Written Testimony of

Gail Shearer
Director, Health Policy Analysis
Washington Office
Consumers Union Washington, DC Office(*)

Before the

Committee on Ways and Means
Health Subcommittee

On

Tax Credits for Health Insurance

April 4, 2001

Summary

At a time of unprecedented budget surpluses and an uncertain economic outlook that could result in growing numbers of uninsured and underinsured Americans, it is critical that Congress move forcefully and expeditiously to make health insurance more affordable. Tax credits for health care coverage are increasingly discussed as a policy option for reducing the ranks of the uninsured. We are concerned that, unfortunately, most tax credit proposals are misguided: some are too small to make coverage affordable; some undermine employer coverage; some have inadequate protections for sick people who are shifted into the individual market. Because of the variation in proposals, they have dramatically different implications for the health care system. The following ten questions provide a framework for evaluating various health care tax credit proposals.

1. What will be the impact on the number of uninsured?

2. Will the credit cause employers to drop coverage?

3. What will be the impact on the number of underinsured (i.e., those with coverage that is not comprehensive)?

4. What will be the impact on the health insurance marketplace: will there be a shift from employer-based coverage to individual coverage?

5. Will those people with higher health risks (e.g., chronic or pre-existing conditions) face higher premiums, exclusions in coverage, and/or denial of coverage?

6. How cost-effective is the proposal?

7. What is the total cost to the federal government (e.g., taxpayers)?

8. Does the proposed tax credit make health insurance subsidies more equitable?

9. Does the proposal target relief to those most in need, in particular those with low and moderate income?

10. What marketplace reforms are included in the tax credit proposal?

Below is an explanation of each question regarding tax credits for health care.

Tax Credits for Health Insurance:
Will They be a Cost-Effective Tool for
Expanding Comprehensive Health Insurance?

1. What will be the impact on the number of uninsured?

Most tax credit proposals are at subsidy levels that represent one third or less of the cost of buying a health insurance policy. This means that for most of the uninsured, they will still face sizable out-of-pocket payments for premiums. For many, health insurance will remain unaffordable.(1) Researchers have developed models to estimate the impact of various tax credits on the uninsured. Most health insurance tax credits are estimated to reduce the uninsured by 1.5 to 12.4 million people.(2) The design details of the tax credit (e.g., does it apply only to those without employer-sponsored coverage? what is the size? is it refundable?) all affect the impact on the number of uninsured.

2. Will the credit cause employers to drop coverage?

Most tax credit proposals result in a modest net increase in the number of insured, but this results from a combination of an increase in the number of people with nongroup insurance, and a decrease in the number of people with employer based insurance.(3) One tax credit proposal ($2,000 for individuals and $4,000 for families) for those not covered otherwise is estimated to result in a 10 percent reduction in employer based coverage.(4)

3. What will be the impact on the number of underinsured (i.e., those with coverage that is not comprehensive)?

The question of adequacy of health insurance coverage is rarely addressed in studies of tax credits. The issue of comprehensiveness of coverage is critical in light of the large and growing number of Americans whose health insurance does not adequately protect them against financial devastation caused by out-of-pocket health care costs. An estimated 31 million adults (in 1998) were underinsured, risking incurring out-of-pocket expenses (not including premiums) in excess of 10 percent of their income in the event that they faced catastrophic illness.(5) Based on government surveys of actual health expenditures, about 16 million households (under 65) and an additional 12 million households over 65 actually spend more than 10 percent of their income out-of-pocket on health care costs and premiums.(6)

If tax credits are skimpy (e.g., $500 per individual) at a level less than half of the average cost of coverage, the marketplace may respond by designing skimpy benefit packages. If policies were designed with very high deductibles, high copayments, low stop-loss levels, and skimpy benefits (e.g., a cap on doctor visits, hospital days, a lack of prescription drug coverage), then it is possible that more people would be "insured" but at the same time more people would be "underinsured." It is important, therefore, that policymakers carefully consider not only the number of people with insurance coverage, but that they also measure the quality of the coverage that people have and the total financial burden of paying for health care.

4. What will be the impact on the health insurance marketplace: will there be a shift from employer-based coverage to individual coverage?

Some tax credit proposals (e.g., all but one studied by Gruber and Levitt) are expected to lead to an increase in the non-employer market at the same time that they lead to a decrease in employer-based coverage. This shift from the employer to individual market is troubling in light of the fact that state regulation varies considerably, and usually leaves high risk individuals and families vulnerable to facing barriers to access to affordable coverage in the individual market. Congress should not undermine the employer-based market which does a good job of pooling the healthy and the sick together, keeping premiums relatively low, unless there is in place a robust and stable individual health insurance market that protects the interests of those with pre-existing conditions.

5. Will people with higher health risks (e.g., chronic or pre-existing conditions) face higher premiums, exclusions in coverage, and/or denial of coverage?

Because of the varied and limited state regulation of individual health insurance markets, health care tax credits are likely to adversely affect the health insurance options that millions of high risk individuals and families face. The likely effects will include: denial of coverage, exclusions of coverage for pre-existing conditions, and high premiums (to reflect high risks). The issue of individual health insurance markets is very complicated, in part because state regulation varies substantially, and in part because these small (residual) markets - and their regulations - have not been examined as carefully as employer-based markets. Some studies assume that the individual marketplace will be regulated much more aggressively than is actually likely. For example, Gruber and Levitt analysis "assumes that policies in the individual market are universally available (at health risk-adjusted prices)." (7)

6. How cost-effective is the proposal?

What is the federal cost per newly insured person, and how does this compare with expanding public programs such as SCHIP and Medicaid? The measure of "cost per newly insured person" is used to rate the tax credit proposals for cost-effectiveness. Cost per newly insured of tax credit proposals ranges from about $2,200 (for a small tax credit targeted to those without health insurance currently) to $5,000 (for larger credits available regardless of prior coverage), in the Gruber and Levitt study. Sheils (et. al.) estimates of cost per newly insured range from about $1,250 to about $10,500.(9) If expanding coverage of the uninsured is the primary objective, then alternatives such as Medicaid/SCHIP expansion are likely to be far more cost-effective. To extend Medicaid coverage (in 1998) to an additional child cost on average $1,225 and to an additional adult cost on average $1,312.(10)

7. What is the total cost to the federal government (e.g., taxpayers)?

The total annual cost (in 1999 dollars) to the federal government of proposals recently under consideration ranges from just under $1 billion (for an above-the line tax deduction) to $62 billion (for a large credit available regardless of prior coverage), according to Gruber and Levitt.(11) Sheils estimates range from annual costs of $3.3 billion to $55 billion.(12)

8. Does the proposed tax credit make health insurance subsidies more equitable?

Current tax policy with regard to health insurance can hardly be described as equitable. Individuals without employer based coverage (other than the self-employed) do not get any federal income tax subsidy (and don't have access to lower cost group plans). Moderate income families in the 15% federal tax bracket get a $150 tax subsidy per $1,000 of premium paid by their employer, while those at the 39.6 percent bracket get $396 of tax benefit per $1,000 of premium. Some tax credit proposals are designed to make the tax subsidy more equitable by including individuals who do not have employer based coverage.

9. Does the proposal target relief to those most in need, in particular those with low and moderate income?

Low- and moderate-income families have the most difficult time affording health insurance. They are much more likely to lack health insurance than higher income families. An estimated 85 percent of uninsured households have incomes that are below median household income for their family structure.(13) Some proposals target the tax credits to people with low- and moderate- income. Tax credits are preferable to tax deductions (which give larger benefits to higher income tax payers).

10. What marketplace reforms are included in the tax credit proposal?

Since tax credits are likely to shift coverage (to some degree) from the employer based market to the individual market, it is important that regulations be in place to protect the interests of high risk individuals and families so that coverage will be both comprehensive and affordable. The types of marketplace reforms that will be essential include: standard benefit packages, community rating, and guaranteed issue. In addition, to protect against adverse selection, some sort of individual mandate would be needed to assuring that the healthy and the sick remain in the same risk pool. These regulations are necessary to prevent marketplace incentives from separating individuals by their risk level, which drives premiums up for those considered to be high-risk.

Notes:
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(*) Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education and counsel about goods, services, health, and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports, with approximately 4.5 million paid subscribers, regularly carries articles on health, product safety, marketplace economics and legislative, judicial and regulatory actions which affect consumer welfare. Consumers Union's publications carry no advertising and receive no commercial support.

(1) See also Iris J. Lav and Joel Friedman, Center on Budget and Policy Priorities, "Tax Credits for Individuals to Buy Health Insurance Won't Help Many Uninsured Families," February 15, 2001.
(2) See, for example, Jonathan Gruber and Larry Levitt, "Tax Subsidies for Health Insurance: Costs and Benefits," Health Affairs, vol. 19, January/February 2000, p. 79. Some tax credits, such as that of the Heritage Foundation, would replace the existing tax deduction system and impose an individual mandate, which by definition would eliminate the uninsured. See also John Sheils, Paul Hogan, and Randall Haught, The Lewin Group, Prepared for The National Coalition on Health Care, "Health Insurance and Taxes: The Impact of Proposed Changes in Current Federal Policy," October 1999, which estimates that tax credits without mandates will reduce the uninsured by 1.5 to 9.8 million.
(3) See Gruber and Levitt, p. 79.
(4) See Gruber and Levitt, p. 79 and Guenther, p. CRS-21.
(5) Consumers Union, The Health Care Divide, August 2000, p. 13. See also Pamela Farley Short and Jessica S. Banthin, New Estimates of the Underinsured Younger than 65, JAMA, 274: 1302-1306.
(6) Ibid., p. 14, 16.
(7) Gruber and Levitt, p. 84.
(8) Gruber and Levitt p. 79.
(9) Sheils, Hogan, and Haught, p. iii.
(10) "Medicaid Enrollment and Spending Trends, Kaiser Commission on Medicaid and the Uninsured, February 2001, www.kff.org.
(11) Gruber and Levitt, p. 79.
(12) Sheils, Hogan, and Haught, p. iii.
(13) Gary Guenther, Congressional Research Service, "Tax Subsidies for Health Insurance for the Uninsured: An Economic Analysis of Selected Policy Issues for Congress," December 12, 2000, citing Jonathan Gruber.