Millions of Americans are without health insurance. President George W. Bush has proposed a number of positive policy initiatives that can reverse this situation and make health care coverage more affordable for millions of individuals and families.
Diverse and Dynamic Uninsured Population
According to the U.S. Bureau of the Census, 41.2 million Americans did not have health insurance coverage at some time in 2001. Roughly half of the members of this diverse population were uninsured for a period of six months or less, and about 40 percent were uninsured for a period of 18 months or more.
The overwhelming majority of the uninsured are young, between the ages of 18 and 34; more than 80 percent are part of a working family. They tend to be employed in small businesses and are concentrated in wholesale and retail trade industries, agriculture, forestry, fishing, mining, and construction. They are disproportionately minorities, largely Hispanic. While a substantial majority of these Americans are low-income working people, the fastest-growing element of the uninsured population is comprised of middle- to upper-middle-income families.
Although the majority of Americans have health care coverage through their place of work, lower-income working Americans are less likely to have employer-sponsored coverage. Americans get unlimited tax relief for the purchase of health insurance if–and only if–coverage is provided through their employer.
Discriminatory Tax Policy
In 2000, the tax exemption for employer-paid health insurance was estimated to be worth $126 billion.
Lower-income working Americans who do not or cannot get health insurance at their place of work have few choices; they can either purchase non-group coverage outside of their place of work (and do so with after-tax dollars) or go without coverage altogether.
Health care economists concluded long ago that the country’s health care tax policy is inequitable and inefficient, and that it distorts the insurance markets and contributes significantly to the number of uninsured in the United States.
Policymakers should also take into account that the uninsured impose costs on the public–including the cost of government payments and programs and other public spending for health care. In a recent research paper, Urban Institute analysts Jack Hadley and John Holohan estimated, in 2001 dollars, the public paid $35 billion for uncompensated care, and that $30.6 billion of that was in the form of government spending.
As Hadley and Holohan explain: “We … estimated that governments finance most of the uncompensated care received by the uninsured, spending about $30.6 billion on payments and programs largely justified to serve the uninsured and covering possibly as much as 80-85 percent of the uncompensated care costs through a maze of grants, direct provision programs, tax appropriations, and Medicare and Medicaid payment additions.”
Most of this money comes from the federal government, primarily through Medicare and Medicaid, followed by state/local tax appropriations for hospitals, Medicaid DSH and UPL payments, and the Veterans Administration’s direct care programs. Replacing this inefficient system with direct assistance to the uninsured would be simpler and cost-effective.
Expanding Coverage and Choice
President Bush proposes to address the needs of America’s uninsured by fixing the inequities of the current system and mainstreaming uninsured individuals and families into the private insurance market. While liberal policymakers would like to enroll the uninsured in public programs such as Medicaid (which are, even now, overwhelmed and underperforming), surveys show Americans prefer private health coverage.
To achieve its mainstreaming objective, the administration would create a new system of tax credits for health care coverage targeting low-income individuals and families without employer-provided coverage. Bush also has proposed a series of reforms aimed at improving existing health care accounts. These policy recommendations would enable individuals and families to make their own decisions regarding health care and how to spend health care dollars.
The President is resubmitting to Congress an $89 billion health care tax credit proposal to assist millions of Americans who are without health insurance provided through the workplace. The tax credit would provide a subsidy of up to 90 percent of the cost of a health insurance premium, up to a dollar amount of $1,000 per person and $3,000 per family.
Families with an adjusted gross income of $25,000 or less would be eligible for the maximum credit of $3,000. For families with incomes above $25,000, the amount of the credit would vary with income. The credit phases out at income levels of $30,000 for an individual with no dependents and $60,000 for families with children.
The proposed tax credit would be refundable, meaning low-income individuals and families who owe little or no taxes would still receive a subsidy for the purchase of health insurance. It would also be “advanceable,” meaning individuals or families would get the assistance at the time premium payment is due and not have to wait until the end of the year for reimbursement.
The Bush tax credit proposal outlines a new role for the states, both in building an infrastructure incorporating choice and competition and in providing additional subsidies for low-income Americans.
Under the terms of the original tax credit proposal outlined last year, the purchase of health insurance in the individual market would qualify a taxpayer for the credit. The new Bush proposal offers the tax credit not only to those who purchase a plan in the non-group market, but also to those who purchase health insurance through private-sector purchasing pools, state-sponsored insurance-purchasing pools, and state high-risk pools.
After December 31, 2004, the Bush plan gives state authorities the discretion to allow individuals and families who would not otherwise be eligible for public assistance to buy into certain state-sponsored purchasing groups where private insurance is offered or to buy into state government employee health-purchasing groups, and to receive a federal tax credit for doing so.
States also could supplement the federal tax credits used for group purchasing of private health plans. Under the terms of the Bush proposal, states could make an additional contribution of up to $2,000 per adult for those with incomes at 133 percent of the poverty level; this contribution would be phased down to $500 per adult for those with incomes that are 200 percent of the poverty level.
Health Care Accounts
The Bush administration has unveiled a broad range of policy improvements to make health care coverage more affordable by giving individuals greater control of their health care spending.
In 2002, the U.S. Department of the Treasury issued a ruling to clarify the status of health reimbursement arrangements (HRAs). Through these arrangements, employers could offer employees a health plan in combination with a tax-free spending account for health care expenses, allowing any unspent funds to be carried over from year to year, tax-free.
Beyond that administrative change in the system, the Bush administration is also proposing statutory changes that would expand and improve Archer MSAs and FSAs. Changes in Archer MSAs are particularly significant, given that nearly 73 percent of MSA enrollees were previously uninsured.
Flexible Spending Arrangements
Under current law, employees can participate in employer-based FSAs, through which employees can set aside a portion of their salaries in a special, pre-tax account to use for anticipated qualified health care expenses. If employees do not use the funds they have set aside in their FSA by the end of the year, however, they lose them. They may not carry over any unused funds to the following year. Under the Bush proposal, employees could carry forward up to $500 of unused funds in their FSAs tax-free every year for medical expenses.
Medical Savings Accounts
Medical savings accounts, from which individuals and families can pay for their medical expenses, are tax-free and can be rolled over from year to year. Under current law, no more than 750,000 individuals can have a medical savings account, and the MSA demonstration is scheduled to end after December 31, 2003. These restrictions have discouraged the health insurance market from offering MSA products.
A number of statutory and regulatory restrictions also constrain how MSAs may be used. For example, under current law an MSA must be coupled with a high-deductible health plan. The law specifically defines a high-deductible plan as one with “deductible(s) in the range of $1,700 to $2,500 in the case of individual coverage, and $3,350 to $5,050 in other coverage arrangements, with out-of-pocket limits set at $3,350 for individual coverage and $6,150 in all other cases.”
The Bush proposal would eliminate the artificial participation cap on MSAs and make the demonstration permanent. Those changes would remove market disincentives and allow supply to meet market demand. Bush would also open the MSA option to any individual who wanted one (with the exception of those who would otherwise be eligible for a refundable tax credit) and change the definition of a “high-deductible” plan to any plan with an annual deductible as low as $1,000 for an individual and $2,000 for family or other coverage, with an additional provision to encourage preventive medical services.
The Bush plan also would allow both employers and employees to contribute to the account–today only one or the other may do so–and would permit contributions up to 100 percent of the annual deductible; contributions are currently capped at 80 percent of the deductible.
The problems of the uninsured are symptomatic of a deeper problem affecting the country’s health care system: the federal and state tax treatment of health insurance. The current system undermines the portability of insurance, inhibits personal ownership and control of health plans, prohibits genuine consumer choice, and obstructs the functions of the market.
President Bush’s health care policy agenda is laudably ambitious. It would make health care coverage more affordable and would help millions of Americans secure health insurance coverage. The President’s policy would ensure the expansion and availability of private health insurance coverage for individuals and families.
The President’s proposals establish a high bar for success. With the help and support of Congress, the bar can be reached–and, in some cases, raised even higher.
Robert E. Moffit Ph.D. is director of the Center for Health Policy Studies and Nina Owcharenko is health care policy analyst at The Heritage Foundation. This analysis was first published on March 11, 2003 as Heritage Foundation Backgrounder #1636 and is reprinted here with permission.
For more information …
The complete text of Heritage Foundation Backgrounder #1636, with footnotes, is available on the group’s Web site at http://www.heritage.org/Research/HealthCare/bg1636.cfm. It is also available in Adobe Acrobat’s PDF format through PolicyBot. Point your Web browser to http://www.heartland.org, click on the PolicyBot icon, and search for document #11956.