Helping the Uninsured Who Need it Most

Published May 1, 2002

The economic slowdown will result in an estimated 1 million people losing their health insurance in 2002. Health insurance premiums are rising about 15 percent on average, with many individuals and businesses seeing increases of 30 to 40 percent.

Congress and state legislatures are looking for a solution to the problem of the growing number of uninsured. Fortunately, there is one, and it is gaining bipartisan support.

Employer-Based Health Insurance

The U.S. has an employer-based health insurance system. About 90 percent of Americans under age 65 who have private health insurance get it through their employer. The other 10 percent purchase health insurance on their own in what’s referred to as the “individual market,” much as people purchase their own auto and life insurance policies.

America has an employer-based health insurance system largely as a result of the tax code. People don’t pay taxes on the money employers spend on health insurance—a significant tax-free benefit for higher-income workers and those who work for companies that purchase expensive health insurance policies.

The self-employed can take a tax deduction for health insurance they purchase for themselves. But Americans who work for employers that do not provide health coverage must buy their own, with after-tax dollars. Unfortunately, these tend to be lower-income workers who find it difficult to afford a health insurance policy.

Bipartisan Support for Tax Credits

To address this problem, there is a growing bipartisan consensus for providing a health insurance tax credit—deducted directly from the amount of taxes owed—as the fairest and most efficient way to provide a tax break to workers who purchase their own policies. Under most proposals, the credit would also be refundable, meaning people would get the credit even if they paid no income taxes.

For example, House Majority Leader Dick Armey (R-Texas) and Rep. Bill Lipinski (D-Illinois) have proposed “Fair Care” legislation that would provide a refundable tax credit of up to $1,000 for an individual and $3,000 for a family. President George W. Bush has recently proposed similar legislation.

Fixed vs. Variable Credit

Economists Mark Paul and Bradley Herring of the University of Pennsylvania and David Song of Yale University recently analyzed the likely response to a tax credit for health insurance. They looked at a “fixed” $1,000 refundable tax credit for self-only coverage when purchased in the individual market. They reported, “[We] find that 85 percent of the uninsured sample requires a subsidy of under $1,000 for the purchase of a $1,000 deductible PPO plan, while only 34 percent of the uninsured would respond to such a subsidy for the purchase of a [more costly] $250 deductible plan.” That is, the authors found the take-up rate is in almost direct proportion to the amount of the subsidy.

Critics of the fixed tax credit charge some low-income families might be unable to pay the out-of-pocket difference, if any, between the amount of the subsidy and the cost of a policy. Moreover, some people with medical conditions are charged more for coverage because of their increased risk.

Mark Litow, an actuary and principal of the actuarial firm Milliman USA, in conjunction with the Council for Affordable Health Insurance (CAHI), have addressed that problem. According to their research, tax credits can be structured to meet the needs of the low-income and difficult-to-insure populations.

According to Litow, using Milliman’s SimuCare econometric model, the federal government could provide a flat $800 per-person annual tax credit to subsidize the cost of a policy, or $3,200 for a family of four. Depending on a number of factors—including age, health status, geographical location, number in the family and, perhaps most importantly, the type of policy chosen—an $800 per-person tax credit would cover between 33 and 90 percent of the cost of a health insurance policy.

Low-Income Workers

Of course, a tax credit that covered $800 of a $1,200 premium would still leave a $400 difference, which could be difficult for a very low-income worker to pay. Thus, the Litow-CAHI proposal provides more tax credit money to low-income working families:

  • Workers making between $7,500 and $17,000 a year would receive an additional $560 on top of the basic $800 credit, for a total of $1,360.
  • Those earning less than $7,500 a year would receive $1,380 in addition to the $800, for a total of $2,180.

This additional tax credit money, targeted to low-income workers, would make it possible for the large majority to purchase health insurance with little or no additional money out of pocket.

Persons with Preexisting Medical Conditions

It is also important to address the challenges faced by persons who cannot qualify for health insurance at standard rates because of a preexisting condition. While most states have a mechanism to ensure people with preexisting conditions can get coverage, those persons often must pay higher premiums. For example, 30 states have high-risk pools, which provide coverage for persons denied health insurance in the private market. In most of these states, participants pay premiums between 25 and 50 percent higher than they would pay if they were healthy.

To address this additional cost, the Litow-CAHI approach factors in an increase of between $400 and $1,090 per person per year, depending on income. Thus:

  • A middle-income family of three with two healthy people and one with a preexisting condition could expect a total tax credit of $2,800 ($800 each for the two healthy members and $1,200 for the one with a preexisting condition).
  • A low-income ($7,500-$17,000) family of three could expect to receive as much as $4,760 ($1,360 each for two and $2,040 for the member with a preexisting condition).

Medicaid Reform Could Pay for Tax Credits

How much would such a tax credit program cost the government? Assuming the credit is going to those who do not have health insurance or are not already getting a tax break through their employer, Litow estimates the legislation would cost between $20 and $25 billion a year. If the tax credit were made available to all workers under age 65—a much more comprehensive proposal than Congress is considering—it would cost an additional $20 to $25 billion a year, for a total annual cost of $40 to $50 billion.

Were Congress to decide to include Medicaid reform at the same time it created a tax credit for all workers, Medicaid recipients could also use a refundable tax credit to purchase a private insurance policy. Including Medicaid recipients in the tax credit structure would make the reform budget neutral: There would be no additional cost to the government.

Medicaid as currently operated is costly and inefficient. The federal government could provide current Medicaid recipients with a very generous refundable tax credit, allowing them to buy an individual insurance policy with almost no out-of-pocket costs, and still save $40 to $50 billion a year—enough to offset a new tax subsidy given to all workers, according to the Milliman USA model.


Creating a variable tax credit system is not without problems. For example, it would give taxpayers an incentive to under-report income in order to receive a larger subsidy. Nevertheless, a tax credit would be the most efficient way to assist uninsured Americans who do not get health insurance through an employer. And a variable tax credit would address the concerns of those who believe a fixed credit is too inflexible to help workers with very low incomes or preexisting conditions.

Prepared by Merrill Matthews Jr., Ph.D., director of the Council for Affordable Health Insurance and assistant editor of Health Care News. A copy of the technical paper upon which this article is based is available upon request from CAHI. Contact Tom Gardner at [email protected].