Why tax credits are the next step in helping the nation's uninsured

By Robert B. Doherty

Ever since the failure of the Clinton health care program, Congress has shied away from some grand plan to provide health care coverage to everyone, and has instead tried to reduce the number of uninsured by incrementally expanding coverage to vulnerable populations. Unfortunately, the process has been a failure: The number of uninsured Americans has grown from approximately 37 million in 1994 to 43 million today. Nonetheless, Congress appears poised to continue incremental reforms.

Consider the history of such efforts. First there was the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which promised to make insurance available to people who lost their group insurance coverage or who had a pre-existing condition. Individuals with pre-existing conditions can now more easily obtain coverage without a waiting period, but people who have lost their group insurance coverage have not received much help. HIPAA promised that insurance would be available to people who lost coverage through their employer, but it has done nothing to assure that such coverage is affordable.

Then there was the Children's Health Insurance Program (CHIP), enacted by Congress in 1997. CHIP provides federal funding to allow states to expand coverage to eligible low-income children either by expanding existing Medicaid coverage or by establishing alternative sources of coverage.

In its first year, CHIP enrolled about 829,000 of the 2.5 million children who were eligible. Enrollment has lagged due to delays in getting states to enact laws to provide coverage to eligible individuals. Complex paperwork requirements have also discouraged families from signing up. Outreach programs, which are essential to educating poor families about their eligibility for CHIP, have been poorly funded and administered.

Even under the most optimistic scenarios, CHIP and HIPAA alone won't dramatically reduce the ranks of the uninsured. As a result, Congress once again finds itself contemplating what it should do next to expand coverage incrementally.

Tax credits: a mixed bag

One option that is gaining support among both Democrats and Republicans is a tax credit. Republicans like tax credits because they cut taxes and make coverage available through the private sector, not through new or expanded government programs. Democrats like tax credits because they could make coverage affordable for many uninsured poorer Americans. Unlike tax deductions, which typically benefit individuals in higher tax brackets, each dollar of a tax credit buys a dollar of coverage, regardless of the income of the person receiving the credit.

A health care tax credit would provide uninsured persons with a direct cash allowance (in the form of having to pay lower taxes) from the federal government, which could be used only to purchase health insurance. Eligible individuals would claim the tax credit on their income tax form and apply the dollar amount to the purchase of an insurance policy.

The idea is simple in concept, but not in practice. Structured properly, tax credits can be an effective tool to expand coverage. But improperly structured, tax credits can actually make things worse. They can create incentives for employers to drop coverage, and some proposals would not provide enough of a subsidy to make coverage affordable to those who lack insurance.

ACP-ASIM's proposal

Earlier this year, the College unveiled a plan to make health insurance available to lower-income Americans as a "down payment" on universal coverage. A key component of the plan is a tax credit for people with incomes between 100% and 150 % of the federal poverty level. (Other elements of the plan include expanding Medicaid to all poor Americans, increasing funding for Medicaid outreach and creating subsidies for temporarily unemployed and uninsured workers).

ACP-ASIM's tax credit proposal was intentionally designed to help those most in need. The amount of the credit--between $2,400 and $2,800 per eligible adult--would pay for 85% or more of the cost of buying a basic health insurance plan. The College also proposed that eligible individuals be given the option of receiving the tax credit as an advance payment. In other words, the government would make the money available at the time individuals have to pay their health care premiums instead of asking them to wait for the money until they file their taxes.

By limiting eligibility for the tax credit to uninsured persons with incomes that fall between 100% and 150% of poverty, the plan would minimize the risk that employers would drop coverage once the credit became available. Most individuals who fall within these income limits don't have coverage through an employer. And those who have coverage would not be eligible for the credit.

An estimated 2.5 million uninsured, low-income Americans would benefit from ACP-ASIM's tax credit proposal. Men, African-Americans, Hispanics, part-time and temporary employees and the self-employed would particularly benefit, because individuals with those demographic characteristics typically do not have access to employer-based coverage or Medicaid.

The limits of incrementalism

The tax credit proposal, combined with the other elements in ACP-ASIM's plan, would help an estimated 10.5 million poor or near-poor Americans at a cost of $116 billion over the next five years. Like all proposals for incremental expansion, it will help prevent things from getting worse for the most vulnerable Americans. It will not eliminate the problem of the uninsured, however. Even if it initially achieved a substantial reduction in the number of uninsured Americans, the number of uninsured may increase again.

If incremental approaches won't solve the problem, then why support them? Because, in the judgment of ACP-ASIM's Board of Regents, it is better to do something now to help those who most need it instead of waiting for a consensus on universal coverage.

At the same time, ACP-ASIM will inform policy-makers about the limits of incrementalism: short term gains that are no substitute for universal coverage. Our objective is to get incremental expansions enacted now while working to make universal coverage a near-term reality, rather than allowing it to remain a distant dream.

Robert B. Doherty is ACP-ASIM's Senior Vice President for Governmental Affairs and Public Policy.