Covering the Uninsured: How States Can Expand and Improve Health Coverage

Published July 1, 2003

Managing Editor’s note: The following article summarizes a larger work originally published on March 11, 2003 as Heritage Foundation Backgrounder #1637.

Innovative governors and legislators in every state of the Union can take specific steps to increase health insurance coverage and improve the range of choice and quality of that coverage for individuals and families.

State officials’ range of action is constrained severely by federal law because America’s health insurance markets are shaped–and distorted–by the federal tax treatment of health insurance. But while state officials obviously cannot change the federal tax code, they can still take major steps to create more expansive and efficient consumer-based health insurance markets.

STEP 1: Cooperate with the President in reducing the number of uninsured.

Over the past two years, the Bush administration has outlined an ambitious and fairly comprehensive health care reform agenda. It includes an $89 billion program of refundable tax credits for the uninsured, an annual rollover of up to $500 of unused funds in employer-based flexible spending accounts (FSAs), and a lifting of existing statutory restrictions on medical savings accounts (MSAs).

STEP 2: Take a statewide inventory of private plans and design a consumer-friendly information clearinghouse for individuals and businesses on available health plans.

Individuals and families who do not get health insurance at the place of work or do not have Internet access to health plans often do not know how or where to secure affordable coverage. State officials should break the “awareness barrier” and make that information, including consumer information on quality care, available in an easy and accessible way through agencies that routinely contact working families, such as the motor vehicle administration, the revenue department, or local hospitals.

There is precedent for the provision of consumer information in a consumer-driven health care system at the federal level. The U.S. Office of Personnel Management (OPM) and the personnel offices of all federal agencies provide comparative plan information for federal employees and retirees enrolled in the consumer-driven Federal Employees Health Benefits Program (FEHBP). These enrollees can choose from many private health plans and receive useful comparative information on the available health plans, including premium costs, co-payments, the levels of benefits, and solid comparative information on health plan performance.

STEP 3: Make sure affordable health plans are available to the uninsured.

A national online source of health insurance policies,, has reported that the average premium for an individual policy purchased through its Internet service was less than $1,500, with a typical deductible of $500 or less. Studies conducted by the National Association of Health Underwriters (NAHU) and the Health Insurance Association of America (HIAA) report similar findings. HIAA, for example, found that of its members who sell individual policies, the average premium was $2,070 for single coverage and $4,000 for family coverage.

Policy costs vary from state to state, reflecting differing economic conditions, demographics, and patterns of medical practice. However, health plan costs also reflect the cost of state rules and regulations governing individual policies. For example, states impose benefit mandates on individuals and families that purchase health insurance, regardless of whether they want or need such benefits.

In a recent analysis of the factors driving health care costs, PricewaterhouseCoopers estimated that, nationwide, government mandates and regulations contributed 15 percent of the total increase in health care premiums for 2001-2002.

Mandated benefits are often popular with provider groups and medical specialty societies, which battle ferociously to make sure state legislators include their treatments or procedures in all state-regulated health plans. Research shows health mandates increase health costs, pricing many individuals and families out of the private market. According to a 1999 HIAA study, as many as one in four of the uninsured are without coverage because of state health benefit mandates.

Some states have begun to change their benefit mandate policies. North Carolina, for example, has imposed a moratorium on any new benefit mandates. Hawaii, Texas, Louisiana, and Vermont require a cost assessment before imposing new benefit mandates. Some states have considered “mandate-lite” plans, and others are taking similar steps.

STEP 4: Conduct a study of the true cost of the uninsured and use that study to justify state credits or premium subsidies for the uninsured.

The Texas Comptroller’s Office found the total cost of health care spending in 1998 for uninsured Texans was $4.7 billion, including the costs to local governments, doctors, hospitals, and state agencies. In effect, Texas citizens paid about $1,000 that year for health care for each uninsured Texan.

State officials can use this kind of analysis if they wish to expand coverage further and piggyback on any federal health care tax credits or premium subsidies. Additional state assistance, especially targeted at low-income or harder-to-insure individuals and families, would bring the cost of coverage within closer reach of those families.

The Bush administration encourages such assistance. State officials should follow through, especially if they believe the President’s proposed federal health care tax credit would not be generous enough for certain populations.

Moreover, for the unemployed, state-based assistance could be administered quickly and easily through state unemployment compensation offices. A person who is eligible for unemployment compensation could automatically be eligible for the credit or the subsidy and for private health insurance. This process of “one-stop shopping” for displaced workers and their families could be done with both a federal and a state credit or premium subsidy approach.

STEP 5: Secure HHS waivers to use existing federal funds to expand private health care coverage.

Officials at the U.S. Department of Health and Human Services have created the Health Insurance Flexibility and Accountability (HIFA) demonstration initiative, along with an expedited approval process, “to encourage new comprehensive state approaches that will increase the number of individuals with health insurance coverage within current-level Medicaid and State Children’s Health Insurance Program resources (SCHIP).”

HHS officials emphasize the value of “approaches that maximize private health insurance coverage options” and target populations below 200 percent of the federal poverty level. Nationally, a substantial majority of uninsured Americans are below 200 percent of the poverty line. State officials can take advantage of this new demonstration authority and use it to secure innovative private-sector coverage options for low-income, uninsured populations.

Under HIFA, HHS Secretary Tommy Thompson has approved several waivers. New Mexico and Oregon, for example, take advantage of Medicaid and SCHIP funds and combine them with private-sector health plans to expand coverage to the uninsured. In New Mexico, state officials can use unexpended SCHIP funds to subsidize private health insurance for 40,000 low-income residents. Under the New Mexico waiver, employers can also contribute to private health plans.

Based on its waiver, Oregon officials will expand the state’s premium support program, the Family Health Insurance Assistance Program, to cover as many as 25,000 beneficiaries. Under the Oregon waiver, Oregon residents earning up to 185 percent of the federal poverty level would be eligible to receive “for the first time” federal premium assistance for employer-sponsored coverage or individual health insurance.

STEP 6: Improve care for Medicaid enrollees by creating a Medicaid preventive care account.

The best Medicaid policy gets low-income persons and their families out of the traditional Medicaid program and mainstreams them into the private health insurance market. Meanwhile, states can adopt initiatives that give Medicaid patients more control over their health care spending and decisions while ensuring they get the care they need when they need it.

State Medicaid programs often have a rich benefits package. While Medicaid coverage looks good on paper, however, the program has a well-deserved reputation for perverse economic incentives, disruptions in the continuity of care, and poor quality care.

Faced with exploding Medicaid spending, states are cutting back on benefits, thereby causing a further deterioration in the quality of care. As a recent Kaiser Commission survey of Medicaid directors shows, states are planning cost-cutting measures such as limiting access to prescription drugs and reducing or freezing payments to doctors, hospitals, and other medical professionals.

Most doctors treat Medicaid patients, but they also find Medicaid reimbursement levels are too low and loathe wrestling with Medicaid paperwork and regulations. In 2001, roughly 20 percent of physicians were not accepting new Medicaid patients, and the overall proportion of physicians serving Medicaid patients declined slightly.

The danger, of course, is that Medicaid patients will start to experience difficulty in getting access to doctors and, like the uninsured, will end up either in hospital emergency rooms for routine medical services or, worse, being treated for deteriorating medical conditions that could and should have been treated more effectively if treated much earlier in a doctor’s office.

A partial solution to this problem would be to create a Medicaid preventive care account for each Medicaid recipient with a specified amount accessed using a PIN number and debit card. Payments for routine medical services–doctors’ visits, regular checkups, and preventive care–could be paid directly out of the Medicaid account.

For Medicaid enrollees, states could roll the unused funds over each year in an interest-bearing account. When enrollees leave welfare or get a job in the private sector, the unused funds could be used to pay for private health insurance or transferred into a medical savings account or health reimbursement account.

State officials should examine the success of such programs in New Jersey, Arkansas, and Florida, where Medicaid recipients decide how best to spend their allocated health care dollars instead of having government officials decide for them.

STEP 7: Establish a statewide voluntary purchasing cooperative for the uninsured.

To give residents more coverage options, states should consider designing voluntary purchasing cooperatives that would function much like the FEHBP, which covers Members of Congress, federal workers and retirees, and their families–roughly 9 million Americans.

Unlike other government health care programs, the FEHBP functions with comparatively little bureaucracy and regulation. It also enjoys a solid historical record of cost control, competitive benefits, programmatic stability, and a high degree of patient satisfaction.

STEP 8: Enact meaningful medical malpractice reform legislation.

The Bush administration has put the medical malpractice problem front and center in the national policy agenda. This alone is sparking a major debate. But the medical malpractice issue is essentially a matter of state tort law.

There is a medical malpractice crisis in several states. Median jury awards have increased dramatically. Malpractice premiums are soaring, “defensive” medical procedures are common, and patient access to care is being compromised. State legislators can take remedial action. While a sound malpractice reform measure would provide for unlimited economic damages, state legislators can reduce the growing pressures on physicians through several amendments to state tort law.

Several states have made significant progress in reforming medical malpractice laws: Alaska, California, Colorado, Maine, Michigan, and Utah. A sound model for medical malpractice reform would be the Medical Injury Compensation Reform Act (MICRA) of 1975, enacted by the California legislature.

STEP 9: Take advantage of the new federal health care tax credits to cover workers displaced by international trade.

In the Trade Adjustment Assistance Reform Act of 2002, Congress enacted a provision to give a 65 percent health care tax credit to the roughly 260,000 workers nationwide who have lost employment and their health care coverage in part because of expanded international trade. The purpose of this first-of-its-kind health care tax credit is to help these workers secure health care coverage.

STEP 10: Take advantage of the new health reimbursement arrangements for state and municipal employees.

In June 2002, the U.S. Department of the Treasury ruled America’s employers may set aside funds for their employees under a new health reimbursement arrangement (HRA), a special tax-free account for the payment of health bills. Employers may roll over unused funds in the employee’s account from year to year and allow employees to use accumulated funds for their health care needs in retirement.

For 2003, the Office of Personnel Management (OPM), the federal agency that runs the FEHBP, allowed the American Postal Workers Union (APWU) health plan to offer an HRA to federal employees and retirees. Under the APWU plan, federal employees can get an up-front credit of $1,000 per person or $2,000 per family in their account to pay for traditional medical expenses as well as dental, vision, and other expenses that may not be covered by insurance. The funds are available before enrollees pay deductibles or out-of-pocket costs, and traditional insurance covers their health costs.

STEP 11: Engage faith-based organizations in preventive care and wellness programs.

State and local officials manage or oversee public health clinics and health centers. These organizations help low-income and uninsured families secure health care services.

An enormous resource exists among faith-based and religious organizations. These organizations can play a vigorous role in promoting and sponsoring wellness and preventive care programs. State officials should make every effort to tap the power of faith-based and religious organizations in their health care outreach into various communities, particularly inner-city and ethnic communities. They should also find ways of integrating these faith-based wellness initiatives into their public assistance programs.


Innovative and imaginative governors and state legislators can make significant headway in reducing the number of America’s uninsured by expanding choice and competition in the state health insurance markets.

The problems of the uninsured are problems for federal and state officials. While the central weakness of the health insurance market is the inefficient, inequitable, and restrictive federal tax treatment of health insurance, state officials can nonetheless take direct action without waiting for Congress to enact major changes in the federal tax code.

States can work energetically with the administration and also implement innovative solutions on their own. Millions of Americans desperately need that federal-state cooperation.

Robert E. Moffit PhD is director of the Center for Health Policy Studies, and Nina Owcharenko is health care policy analyst, at The Heritage Foundation. For the complete analysis with footnotes, visit the Heritage Web site at