Support is growing for a proposed solution to the rising number of uninsured Americans: a federal tax credit for purchases of health insurance. If properly designed and implemented, supporters argue, such a tax credit would allow uninsured, low-income individuals and families to purchase affordable, quality health insurance.
The support for tax credits is bipartisan, ranging from President George W. Bush to Democratic lawmakers such as Albert Wynn (D-MD) and Edolphus Towns (D-NY), both of whom have sponsored tax credit bills with Republican members in the U.S. House of Representatives.
Bush’s budget proposal for 2006 includes a health care tax credit to help low- and moderate-income Americans afford health insurance. He proposes a refundable income tax credit to cover 90 percent of the cost of a health insurance policy, up to a maximum of $1,000 for individuals and $3,000 for families. The income limits to qualify are $30,000 for individuals and $60,000 for families. The credit could be used for traditional health insurance, for a health savings account, or to buy into state-sponsored purchasing pools.
To be effective, a health care tax credit would have to meet some specific criteria:
- it must be refundable for low-wage workers (that is, they get the subsidy even if they have no tax liability);
- it credit must be advanceable, so that it can be used to pay monthly premiums as they come due, rather than a lump-sum payment received when tax returns are filed on April 15;
- it must not come with costly mandates that price healthy people out of the market;
- it must be widely available to attract many buyers and sellers;
- it must be limited in dollar amount so that it does not encourage wasteful spending; and
- it should be compatible with Health Savings Accounts.
Many of the proposals introduced in Congress, as well as Bush’s proposed credit, meet those criteria.
Ineffective Credit in Place
In 2002, Congress established a health care tax credit for individuals who have lost their manufacturing jobs to foreign competition. Also eligible are individuals whose pensions are endangered because their former employer went belly-up.
The goal was to help this vulnerable population afford health insurance by giving them a credit worth 65 percent of the cost of their premiums. Yet only 6 percent of those who may be eligible have taken advantage of the credit, because of flaws in the design of the law.
In designing the credit, which falls under the Trade Adjustment Assistance (TAA) program, Congress created a problem by mandating that any insurance company offering policies to the eligible population must provide coverage to all individuals who qualify for the credit, regardless of their medical condition. This restriction, known as guaranteed issue, hurts those who need coverage by driving up prices.
When insurance companies are forced to accept all applicants, they raise premiums to cover the inevitable higher payouts. Subsequently, business dwindles because neither sick nor healthy people can afford the policies, so carriers leave the market, and rates go up as competition decreases.
Guaranteed Issue Fails Consistently
Those outcomes have been borne out repeatedly in all eight states that have imposed guaranteed issue on insurance carriers in the market for individually purchased insurance. For example, when New Jersey imposed guaranteed issue on all health insurers doing business there, premiums skyrocketed to more than double the national average.
Likewise, when Congress mandated guaranteed issue on carriers participating in the TAA credit program, the program received very few takers. According to the U.S. Treasury Department, of the 39 states participating in the program, 20 have no private carriers offering a policy, and 14 states have only one private insurer offering a plan.
Congress Limited Availability, Value
Congress also limited the usefulness of the TAA tax credit when it chose to restrict it mostly to individuals near retirement age and living on meager unemployment benefits–a population with more limited means and significantly higher health needs than most other uninsured persons. A recent Government Accountability Office report found that to use the tax credit, those eligible had to spend 13 percent to 25 percent of their monthly income on premiums.
Another flaw in the TAA health credit design is that it provides an unlimited, partial subsidy, rather than a dollar-for-dollar credit up to a maximum limit. Individuals must pay 35 percent of the cost of their health insurance, with taxpayers picking up 65 percent. This encourages waste by subsidizing the last dollar of insurance spending as much as the first dollar.
By contrast, a 100 percent tax credit for the lowest-income purchasers could reduce the cost of a modest but still comprehensive policy to zero. Limiting the credit to a fixed amount requires individuals to pick up 100 percent of the additional cost for policies with more expensive coverage.
The Bush administration’s proposed tax credit offers a flat, dollar-for-dollar credit to low-income individuals ($1,000) and families (up to $3,000). The credit phases out gradually for those with higher incomes (more than 200 percent of the poverty level), but the fact that the amount is limited avoids the incentive to spend wastefully.
Workable Tax Credit Possible
The good news is that tax credits can work if they are well designed and target the right buyers.
The majority of today’s uninsured are working individuals and families with very modest incomes. They earn too much to qualify for Medicaid, but not enough to afford coverage without assistance.
More than 80 percent of the nation’s uninsured individuals have full or part-time jobs, and more than 30 percent have incomes that are 100 to 200 percent of the federal poverty level. This should be the target group for a health tax credit. (See the accompanying figure.)
This uninsured population is relatively young and eminently insurable at reasonable rates. In most states, the limited credit proposed by Bush would pay for between half and two-thirds of the average cost of health insurance (based on a full $1,000 tax credit and eHealthInsurance’s estimated median individual premium of $1,656 per year).
For uninsured individuals with chronic health conditions, coverage should come through state high-risk pools, which already exist in 33 states. These pools allow the small percentage of the uninsured who have serious health conditions to obtain health insurance coverage at premiums that are capped at 150 to 200 percent of the average premium cost in that state.
This cost could be offset with tax credits, thus providing a safety net for a vulnerable population, while keeping premiums more affordable for others.
HSA Tax Credits Appealing
Congress could also consider using tax credits to help people afford the newly created Health Savings Accounts (HSAs). HSAs are attractive to those with modest incomes because premiums are much lower when high-deductible policies are coupled with HSAs.
A portion of the Bush administration’s proposed federal tax credit ($700 for individuals, $2,000 for families) could be used to purchase insurance, and the remainder ($300 for individuals, $1,000 for families) could be deposited directly into a tax-free HSA to use for deductible expenses, as the administration has proposed.
Laura Trueman ([email protected]) is executive director of the Coalition for Affordable Health Coverage (http://www.CAHC.net). This article first appeared on the National Center for Policy Analysis Web site (http://www.ncpa.org). Reprinted with permission.