Health Care
Tax Credits Gaining Support, but May be Difficult Way to Help
Uninsured
Bureau of National Affairs
April
12, 1999
By David Nather
After
one failed attempt at a massive health care overhaul and a few targeted
proposals to cover select groups of uninsured people, Congress may get
into a serious debate this year over a different way to help Americans
without health coverage: tax credits.
They have all the
advantages that government programs cannot offer, supporters say. They
would expand health coverage without new mandates and regulations. And
they would let consumers buy whatever kind of health coverage they want,
rather than the one or two health plans their employer might
offer.
Most of all, supporters say, they would help correct
the bias in the tax code that lets people get health insurance tax-free
if they get it through their employer but not if they buy it
themselves.
But a closer look shows that the idea carries
its own set of problems that policymakers will have to address if they
are serious about using tax credits to expand health coverage, according
to analysts.
For one thing, the skeptics say, the credits
would have to be big enough to subsidize virtually the entire health
insurance premium if anyone expects the working poor to use them. That
means the credits would have to be expensive--far more expensive than
most proposals currently call for.
Moreover, some analysts
say that even with a generous tax credit, people will not be able to
find meaningful health insurance at an affordable price if they have to
buy coverage in the individual market.
The problem is that,
unlike the group health insurance that covers employers' workers and
their dependents, individual insurance cannot hold down premiums for
high-risk people by spreading risk among a large
population.
That is why analysts say any health care tax
credits must be accompanied by individual market reforms or some other
mechanism of spreading risk to make sure people can buy comprehensive
and affordable health insurance with their tax
credits.
"You can't throw them in the individual market.
That would be a disaster," said Kenneth Thorpe, a health policy
professor at Tulane University who served as a top Department of Health
and Human Services official during the 1994 health reform
debate.
Gaining Momentum
The practical issues are
being examined closely this year because health care tax credits are
shaping up as a major legislative initiative and possibly the key to
Republicans' search for market-oriented ways to help the nation's 43
million uninsured people.
House Majority Leader Dick Armey
(R-Texas) plans to introduce a bill to establish refundable tax credits
for people without employment-based health insurance, virtually
guaranteeing that the idea will receive serious discussion in the
House.
A spokesman for House Ways and Means Committee
Chairman Bill Archer (R-Texas) said any health care tax credit measure
probably would come up later this year as part of a broader tax cut
package.
There are other tax credit bills. Senate Health,
Education, Labor, and Pensions Committee Chairman James Jeffords (R-Vt.)
is considering offering a proposal. Rep. Charles Norwood (R-Ga.) already
has introduced one (H.R. 1136) outlining a different version of the
credits.
House Budget Committee Chairman John Kasich
(R-Ohio) has his own proposal in the works, as does Rep. John Shadegg
(R-Ariz.).
And House Ways and Means Health Subcommittee
Chairman Bill Thomas (R-Calif.), laying down the outer marker of the
debate, plans to introduce legislation that would take health insurance
entirely out of the workplace and give individuals the tax credit so
they could buy health insurance for themselves.
While few
lawmakers or outside groups are willing to go that far, the more limited
idea of offering health care tax credits within the employer-based
system is getting support from a variety of industry and research groups
that normally agree on very little.
Health care tax credits
have been proposed in various forms by the National Association of
Health Underwriters, whose proposal forms the basis for much of Armey's
draft bill, and by groups ranging from the American College of
Physicians-American Society of Internal Medicine to the Blue Cross Blue
Shield Association.
Along with an expected GOP push to
speed the transition to full deductibility of health insurance costs for
the self-employed, the tax credit proposals show the growing popularity
of using the tax code to expand health coverage.
The
Uninsured
They also show a new willingness of lawmakers and
industry groups to talk about the uninsured in a way they have not done
since the collapse of President Clinton's health reform plan in
1994.
"We have as good an economy as we're ever going to
have ... but the number of uninsured has increased," said Chip Kahn,
president of the Health Insurance Association of America. "The problem
has gotten worse in good times, which means people are very nervous
about what would happen in an economic downturn."
For those
who never gave up on the goal of health insurance for all Americans, a
well-designed health care tax credit could be "a downpayment ... and a
steppingstone toward universal health coverage," said ACP-ASIM
President-elect Whitney M. Addington.
White House officials
say they are open to the tax credit approach and any other ideas on how
to expand health coverage.
But as with any coverage
proposal, the details will be crucial in this debate. Administration
officials are raising the same questions that have been raised by other
analysts: How much will it cost to give uninsured people the kind of
subsidy they need to afford health coverage? Will it include insurance
market reforms to make sure people can get affordable
coverage?
And, perhaps most troubling for policymakers, how
can the tax credit be designed to avoid subsidizing people who already
have health insurance?
The last question may not have the
kind of answer tax credit supporters want to hear. When asked whether
there was any way to prevent employers from dropping health coverage
once the tax credit becomes available to their workers, Norwood said,
"No. They're going to."
The Tradeoff
In fact, there
may be a direct tradeoff between the size of the credit and the impact
on employer-based coverage, analysts say. Make the credit too small and
low-income people will not use it. Make it too big and employers may be
tempted to stop providing health insurance and let their workers fend
for themselves.
For example, the draft Armey proposal would
provide a refundable tax credit of $800 a year per adult and $400 per
child, up to a maximum of $2,400 per family.
Those are the
same credit levels in the NAHU proposal. Janet Stokes Trautwein, NAHU's
director for policy analysis, said the group set its credits at those
levels specifically to avoid giving employers any incentive to drop
coverage.
But analysts from other groups, including the
Urban Institute and Consumers Union, say that is not enough to allow
consumers to buy meaningful coverage. To be useful to the working poor,
they say, the credits must be set high enough to pay the entire cost of
coverage.
That is why the ACP-ASIM proposal calls for a
much bigger tax credit, although it would be limited to people just
above the poverty line. The physician group would give every adult at
the poverty line a tax credit of $2,800 a year, phasing down to $2,400 a
year for those with incomes up to 150 percent of the poverty
line.
"You need to give them an amount of money that
approximates the cost of the policy. Otherwise they're not going to pick
it up," said Linda Blumberg, a senior research associate at the Urban
Institute.
That would take some serious money. In 1996,
health maintenance organization coverage, the least expensive option,
cost an average of $1,883 per year for individuals and $5,071 for
families for employers with 200 or more workers, according to the
Employee Benefit Research Institute.
The Individual
Market
Many people who use the tax credit, however, would not
be buying into group health coverage where premiums are fairly
predictable because the risks are spread out among a large population.
They would be more likely to buy individual policies--and those premiums
are all over the map, varying greatly depending on how old the consumer
is and where he or she lives.
In California, for example, a
25-year-old could join a Blue Cross Blue Shield HMO for $90 a month in
1996, but a 60-year-old would have had to pay $260 a month, according to
a March 1998 report by the Alpha Center.
The variation
between states is even greater. In the 10 states studied by the Alpha
Center, a 60-year-old man in an intermediate-cost area could expect to
pay anywhere from $149 a month to $535 a month in health insurance
premiums, depending on where he lived.
And those were the
standard rates--the least a consumer could expect to pay. A person
suffering from obesity or hypertension would be seen as a greater risk
and could face premiums as much as 50 percent to 100 percent higher, the
center reported.
But trying to design a tax credit that
accounts for all of those variables would be an impossible task and it
could produce a formula so complex it could never pass Congress, let
alone be understood by the people who would need to use it, Trautwein
said.
Insurance Reforms
Instead, analysts say, any health
care tax credit must be accompanied by some kind of initiative to
stabilize the individual insurance market so consumers will have
something to buy.
Some say a full-scale package of
insurance reforms is needed. In a March 18 analysis of the tax credit
proposals, Consumers Union said any tax credit should be accompanied by
a standard, comprehensive benefit package, either provided by or defined
by the government, and by guaranteed issue of coverage to all who seek
it and community rating to limit the variation in health insurance
premiums.
"If high-risk individuals lose the risk-spreading
of the employer-based insurance market, they are likely to find that
comprehensive coverage is unavailable or unaffordable in the individual
market," the consumer group warned.
Another possibility,
according to Thorpe, is to enroll those who need coverage in a targeted
government program similar to the State Children's Health Insurance
Program, run by the states and jointly funded by the federal government
and the states.
Trautwein, however, said the best way to
spread risk and guarantee coverage to high-risk individuals is through
the risk pools that already are in place in 30 states.
The
draft Armey proposal would take this approach, creating a "safety net
block grant" out of unused tax credit funds that states could use to
develop risk pools or other ways to help the uninsured get
coverage.
Risk pools have worked "better than any other
access mechanism," Trautwein said, noting that so-called "uninsurables"
who participate in the current risk pools pay an average of only 125
percent of the standard premium for their coverage. "If you're an
uninsurable person, that's a very good rate," she said.
Tax
Fairness
For supporters of the idea, there is a basic reason to
help the uninsured through tax credits. It is the issue of tax
fairness.
In a Jan. 8 memo to House Republicans (7 HCPR 98,
1/18/99), Armey said the problems of the uninsured can be traced to the
fact that people can get tax-free health benefits only through the
workplace. If their employer does not offer health insurance and they
buy it themselves, they are taxed.
In addition, many
analysts have noted that the tax exclusion for employment-based health
insurance favors high-income people because the value of their tax break
is greater than that of lower-wage workers.
"If the CEO is
going to receive government-subsidized health care, then so should the
waitress earning the minimum wage. Period," Armey said in the
memo.
The tax fairness angle is not the only argument
raised by supporters. The NAHU proposal claims tax credits would give
everyone a basic level of resources to buy health insurance, "thus in
essence achieving universal coverage, but through incentives rather than
mandates."
And the Heritage Foundation argued in a June
1998 paper that tax credits would "offer families what they really want:
control and ownership of their health coverage."
But the
tax fairness argument figures prominently into all of the proposals.
Shadegg, for example, says he set his tax credit at $500 for individuals
and $1,000 for families because that is the estimated value of the
average tax exclusion employers receive for covering their
workers.
Trautwein said helping the uninsured is the most
important goal of any health care tax credit, but tax equity is an
important second issue and that is why the credit should be offered to
everyone, not limited to low-income people as some analysts have
suggested.
"We think ultimately you're going to have to
address the tax equity issue, and we would prefer that it be sooner
rather than later," Trautwein said.
Separate Issues
The
answer, for some, is to treat the uninsured and tax fairness as separate
issues.
Kahn, for example, noted that full deductibility of
health insurance for the self-employed will not make much of a dent in
the uninsured problem because it mostly will help people who already
have coverage. Still, he said, "that's no argument against it because
there ought to be tax equity anyway."
And Blumberg of the
Urban Institute said a tax credit might not be the most effective way to
help the low-income uninsured because it raises too many administrative
problems.
For example, any tax credit that is paid up front
must be reconciled with the taxpayer's actual income at the end of the
year. That may make low-income people reluctant to take the credit,
because they do not always know what their income will be at the end of
the year and they do not want to have to pay back some of the credit
later, Blumberg said.
"What a lot of these proposals are
trying to do is solve the tax equity issue and in the same breath cover
the uninsured, and that's not necessarily going to serve everyone in the
best way," Blumberg said.
Supporters, however, say both
goals are important and must be treated together. And if the tax credit
cannot pay the entire cost of someone's health insurance, they say, at
least it would be a start for people with no coverage at
all.
"Right now they have nothing," said Trautwein. "We
need to take that first step."
Bureau of National Affairs
Volume 7 Number 15
Monday,
April 12, 1999
ISSN 1521-5369