by

Gail Shearer
Director, Health Policy Analysis
Washington Office

and

Susanna Montezemolo
Esther Peterson Fellow
Washington Office

The Case for Subsidizing Health Insurance Coverage for
Laid-Off Workers

There are several compelling reasons why Congress should devote a relatively small portion - about one quarter - of the economic stimulus package to provide health insurance subsidies for laid-off workers and their families. The key reasons are explained below.

1. Laid-off workers lose their income and their employers' contribution to their health insurance. Most simply cannot afford to pay for continued health insurance coverage, and some are not even eligible to do so.

When a worker is laid off from his or her job, family income decreases substantially. If there are two incomes in the family, the income loss can be challenging; but if the household relies on a single income, its loss will be truly devastating. In either case, the overwhelming majority of people who are eligible to continue their health insurance through COBRA simply cannot afford to do so. The average worker must pay over $2,700/year ($225/month) for individual coverage and almost $7,200/year ($600/month) for family coverage. These premiums represent 102 percent of the total premium previously paid by both the employer and the employee.(3) This coverage is least affordable for low- and moderate-income individuals; indeed, these workers are least likely to elect COBRA coverage when eligible.(4)

Health coverage is even less accessible for displaced workers who are ineligible for COBRA. COBRA applies only to employers with 20 or more employees, so displaced workers of small firms are ineligible. In addition, anyone who did not elect employer health insurance coverage before being laid off is ineligible for COBRA coverage. Also, workers in companies that discontinue health coverage are ineligible for COBRA, as are workers in companies that declare bankruptcy.

2. A gap in health insurance between jobs can result in inadequate insurance in the future, since new employer-based coverage can impose preexisting condition exclusions and new waiting periods if there has been a gap in coverage.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) sought to reduce "job lock," which can keep employees in their current jobs for fear of being subject to new preexisting condition clauses and waiting periods in a new employer's health insurance. Job lock contributes to a slower, less efficient economy.(5) HIPAA prohibits group health insurance policies from requiring new preexisting condition exclusions and waiting periods if the individual has been continuously insured. A gap of 63 days or more in health insurance following a layoff can cause an individual to face new preexisting condition exclusions and waiting periods before coverage will be available. These exclusions (e.g., for conditions such as high blood pressure, diabetes, and cancer) and waiting periods (which can last as long as 12 months) can create so many loopholes to coverage that for many people health insurance coverage becomes meaningless. The very conditions for which coverage is most needed are excluded for a lengthy time period. It is therefore vital that laid-off workers not lose access to high-quality health care coverage when they eventually find jobs.

3. The absence of health insurance often results in delayed or denied health care and means financial devastation to families with modest means.

The myth that the uninsured receive needed health care coverage has been disproved. In August 2000, "Second Class Medicine" in Consumer Reports(6) showed how the uninsured suffer through patchwork safety-net systems that fail to provide adequate or timely diagnoses, continuity of care, or high-quality care, with tragic results for individuals and families who are uninsured. In addition, in October 2001, the Institute of Medicine released Coverage Matters: Insurance and Health Care, which concludes that "[t]he uninsured are much more likely than persons with insurance coverage to go without needed care."(7) Low-income displaced workers without health insurance are financially devastated if they (or their family members) become extremely ill or suffer serious injury. The link between adequate health care coverage and financial ruin is unmistakable: In 1999, an estimated half-million middle-class families went to bankruptcy court following a serious illness.(8)

4. Guaranteeing continued health insurance will help boost consumer confidence, which will contribute to the economic recovery.

The fear of losing health insurance after being laid off is one factor that contributes to low levels of consumer confidence. Consumer confidence, as measured by the Conference Board, declined between January 2000 and August 2001 (see chart below). However, the tragic events of September 11, 2001 caused the index to drop suddenly and sharply - the largest monthly decline since October 1990.(9)

Consumer spending represents the largest part of the U.S. gross domestic product (GDP). The importance of non-tangible "consumer mood" is viewed as key to economic recovery; as a result, consumer confidence is a key leading economic indicator able to help predict the future movement of the economy. Policymakers have repeatedly called on consumers to help get the economy back on track by spending money on consumer goods. One step to restoring consumer confidence is to provide consumers with the security of knowing that they will not lose their health insurance even if they lose their jobs.

5. Subsidizing health insurance premiums for displaced workers not only targets relief to a vulnerable population, but also provides a substantial stimulus for the economy.

Unlike decreases in the alternative minimum tax for corporations and accelerated depreciation for corporate investments, subsidizing health insurance for people who lose their jobs clearly targets federal dollars to a vulnerable population. It does not rely on "trickle down" theories in order to provide tangible relief to these individuals and families.

In addition, the impact of health insurance subsidies on the economy is likely to be substantial. Unlike cuts in income tax rates for high income individuals (many of whom save the additional disposable income), these subsidies are by definition spent on health insurance premiums. Insurance companies sell more coverage. Individuals and families with health insurance coverage consume more health care services and products, sending dollars provided by insurance reimbursement through the health care system (to doctors, nurses, health plans, and pharmacies). Individuals who receive subsidies will have more money to spend,(10) which will further stimulate the economy. This additional spending will have a multiplier effect: As individuals spend more, companies will hire more workers, which will in turn increase employment and spending levels.