For Release on Delivery

Expected at 2:30 p.m.

Thursday, March 15, 2001

GAO-01-481T

HEALTH INSURANCE

Proposals for Expanding

Private and Public

Coverage

Statement of William J. Scanlon

Director, Health Care Issues

Testimony

Before the Committee on Finance, U.S. Senate

United States General Accounting Office

GAO
Page 1 GAO-01-481T

Mr. Chairman and Members of the Committee:

I am pleased to be here today as the Committee begins considering options

to expand health insurance coverage for the 1 in 6 nonelderly Americans

(under 65) who are uninsured. These 42 million people represent a

heterogeneous population. As we noted in our testimony before your

Committee earlier this week,1 the majority of the uninsured are working,

often for small businesses or in certain industries such as agriculture or

construction that are less likely to offer health insurance, or are lowincome persons who are ineligible for or not enrolled in public programs.

A disproportionate share of young adults, Hispanics, and residents of

southern or western states are uninsured. But the uninsured population

also includes people employed by larger-sized firms and other industries

as well as those of all income levels, ages, races and ethnicities, and

geographic locations. Given the heterogeneity of this population, a variety

of approaches have been proposed in the Congress and by proponents to

increase private or public health insurance coverage in ways that may

match the needs of different uninsured persons and maximize the

potential impact for expanding coverage.

Several recent congressional efforts represent important steps toward

increasing the availability of health insurance for workers and low-income

families, including

• improving the availability of private health insurance for individuals

changing jobs or with preexisting health conditions,

• increasing the percentage of health insurance premiums that selfemployed individuals can deduct from their taxable income,

• giving additional flexibility to states to expand Medicaid eligibility to a

larger group of low-income children and their parents, and

• establishing the new federal-state State Children’s Health Insurance

Program (SCHIP), which had already enrolled more than 3 million lowincome children in 2000.

 

1See Health Insurance: Characteristics and Trends in the Uninsured Population (GAO-01-507T, Mar.

13, 2001).

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Private and Public Coverage
Health Insurance: Proposals for Expanding

Private and Public Coverage

Page 2 GAO-01-481T

These steps help millions of Americans, and the full effect of some of these

actions likely has not yet been realized. Despite these efforts, however,

millions of Americans remain uninsured.

To assist the Committee as it considers the variety of proposals offered to

expand coverage to the uninsured, my remarks today will provide an

overview of potential approaches for increasing private or public coverage

and considerations that could impact their effectiveness in reaching

significant numbers of the uninsured. Specifically, I will focus on

• proposed additional tax incentives, such as deductions or credits, to

encourage individuals to purchase private health insurance or employers

to offer coverage;

• proposed expansions to public programs, including expanding Medicaid

and SCHIP to additional low-income children and adults, and allowing

near-elderly individuals not yet 65 to “buy in” to Medicare; and

• the potential for unintended consequences of private and public coverage

expansions on existing private health insurance coverage.

My comments are based on our prior and ongoing work on the uninsured

population, private health insurance, Medicaid, and SCHIP, as well as

other published research.2 We reviewed key elements of major proposals

that have been introduced in the 106th and 107th Congresses, as well as

several put forth by various proponents.

In summary, the success of proposals to provide additional tax incentives

to promote private health insurance—which already is the primary source

of health coverage for most nonelderly Americans—will depend on

whether they are large enough so that more uninsured individuals will

purchase insurance or more employers will begin offering coverage or

increase their contribution to premiums. Because most uninsured

individuals either pay no taxes or are in the lowest marginal tax rate

bracket, a refundable tax credit would provide a larger net reduction in

premium costs for low-income uninsured individuals than would allowing

a deduction from taxable income. Tax credits also will be more effective if

available when low-income persons purchase coverage rather than in the

next year when tax returns are filed. Most of the proposed tax credit

amounts represent less than half of premiums for many individuals, which

 

2A list of related GAO products appears at the end of this statement.
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some analysts conclude is not large enough to induce most low-income

uninsured individuals to begin purchasing health insurance. Some

proposed credits for small employers or those with many low-wage

workers would be provided for a limited period of time, which may make

affected employers hesitant to begin offering coverage or increasing their

premium contribution if the continued availability of the credit is

uncertain.

Other proposals would expand eligibility for existing public programs to

more low-income children and adults. These include

• giving states the option of increasing income eligibility limits under

Medicaid or SCHIP;

• expanding these public programs to persons who are not now eligible,

such as most childless adults for the Medicaid program or the parents of

children eligible for SCHIP; and

• allowing near-elderly individuals who are not yet Medicare-eligible to pay

premiums and thereby buy in to Medicare.

The success of these efforts in reducing the number of uninsured is

contingent upon (1) the willingness of states to pursue options to expand

Medicaid and SCHIP eligibility and (2) the effectiveness of outreach to

enroll eligible individuals, since at present many eligible individuals are

not participating.

Proposed approaches to expand insurance coverage may result in some

individuals or employers dropping current coverage in order to take

advantage of a new tax subsidy or public program that would reduce

health insurance costs associated with individual or employment-based

coverage. While some steps may be taken to reduce the potential for this

phenomenon—known as “crowd-out”—some level of such displacement

of existing private coverage may be an inevitable cost of efforts to

decrease the number of uninsured Americans.

Employers voluntarily offering private health insurance benefits are the

predominant source of coverage for nonelderly Americans, and publicly

sponsored programs also enroll many low-income people. Two-thirds of

nonelderly Americans obtain private health insurance through

employment. The federal tax code provides incentives for employers to

subsidize health benefits by making their premium contributions tax

Background
Health Insurance: Proposals for Expanding

Private and Public Coverage

Page 4 GAO-01-481T

deductible as a business expense; this subsidy also is not considered

taxable income for employees. In addition, tax benefits are available to

individuals who purchase nongroup private insurance directly from

insurers (referred to as “individual insurance”) if the person is selfemployed3 or has premium and medical expenses combined that exceed

7.5 percent of his or her adjusted gross income.

However, private insurance is not accessible to everyone. Some workers,

including those working for small firms or in certain industries such as

agriculture or construction, are less likely to be offered employment-based

health coverage. Health insurance may also be expensive and potentially

unaffordable for those paying the entire premium individually rather than

receiving employment-based coverage where employers typically

contribute to some or all of the cost. In addition, while all members of a

group plan typically pay the same premium for employment-based

insurance regardless of age or health status, in most states individual

insurance premiums are higher for older, sicker individuals than for

young, healthy individuals, potentially making them unaffordable.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

provided several important protections to improve the availability of

private health insurance, particularly for individuals changing jobs or with

preexisting health conditions. HIPAA included guaranteed access to

coverage for those leaving group coverage and for small employers;

however, it did not address issues of affordability. In addition, many

states have enacted reforms that guarantee access to health insurance for

certain high-risk individuals and small groups and that sometimes limit the

premiums these persons and groups pay. While these federal and state

private insurance market reforms provide important protections for

certain individuals and groups, recent research finds little, if any, effect

from these reforms on overall private insurance coverage rates.

Public programs such as Medicaid and SCHIP cover certain low-income or

disabled individuals. However, eligibility for these programs is often

restricted to selected groups, such as children, parents of eligible children,

pregnant women, or disabled individuals, and depends on the applicant’s

age, income, and other factors. For example, childless adults, unless

disabled, are generally not eligible for Medicaid. States must set income

thresholds to meet certain minimum federal standards but may opt for

 

3For 2001, self-employed individuals may deduct 60 percent of eligible health insurance expenses from

taxable income; this share is scheduled to rise to 100 percent in 2003 and thereafter.
Health Insurance: Proposals for Expanding

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Page 5 GAO-01-481T

higher eligibility standards as long as they are within federal guidelines.

SCHIP was established in 1997 to give states the choice of receiving

enhanced federal funding to cover additional low-income children who do

not qualify for Medicaid, generally those in families whose incomes are up

to 200 percent of the federal poverty level. Unlike Medicaid, SCHIP is not

an entitlement program, and states can halt enrollment once budgeted

funds are exhausted.4 As of September 2000, HCFA reported that 3.3

million children were enrolled in SCHIP. Although Medicare primarily

insures most Americans 65 years or older, it also provides coverage for

some nonelderly individuals who are disabled or have end-stage renal

disease.

Additional tax incentives proposed to encourage people to purchase

health insurance vary in terms of who would be eligible, whether the tax

incentive is provided to individuals or employers, and whether the

incentive is a deduction that reduces taxable income or a credit that

reduces total tax liability. The proposals share challenges that will affect

their success in covering newly insured individuals. These challenges

include (1) making the reduction in premiums large enough to induce

uninsured persons to purchase health insurance or to encourage

employers to offer coverage or increase their contributions to premiums,

and (2) timing a subsidy to be available for low-income individuals at the

time they pay their premiums, rather than after the end of the tax year.

Some proposals would allow people who purchase individual, nongroup

health insurance to deduct the cost of premiums from their taxable

income, with the intention of both increasing coverage and making the tax

treatment of individually purchased and employment-based insurance

more uniform. These proposals vary as to whether tax filers would have

to itemize deductions in order to receive the health insurance deduction or

could make the deduction an “above-the-line” adjustment to gross income

without itemization.5 Some proposals would also allow employees’

contributions to employment-based health insurance to be deducted from

 

4As an entitlement program, states must enroll all individuals who apply and meet state and federal

Medicaid requirements.

5In 1998, nearly 31 percent of tax filers itemized their deductions.

Impact of Proposed

Tax Incentives Will

Depend on Their Size

and Timing

Tax Deductions
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their taxable income—potentially important if the employee must pay

most or a large share (more than half) of the plan’s premium, since these

employees are more likely to turn down employment-based coverage.

A tax deduction may be limited in its ability to induce uninsured

individuals to purchase private insurance because most uninsured

individuals do not earn enough for a deduction to make any or a

significant difference in their net health insurance costs. In 1999, about 40

percent of the uninsured either did not file income tax returns or were in

the 0 percent marginal tax rate and would not benefit from the deduction

if they purchased individual insurance. Nearly 50 percent of the uninsured

were in the 15 percent marginal tax rate, which, if they purchased

qualifying health insurance, would allow them a 15 percent net reduction

in their insurance cost.6 Analysts have generally agreed that this level of

reduction would encourage few additional uninsured individuals to

purchase health insurance. The remaining 10 percent of the uninsured,

based on their marginal tax rates, would be eligible for a 28 to nearly 40

percent net reduction in the cost of their health insurance.7 While this

level of reduction in net premiums may induce some individuals in higher

tax brackets to purchase health insurance, it is less than some analysts

have concluded would be necessary to lead to a widespread increase in

coverage. For example, the Congressional Budget Office (CBO) reported

that tax subsidies “would have to be fairly large—approaching the full cost

of the premium—to induce a large proportion of the uninsured population

to buy insurance.”8

Other proposals would allow individuals purchasing health insurance to

receive a tax credit. In contrast to a deduction, the amount of the credit

depends not on the filer’s marginal tax rate but how the credit is designed.

Some proposals involve providing tax filers below a certain income

threshold a flat credit if they purchase individual health insurance, such as

up to $1,000 for single coverage or $2,000 for family coverage, while

 

6In 1999, the 15 percent tax bracket included single tax filers with taxable income of $25,750 or less,

head-of-household tax filers with taxable income of $34,550 or less, and joint tax filers with taxable

income of $43,050 or less.

7The 28 percent tax bracket included single tax filers with taxable income of $25,751 to $62,450, headof-household tax filers with taxable income of $34,551 to $89,150, and joint tax filers with taxable

income of $43,051 to $104,050. The 39.6 percent tax bracket included any tax filer with income over

$283,150.

8CBO, Options to Expand Federal Health, Retirement, and Education Activities (Washington, D.C.:

June 2000).

Tax Credits
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higher-income individuals could be eligible for a partial credit or no credit.

Because more than half of uninsured individuals would not have had

enough income tax liabilities in 1999 to receive the full credit amount,

some proposals would make the credit refundable so that more lowincome tax filers and a number of those who would not otherwise file

could receive a larger portion or all of the amount.9

The number of individuals eligible for a tax credit would vary depending

on the income thresholds specified in a proposal. For example, we

estimate that in 1999 22 million uninsured Americans were in families that

potentially would have been eligible for a tax credit available to single tax

filers with $30,000 in taxable income and joint or head-of-household tax

filers with $50,000 in taxable income. A recent study estimated that a tax

credit of $1,000 for single coverage and $2,000 for family coverage with

these taxable income thresholds could enable about 4.2 million—or nearly

20 percent of eligible individuals—to become newly insured.10 If income

eligibility levels were twice as high, we estimate that 3 million additional

uninsured individuals would have been in families potentially eligible for

the tax credit, and the study estimated that a credit at this higher income

eligibility level would result in another 0.5 million newly insured.11

A fixed-dollar tax credit would represent a varying proportion of the

health insurance cost, since health insurance premiums can vary widely

with the locality, age, and health of the individual and the level of benefit

and plan type. In 1999, we reported some examples of annual premiums in

the individual health insurance market for single coverage, including

• a low premium of $744 for a healthy 30-year-old male in Arizona,

• a mid-level premium of $2,658 in a rural New York county, a state that has

community rating and therefore does not allow variation by age or health

status of the individual, and

 

9By being refundable, a tax credit allows tax filers whose income tax liability is less than the value of

the credit to receive a refund in excess of their federal tax liability.

10Unpublished data from Jonathan Gruber based on Jonathan Gruber and Larry Levitt, “Tax Subsidies

for Health Insurance: Costs and Benefits,” Health Affairs (Jan/Feb 2000), pp. 72-85. The authors

estimate that the number of uninsured that would be newly covered would be higher (about 6 million)

if the credit was payable in advance but lower (about 2 million) if it excluded anyone with employerbased coverage.

11Gruber and Levitt, “Tax Subsidies for Health Insurance: Costs and Benefits.”
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• a high premium of $7,154 for a 60- to 64-year-old smoker in urban Illinois.12

Thus, in some states, a $1,000 tax credit could represent all or most of the

premium for a young, healthy male or for someone purchasing a plan with

a high deductible or limited benefits. On the other hand, a $1,000 credit

could represent a small proportion of the premium for a comprehensive

health plan for an older person or someone with existing health

conditions. For many individuals, a $1,000 tax credit would likely

represent less than half of a typical premium.

A tax credit’s ability to induce uninsured individuals to purchase coverage

will also depend on the timing of the credit. Some low-income individuals

who want to take advantage of a credit to purchase health insurance may

find it difficult to do so if they must pay the premiums up front but cannot

receive the credit until the following year after filing their tax return. To

alleviate this problem, some proposals would allow advance funding of a

credit, so that eligible individuals could receive the credit at the time they

purchase the health insurance. There is limited experience with advance

payments of tax credits for individuals, and establishing an effective

mechanism could be administratively challenging. Procedures and

resources to assess eligibility based on partial-year income information

would need to be available nationwide. In addition, efficient and equitable

procedures for end-of-year reconciliations and recovery of excess

payments would be necessary.

The Earned Income Tax Credit (EITC), a refundable tax credit that offsets

much of the impact of Social Security taxes paid by low-income workers

in order to encourage them to seek work rather than welfare, does provide

an option allowing recipients to receive 60 percent of the credit in

advance. The share payable in advance is limited to 60 percent to reduce

the risk to recipients of having to repay erroneous payments and to reduce

the risk of overpayments. However, very few EITC recipients—about 1

percent—have received an advance payment for their EITC.13 This low

participation is in part because many EITC recipients are unaware of the

advance payment option or prefer to receive the full credit at the end of

the tax year. While the EITC experience suggests that it may be difficult to

make an advance payment option work effectively for a health insurance

tax credit, more low-income individuals may use this option for health

 

12Private Health Insurance: Potential Tax Benefit of a Health Insurance Deduction Proposed in H.R.

2990 (GAO/HEHS-00-104R, Apr. 21, 2000).

13For more information on the EITC, see Federal Taxes: Information on Payroll Taxes and Earned

Income Tax Credit Noncompliance (GAO-01-487T, Mar. 7, 2001).
Health Insurance: Proposals for Expanding

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insurance because they are required to spend money up-front to get the

tax credit, whereas EITC is an addition to income, not a reimbursement

for an expense.

To encourage more employers to offer coverage, some proposals would

provide a tax subsidy to small firms or those with low-wage workers that

often do not offer health insurance to their employees. Although at least

96 percent of private establishments with 50 or more employees offered

coverage in 1998, only 36 percent of private establishments with fewer

than 10 workers and about 67 percent of private establishments with 10 to

25 workers offered coverage. Also in 1998, among private establishments

in which half or more of the workers were low-wage, only 31 percent

offered health insurance to their employees, while other private

establishments were nearly twice as likely to offer health insurance.14

As with tax credits to individuals, if employer tax credits are to increase

insurance coverage, they must be large enough to induce employers to

begin offering coverage and to make the employee share affordable.

Generally, credit amounts proposed to date for small employers would

represent much less than half of the annual cost of coverage per employee,

which is typically about $2,400 for single coverage and almost $6,400 for

family coverage.15 For example, one proposal would provide a temporary

tax credit for employers with 2 to 50 employees that had not offered health

insurance in the past 2 years and that began purchasing coverage through

a qualified coalition. The credit would amount to 20 percent of employer

contributions to the insurance, up to $400 per year for individual coverage

and $1,000 per year for family coverage. Massachusetts and Kansas

recently began offering a tax credit to small businesses, and

Massachusetts also offers a tax credit to low-income employees.

However, these policies are too new to fully assess their effects on

coverage. Another proposal would provide a credit to employers to

encourage them to pay a larger share of premiums for low-wage workers.

This is intended to encourage more low-wage workers who are offered

employment-based health insurance to accept it.16 One study estimated

 

14Agency for Healthcare Research and Quality, Center for Cost and Financing Studies, 1998 Medical

Expenditure Panel Survey, Insurance Component.

15The Kaiser Family Foundation and Health Research Educational Trust’s Employer Health Benefits:

2000 Annual Survey reports that average premiums in 2000 were $2,426 for single coverage and $6,351

for family coverage.

16See Charles N. Kahn III and Ronald F. Pollack, “Building a Consensus for Expanding Health

Coverage,” Health Affairs, Vol. 20, No. 1 (Jan./Feb. 2001), pp. 40-48.

Tax Incentives for Small

Employers or Those With

Many Low-Wage Workers
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Page 10 GAO-01-481T

that in 1996 37 percent of workers earning less than $7 per hour were

offered coverage but turned it down, while only 14 percent of workers

earning $15 or more per hour turned down coverage.17

Many proposed or already available state-offered tax credits for employers

provide only a temporary subsidy for the first few years an employer offers

coverage. This may limit their potential for inducing employers to initiate

and keep offering coverage. Experts we have consulted in our private

insurance work told us that small employers are not likely to begin

offering health insurance if they do not believe they will be able to do so

permanently.

Some proposed employer tax credits are linked to small employers

obtaining health insurance through a purchasing cooperative. We

reported last year that several existing cooperatives gave small employers

the ability to offer a choice of plans, but typically at premiums similar to

those available outside of the cooperative. We also reported that most

current cooperatives represented a small share of their local small group

market (5 percent or less) and several had recently been discontinued or

faced declining insurer or employer participation.18 Some analysts suggest

that small employer purchasing cooperatives could be more effective in

making coverage more affordable if they represented a larger share of the

market. A significant employer tax credit linked to a small employer

purchasing cooperative might stimulate participation and create larger

market share, making them better able to secure lower-cost coverage for

participants.

While expansions of Medicaid and the implementation of SCHIP in recent

years have given states the ability to cover more low-income individuals, a

significant number of this group remain uninsured. A variety of factors

contribute to this situation. Some groups of low-income persons generally

are ineligible, such as adults without children. Also, while some states

have exercised options that allow them to increase existing limits on

income eligibility thresholds for low-income children and parents, many

states with high uninsured rates have not done so. Several proposals

would further expand Medicaid and SCHIP to cover populations that are

 

17Philip F. Cooper and Barbara S. Schone, “More Offers, Fewer Takers for Employment-Based Health

Insurance: 1987 and 1996," Health Affairs, Vol. 16, No. 6 (Nov./Dec. 1997), pp. 142-149.

18Private Health Insurance: Cooperatives Offer Small Employers Plan Choice and Market Prices

(GAO/HEHS-00-49, Mar. 31, 2000).

Success of Public

Program Expansions

Depends on State

Responsiveness and

Outreach
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Page 11 GAO-01-481T

not currently eligible (such as childless adults) or raise income and asset

eligibility standards. Another proposal would allow some near-elderly

persons to buy in to Medicare. But many low-income people who

currently are eligible for these public programs have not enrolled.

Therefore, state outreach efforts to low-income individuals are key to the

success of current and proposed programs.

Despite mandatory and optional state Medicaid expansions and the

implementation of SCHIP in recent years, millions of low-income children

and adults remain uninsured. Nearly 3 million children in households

below the federal poverty level were uninsured in 1999 even though they

would typically have been eligible for Medicaid.19 And although SCHIP

now covers more than 3 million children, in 1999 there were nearly 6

million uninsured children in families with incomes below 200 percent of

the federal poverty level (about $34,000 for a family of four)—the income

threshold targeted by many SCHIP programs. Another 16.3 million adults

with family incomes below 200 percent of the federal poverty level were

uninsured, and nearly half of these had family incomes below the federal

poverty level.

The federal statutes create some gaps in the ability of public programs to

cover low income individuals (such as generally not allowing coverage for

childless adults), but they also give states flexibility to cover children and

parents at higher income levels. States vary considerably in the extent to

which they have taken advantage of existing options for expanding

eligibility for Medicaid or SCHIP. Some states have used Medicaid waivers

and other authority to expand eligibility for their programs beyond

traditional groups and income thresholds. For example, 12 states have

obtained section 1115 research and demonstration waivers20 from the

Health Care Financing Administration for Medicaid to increase income

thresholds for existing eligibility groups and in some cases to add new

eligibility groups, such as childless adults. Recently, three states—New

Jersey, Rhode Island, and Wisconsin—obtained section 1115 waivers to

 

19Section 6401 of the Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239) required states to

provide Medicaid coverage for pregnant women and children up to age 6 in families with income

below 133 percent of the federal poverty level. Section 4601 of the Omnibus Budget Reconciliation Act

of 1990 (P.L. 101-508) required, in effect, that states expand Medicaid coverage to older children living

in families with incomes below the federal poverty level annually until October 2002, when children

through the age of 18 will be eligible.

20Section 1115 refers to a section of the Social Security Act that allows the Health Care Financing

Administration to exempt states from many title XIX and XXI requirements, thus allowing

demonstration projects likely to assist in promoting program objectives.

Medicaid and SCHIP

Expansions
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Page 12 GAO-01-481T

use SCHIP funds to cover eligible children’s parents—but few other states

have sought to do so. Also, 30 states have expanded Medicaid eligibility

under section 1931 of the Social Security Act to disregard portions of an

applicant’s income or assets when determining eligibility, which

effectively increases the level of income and assets an eligible individual

may have.

States’ willingness and ability to use additional federal flexibility will be

key to efforts to expand public coverage. States with high uninsured rates

typically have lower income eligibility thresholds for Medicaid than those

with low uninsured rates. For example, the average Medicaid eligibility

level for parents in the 13 states with high uninsured rates is 54 percent of

the federal poverty level, compared with an average of 99 percent of the

federal poverty level for the 29 states with low uninsured rates.

Furthermore, states with low uninsured rates have been more likely to use

available authority to expand coverage than states with high uninsured

rates. Whereas 10 of the 29 states with uninsured rates significantly lower

than the U.S. average have used section 1115 waivers to expand Medicaid

eligibility, only 1 of the 13 states with uninsured rates significantly higher

than the U.S. average has done so. Appendix I summarizes selected

eligibility requirements and options that states have adopted for Medicaid

and SCHIP.

States’ financial capacity may be a factor in what states have done to

expand Medicaid and SCHIP to cover additional low-income individuals.

States with high uninsured rates tend to be poorer and already cover a

larger share of their population in Medicaid. On average, 16 percent of the

nonelderly populations in the 13 states with high uninsured rates are in

poverty compared with 10 percent in the 29 states with low uninsured

rates. These high uninsured states also cover a higher proportion of their

nonelderly residents through Medicaid (9 percent) than do states with low

uninsured rates (7 percent).

Another proposed public program expansion known as a Medicare “buyin” would allow some near-elderly individuals to pay premiums to enroll in

Medicare. This proposal targets the more than 3 million uninsured nearelderly individuals between ages 55 and 64. This population is of

particular concern because near-elderly individuals approaching

retirement now are less likely to have employment-based retiree coverage

available than in the past. As we reported in 1998, fewer employers

Medicare Buy-In
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Page 13 GAO-01-481T

sponsored retiree health benefits in 1997 than in 1991.21 Recent employer

surveys indicate that this decline has not reversed since 1997.22 Further,

with the aging of the baby boom generation, over the next decade the

number of near-elderly individuals not yet eligible for Medicare will grow,

which likely will increase the number of uninsured persons in this age

group.

CBO estimates that few individuals would be able to afford the full

premium that would be necessary to buy-in to Medicare—$300 to more

than $400 per month initially.23 High-cost individuals who would face

higher than average premiums in the individual insurance market would

be most likely to opt for a Medicare buy-in, which would likely lead to

premium increases over time. Subsidies to low-income individuals would

encourage more lower-cost near-elderly individuals to buy in to Medicare.

Many low-income individuals who are eligible for Medicaid and SCHIP do

not enroll. Some may be unaware that they or their children may be

eligible, while the administrative complexity of enrolling and other

reasons may discourage other eligible individuals from participating.

Thus, outreach to low-income individuals to enroll in existing or expanded

public programs is key to the success of the programs. We reported in

1996 that 3.4 million Medicaid-eligible children—23 percent of those

eligible under federal standards—were uninsured.24 Another study found

that in 1998 16 percent of children under 200 percent of the federal poverty

level were eligible for Medicaid or SCHIP but were uninsured.25

Lessons from the Medicare program also illustrate the importance of

effective outreach for low-income beneficiaries. We reported that about

43 percent of low-income Medicare beneficiaries that were eligible in 1996

 

21See Private Health Insurance: Declining Employer Coverage May Affect Access for 55- to 64-YearOlds (GAO/HEHS-98-133, June 1, 1998). A forthcoming GAO report will update trends in retiree health

coverage for early and Medicare-eligible retirees.

22See Mercer/Foster Higgins, National Survey of Employer-Sponsored Health Plans 2000 and Kaiser

Family Foundation and Health Research and Educational Trust, Employer Health Benefits: 2000

Annual Survey.

23CBO, “Medicare Projections and the President’s Medicare Proposals” (Apr. 1999).

24Medicaid: Demographics of Nonenrolled Children Suggest State Outreach Strategies (GAO/HEHS98-93, Mar. 20, 1998).

25Kaiser Family Foundation, based on Urban Institute simulations of 1997 Current Population Survey

March Supplement, projected to 1998.

Outreach Is a Key to

Success of Public Program

Expansions
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Page 14 GAO-01-481T

for federal-state assistance for paying Medicare premiums and/or other

out-of-pocket expenses not covered by Medicare were not enrolled.26

Recognizing the low participation by these individuals eligible for the

Qualified and Specified Low-Income Medicare Beneficiary programs, last

year the Congress enacted requirements that the Social Security

Administration identify and notify potentially eligible individuals, and that

the Department of Health and Human Services develop and distribute to

states a simplified uniform enrollment application.27

Efforts to expand private or public coverage to those currently uninsured

can also provide new incentives to those already having private health

insurance. Some currently insured individuals may drop employmentbased coverage to get tax-subsidized individual insurance or enroll in

Medicaid or SCHIP. While there was disagreement among analysts about

the extent of crowd-out of private health insurance resulting from the

Medicaid expansions in the late 1980s and early 1990s,28 concern led the

Congress to include a requirement in SCHIP that states devise methods to

avoid such crowd-out. While several approaches may offset the extent of

crowd-out, some degree of crowd-out may be an unavoidable cost of

expanding private or public coverage to insure those that are currently

uninsured. For example, CBO analysts suggested that some displacement

of private insurance is inevitable, particularly since some low-income

families move in and out of private insurance coverage and public

programs can allow these low-income families to achieve more stable

insurance coverage.

Expanding tax preferences are also not immune from potential crowd-out.

Tax deductions or credits to subsidize uninsured individuals to purchase

individual health insurance would also provide a tax subsidy to the

approximately 13 million nonelderly individuals who purchased individual

health insurance in 1999. While this tax expenditure to those already

insured would make more equitable the tax treatment of individuallypurchased and employment-based health insurance, it also increases the

 

26Low-Income Medicare Beneficiaries: Further Outreach and Administrative Simplification Could

Increase Enrollment (GAO/HEHS-99-61, Apr. 9, 1999).

27These requirements were enacted under sections 709 and 911 of the Medicare, Medicaid, and SCHIP

Benefits Improvement and Protection Act of 2000 that was incorporated by reference in P.L. 106-554.

28See, for example, Lisa Dubay and Genevieve Kenney, “Did Medicaid Expansions for Pregnant

Women Crowd Out Private Coverage?” Health Affairs, Vol. 16, No. 1 (Jan./Feb. 1997), pp. 185-193, and

David M. Cutler and Jonathan Gruber, “Medicaid and Private Insurance: Evidence and Implications,”

Health Affairs, Vol. 16, No. 1 (Jan./Feb. 1997), pp. 194-200.

Proposals Could

Unintentionally Lead

to Crowd-Out Among

Those Already

Privately Insured
Health Insurance: Proposals for Expanding

Private and Public Coverage

Page 15 GAO-01-481T

federal cost per newly insured person since much of the subsidy goes to

those already covered. Moreover, some employers currently offering

health insurance to their employees may discontinue offering coverage if

their employees have tax preferences available for individually-purchased

insurance.29 Similarly, even if employers continued sponsoring coverage,

some employees—especially those who are young and healthy—may be

able to purchase lower-cost insurance in the individual market, which

could over the long-term increase the costs for some remaining in the

group employment-based market. One study estimated that, among

people electing a tax credit, nearly half would already be purchasing

individual insurance, about one-quarter would shift from employmentbased coverage, and another one-quarter would have previously been

uninsured. Of those shifting from employment-based coverage, about onefourth would be because the firm dropped coverage.30

Similarly, when eligibility for public programs is expanded, employers

with many low-income individuals eligible for public coverage may decide

to discontinue coverage or individuals offered employment-based

coverage may shift to public programs where they have lower or no

premiums or other out-of-pocket costs. The absence of measures to

reduce crowd-out can be significant. For example, a recent report

indicated that one state that extended Medicaid coverage to parents with

eligible children without a waiting period found that nearly one-third of

those that became newly enrolled had previously had private health

insurance.31

Several approaches have been tried or proposed to minimize crowd-out,

but none may completely eliminate it. For example, some tax subsidies or

public program expansions would exclude anyone offered employersubsidized health insurance or where the employer contributes to most of

the cost of coverage. Requiring a waiting period between the time the

individual had employment-based coverage and when they are eligible for

a tax subsidy or public program could also reduce crowd-out. For

example, some states in accord with the federal requirement to establish

mechanisms to reduce crowd-out behavior, have established waiting

 

29Employers that decide to no longer offer health insurance may increase their employees’

compensation a comparable amount in wages or other benefits. The net cost to the federal budget

from providing a tax deduction or credit to those dropping employment-based coverage for taxsubsidized individual insurance would be largely offset if employees’ wages were increased and

subject to income taxes.

30Gruber and Levitt, “Tax Subsidies for Health Insurance: Costs and Benefits.”

31Academy for Health Services Research and Health Policy, State of the States, produced for the

Robert Wood Johnson Foundation’s State Coverage Initiatives (Jan. 2001).
Health Insurance: Proposals for Expanding

Private and Public Coverage

Page 16 GAO-01-481T

periods requiring individuals not to have had employment-based coverage

for a certain time before becoming eligible for SCHIP. Other states have

established cost sharing requirements (premiums or copayments) for

SCHIP, thereby providing less of a financial incentive for low-income

workers to switch from an employment-based plan where cost sharing

requirements are common.

A variety of approaches have been proposed to increase private and public

coverage among uninsured individuals. The success of these proposals in

doing so for these diverse populations will depend on several key factors.

The impact of tax subsidies on promoting private health insurance will

depend on whether the subsidies reduce premiums enough to induce

uninsured low-income individuals to purchase health insurance and on

whether these subsidies can be made available at the time the person

needs to pay premiums. The effectiveness of public program expansions

will depend on states’ ability and willingness to utilize any new flexibility

to cover uninsured residents as well as develop effective outreach to

enroll the targeted populations. While crowd-out is a concern with any of

the approaches, private or public, some degree of public funds going to

those currently with private health insurance may be inevitable to provide

stable health coverage for some of the currently 42 million uninsured.

Mr. Chairman, this concludes my statement. I would be happy to answer

any questions that you or Members of the Committee may have.

For more information regarding this testimony, please contact Kathryn G.

Allen at (202) 512-7118 or John E. Dicken at (202) 512-7043. JoAnne R.

Bailey, Paula Bonin, Randy DiRosa, Karen Doran, Betty Kirksey, Susanne

Seagrave, and Mark Vinkenes also made key contributions to this

statement.

Concluding

Observations

GAO Contacts and

Staff

Acknowledgments
Page 17 GAO-01-481T

State

Uninsured as

percentage of

nonelderly

population, 1998-99

Medicaid upper

income eligibility

standard for

parents, as of

March 2000

(percentage of

federal poverty

level)a

SCHIP upper income

eligibility standard, as

of September 30, 2000

(percentage of federal

poverty level)

Uninsured rate significantly above U.S. average

New Mexico 26.6 60 235

Texas 26.3 31 200

Arizonab25.5 50 200

California 23.4 108 250

Louisiana 23.2 22 150

Nevada 23.2 78 200

Florida 22.0 68 200

Montana 21.5 71 150

Mississippi 20.9 39 200

Oklahoma 20.8 50 185

West Virginia 20.7 29 150

Idaho 20.6 34 150

New York 19.1 56 192

Average 22.9 54 189

Uninsured rate not significantly different from U.S. average

Arkansasb19.3 22 100

Alaska 18.9 104 200

South Carolina 18.7 56 150

Georgia 18.6 44 200

District of Columbia 18.4 200 200

Wyoming 18.3 67 133

U.S. average 17.9 82 202

Alabama 17.8 21 200

Colorado 17.4 43 185

North Carolina 17.2 54 200

Average 18.1 68 174

Uninsured rate significantly below U.S. average

New Jerseyc16.5 45 350

Illinois 16.2 40 185

Kentucky 16.2 52 200

Maryland 16.2 44 200

Oregonb 16.2 100 170

Virginia 15.8 32 185

Washington 15.4 200 250

Appendix I: Selected Medicaid and SCHIP

Eligibility Standards Among States
Appendix I: Selected Medicaid and SCHIP

Eligibility Standards Among States

Page 18 GAO-01-481T

State

Uninsured as

percentage of

nonelderly

population, 1998-99

Medicaid upper

income eligibility

standard for

parents, as of

March 2000

(percentage of

federal poverty

level)a

SCHIP upper income

eligibility standard, as

of September 30, 2000

(percentage of federal

poverty level)

North Dakota 15.2 81 140

Utah 15.2 57 200

South Dakota 15.0 67 200

Delawareb14.9 108 200

Indiana 14.2 30 200

Maine 13.9 104 185

Michigan 13.6 46 200

Tennesseeb13.5 75 100

Kansas 13.0 42 200

Connecticut 12.8 193 300

Wisconsinb,c 12.7 193 185

Vermontb12.3 185 300

Ohio 12.1 108 200

New Hampshire 11.9 61 300

Hawaiib 11.8 100 200

Massachusettsb11.7 133 200

Pennsylvania 11.5 71 200

Nebraska 11.2 42 185

Missourib10.8 108 300

Iowa 10.2 90 200

Rhode Islandb,c 9.8 193 250

Minnesotab9.6 275 280

Average 13.6 99 216

Note: States are categorized as higher than, similar to, or lower than the U.S. average

based on whether the state-level estimate statistically is significantly different from the

U.S. average. Because smaller states have smaller sample sizes in the Current

Population Survey, the potential sampling error is larger in these states than in larger

states. Thus, a specific uninsured rate may be significantly different from the U.S.

average for one state but not for another with a smaller population and sample size. For

this reason, New York’s uninsured rate of 19.1 percent is significantly higher than the U.S.

average, even though it is slightly lower than Arkansas’ estimated rate of 19.3 percent,

which is not significantly different from the U.S. average.

a

Income eligibility level for parents assumes a family of three with one wage-earner, that

all income is from earnings, and that only earned income disregards are taken.

b

State has received a section 1115 waiver implemented to expand Medicaid eligibility (as

of Jan. 26, 2001).
Appendix I: Selected Medicaid and SCHIP

Eligibility Standards Among States

Page 19 GAO-01-481T

c

State has received a section 1115 waiver implemented to expand SCHIP eligibility (as of

Jan. 18, 2001).

Source: Uninsured rates from 1999 and 2000 Current Population Supplements, which

were combined to improve the precision of the state estimates. Medicaid eligibility

standards for parents from Families USA “Disparities in Eligibility for Public Health

Insurance Between Children and Adults, 2000” (Mar. 2000), based on Center for Budget

and Policy Priorities analysis of state Medicaid eligibility levels; SCHIP eligibility standards

from Health Care Financing Administration.
Page 20 GAO-01-481T

Health Insurance: Characteristics and Trends in the Uninsured Population

(GAO-01-507T, Mar. 13, 2001).

Federal Taxes: Information on Payroll Taxes and Earned Income Tax

Credit Noncompliance (GAO-01-487T, Mar. 7, 2001).

Private Health Insurance: Potential Tax Benefit of a Health Insurance

Deduction Proposed in H.R. 2990 (GAO/HEHS-00-104R, Apr. 21, 2000).

Medicaid and SCHIP: Comparisons of Outreach, Enrollment Practices,

and Benefits (GAO/HEHS-00-86, Apr. 14, 2000).

Private Health Insurance: Cooperatives Offer Small Employers Plan

Choice and Market Prices (GAO/HEHS-00-49, Mar. 31, 2000).

Private Health Insurance: Estimates of Effects of Health Insurance Tax

Credits and Deductions as Proposed in H.R. 2261 (GAO/HEHS-99-188R,

Sept. 13, 1999).

Children’s Health Insurance Program: State Implementation Approaches

Are Evolving (GAO/HEHS-99-65, May 14, 1999).

Private Health Insurance: Progress and Challenges in Implementing 1996

Federal Standards (GAO/HEHS-99-100, May 12, 1999).

Low-Income Medicare Beneficiaries: Further Outreach and Administrative

Simplification Could Increase Enrollment (GAO/HEHS-99-61, Apr. 9, 1999).

Private Health Insurance: Estimates of a Proposed Health Insurance Tax

Credit for Those Who Buy Individual Health Insurance (GAO/HEHS-98-

221R, July 22, 1998).

Private Health Insurance: Estimates of Expanded Tax Deductibility of

Premiums for Individually Purchased Health Insurance (GAO/HEHS-98-

190R, June 10, 1998).

Private Health Insurance: Declining Employer Coverage May Affect

Access for 55- to 64-Year-Olds (GAO/HEHS-98-133, June 1, 1998).

Medicaid: Demographics of Nonenrolled Children Suggest State Outreach

Strategies (GAO/HEHS-98-93, Mar. 20, 1998).

(290044)

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