Survey Points Way to Affordable Health Insurance

Published July 1, 2001

Representatives Richard Armey (R-Texas) and William Lipinski (D-Illinois), along with 23 cosponsors from both sides of the aisle, introduced the Fair Care for the Uninsured Act of 2001 (H.R. 1331) on April 3, 2001. The plan would create refundable tax credits of $1,000 per individual, $2,000 per married couple, and up to $3,000 per family for the purchase of health insurance. The bill joins other legislative proposals, including one from President George W. Bush, that also offer refundable tax credits to help families buy health insurance.

Opponents commonly argue tax credits do not offer enough assistance to people to purchase coverage. As one critic put it, a $1,000 tax credit to help an individual buy health insurance is like throwing a “10 foot rope to someone in a 30 foot hole.” But in fact, credits of that size can help many families afford coverage–even more so if they are combined with assistance or tax credits at the state level, such as Colorado’s recently enacted $500 credit.

Survey Evidence

According to a recent survey conducted by eHealthInsurance Services, Inc., many good insurance products would be available to families who are eligible for tax credits. The survey looked at the most recent 20,000 approved applications for policies sold through, the largest online broker of individual health insurance in America. Among the survey’s findings:

  • Policies are affordable. Of the 20,000 policies examined, 15,000 fell within 75 percent to 100 percent of the tax credit amounts proposed in Armey/Lipinski’s H.R. 1331.
  • Quality coverage is available. Of the 20,000 policies, 93 percent were for a health maintenance organization (HMO) or preferred provider organization (PPO) product. Of the HMO products, 80 percent had no deductible; of the PPO products, 71 percent had a deductible less than $1,000.
  • Individually purchased plans are widely available. The 20,000 approved policies were from 40 states representing 93 percent of the U.S. population. Covered persons ranged in age from one to 64 years old.

The Problem? Employer-Based Insurance

America’s system of employer-based private health insurance is fraying. Despite last year’s small decline in the number of uninsured Americans, uninsurance increased during the 1980s and 1990s and is universally forecast to continue rising. Absent changes in public policy, there could easily be another 10 million uninsured by 2010.

Alternatives to the system of employer-based coverage are needed. Under the current tax code, workers whose employers contribute to their health coverage have that amount excluded from income and payroll taxes. This represents a significant and highly regressive tax break: the higher one’s tax bracket, the bigger the subsidy.

According to the Lewin Group, a leading econometrics consulting firm, families earning $100,000 a year average $2,638 in health insurance-related tax subsides; those who earn less than $15,000 a year get an average subsidy of just $79.

Primarily as a result of annual premium increases beyond the rate of inflation (projected to reach double digits in 2001), employers are beginning to move away from offering health insurance to their employees. The threat of more employer liability and increased costs associated with any Patients’ Bill of Rights legislation will only speed up that trend. People without access to an employer’s health plan get no tax break at all. They must either go without insurance or buy a policy in their state’s individual market.

The Appeal of Refundable Tax Credits

Refundable tax credits would address the regressive nature of the current system. The credits would direct assistance to people who need it most–lower-income Americans who receive no subsidies because they are not eligible to participate in an employer’s plan. Nearly half of the estimated 42.6 million uninsured pay no federal income taxes, making it essential that the credits be refundable.

The refundable tax credit approach has garnered widespread bipartisan support. It was included in the platforms of both candidates campaigning for President last year. During the 106th Congress, moreover, 72 Members of the House from both parties became cosponsors of at least one tax credit bill.

The benefits of moving toward tax credits and making coverage more affordable would include the following:

  • The right to sue. Individuals who purchase their own health insurance policies have unambiguous legal remedies as the first party to a contract with a health insurance company. Before purchasing policies, signatories to the contract would read the plans and know the benefits, and could sue if the insurer violated the terms of the contract. These families would not need a Patients’ Bill of Rights. The relationship is much less direct, and the incentives are much different, with employer-provided coverage.
  • The right to choose coverage. Under the current system, most Americans are at the mercy of their employer when it comes to choosing a health insurance policy. Tax credits would allow families to select their own coverage and change plans if they became dissatisfied. Better service results when customers have options.
  • Portability. Individually purchased plans could be kept regardless of employer or employment status, providing a consistency of coverage especially beneficial for people with preexisting conditions. Insurers would have greater incentive to provide more preventative treatments than is the case in the employer-based system, because each customer likely would remain with the insurer for a long time.
  • Privacy of medical records. Patients are quite properly concerned about the privacy and security of the information in their medical records. Under a refundable tax credit system, patients purchasing their own insurance policies would have more say over what happens to their medical information.


Allowing refundable tax credits of the amounts proposed in H.R. 1331 would substantially reduce the number of Americans without health insurance. As the eHealthInsurance Services survey shows, individually purchased plans are affordable, contain meaningful coverage, and are widely available. Tax credits would allow more people to take advantage of this burgeoning market.

James Frogue is a health care policy analyst at The Heritage Foundation.