelerate the death benefit for long- term care. HIAA would like to
applaud the Administration and the 106th Congress' call for programs that would
encourage personal responsibility for long-term care, help people currently in
need of long-term care, and increase educational efforts on long-term care.
Administration and Congressional proposals all have an important common factor,
the recognition that private long-term care insurance plays a vital role in
helping the elderly and disabled, as well as baby boomers, pay for their future
long-term care costs. The heightened public awareness brought about by these
proposals coupled with the passage of incentives for the purchase of long- term
care insurance in the Health Insurance Portability and
Accountability Act of 1996 (HIPAA) have been essential first steps in solving
our nation's long-term care crisis; however, these preliminary tax initiatives
are not enough. HIPAA provides little added incentive for individuals to
purchase long-term care insurance because the tax breaks are only applicable to
employer- sponsored long-term care coverage and fall to address the individual
market where 80 percent of all policies are purchased. Under current law, tax
benefits can range from a full exclusion from income if one's employer pays the
premiums to no tax benefit if an individual pays and does not have sizeable
medical expenses. These disparities lead to inequitable results. For many,
current law's tax deduction is illusory. Today, an individual purchasing an LTC
policy can deduct premiums only if they itemize deductions and only to the
extent medical expenses exceed 7.5 percent of adjusted gross income. Only 4
percent of all tax returns report medical expenses as itemized deductions.
Recent developments have improved the political climate for long- term care
insurance, but they are not panaceas and will not, by themselves, achieve the
optimum public- private partnership for long-term care financing. HIAA believes
that other equally important tax-related changes, at both the federal and state
levels, could make long-term care insurance more affordable to a greater number
of people. The expansion of this market will restrain future costs to federal
and state governments by reducing Medicaid outlays. Providing additional tax
incentives for these products would reduce the out-of-pocket cost of long-term
care insurance for many Americans, increase their appeal to employees and
employers, and increase public confidence in this relatively new type of private
insurance coverage. In addition, it would demonstrate the government's support
for and its commitment to the private long- term care insurance industry as a
major means of helping Americans fund their future long-term care needs. As you
know, Representatives Nancy Johnson and Karen Thurman recently introduced H.R.
2102, "The Long-Term Care and Retirement Security Act of 1999." This legislation
would: Provide an above-the-line tax deduction for LTC insurance premiums. The
deduction would begin at 50 percent, but rise each year the insured keeps the
policy in force until the deduction reaches 100 percent. (Joint Tax Committee
cost estimate: $4.0 billion over 5 years and $12.5 billion over 10 years)
Provide a $1,000 tax credit to individuals with LTC needs, or
to their caregivers. The credit would be phased-in over a three-year period,
(Joint Tax Committee cost estimate: $5. 1 billion over 5 years and S 14. 0
billion over I 0 years) Authorize the Social Security Administration to carry
out a public education campaign on the costs of LTC, limits of coverage under
Medicare and Medicaid, the benefits of private LTC insurance, and the tax
benefits accorded LTC insurance Encourage more states to establish LTC
partnerships between Medicaid and private LTC insurance along the lines of those
operating in Connecticut, New York, Indiana, and California. HTAA believes that
the provisions of "The Long-Term Care and Retirement Security Act of 1999" are
the critical next steps to begin preparing individuals, families, and our
society for the increased LTC needs we know are coming. Congress needs to ensure
that any tax legislation passed this year incorporates provisions to help
private LTC insurance assume an increasingly prominent role in protecting
families from LTC costs and easing the financial burden on public programs. By
the year 2020, the Congressional Budget Office has estimated that, at current
growth rates in private LTC insurance.- Medicaid will save $12.4 billion (14
percent of total program nursing home expenditures); private LTC insurance will
reduce out-of-pocket costs by 18 percent; and private LTC insurance will also
reduce Medicare spending by 4 percent. Savings to individuals and public
programs will be much greater in subsequent years, as those presently purchasing
private policies approach and pass 85 years of age. If Congress enacts
legislation that gives Americans enhanced incentives to protect themselves
against the costs of LTC, savings to individuals and public programs will be
still greater. Insummary, HIAA supports policy that would, Enhance the deduction
for long-term care insurance premiums, such that premium dollars are not subject
to a percentage of income. The deduction should not be limited to situations
where employer- provided coverage is unavailable. If an employer decides to
provide premium contributions, employees should be entitled to deductions for
the portion that they pay. Allow children to deduct premiums paid to purchase a
policy for their parents and/or grandparents without regard to whether the child
is providing for their support. Permit premiums to be paid through cafeteria
plans and flexible spending accounts. Permit the tax-free use of IRA and 401(k)
funds for purchases of long-term care insurance. Provide a tax subsidy for the
purchase of long-term care insurance. Encourage state tax incentives for the
purchase of long-term care insurance. Long-term care tax incentives would
largely benefit two groups: those who did not have the opportunity to purchase
such coverage when they were younger and the premiums were lower, and as a
result, now face the greatest affordability problems because of their age- and
those younger adults, our current baby boomers, who need incentives or
mechanisms to fit long-term care protection into their current multiple
priorities (e,g., mortgage and children's college tuition) and financial and
retirement planning. Educational effects of such tax incentives could far
outweigh their monetary value by educating consumers about an important issue
and, as a result, would help change attitudes. In an effort to inform all
Americans about the value of long-term care insurance, HIAA formed the Americans
for Long-Term Care Security (ALTCS), a broad based coalition of organizations
sharing a common vision to educate policy makers, the media, and the general
public about the importance of preparing for the eventual need of long-term care
and viable private sector financing options. When state and federal legislation
opportunities to advocate private sector options - such as tax incentives to
purchase long-term care insurance - arise, members of ALTCS will encourage swift
passage through a variety of advocacy, media, and lobbying means. Furthermore,
ALTCS believes that the government must continue to provide a safety net for the
truly needy. At the same time, the government should provide incentives for
private sector solutions, such as long-term care insurance, so that individuals
and families are encouraged to take personal responsibility for long term care
planning. Conclusion The health insurance industry, working
with employers, has been extremely effective in recent years in slowing premium
increases, improving health care quality, and expanding coverage in the
employment-based market. Yet, without additional financial support from the
government, the number of Americans without health insurance
coverage will continue to grow by about one million people each year into the
next decade. Unfortunately, a series of legislative initiatives being considered
at both the state and federal level would move us in the opposite direction.
These mandates and so-called patient protection" measures would put affordable
private coverage out of reach for even more Americans. Instead, we need to work
together to make the uninsured "job one." Additionally, tax incentives are
needed to spur the growth of private long-term care insurance and help the next
generation of Americans better protect themselves from costs of long term care.
HIAA supports the use of broad-based state and federal funding to subsidize the
cost of health insurance for those who cannot otherwise afford
it. We have witnessed the success of favorable tax treatment in helping to
expand coverage to a large percentage of working Americans. Therefore, we
believe that providing greater equity under the tax code for individuals and the
self- employed is a reasonable way to make health coverage more affordable for a
large number of the 41 million Americans who currently do not have coverage.
H.R. 2102 and other similar measures would be a very good start. We also would
encourage Congress to consider tax credits, vouchers and other
subsidies as a means of making coverage more affordable for even more Americans.
Again, we are encouraged that Congress is addressing the issue of the uninsured
and considering ways to make private health coverage more affordable. We look
forward to working with you as you consider ways to expand private health
coverage and provide equitable treatment under the tax code for individuals who
have taken responsibility for their own health care coverage. We look forward to
working with the members of this committee, and other members of congress, to
help find ways to expand health insurance coverage in the
months and years ahead. Mr. Chairman, that concludes my testimony. I would be
happy to answer any questions you may have.
LOAD-DATE:
June 18, 1999 
