In October 1999, then-Governor George W. Bush appointed members to a Blue Ribbon Task Force on the Uninsured, created by the Texas Legislature to examine the problems of Texans who lack health insurance, to review demographic trends relating to the uninsured population, and to examine other states’ programs, laws, and systems that address the lack of affordable health coverage.
Among those appointed by Bush was John C. Goodman president of the National Center for Policy Analysis.
In a report issued in March 2001, the Task Force recommended expanding enrollment in the state’s Medicaid program. Goodman disagreed, submitting the following minority report.
The majority report of the BRTF was compiled by conscientious, well-intentioned people. However, we the undersigned believe the majority report has failed to identify the fundamental reasons why there are so many uninsured in Texas. Nor does the report explain why the number of uninsured in Texas continued to rise during a decade of rising incomes and unprecedented economic growth. Further, we believe that even if all the majority recommendations were fully implemented, the number of uninsured in Texas would continue to rise, indefinitely into the future.
The Effects of Federal Policies
Over the past decade, virtually every state in the nation has made a major effort to insure its uninsured. Collectively, these efforts have failed. Nationwide, the percent of the population that is uninsured is higher today than it was in 1990.
One reason why state action has been so ineffective is that the most important government policies affecting uninsurance are federal government policies, over which state governments have little, if any, control. Perversely, federal policies actually encourage many people to choose to be uninsured rather than insured.
Federal policies also have other perverse outcomes that affect the state of Texas. In many cases, federal policies encourage people to choose public insurance (e.g., Medicaid and S-CHIP) rather than private insurance. Federal law also effectively prevents personal and portable insurance. And it prevents Texas from using its health care dollars in a way that would maximize health care outcomes.
Federal Tax Law
The federal tax law encourages all Americans to obtain health insurance through an employer by excluding employer payments for health insurance from the employees’ taxable income. For a middle-income family, this means that health insurance fringe benefits escape, say, a 28 percent income tax and a 15.3 percent (FICA) payroll tax. For these families, the government is effectively paying for 43 percent of the cost of the insurance.
The subsidy is much less generous for those who earn lower incomes. For example, almost half the work force pays no income tax. For these employees, the federal tax exclusion is worth only the 15.3 percent saving in forgone payroll taxes. The reason why firms that employ low-skilled workers are less likely to offer health insurance to their employees is that untaxed health insurance (relative to higher taxable wages) is less attractive for these employees.
Whatever the reason, approximately 81 percent of Texas’ small employers do not offer health insurance to their employees, and if the employees purchase insurance on their own, they get virtually no tax relief. Thus for a large number of Texans, federal tax policy toward private insurance is one of indifference. There is no tax subsidy for those who insure; and no tax penalty for those who remain uninsured.
What is the alternative to having private insurance? People who do not qualify for public programs (e.g., Medicaid) must rely on their own resources and on charity care. As the majority report notes, Texas currently spends about $1,000 per year on free care for every uninsured person in the state, on the average. That implies that the value of “free” care is about $4,000 a year for a family of four.
Interestingly, $4,000 is an adequate sum to purchase private health insurance for a family in most Texas cities. Therefore, one way to look at the choice many Texas families face is: they can rely on $4,000 in free care (on the average) or they can purchase a $4,000 private insurance policy with after-tax income. Granted, the two alternatives are not exactly comparable. Families surely have more options if they have private insurance. But for many, the free care alternative will appear more attractive.
Federal Spending on Indigent Health Care
Although the federal government offers very little financial incentive for people to purchase their own insurance, it is a major source of funds for free care made available to the uninsured.
There are more than 40 federal programs that fund health services for the uninsured in Texas. The largest single program, spending more than $1.5 billion a year, is the disproportionate share hospital (DSH) payment program, designed to compensate hospitals that serve a larger than average number of indigent patients. Just over 60 percent of funds for the program in Texas come from the federal government. There are also programs for public housing residents, seasonal farm workers, legal immigrants, and even undocumented immigrants.
Is there a way to redirect the money we now spend on free care in order to give people an incentive to be insured, rather than uninsured? For example, could Texas use some, or all, of its uncompensated care money and subsidize the purchase of private insurance for the families who currently rely on our indigent care system? Unfortunately, federal law makes this approach virtually impossible. In general, DSH money is money available only to offset unreimbursed hospital expenses. Other federal funding is similarly constrained.
Federal Subsidies for Public Health Insurance Programs
Approximately 1,781,000 Texans are insured under the state’s Medicaid program, and 239,000 children are insured under S-CHIP. Although managed by the state, these programs are created under federal law, and the federal government provides the bulk of the funding (60 percent of Medicaid and 73 percent of S-CHIP).
When Congress passed legislation creating Medicaid and S-CHIP, the clear intent was to provide insurance for those who would not otherwise be insured by the private sector. However, there is evidence that the expansion of these two programs is coming at the expense of private insurance. That is, people are dropping their private coverage in order to take advantage of their eligibility for public coverage.
It is not difficult to understand why. Families who obtain insurance coverage from an employer are benefiting from, say, a 15 percent (tax) subsidy; whereas families who qualify for public insurance enjoy a 100 percent (spending) subsidy. As a result, when people drop their private insurance and enroll in public programs, the cost to the taxpayer climbs from 15 percent to 100 percent. Thus taxpayers take on a major new burden, but little is accomplished in return.
Precisely because of the substitution of public for private coverage, the expansion of public programs is usually a very costly way to increase the number of people with insurance. For example, when Congress passed the S-CHIP program, the Congressional Budget Office (CBO) predicted large-scale substitution of public for private insurance. As a result, the CBO predicted that the cost of S-CHIP would be about $3,000 for each newly insured child, at a time when private insurance could be purchased for $500 or $600.
Under current federal law, there is not much the state can do to prevent this outcome. However, if the law were changed, states would be able to use their Medicaid and S-CHIP money to encourage private insurance instead. For example, rather than enrolling a child in S-CHIP, the same money (or some portion of it) might be used to pay the employee’s share of the premium in a parent’s employer-provided health plan. Such options would not only save money for the state, they would also be family friendly—allowing all members of the same family to enroll in the same health plan and see the same doctors and at the same facilities.
Federal Laws Preventing Portability
One of the disadvantages of our current system of employer-based health insurance is that employees must switch health plans every time they switch jobs. Even if they don’t change jobs, once a year their employer can opt for a new health plan. And every change of health plans potentially means the employee will have to change doctors. As a result, it is a system under which there can be no continuity of care.
Another problem is that when health plans are selected by employers, they will tend to meet the needs of employers rather than the needs of individual employees. The result is health insurance that is less valued by employees and less attractive to them.
An alternative to this arrangement is a system of personal and portable insurance. Employers could still pay the premiums (as they do now) in order to take advantage of the federal tax subsidy. But the insurance could be owned by the employees and they could take their insurance with them as they move from job to job on their journey through the labor market. An example of such a system is a proposal developed by the National Center for Policy Analysis and Blue Cross/Blue Shield of Texas.
An obstacle to implementing such a system is the Health Insurance Portability and Accountability Act (HIPAA). Although advertised as enabling portability at the time of its passage, HIPAA in fact makes portability impossible. The reason is that HIPAA (combined with the provisions of ERISA) makes it impossible for employers to purchase individually owned insurance for their employees.
Federal Obstacles to the Efficient Use of Public Health Care Dollars.
Texas communities receive health care funding both from the state and from the federal government. These funds flow through such programs as Medicaid, S-CHIP, DSH, etc. However, each of these programs has its own set of rules, narrowly prescribing how the funds may be spent. The result is that local communities have no power to allocate resources in ways that would maximize their impact.
For example, in one community the greatest return on health care spending may come from fluoridating the water supply. In another community, the greatest return may come from improving sanitation. Yet local communities have no authority to use their diverse health care funding to achieve these goals.
An example of a community that is adversely affected by such restrictions is El Paso. As Table I shows, El Paso (upper Rio Grande) has low utilization of Medicaid per Medicaid-eligible person, but high spending for uncompensated care per uninsured person.
As a result, El Paso’s low-income population overutilizes hospital care and underutilizes outpatient care. The city and its people would be better off if it were free to reallocate funds from inpatient to outpatient care. But restrictions on the use of funds apparently make this option difficult, if not impossible.
Ideally, cities like El Paso should be able to combine their funds for Medicaid, S-CHIP, and DSH and freely allocate those funds so as to achieve maximum health impact.
The Texas Legislature should by means of resolution call on the federal government to enact changes in policies that would:
- Allow the state of Texas to combine all federal and state health care dollars currently being spent on health care for low- and moderate-income families and allocate those funds without restriction so long as the money is spent on indigent health care.
- Allow the state of Texas to use funds now available through Medicaid, S-CHIP, DSH, and other programs to subsidize private insurance instead.
- Allow the state of Texas to give employers the opportunity to purchase individually owned, personal, and portable insurance for their employees without tax penalty.
The March issue of Health Care News will present the conclusion of John Goodman’s report, a proposal to create personal and portable insurance in Texas.