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79–970 2002

HEALTH CARE TAX CREDITS TO DECREASE THE

NUMBER OF UNINSURED

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

FEBRUARY 13, 2002

Serial No. 107–58

Printed for the use of the Committee on Ways and Means

(

ii

COMMITTEE ON WAYS AND MEANS

BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHIL ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY C. HULSHOF, Missouri

SCOTT MCINNIS, Colorado

RON LEWIS, Kentucky

MARK FOLEY, Florida

KEVIN BRADY, Texas

PAUL RYAN, Wisconsin

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

LLOYD DOGGETT, Texas

EARL POMEROY, North Dakota

ALLISON GILES, Chief of Staff

JANICE MAYS, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.

iii

C O N T E N T S

Page

Advisories announcing the hearing ........................................................................ 2, 4

WITNESSES

U.S. Department of the Treasury, Hon. Mark Weinberger, Assistant Secretary

for Tax Policy ........................................................................................................ 20

Council of Economic Advisors, Hon. Mark McClellan, Member .......................... 22

Center on Budget and Policy Priorities, Iris Lav .................................................. 86

eHealthInsurance Inc., Vip Patel ........................................................................... 68

Heritage Foundation, Stuart Butler ....................................................................... 78

Progressive Policy Institute, Jeff Lemieux ............................................................ 97

SUBMISSIONS FOR THE RECORD

American Academy of Actuaries, Cori E. Uccello, and Task Force on Health

Insurance Rate Filing, Roderick E. Turner, joint statement ............................ 119

Communicating for Agriculture and the Self-Employed, Inc., Fergus Falls,

MN, statement ...................................................................................................... 123

Gruber, Jonathan, Massachusetts Institute of Technology, Cambridge, MA,

statement and attachments ................................................................................. 123

Healthcare Leadership Council, Mary R. Grealy, statement ............................... 128

National Association for the Self-Employed, statement ....................................... 131

Providence Health System, Seattle, WA, Sister Karin Dufault; PeaceHealth,

Bellevue, WA; Providence Services, Spokane, WA; and Swedish Health

Services, Seattle, WA; joint statement ............................................................... 133

(1)

HEALTH CARE TAX CREDITS TO DECREASE

THE NUMBER OF UNINSURED

WEDNESDAY, FEBRUARY 13, 2002

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

Washington, DC.

The Committee met, pursuant to notice, at 11:25 a.m., in room

1100 Longworth House Office Building, Hon. Bill Thomas (Chairman of the Committee) presiding.

[The advisory and revised advisory announcing the hearing follow:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721

February 6, 2002

No. FC–14

Thomas Announces a Hearing on Health Care Tax

Credits to Decrease the Number of Uninsured

Congressman Bill Thomas (R–CA), Chairman of the Committee on Ways and

Means, today announced that the Committee will hold a hearing on the President’s

proposal to reduce the number of uninsured through tax credits. The Committee will

also examine other tax credit proposals, such as the one that passed the House in

December. The hearing will take place on Wednesday, February 13, 2002, in

the main Committee hearing room, 1100 Longworth House Office Building,

beginning at 10:00 a.m.

In view of the limited time available to hear witnesses, oral testimony at this

hearing will be from invited witnesses only. Witnesses will include Bush Administration experts on health care tax credits and proposals to help reduce the uninsured population. However, any individual or organization not scheduled for an oral

appearance may submit a written statement for consideration by the Committee and

for inclusion in the printed record of the hearing

BACKGROUND:

On February 4, 2002, the President submitted his fiscal year 2003 budget to the

Congress, which included a refundable, advanceable tax credit for the purchase of

health insurance. This initiative addresses the fundamental, chronic, institutionalized uninsured problem in America. Despite recent declines in the total number of

uninsured—38.5 million in 2000, down from a high of 44 million in 1998—the prospects for a continued and sustained rise in the uninsured have grown with the resurgence of double digit health inflation and a war-weakened economy.

Premiums for employer-sponsored health insurance increased 11 percent last

year, the largest increase in recent years, and projections for the near future peg

health inflation even higher. As health costs are the primary reason most people

forgo insurance, the return of double-digit health inflation will likely exacerbate the

uninsured problem. Because most individuals obtain health coverage through their

employers, the combination of higher premiums and recent increases in unemployment mean providing increased access to affordable insurance policies will prove

more challenging and requires more creative solutions.

In December of 2001, the House passed economic stimulus legislation (H.R. 3529,

the ‘‘Economic Security and Worker Assistance Act of 2001’’) that included an

advanceable, refundable tax credit for the purchase of health insurance. That bill

would provide a 60-percent credit for the purchase of qualified insurance policies for

those involuntarily terminated from their jobs. Individuals would have the choice to

stay in their employer-sponsored COBRA policy or to purchase a policy in the individual market. The President’s 2003 budget provides a $1,000 credit for individuals

and up to $3,000 for families for the purchase of qualified policies up to certain income limits.

In announcing the hearing, Chairman Thomas stated: ‘‘This hearing will help lay

the groundwork for insuring all Americans. Because nearly 40 percent of uninsured

adults and 25 percent of uninsured children have no regular source of health care,

they receive less health care and often resort to more costly interventions such as

inappropriate emergency room utilization. While it was unfortunate the Senate

failed to act on any uninsured proposal, I am committed to working with Republicans and Democrats and the Administration to ensure access to quality, affordable

health insurance.’’

3

FOCUS OF THE HEARING:

The focus of the hearing is to review various proposals to provide a refundable

tax credit for the purchase of health insurance, including the President’s proposal.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Please Note: Due to the change in House mail policy, any person or organization

wishing to submit a written statement for the printed record of the hearing should

send it electronically to ‘‘hearingclerks.waysandmeans@mail.house.gov’’, along with a

fax copy to 202/225–2610 by the close of business, Wednesday, February 27, 2002.

Those filing written statements who wish to have their statements distributed to

the press and interested public at the hearing should deliver their 200 copies to the

full Committee in room 1102 Longworth House Office Building, in an open and

searchable package 48 hours before the hearing. The U.S. Capitol Police will refuse

unopened and unsearchable deliveries to all House Office Buildings.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written statement

or exhibit submitted for the printed record or any written comments in response to a request

for written comments must conform to the guidelines listed below. Any statement or exhibit not

in compliance with these guidelines will not be printed, but will be maintained in the Committee

files for review and use by the Committee.

1. Due to the change in House mail policy, all statements and any accompanying exhibits for

printing must be submitted electronically to ‘‘hearingclerks.waysandmeans@mail.house.gov’’,

along with a fax copy to 202/225–2610, in Word Perfect or MS Word format and MUST NOT

exceed a total of 10 pages including attachments. Witnesses are advised that the Committee will

rely on electronic submissions for printing the official hearing record.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing.

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material

not meeting these specifications will be maintained in the Committee files for review and use

by the Committee.

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments

by the Committee, must include on his statement or submission a list of all clients, persons,

or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the name, company, address,

telephone and fax numbers where the witness or the designated representative may be reached.

This supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing.

Statements and exhibits or supplementary material submitted solely for distribution to the

Members, the press, and the public during the course of a public hearing may be submitted in

other forms.

Note: All Committee advisories and news releases are available on the World

Wide Web at http://waysandmeans.house.gov.

The Committee seeks to make its facilities accessible to persons with disabilities.

If you are in need of special accommodations, please call 202–225–1721 or 202–226–

3411 TTD/TTY in advance of the event (four business days notice is requested).

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.

f

4

* * * NOTICE—CHANGE IN TIME * * *

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721

February 11, 2002

No. FC–14–Revised

Change in Time for Hearing on Health Care Tax

Credits to Decrease the Number of Uninsured

Congressman Bill Thomas (R–CA), Chairman of the Committee on Ways and

Means, today announced that the full Committee hearing on health care tax credits

to decrease the number of uninsured scheduled for Wednesday, February 13, 2002,

at 10:00 a.m., in the main Committee hearing room, 1100 Longworth House Office

Building, will be held instead at 10:45 a.m.

All other details for the hearing remain the same. (See full Committee Advisory

No. FC

witnesses and guests to today

Chairman THOMAS. Good morning. I would like to welcome our

–14 released on February 6, 2002.)

f’s hearing. I apologize for the lateness

of the beginning of the hearing. There was necessary administrative business that had to take place.

Today’s hearing is an important one on how to make health insurance more affordable, specifically for displaced workers but also

for those who do not have health insurance. As we know, a million

Americans have lost their jobs since September 11, and when people lose their jobs, if they had it, they lose their health insurance

coverage.

Some 40 million Americans are uninsured. When the uninsured

receive their medical care but can’t pay for it, pretty obviously they

get the care but the costs are shifted to others. Exacerbating the

problem is that same uninsured individual’s tendency to deal less

in preventive care and often resort to the most expensive kind of

medicine, emergency room use of a doctor of last resort.

Six weeks ago now the House passed legislation providing unemployed workers access to the health insurance of their choice. If the

Senate had acted, millions of unemployed, uninsured workers and

their families would already be receiving a 60 percent refundable

and advanceable tax credit to assist them in purchasing the health

insurance that best fits their family’s needs. Unfortunately, the response that we got from the Senate was for the last century’s response of unemployment insurance.

I think three fundamental principles should govern our solution

to this problem: One, obviously availability; two, affordability; and,

as much as possible, allowing consumer choice. The Displaced

Worker Tax Credit I believe meets all of these principles.

The tax credit is refundable. That means even people with little

or no tax liability receive assistance to purchase private health inVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 E:\HR\OC\A970.XXX pfrm04 PsN: A970
5

surance. The tax credit is also advanceable. That means assistance

is provided when it is needed, and individuals don’t have to wait

until the end of the year to get a refund check from the Internal

Revenue Service. And, most importantly, it allows individual to

choose the health care that best fits their family’s needs, whether

they choose to stay with their former employer’s plan or opt for a

new, perhaps more affordable one.

The President’s budget reserves over $100 billion for two new

health insurance tax credits, credits for all lower- and moderate-income uninsured individuals, and the Displaced Worker Tax Credits

which passed this House in December.

The Displaced Worker tax credit is a large umbrella. If you have

lost your job, you are eligible. It will cover all those who find themselves unemployed through no fault of their own, not just people

who were lucky enough to have insurance while they had a job. It

helps everyone, but particularly those at the lowest income level.

The broader uninsured tax credit is specifically targeted at lowerand moderate-wage earners without insurance, because on their

jobs they don’t have that insurance. It recognizes the diversity of

the uninsured and allows them to purchase the health plan that

is best for them.

Passing the problem off to the States, already struggling with

skyrocketing Medicaid costs, is probably not the answer. Forty

States are running budget deficits and six are not even in session

this year. The prospect that these States would magically expand

Medicaid, fundamentally a welfare program for the poor, to middleclass individuals is I think a long shot at best.

Health insurance for the unemployed should be just one component of a modern health care system that offers choice, independence, and the ability to tailor to your particular and specific needs.

But the real answer is to restore our economy to full health, creating the jobs and paychecks that will get displaced workers back

on their feet. They still may, however, have a job but no health insurance.

[The opening statements of Chairman Thomas and Mr. Ramstad

follow:]

Opening Statement of the Hon. Bill Thomas, a Representative in Congress

from the State of California, and Chairman, Committee on Ways and Means

Good morning. I’d like to welcome our witnesses and guests to today’s hearing on

how to make health insurance more affordable for displaced workers.

A million Americans have lost their jobs since September 11.

When people lose their jobs, they often lose their health insurance coverage too.

Now, nearly 40 million Americans are uninsured. When the uninsured receive medical care but can’t pay for it, the costs are shifted to others. Exacerbating the problem is that these same uninsured individuals tend to receive less preventive care

and often resort to emergency rooms as the doctor of last resort.

Six weeks ago, the House passed legislation providing unemployed workers access

to the health insurance of their choice. If the Senate had acted, millions of unemployed, uninsured workers and their families would already be receiving a 60% refundable and advanceable tax credit to assist them in purchasing the health insurance that best fits their families’ needs. We are still waiting for the Senate to act.

Three fundamental principles should govern our solution to this problem: availability, affordability, and consumer choice. The displaced worker tax credit meets all

those goals.

The tax credit is refundable—that means even people with little or no tax liability

receive assistance to purchase private health insurance. The tax credit is

advanceable—that means assistance is provided when it is needed, and individuals

6

don’t have to wait until the end of the year to get a refund check from the IRS.

And most importantly, we trust individuals to choose the health care that best fits

their families’ needs, whether they chose to stay with their former employer’s plan

or they opt for a new one.

The President’s budget reserves over $100 billion for two new health insurance

tax credits: credits for all lower and moderate income uninsured individuals and the

displaced worker tax credits, which passed the House in December.

The displaced worker tax credit is a large umbrella: if you’ve lost your job, you’re eligible. It will cover all those who find themselves unemployed through no fault of

their own, not just people who were lucky enough to have insurance while they still

had a job. It helps everyone, but particularly those at the lowest income level. The

broader uninsured tax credit, is specifically targeted at lower and moderate wage

earners without insurance, because their jobs don’t offer health care. It recognizes

the diversity of the uninsured, and allows them to purchase the health plan that

is best for them.

Passing the problem off to the states—already struggling with skyrocketing Medicaid costs—is not the answer. Forty states are running budget deficits and six are

not even in session this year. The prospect that these states would magically expand

Medicaid, a welfare program for the poor, to middle class individuals is a long-shot

at best.

Health insurance for the unemployed should be just one component of a comprehensive modern health care system that offers choice, independence and the ability to tailor care to your specific needs. But the real answer is to restore our economy to full health, creating the jobs and paychecks that will get displaced workers

back on their feet.

Before proceeding to our witnesses, I would ask the Ranking Member, the gentleman from New York, if he wishes to make an opening statement.

Opening Statement of the Hon. Jim Ramstad, a Representative in Congress

from the State of Minnesota

f Mr. Chairman, thank you for calling this important hearing and for your strong

leadership on decreasing the number of uninsured Americans through tax incentives.

The President’s health insurance tax credit proposal and the similar provision the

House passed in December in the ‘‘Economic Security and Workforce Assistance Act’’

would go a long way toward providing uninsured Americans with the health insurance they so desperately need.

Over 40 million Americans currently have no health insurance. With a weakened

economy and double-digit health care inflation, this crisis is not likely to improve

without bold action.

President Bush and this Committee are providing the leadership needed to tackle

this issue. We must examine creative ways to give more Americans access to quality, affordable health care.

I also want to compliment the Bush Administration for its proposal concerning

Flexible Spending Accounts (FSAs), which allow workers to save for future health

care costs. The President’s proposal is similar to legislation I introduced, H.R. 1590,

which allows workers to roll over $500 from one year to the next instead of forfeiting their FSA balance at the end of the year. This reform will encourage workers

to save for health care expenses and make smart purchasing decisions.

I certainly look forward to hearing from the witnesses today about ways to adtoday, the Chair would recognize the Ranking Member, the gendress the crisis of uninsured Americans, and once again, thank you, Mr. Chairman.

Chairman THOMAS. Now, prior to calling on our witnesses

f tleman from New York.

Mr. RANGEL. Thank you, Mr. Chairman.

It seems like it was only yesterday that the leadership of this august Committee was contemplating pulling up the Tax Code by its

roots. One of the reasons was the tax credits and the things that

made the Code so complicated. Of course, when you think of the

7

political priorities as to whether or not we would want to simplify

the Tax Code or whether we would want to destroy employer-based

health plans, then we have to decide which is the priority and

which way that we are going to go.

It just seems to me that even when we talked about the stimulus

package, that we could have found an uncomplicated way to do it

on a temporary basis, and we can move on with these hearings to

see whether or not the system that you are recommending or the

Administration has recommended is employee-friendly, whether it

gives older folks an equal opportunity, as well as people who are

not that healthy. In any event, Mr. Stark has developed an expertise in this area as the Ranking Member of the Health Subcommittee, and with your kind permission I would like to yield to

him, and I might add for the Chairman’s comfort, just to him.

Mr. STARK. Thank you, Mr. Chairman and Mr. Rangel.

The issue today of the health insurance tax credit is important

to all of us, and most important I suppose to the 40 million Americans who go today without health insurance, which means basically

in this country they don’t get health care. It need not be a partisan

issue. Obviously there are some great philosophic differences here.

And I am concerned that this hearing should focus not on the

goal, is going to focus not on the goal of helping the uninsured get

insurance, this hearing is going to focus on tax credits, whether

they solve the problem or they don’t. And we have much research

to show that health care tax credits create more problems than

they solve, unless in fact they are universal and come with strict

controls on the health insurance industry, which is not suggested.

The choice of—well, we will see some research that Professor

Gruber will give us, that shows that under the health tax credits

we would reduce the number of uninsured by less than 2 million,

and we could better spend the money to put those people who are

uninsured into existing government programs. The tax credit proposal purports to give choice to people, but the choice of an inadequate, expensive plan isn’t a choice. Americans who are deemed

bad risk—heart condition, history of cancer, high blood pressure,

arthritis, asthma, allergies—have very little real choice in the private individual market, and the tax credits aren’t going to do them

any good.

I know that the Chairman has been critical of the employerbased system. I would like to put into the record the Joint Economic Committee Democratic staff report on the health insurance

tax credits. I think my colleagues will find it interesting, and we

have copies to pass out. We also have done some research on what

health plans are available for a family of four without pre-underwriting in the various communities around the country, which

would show that these tax credits aren’t going to go very far toward covering people.

It is interesting to note that a famous American politician, a Republican, I might add, has said repeatedly that we should jettison

the employer-based health insurance, it is fatally flawed, and replace it, and I think it is interesting. Sixty years ago under a

Democratic Administration we went to war, perhaps the greatest

war this country ever fought, and we created at that time the employer-based health insurance to protect all the Americans who

8

were coming in off the farms to pitch in, to help in that war effort,

and now under a Republican Administration 60 years later you

want to destroy that system as we enter into another war. I think

that is a sad commentary. Thank you.

[The information follows:]

JOINT ECONOMIC COMMITTEE

DEMOCRATIC STAFF

SENATOR JACK REED (D–RI) VICE CHAIRMAN

Joint Economic Committee,

Hart Senate Office Building,

Washington, DC 20510.

HEALTH INSURANCE TAX CREDITS:

THE WRONG PRESCRIPTION FOR THE UNINSURED

February 13, 2002

Executive Summary

Despite a strong economy over the last decade, there are still millions of working

adults who lack health insurance. High costs and difficulty in gaining access to care

are the primary barriers to insurance coverage both for workers and for the unemployed. Many low-income workers are not offered insurance benefits through their

employers. For them, the cost of private, non-group insurance plans can be prohibitively expensive. High costs also force some workers to decline employer-sponsored

coverage because they cannot afford the employee share of the premiums. The unemployed face similar problems, and for them finding affordable health insurance

coverage can be even more difficult.

Providing tax credits for health insurance is one approach that has been proposed

as a means of reducing the ranks of the uninsured. The Bush Administration, for

example, has proposed a refundable tax credit for uninsured individuals and families. But tax credits cannot fully address the problems of access and affordability

for the vast majority of the uninsured in the United States.

The purpose of a tax credit is to lower the cost of health insurance premiums sufficiently to allow more people to buy coverage. Proponents argue that a health insurance tax credit would expand coverage by giving people money—either a fixed percentage of premium costs or a flat dollar amount—to use toward purchasing a plan

in the private, non-group market.

To be effective, the credit must be large enough to allow the low-income uninsured

to afford coverage and to give private insurers an incentive to provide that coverage.

Under current tax credit proposals, however, health insurance would still be out of

reach for most low-income Americans. Many very poor families would have to spend

more than half of their annual income on health insurance to receive coverage under

these plans. Tax credits alone would also do little to improve access to coverage, because providing coverage to people with health risks will not be profitable for insurers unless premiums are very high or better methods of pooling risks are developed.

As a result, insurance providers may still turn away some uninsured because of age

or health status, even if the applicants can afford to pay somewhat higher-than-normal premiums.

A more effective way to guarantee health coverage for the poor would be to extend

coverage through existing public programs such as Medicaid and SCHIP. Most proposals would grant free coverage to the very poor and allow the near poor to buy

into public programs at reduced rates. The advantage of these proposals is that they

would virtually eliminate the problem of health insurance coverage for the poor,

without spending public resources to subsidize those who can already afford and

gain access to health insurance. In the longer run, offering tax advantages for

health insurance for higher-income employees who are not covered by employer

plans may even induce some employers to drop their plans, raising public costs for

health insurance even further.

I. Why Do More Than 38 Million Americans Lack Health Insurance?

In 2000, more than 38 million Americans did not have health insurance at any

point during the entire year, and many more lacked insurance for at least part of

the year. Further, many of those who did have some insurance did not have enough

coverage to allow them to pay for all their health care needs. These problems occurred in spite of record levels of employment, the most common source of health

9

insurance. As the economy slows and unemployment increases, the number of uninsured will continue to rise.

Most of those without insurance are working adults under the age of 65. More

than 75 percent of the uninsured—some 30 million Americans—are between the

ages of 18 and 64. Most of them are working poor. The overwhelming majority (75.9

percent) worked either full- or part-time during the year, yet more than half of the

nonelderly uninsured have household incomes that are less than 200 percent of the

Federal poverty level (FPL), which in 2000 was about $17,500 for a family of four.

Barriers to Coverage: Access and Affordability

There are two primary barriers to coverage for the low-income uninsured—access

and affordability. The cost of a comprehensive health insurance plan can be a significant share of a low-income family’s monthly budget. After paying rent and buying food, many simply cannot afford to pay insurance premiums.

Access to coverage is also a serious problem. Many people are uninsured because

they do not meet the eligibility requirements for group plans or for public programs

such as Medicaid. Those who have past or present health problems may be unable

to find an insurer willing to cover them in a private, non-group plan, and these

plans often exclude existing medical problems and are very expensive when they do

exist.

The problems of affordability and access plague all three markets for health insurance—employer-sponsored group insurance, public programs, and private non-group

plans.

Employer-sponsored group insurance

Most Americans with health insurance are covered by a plan offered by their employer. However, many of the uninsured do not have access to an employer-based

plan. The majority (80 percent) of those who are working but uninsured are not ofVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 E:\HR\OC\A970.XXX pfrm04 PsN: A970
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1Workers Without Health Insurance: Who Are They and How Can Policy Reach Them? Bowen

Garrett, Len M. Nichols and Emily K. Greenman. The Urban Institute for the W.K. Kellogg

Foundation 2 Employer Health Benefits 2001 Annual Survey. The Kasier Family Foundation and Health

Research and Educational Trust, September 2001. 3 Calculations by the Joint Economic Committee Democratic Staff. Assumptions: minimum wage of $5.15 per hour, 35 hour work week, 4.3 work weeks per month and 7.5% social security

tax. 4 ‘‘The Health Care Safety Net: Millions of Low-Income People Left Uninsured.’’ Families USA,

July 2001. 5 How Accessible is Individual Health Insurance for Consumers in Less-Than-Perfect Health?

Karen Pollitz, Richard Sorian and Kathy Thomas. The Henry J. Kaiser Family Foundation,

June 2001. 6 ‘‘Current Population Reports: Health Insurance Coverage: 2000,’’ Robert J. Mills, U.S. Census Bureau, September 2001. 7 ‘‘Rising Unemployment and the Uninsured,’’ December 2001, Kaiser Family Foundation.

Analysis by Jonathan Gruber suggests that for every percentage point increase in the unemployfered or are not eligible for an insurance plan at work.1 Smaller firms, which tend

to employ more low-wage workers, are much less likely than large firms or those

with a higher proportion of high-wage employees to offer health insurance benefits.

Even if an employer offers health benefits, many part-time and temporary employees are not eligible to participate. While employer contributions and tax advantages

make employer-sponsored plans generally more affordable than non-group plans, the

cost of the employee share of the premiums may still put insurance out of reach

for low-income workers. In 2001, workers paid an average monthly premium of $150

for a family health insurance plan.2 A worker making minimum wage would earn $717 a month before taxes; therefore, such health insurance premiums would cost

about 20 percent of the worker’s gross monthly earnings.3

Public coverage

Medicaid offers an insurance safety net for some very low-income families, but not

all. Federal law established a stringent set of eligibility guidelines for the program.

Very few adults without children can qualify, regardless of how poor they may be.

More than 80 percent of uninsured adults with incomes below 200 percent of poverty do not qualify for Medicaid coverage.4 Many of these adults are disabled, but

even their poor health does not necessarily qualify them for coverage. In most

states, non-working individuals with a chronic disability are not eligible for Medicaid unless their incomes are below 74 percent of the poverty line (about $6,8000

for a single adult). A disabled adult being supported by a spouse or parent making

the minimum wage, for example, would not qualify for Medicaid. The disabled cannot get Medicare coverage until they have been receiving Social Security disability

benefits for 2 years. So while public insurance programs have been very effective

in expanding coverage to the elderly and poor children, a large portion of the lowincome population remains uninsured.

Private non-group insurance

The only avenue left for people without access to employer-sponsored coverage

and who do not qualify for public programs is private, non-group insurance. But securing coverage in the private market is very difficult. Insurers in most states have

the right to refuse coverage based on health risk and age. This means that people

who have had a heart attack or who suffer from chronic health problems may not

be able to find an insurer willing to cover them. One-third of insurance applications

from people with mild to severe health problems are rejected.5 Even those who are

accepted may not be able to get insurance that covers their pre-existing health problems.

Even if someone is able to get coverage, the cost of a plan with adequate benefits

can be prohibitive. Insurers in most states can charge higher premiums based on

a person’s age or health status. The high costs put this type of insurance out of

reach for many people. In the group market, on the other hand, insurers can pool

their risk and keep premiums lower. Low-cost insurance plans do exist, but the benefits are very limited—some do not even cover basic maternity care—and the

deductibles can be as high as $5,000 per year.

A Growing and Persistent Problem

As unemployment continues to rise and health care costs increase, the number of

uninsured people is expected to grow in 2002. More than 60 percent of Americans

get their coverage through an employer-sponsored plan.6 When people lose their

jobs, they are at greater risk of becoming uninsured. One estimate suggests that the

number of people without health insurance could increase by 2.4 million this year.7

11

ment rate the number of uninsured people increases by 860,000. This estimate assumes unemployment rises to 6.8%. 8 Employer Health Benefits Annual Survey 2001. In 2001, employers paid 73% on average for

a family health insurance plan. 9 Employer Health Benefits Annual Survey 2001.

The Consolidated Budget Reconciliation Act 1985 (COBRA) (see box) allows many

people who have insurance coverage through their jobs to continue it after they are

laid off. The vast majority of laid-off workers either cannot or choose not to take

advantage of this opportunity, however. Over 40 percent of workers and their adult

dependents, often those in the lower-income brackets, fail to meet COBRA’s eligibility standards. Small firms, for example, are not obligated to offer COBRA coverage to workers. High costs prohibit many of the remaining 50 to 60 percent of unemployed workers from participating. Under COBRA, employees must shoulder the

entire burden of the premium costs plus an additional 2 percent administrative fee.

What is COBRA? The Consolidated Budget Reconciliation Act of

1985 (COBRA) requires employers with 20 or more employees to

offer the option of continuing group health insurance coverage if

an employee is fired, has his or her hours reduced, retires, dies, or

gets divorced or separated. Workers who are fired or have their

hours reduced can continue coverage for 18 months, otherwise

they can carry it for 36 months. Employers do not pay any share

of the premiums. The individual must pay the full cost of the

health insurance premium as well as a 2 percent administrative

fee.

The increase in the cost of health insurance for the individual losing a job can

be substantial because, on average, employers pay almost three-quarters of the cost

of the health insurance they provide as a fringe benefit for their employees.8 Few

continue to pay a share of health insurance premiums when workers become unemployed, however. In 2001, the average monthly premium (including both employee

and employer shares) for an employer-sponsored plan was $221 for an individual

and $588 for a family.9 This means that average workers with family coverage

would see their share of premiums rise from $150 a month when they were employed to $588 a month when they were unemployed and using COBRA. Even those

workers who are employed may find health insurance more difficult to get in tough

economic times. As the job market gets tighter, employers have less incentive to

offer health insurance benefits to lure new employees. They may stop offering insurance or shift a greater share of the premium cost to employees.

II. Can a Health Insurance Tax Credit Help the Uninsured?

Tax credits have been proposed as one option to help reduce the ranks of the uninsured. A health insurance tax credit would give people money—either a fixed percentage of premium costs or a flat dollar amount—to use toward the purchase of

a health insurance plan in the private, non-group market. (Some proposals would

also allow the credit to be used toward COBRA coverage or the employee share of

premiums in an employer-sponsored plan.) Refundable credits would allow any eligible individual to get the credit, even if he or she does not have any income tax liability.

What is a Tax Credit? A tax credit is used to reduce an individual’s tax liability. The recipient generally must complete an income tax return to get the credit. If the credit is refundable,

amounts in excess of a worker’s tax liability are paid to the worker. As opposed to a tax deduction, which reduces an individual’s

taxable income, the value of a tax credit is the same for everyone

and does not increase for those in higher tax brackets.

Proponents argue that health insurance tax credits can help expand coverage by

giving people the resources to purchase coverage and allowing them the freedom to

choose among the options in the private market. However, tax credits are an inefficient and relatively high cost tool to expand health insurance coverage, particularly

for low-income people. Tax credits do not address some of the fundamental problems

with access and affordability of coverage in the private, non-group market.

12

10Pollitz et al. 11 A 10-Foot Rope for a 40-Foot Hole: Tax Credits for the Uninsured. Families USA Foundation, September 2001.

Affordability of Insurance with Tax Credits

The tax credits proposed to date are too small—relative to the cost of premiums

in the private, non-group market—to allow many of the low-income uninsured to

buy adequate coverage. Even with the additional funds, insurance premiums can be

a significant share of income for poor individuals and families. For some young and

healthy individuals who can find inexpensive coverage fairly easily, a tax credit

could make coverage more affordable. But premiums for nongroup coverage can be

significantly more expensive for older and less healthy people.

Timing of payments is also a crucial part of making insurance affordable. People

need the money on a monthly basis to pay their premiums. Tax credits are typically

paid out as annual, lump-sum payments.

• Health insurance premiums can be a significant share of income for

poor families, even with the added funds from a tax credit. Very poor

families—even with the benefit of a tax credit—would likely have to spend half

or more of their annual income in order to purchase a health insurance plan.

According to the Employer Health Benefits Survey 2001, the cost of an employer-provided family plan was about $7,000 in 2001. The Administration’s tax

credit proposal would give a $1,000 per adult and $500 per child for a maximum

of $3,000 for a family. It is important to note that these estimates are based

on the cost of premiums for group policies offered through an employer. A nongroup plan that included the same type of benefits could be twice as expensive

and would consume an even greater share of family income.

Cost of Group Health Insurance As a Percentage of Family Income

Credit = $1,000 per adult, $500 per child

With a $2,000 tax credit

one adult, two children

With a $3,000 tax credit

two adults, two children

Family Income (2001$) Percentage of Income Family Income (2001$) Percentage of Income

$7,100 approximately

50% of poverty

70% $9,000 approximately

50% of poverty

45%

$14,300 approximately at poverty

level

35% $18,000

approximately at

poverty level

22%

$21,400 approximately 150% of poverty

23% $27,000

approximately 150%

of poverty

15%

Source: JEC Democratic Staff calculations.

A tax credit would do little toward making insurance affordable for these individuals and families. An alternative approach that would do more to make insurance

affordable would be to cap the cost of premiums paid by poor people. For example,

federal law caps the cost of premiums for low-income families enrolled in the State

Children’s Health Insurance Program (SCHIP) to 5 percent of family income. This

approach would help to target federal subsidies for health insurance toward those

who need them most.

• Premiums in the non-group market are generally more expensive than

comparable employer-provided or public insurance plans. Insurers can

and do increase the cost of a plan based on a person’s health status. In one

study, almost half of all accepted applications had premiums above the standard rate because of a pre-existing health problem. The added costs are not just

for people in very poor health. Common afflictions such as hay fever and sportsrelated knee injuries can also raise the price of insurance in the non-group market.10 Premiums also increase with age. In some cases, a healthy 55 year-old

can be charged twice as much as a 25 year-old for the same type of coverage.11

13

Recent Tax Credit Proposals

Examples of recent health insurance tax credit proposals include:

In its FY 2003 budget, the Bush Administration has proposed a refundable income tax credit for the purchase of health insurance in the private,

nongroup market for people under age 65.

• The maximum value of the credit would be $1,000 per individual,

$500 per child, maximum credit would be $3,000 for a family.

• The credit would be targeted to low-income people. It would begin

to phase out for individuals without dependents with an adjusted

gross income (AGI) of $15,000 and for families with two or more

children and an AGI of $25,000.

• Starting in July 2003, recipients could receive the credits in advance. Eligibility for the credit would be based on the prior year’s

income.

• The IRS would not seek to reconcile advance payments with actual

earned income at the end of the year.

• The credit could not be used to pay premiums for employer sponsored or public health insurance plans.

• Starting in 2004, states could allow certain individuals to use the

credit to purchase private insurance through a state-sponsored purchasing pool.

The economic stimulus package passed by the House of Representatives in

December 2001 included a temporary, refundable health insurance tax

credit for unemployed workers that would pay up to 60 percent of health

insurance premiums for a plan under COBRA or one purchased in the private, nongroup market.

• Only workers who were laid off after March 15, 2001 and eligible

for unemployment compensation or are certified by a state as eligible for benefits but are beyond their benefit year or have exhausted

their maximum benefit levels would be eligible for the credit.

• There is no income eligibility requirement.

• The credit would only be available for 12 months.

• Eligible individuals would file for a health insurance credit eligibility certificate as part of the process for applying for unemployment compensation. Individuals would pay 40 percent of their premium to their insurance company, and the Federal Government

would directly reimburse the provider for the balance.

• People need the money on a monthly basis. Insurance payments are due

every month, but most tax credits are single, lump-sum payments. Without a

monthly flow of funds, health insurance will not be affordable for many lowincome households. To best help low-income households that face tight monthly

cash constraints, financial assistance for health insurance needs to be spread

throughout the year. The current tax system is not structured to meet this demand. Changes would have to be made—new procedures, new tax laws, new

tax forms—to an already complicated tax code in order to get the health insurance tax credit funds out on a monthly basis.

• The availability of low-cost plans is limited and the benefits are poor.

Given the high cost of comprehensive insurance plans, one option for the uninsured would be to purchase a plan equal to the size of the tax credit. While

there are some low-cost insurance plans ($1,000 or less annual premium for an

individual) available in the private, non-group market, recent surveys suggest

that these plans are not abundant, they are not always available nationwide

and they are generally poor in quality of coverage.

A study by Families USA found that six of twenty-five states surveyed did not

have any $1,000 plans available for a healthy 25 year-old woman. Eighteen

states did not have $1,000 plans for a healthy 55 year-old woman. Because insurance coverage for families and people in less-than-good health is more expensive, it is likely that people in those circumstances will have even fewer options.

And even when low-cost insurance plans are available, there is no guarantee

that insurance providers will approve specific applicants for coverage.

The low-cost plans that do exist have limited coverage and are of little use to

the low-income uninsured. Almost no existing insurance plans with annual preVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 E:\HR\OC\A970.XXX pfrm04 PsN: A970
14

12Fifteen states require insurers to guarantee coverage for all participants in non-group plans.

However, half of these states only require insurers to offer a basic plan. Even with a guarantee

of coverage, insurers in almost all states can charge higher premiums based on health status

and age. 13Pollitz et al.

miums of $1,000 or less cover maternity care and many do not cover emergency

care, mental health services or prescription drugs. The deductibles are very

high—often ranging from $500 to $15,000 for a family plan. After the deductible

is met, many plans also have a coinsurance fee that would require the insured

to pay a certain percentage of the costs of any medical services they used. Some

argue that deductibles, co-insurance fees and copayments help limit the ‘‘moral

hazard’’ problem in health insurance by creating an incentive for people to limit

unnecessary treatment. However, the extremely high cost of some deductibles

and coinsurance rates can put health care completely out of reach for many lowincome people.

Supporters of tax credits suggest that families could set aside funds in tax advantaged flexible savings accounts (FSAs) to cover the cost of deductibles. While

this may be a good option for some people with access to an FSA and sufficient

disposable income, it would not help most of the low-income uninsured. First,

workers can only access an FSA through their employer. Part-time workers and

workers in small firms are less likely to have or be eligible for an employersponsored FSA. Second, workers must have sufficient disposable income to contribute to the account. Low-income workers on tight budgets would be less likely to be able to afford regular contributions. They would also get less of a tax

break on their savings than higher-income workers. Even if FSAs are modified

to allow workers to rollover contributions from year to year (currently, a worker

must forfeit any unused funds at the end of the year), it could still take a long

time for a low-income worker to accumulate sufficient funds to make a $5,000

or higher deductible affordable.

Insurance companies have little incentive to offer low-cost insurance plans because they are not likely to be very profitable. The market for these plans is

limited because their coverage is poor and most people without known health

problems would get little benefit from them, so insurers do not have a large pool

over which to spread their risks. If a significant number of people with low-cost

plans incur high medical costs, the insurers could lose money.

Access to Insurance with Tax Credits

Money is not the only barrier to coverage for the uninsured. There is no guarantee

of coverage in the private, non-group insurance market. Insurers in most states

have the right to deny or limit coverage based on age and health condition.12 Even

with funds from a tax credit, some of the uninsured may simply not be able to find

a private insurance firm willing to offer them adequate coverage. A tax credit does

nothing to address this problem.

The problem of access also extends to the tax credit itself. If eligibility for the

credit is based on prior-year earnings, as has been suggested, people in need of

health insurance assistance this year may not qualify for the credit.

• More than a third of applications for non-group coverage may be denied due to mild or serious health conditions, according to a recent

study.13 Further, more than 60 percent of the accepted applications imposed

some kind of restriction based on pre-existing health conditions. Even minor

problems can cause difficulties. In one case, some insurance carriers rejected a

woman with hay fever and more than 80 percent of her acceptances came with

coverage exclusions. A coverage exclusion means that the insurance plan will

not cover costs relating to a specific illness or a part of the body. So while

money is an important part of the equation for expanding health insurance coverage, it will not help people who are effectively shut out of the market as a

result of their age or health status.

15

14 Achman and Chollett.

Crowding Out If the government offers a tax credit for health insurance, there is a risk that some people will drop their employersponsored coverage in order to collect the money and purchase a

private plan. This is called crowding out. This raises the possibility that, over time, employers will be less likely to offer insurance so that their employees can take advantage of the tax credit.

Without the option of affordable, group insurance that mandates

coverage, more people may become uninsured.

In initial descriptions of its tax credit policy, the Administration suggests that

the uninsured could get access to insurance through state-sponsored insurance

purchasing and high-risk pools. However, in their current form, high-risk pools

would not be much better than the private market. Not all states have a highrisk pool, and those that do have them usually limit the number of enrollees.

Only about 110,000 people nationwide are insured through these pools. While

people may be able to get an offer of coverage, the premiums are often very

high—an average of $3,083 for an individual plan in 1999—and the deductibles

and coinsurance rates are also high. In addition, many pools have a six to

twelve month waiting period before an applicant can get coverage.14

• People who need financial assistance the most may not be able to access the tax credit. Most recent tax credit proposals have addressed the problem of eligibility for very low-income individuals by making the credits refundable—allowing people to get the credit even if they have no tax liability from

which to deduct it. Most tax credits can only be used to offset taxes owed, but

a refundable credit can be paid directly to people even if they do not have taxable incomes. However, even refundable credits are not generally available

until tax returns are filed, which may be a year or more after a worker has

become uninsured. This would do little to help those who need health care coverage now.

Some tax credit proposals would deal with this problem by paying insurance

subsidies to those with low incomes as soon as they become unemployed or lose

insurance, without requiring reconciliation at the end of the year. This means

that people could get the credit without having to go back at the end of the year

and verify that their incomes for the year as a whole remained below the eligibility guidelines. Having to do so would be a major administrative headache and

could expose some workers to large, unexpected tax liabilities. But such a system has great potential to be abused if no income verification is ever required.

To allow the credit to be pre-paid—without requiring those who turn out to be

ineligible to pay it back—proposals generally base eligibility on the prior year’s

earnings. This means that people who lose their job or suffer a significant financial setback this year would likely not be able to claim the credit if they had

good incomes last year. At the same time, those who have good incomes now

but did not last year could qualify for the credit based on last year’s tax return.

III. Implementation Problems with a Health Insurance Tax Credit

There are inherent problems in using the tax system to get money to the people

who need it the most, when they need it the most. The tax system is based on an

annual accounting of income and annual payments of refunds and credits. But an

individual’s income and expenses, particularly for low-income households, can vary

greatly on a monthly basis. In order for a health insurance tax credit to be effective,

people need to get the money every month to pay their premiums. Making a health

insurance tax credit ‘‘advanceable’’—delivering subsidies on a monthly basis—poses

serious hurdles to effective implementation.

Making the Tax Credit Advanceable

Current tax credit proposals do not fully address all aspects of the process they

would use to advance money on a monthly basis. Most tax credit proposals acknowledge the need to make the credit advanceable so that people will have the money

on a monthly basis. However, there is not an existing process by which to do this

and most proposals offer only a limited description of how they will implement their

idea. For example, the Bush Administration proposes that the credit would be paid

directly to health insurance providers. Individuals would pay their monthly share

of the premium and, using a tax credit identification number, providers would be

directly reimbursed by the Treasury Department.

16

Implementation Questions

What process would be used to determine income?

As noted above, there are problems in using the prior year’s income to determine eligibility for a tax credit because some people who need the money now

may not qualify if they had good earnings last year. If the income tax return

is used to determine income eligibility for the tax credit, it would create two

problems. First, people who were not required to file an income tax return

last year, but otherwise would be eligible for the tax credit, would not be able

to get it. Second, people would need to apply for the tax credit throughout

the year—not just in April when they file their return.

What process would be used to distribute checks on a monthly basis?

If a tax credit were to be paid directly to the insurance provider, it raises the

question of how the government would determine what constitutes an eligible

provider. In order to guard against fraud, a process would have to be developed to make sure that insurance providers are legitimate. This could certainly delay the process of implementation.

What incentive would health insurance providers have to participate?

It is unclear whether health insurance providers would have sufficient incentive to participate. While they would get new business under this scenario,

they would have to weigh that benefit against the costs of devoting time and

resources to accounting for a new stream of funds. If the government does not

issue the monthly premium checks in a timely manner, the insurance company could be forced to carry the cost of unpaid premiums. In addition, insurers would have to be held harmless for any fraudulent use of health insurance

tax numbers by individuals.

Advancing the Tax Credit through Payroll Deductions

Another option for getting the money into people’s hands on a monthly basis is

to lower the withholding in their paychecks. This would require the cooperation of

employers. Almost all of the people who would be claiming this credit would be

working in firms that did not offer health insurance. It is unlikely that these employers would want to take on the added burden of paperwork and adjusting withholding. Of course, individuals who do not work would not be able to claim the credit with this method.

The Earned Income Tax Credit (EITC) offers an example. Data show that almost

all recipients opt to take the credit as a lump-sum payment as part of their tax return. As few as 1 percent of recipients opt to submit the necessary paperwork to

their employer in order to receive the credit throughout the year in their paycheck.

Economic theory would suggest that low income individuals on tight budgets would

prefer to receive the money over the course of the year to help meet basic expenses.

While there is no evidence about why most EITC recipients opt for the lump sum,

it raises the possibility that the added paperwork burden and the involvement of

employers may discourage some people.

Access to State-Sponsored Pools

As noted earlier, the Administration has recommended state-sponsored purchasing and high-risk pools as one avenue for the uninsured to get access to coverage. This raises some implementation questions:

How will the Federal government encourage the formation of state-sponsored pools?

Only 29 states currently have high-risk insurance pools and many of these

limit the number of people who can join. According to a recent report by The

Commonwealth Fund, all of the existing high-risk pools operate at a financial

loss. While some limited funds are contributed by insurance companies, state

budgets are left to make up the bulk of the shortfall. The initial descriptions

of the Administration’s tax credit proposal do not include any funding or reimbursements to states to encourage them to establish or expand a state-purchasing pool. As states face tighter budget constraints, many states will not

have the necessary resources to cover the pools.

How will the government pool risk?

Uninsured individuals will likely turn to state-sponsored purchasing pools

after they have been rejected by insurers in the private market. This means

that the vast majority of people in these pools will have past or present

health problems that make them a poor risk in the eyes of the insurance proVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 E:\HR\OC\A970.XXX pfrm04 PsN: A970
17

vider. The insurance coverage options available to such a high-risk pool will

be limited and carry high premiums.

IV. Conclusion

Despite dramatic increases in wealth and prosperity during the nineties, the lack

of health insurance—particularly among low-income individuals—remains a persistent problem. While health insurance tax credits may help some healthy people

with good incomes to buy coverage, millions of Americans will not be helped by this

approach.

Tax credits do little to address the fundamental reasons why so many low-income

people are not able to get adequate health insurance in this country. The size of

proposed tax credits would not make health insurance more affordable for many of

the uninsured. Premiums for adequate health insurance would consume a significant share of income for poor households—even with the boost from a tax credit.

Low-cost insurance plans are not widely available and their benefits are quite limited. And tax credits do nothing to address the serious problem of access to insurance coverage. Even with the necessary funds, many of the uninsured could be

turned away from insurance providers because of their age or health status.

Expanding public insurance programs avoids some of the inherent problems with

tax credits. Most current proposals would grant coverage free to the very poor and

allow the near poor to buy into public programs at reduced rates. Expanding a public program to everyone below a certain income level, regardless of age and health

status, would have a dramatic effect on the ability of the low-income uninsured to

access coverage. The clear advantage of these proposals is that they would virtually

eliminate the problem of health insurance coverage for the very poor.

In order to solve the persistent problem of the uninsured, the nation will need

to make a significant investment. Over the long-term, the cost of having millions

of people without health insurance and thus without access to basic care will put

pressure on public health services and reduce earnings among people who can least

afford it.

For additional information, please contact JEC economist Kathleen FitzGerald at

202–226–4065 or KathleenlFitzGerlad@jec1.house.gov.

References

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High-Risk Health Insurance Pools. The Commonwealth Fund, http://

www.cmwf.org, August 2001.

Blumberg, Linda J. ‘‘Health Insurance Tax Credits: Potential for Expanding Coverage.’’ The Urban Institute, Health Policy Briefs No. 1, http://www.urban.org, August 2001.

Duchon, Lisa, Cathy Schoen, Michelle M. Doty, Karen Davis, Erin Strumpf and

Stephanie Bruegman. Security Matters: How Instability in Health Insurance Puts

U.S. Workers at Risk. The Commonwealth Fund, December 2001.

Feder, Judith, Larry Levitt, Ellen O’Brien and Diane Rowland. ‘‘Covering the LowIncome Uninsured: The Case for Expanding Public Programs.’’ Health Affairs (20)

1, January/February 2001.

Families USA. ‘‘The Health Care Safety Net: Millions of Low-Income People Left

Uninsured,’’ http://familiesusa.org, July 2001.

Families USA Foundation. A 10-Foot Rope for a 40-Foot Hole: Tax Credits for the

Uninsured, http://familiesusa.org, September 2001.

Garrett, Bowen, Len M. Nichols and Emily K. Greenman. Workers Without Health

Insurance: Who Are They and How Can Policy Reach Them? The Urban Institute

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http://www.cbpp.org, December 26, 2001.

Gruber, Jonathan. ‘‘Tax Subsidies for Health Insurance: Evaluating the Costs and

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Guenther, Gary. RL30762: Tax Subsidies for Health Insurance for the Uninsured:

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www.kff.org., May 2000.

18

Kaiser Commission on Medicaid and the Uninsured. Health Insurance Coverage In

America: 1999 Update, http://www.kff.org, December 2000.

Kaiser Commission on Medicaid and the Uninsured. Medicaid’s Role for the Disabled Population Under Age 65, Fact Sheet, http://www.kff.org, April 2001.

Kaiser Commission on Medicaid and the Uninsured. The Uninsured and their Access

to Health Care, Fact Sheet, http://www.kff.org, January 2001.

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June 2001.

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f–01/mcclellan.html, May 2001.

Chairman THOMAS. The Chairman of the Health Subcommittee

wishes to intervene.

Mrs. JOHNSON OF CONNECTICUT. I would just like the

record to note that Members of both parties for many, many years

in this body have looked to subsidizing premiums for people who

had to pay for their own health insurance as the way to close the

gap and create a system that provided affordable insurance to all

Americans. It is not a new idea.

What has changed is that we have figured out how to deliver it

promptly, how to deliver it to everyone, and how to provide a subsidy that really is powerful in the market. And to all those Democrats that have cosponsored legislation, introduced tax credit legislation, I just want to say, Mr. Stark, that I don’t think that you

speak for all in your party when you say that tax credits are not

an effective means to reach the uninsured.

So it is a longstanding issue with a lot of Democrat support, and

I am pleased that we are moving forward in this hearing on a very

powerful approach to providing health security to the unemployed,

as well as some level of financial security which our unemployment

compensation system is structured to provide. Thank you, Mr.

Chairman.

Chairman THOMAS. I thank the gentlewoman.

19

Without objection, the Chair would place in the record an article

from The Washington Post, June 18, 1999, the co-authors are Dick

Armey and Pete Stark, about the positive aspects of a tax credit

for the uninsured.

[The article follows:]

Medical Coverage for All

The ultimate congressional odd couple weighs in on tax credits for the uninsured.

The Washington Post

June 18, 1999

By Dick Armey and Pete Stark

We may be the ultimate congressional odd couple. We seldom agree on anything.

But on this we do agree: Congress should act now to help the 43 million Americans

who have no health insurance.

The ranks of the uninsured are growing by 100,000 a month. And this is happening during a time of strong economic growth, despite continuing congressional

attempts to expand coverage. Imagine what will happen come the next economic

downturn.

For individuals, being uninsured is a problem because too often it means health

care forgone, small warning signs ignored and minor illnesses allowed to become

costly crises. It’s a problem for families because unpaid medical bills are a leading

cause of personal bankruptcy. And it’s a problem for the nation because uncompensated care is an unfair burden on doctors, hospitals and taxpayers.

Why is the problem growing? Because Americans are increasingly unable to get

coverage through their jobs. With health premiums going up, employers are bearing

a smaller share of those premiums, and the work force is becoming increasingly mobile and part-time. More and more people find themselves working in places where

coverage is either unavailable, unaffordable or undesirable (‘‘one crummy HMO’’).

And when these workers try to buy insurance outside their jobs, they lose a generous tax break, making coverage that much less affordable.

Indeed, today’s tax code discriminates against not only insurance purchased outside the workplace but also lower-paid, part-time and small-business workers. The

highly paid CEO gets a more lavish health-care tax break than the waitress earning

the minimum wage.

These problems cry out for remedy. And happily, a bipartisan remedy is available.

We think Congress should create a new refundable tax credit to enable all Americans to buy decent health coverage.

Properly designed, such a credit could bring about near-universal coverage without new mandates or bureaucracy. It would eliminate barriers the uninsured face

in today’s system, enabling them to shop for basic coverage that suits their individual needs and is portable from job to job.

To be successful, the credit would need to be sufficiently generous to buy a decent

policy; available to those who owe no tax liability; and, to prevent fraud, paid directly to insurers or other entities, not to individuals.

Would the existence of such a credit prompt some employers and employees to

drop workplace coverage? Unavoidably. But job-based coverage is already eroding.

And the erosion can be minimized by making the credit less attractive than most

company plans.

To be sure, we don’t want to end workplace coverage. We do want to permit a

gradual transition to a world in which individuals are free to obtain the kind of insurance they want, regardless of where it’s purchased.

What amount is ‘‘sufficiently generous’’? That’s open to debate. But we note that $3,600 per family is roughly the amount the federal government spends on its own

employees’ families.

Obviously this proposal would produce a revenue loss of tens of billions a year,

risking a return to deficits. So how do we ‘‘pay’’ for it? Well, a portion of the surplus

could be used. And we note that reducing the numbers of the uninsured would free

billions in current federal cross-subsidy programs.

Admittedly, a tax credit can’t help people who are too sick to insure at any price.

Although we differ, fairly strongly, about the best way to help such people, we agree

a reasonable way can be found to do so, and we’ll keep looking for it. (Rep. Stark

would prefer to get insurers to take all customers at a common price, regardless of

health status. Rep. Armey would set up ‘‘high-risk pools’’ to subsidize sick people’s

coverage in the 22 states that haven’t already done so.)

20

Too often, when Congress turns to health issues, it ends up applying legislative

Band-Aids. It’s time to address underlying causes. The biggest health problem facing the country is the uninsured. The Tax Code can be used to help them. We urge

a bipartisan consensus to do so.

Rep. Dick Armey (R-Tex.) is the House Majority Leader. Rep. Pete Stark (D-Calif.) is the senior Democrat on the House Ways and Means health subcommittee. Copyright 1999 The Washington Post Company.

Mr. STARK. Would the gentleman yield at that point?

Chairman THOMAS. Certainly.

f Mr. STARK. Because he is quite correct, I worked for a long time

with Majority Leader Armey to see if we could do it, and we came

to the conclusion that while a minimum of a $3,600 tax credit was

necessary, first of all it had to be universal, it had to replace the

entire health care system, and it had to have regulation over the

insurance industry. Mr. Armey felt that he couldn’t get the Republicans to agree to that, we would have to have community rating

and no underwriting, that it wouldn’t work without regulating the

insurance companies, and we agreed at that point that it was a

good idea but politically impractical without the second half, which

would have been our controlling the insurance industry.

Chairman THOMAS. I will tell the gentleman that in his opening remarks he did indicate that there were individuals who

thought the employer-based system was flawed. Apparently he is

among them, and if he wishes to work with the Chair on those additions which would make an adequate tax credit insurance structure, the Chair is more than willing to work with the gentleman.

Although I certainly couldn’t replace Dick Armey in the team of

Dick Armey and Pete Stark, I would be willing to work on that.

And with that, it is a pleasure to have in front of us again the

Honorable Mark B. McClellan, Member of the Council of Economic

Advisers (CEA) in the Bush Administration, and the Honorable

Mark Weinberger, who is the Assistant Secretary for Tax Policy at

the U.S. Department of the Treasury. Your written statements will

be made a part of the record, and if you could summarize briefly,

we would appreciate that, so that we could move to the questions

focused in part upon the President’s proposal in his budget. I assume, Mr. Weinberger, you will begin?

STATEMENT OF THE HON. MARK WEINBERGER, ASSISTANT

SECRETARY FOR TAX POLICY, U.S. DEPARTMENT OF THE

TREASURY

Mr. WEINBERGER. Yes, Mr. Chairman. Thank you.

Mr. Chairman, Mr. Rangel, distinguished Members of the Committee, I appreciate the opportunity to discuss with you today the

President’s proposal for tax credits for the purchase of health insurance. The Administration looks forward to working together

with Congress to address the pressing need to expand access to

health insurance for uninsured Americans.

Almost 40 million Americans are reported to go without health

insurance coverage for an entire year, and as many as 20 million

more are without health insurance coverage during some part of

the year. The scope and persistence of this issue highlights the importance of our making progress this year.

21

Tax credits to expand access to health insurance are a common

element of proposals from both Republicans and Democrats. Many

of the Members of this Committee have supported such proposals

and sponsored such legislation in prior sessions of Congress. We

just seek to bridge partisan divides and seek common ground on

this key issue which enjoys such bipartisan support and is important to uninsured Americans.

As we move forward together on the issue, I hope we can make

some commitments to each other. When we see a weakness in a

particular element of a proposal, let’s make a resolution to try and

identify a fix. When we question the motives of alternative approaches, let’s have the resolution to focus on our shared objectives

of better and affordable health insurance for all. When there are

heartfelt differences of opinion, let’s have the resolution to listen

and not just hear. And when we recognize good ideas in each other’s perspective, let’s have the courage to learn from them, adopt

and innovate.

Finally, there are many tradeoffs in developing a comprehensive

solution. A policy that excels along one dimension may do poorly

along others, and we have to balance these competing dimensions.

There is a need for flexible and innovative solutions to this problem. The reality is that there is no single approach that will resolve

the entire issue.

The uninsured population is not made up of just the poor or the

unemployed. In 1999, 81 percent of the uninsured population were

in families with at least one full-time worker. While more than

one-third of the uninsured had incomes below the poverty line, approximately 29 percent had incomes between 100 and 200 percent

of poverty. Nearly three-quarters of the uninsured below 200 percent of poverty are adults, many who do not live in-households with

children.

Given the need for a broad approach to this problem, the President supports both an immediate temporary health insurance credit for displaced workers, as contained in the economic security

package passed by this body, and a permanent new health insurance tax credit to expand health insurance coverage that is not dependent upon employment status. For brevity, I will describe the

displaced worker credit and my colleague, Mr. McClellan, will discuss the permanent health insurance credit.

The health credit for displaced workers is a refundable,

advanceable tax credit that can be claimed by unemployed workers

for up to 12 months. The credit can be used to offset 60 percent

of the cost of health insurance premium for unemployed workers

and their families. The credit can be applied to the purchase of the

Consolidated Budget Reconciliation Act of 1985 (COBRA) and other

types of qualified non-employer health insurance. Eligible unemployed workers include those who receive unemployment insurance

benefits and those who would be eligible for those benefits, except

that the rights to benefits were exhausted or the period in which

the benefits were payable ended.

The design of the health credit reflects the President’s goal of

providing targeted, quick assistance to Americans who have lost

their jobs during this recession. Because it builds on existing infraVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 E:\HR\OC\A970.XXX pfrm04 PsN: A970
22

structure to assist displaced workers, it can be fully implemented

in a matter of months.

In particular, State work force agencies will certify eligibility for

the credit when they certify the displaced worker is eligible for unemployment insurance benefits. That certification will be presented

to the insurance company along with the remainder of the premium. The insurer will be reimbursed by the U.S. Department of

the Treasury for the amount of advance credit it provides.

We believe that the displaced worker credit offers a number of

advantages over competing proposals that have been advanced that

would have been COBRA-only policies or expansion of Medicaid assistance. A COBRA-only credit would provide no benefit to 40 to 50

percent of displaced workers.

A COBRA credit would impose a costly new mandate that employers would be required to implement immediately. Further, a

COBRA credit is poorly targeted to workers who lose their jobs because of the economic downturn. About 60 percent of those eligible

for a COBRA credit are workers who voluntarily leave their job,

not displaced workers.

Some have advocated forcing workers not eligible for the COBRA

credit into a State Medicaid plan. There are many troubling aspects of that temporary relief. This would require these workers to

drop their current insurance coverage and possibly change health

insurance providers if they do not participate in Medicaid.

Extending Medicaid to cover these displaced workers would require State legislation, and would necessitate delays before State

legislatures were even in session to be able to provide this so-called

immediate relief. The cost to States of such expansions could be ill

afforded by many States at the present time, and would take away

resources from their ability to fund expansions for low-income children and families who also need assistance.

So, in short, that is the description of the displaced worker credit, and I turn to Mr. McClellan to talk about the permanent health

insurance credit.

STATEMENT OF THE HON. MARK MCCLELLAN, MEMBER,

COUNCIL OF ECONOMIC ADVISERS

Mr. MCCLELLAN. Mr. Chairman, Mr. Rangel, and distinguished

Members of the Committee, I also want to thank you for the opportunity to discuss with you today the President’s proposals for

health credits as one element of an effective policy response to address the urgent problem of the uninsured in the United States.

The second credit we will highlight is the permanent health insurance credit contained in the President’s budget proposal.

This proposal would create a refundable, advanceable tax credit

for the cost of health insurance purchased by individuals under age

65. Individuals participating in employer-provided health plans or

generally in a public plan would not be eligible for the credit. Eligible health insurance plans would be required to meet some minimum coverage standards, including coverage for high medical expenses.

This credit is designed with a number of attractive features in

mind, reflecting our efforts to learn from and incorporate the best

ideas of previous proposals as well as critiques of those proposals.

23

Our goal is to maximize the impact of the credit on the uninsured,

while minimizing any undesirable effects on currently covered

workers. This includes significant modifications of the credit that

the President proposed in his budget last year.

First, the credit amount varies with family size, mirroring the relationship of actual health insurance premiums. The maximum

credit would be $1,000 per adult and $500 per child up to two children in a family. For example, a policy covering two adults and two

or more children would be eligible for the maximum credit of

$3,000.

Second, the credit is targeted to lower—and middle-income individuals and families who are least likely to have employer-based

health insurance, resulting in an efficient use of the subsidy to expand coverage. The credit phases out with incomes. It is further

limited by a cap on the amount of the premium eligible for the subsidy. The maximum subsidy percentage of 90 percent would apply

for low-income taxpayers and would be phased down at higher incomes.

Third, the credit is refundable, so even those without any income

tax liability can receive the subsidy.

Fourth, the credit is available in advance at the time that the individual purchases health insurance, before they file their tax return. Eligibility for the advance credit would be based on the person’s prior year’s tax return. Individuals would reduce their premium payment by the amount of the credit, and the health insurer

would be reimbursed by the U.S. Department of the Treasury for

the amount of the advance credit. Alternatively, instead of an advance credit, individuals could claim a credit as part of the normal

tax filing process based on their current year income. The availability of the advance credit will make the credit much more attractive for persons who want to use the assistance when they are

actually purchasing their insurance, not later, making it even more

effective in expanding health insurance coverage.

Fifth, while the credit could be used for the purchase of health

insurance in the nongroup market, qualifying health insurance

could also be purchased through private purchasing groups, Statesponsored insurance purchasing pools, and State high risk pools.

These groups can promote risk pooling and provide economies of

scale, resulting in additional opportunities for individuals to get affordable coverage. States can also provide additional subsidies for

lower income participants.

There is considerable new evidence that this proposal could have

a rapid and substantial impact on the uninsured. The Council of

Economic Advisers has just released a new analysis of the credit,

which I would request to be read into the record.

[The information follows:]

24

Council of Economic Advisers

February 13, 2002

HEALTH INSURANCE CREDITS

SUMMARY

The President’s proposal to introduce tax credits for the purchase of health insurance will enable millions of Americans to purchase private health insurance, improving the functioning of private markets, empowering patients to make informed

decisions, and increasing utilization of high quality health care.

This proposal is part of a broader vision for promoting access to innovative, highquality patient-centered health care for all Americans, by encouraging effective patient choice among competing health care coverage options. This vision is discussed

in more detail in the 2002 Economic Report of the President.

Program Description

• The health insurance credit is available to anyone under 65 without employersponsored or public insurance. Individuals would be eligible for a tax credit of

up to $1,000, and families purchasing a family policy would be eligible for a tax

credit of up to $3,000.

• The health insurance credit is ‘‘refundable,’’ so that even those without tax liability can take advantage of it. It is ‘‘advanceable,’’ so that people will have

immediate access to the credit when they want to buy insurance, rather than

having to wait until they file tax returns. The advance credit is based on income

in the previous year, so people will not have to worry about having to return

the credit if their incomes change over the course of the year.

• The maximum subsidy rate would both phase out at higher incomes, with a

maximum subsidy rate of 90 percent. The phase-out, described below, would

begin at $15,000 for single filers and $25,000 for others.

Policy Effects of the Health Insurance Credit

• A significant number of currently uninsured people will take advantage of the

tax credit.

Research suggests that the tax credit will allow 6 million or more Americans

who would otherwise be uninsured during a year to gain coverage. The credit

covers a substantial portion of the premiums most people would face in the private individual insurance market, thus increasing participation in and enhancing the efficiency of the individual market for health insurance.

Anyone without employer or public insurance, including people who would be

ineligible for assistance through expansions of Medicaid or the State Children’s Health Insurance Program and dislocated workers who do not have COBRA coverage available to them, would be able to take advantage of this program.

• The incentives created by the credit could improve the functioning of the individual private market and enable people to make informed decisions about their

care.

Currently individual health insurance policies are expensive in part because

many healthy people do not participate in the individual market. The health insurance credit encourages participation, especially among healthier individuals,

and thus improves the ‘‘pooling’’ of health risks. Because people would have to

pay at least some portion of their premiums, they would have an incentive to

be well-informed and to seek out high value, high quality, informed care.

• The credit makes the system of subsidies more equitable.

Employer-sponsored insurance (ESI) is already subsidized through the Tax

Code, because employer contributions are untaxed, with the biggest tax benefits

going to those with high earnings. People with the same income are also treated

differently, based on the source of their insurance. The health insurance credit

would make the system more equitable and more progressive, since it would be

largest for those with lower incomes and would be available to those who do

not receive subsidies through the current system.

• The health insurance credit will complement the employer-sponsored group

markets.

Because the health insurance credit is less generous than the tax subsidy on

a typical employer plan for all but the lowest-income workers, the proposed

25

1 Estimates of the number of uninsured vary depending on the survey question and the length

of time uninsured. This estimate is based on the March 2001 Current Population Survey. Data

from other surveys such as the Survey of Income and Program Participation suggest that 55

to 60 million were uninsured for part of a year or more. 2Kaiser Family Foundation, Uninsured in America: A Chartbook (2000); Urban Institute,

Health Insurance Access and Use: United States, (July 2000). 3Kaiser Family Foundation, Uninsured in America: A Chartbook (2000). Note that the Census

Bureau does not report coverage for families with income between 100 and 200 percent of the

Federal poverty line.

credit would not substitute for the employer-sponsored group market. Any employee eligible for ESI who opted for the new credit would have to pay taxes

on any additional wages earned in lieu of health insurance coverage, and would

only be entitled to a capped credit. Employer decisions about offering health insurance, and the generosity of the insurance, depend on the value of the tax

subsidy to average or typical employees and not just low-income employees.

Most employers offering coverage would continue to do so, and low-income

workers in these firms would continue to benefit from these generous contributions. Thus, the majority of those taking up the new health credit would be people who were either previously uninsured or previously covered in the non-employer market.

• The health insurance credit does not distort labor markets.

The credit is available to anyone under 65 without employer-sponsored (or public) insurance, so it does not provide a disincentive for employment at the individual or firm level. Because the advance credit is based on the prior year’s income, people can take new jobs without fear of having to repay it at the end

of the year.

THE UNINSURED AND HEALTH INSURANCE MARKETS

The goal of the health insurance credit is to increase participation in and improve

the functioning of health insurance markets. To see the value of this improvement,

it is important to understand the composition of the uninsured population and how

those markets function.

The Uninsured

In 2000, approximately 39 million Americans, or 14 percent of the population, reported that they were uninsured for the entire year.1 They may go without effective

health care, or may rely on inefficient care at emergency rooms and clinics.2 Expensive expansions of government run health care programs such as Medicaid and the

State Children’s Health Insurance Program (SCHIP) in the 1980s and 1990s did little to change the number of uninsured.

The uninsured population is not made up of just the poor or the unemployed.

Over 80 percent of the uninsured population in 1999 were in families with at least

one worker. Furthermore, while 36.4 percent of the uninsured had incomes below

the poverty line, a large fraction, 28.7 percent, had incomes between 100 and 200

percent of poverty.3 As shown in Figure 1, nearly three-quarters of the uninsured

below 200 percent of poverty are adults, most of whom do not live in-households

with children. These childless adults would benefit from the health insurance credit,

but would not be assisted by proposals to expand the SCHIP program to include

parents. That said, many of the children who are currently uninsured are also eligible for Medicaid or SCHIP. Coupled with continuing outreach efforts to increase

Medicaid and SCHIP enrollment, the availability of the credit provides another opportunity for low-income families to get coverage.

26

4 Census Bureau, Health Insurance Coverage, 1999. 5This can again induce the healthiest remaining in the more generous plan to leave that plan.

In extreme cases, this drives the most generous plans or those with the sickest members out

of the market altogether.

Insurance coverage differs significantly by race and ethnicity. In 2000, 32 percent

of Hispanics were uninsured, compared to 20 percent of blacks and 19 percent of

Asians. In contrast, just 10 percent of whites are uninsured.4 Insurance coverage

also differs across types of employment, with employer-sponsored insurance less

likely to be available to part-time, seasonal, and short-term workers.

The benefits of increasing participation in health insurance markets extend beyond those realized by the individuals themselves. First, even those without insurance receive publicly subsidized basic health care through emergency rooms—a very

expensive way to provide care. Second, access to health care is important to control

the spread of disease through immunizations or through early diagnosis and treatment. Third, greater participation in insurance markets allows broader pooling of

health risks—the markets themselves work better.

Insurance Markets

One important goal of health insurance is to reduce the risk to individuals of high

medical expenses, trading the certainty of a known premium for the uncertainty of

very unpredictable health care costs. An important element of insurance is thus the

‘‘pooling’’ of risk—people sign up for insurance before they know how much they will

spend on health care, and then the premiums of those who have low expenses help

subsidize spending on those with high expenses.

Several things can interfere with the smooth functioning of this important insurance market. One is lack of choice and competition. Health insurance plans have

little incentive to adapt to changes in medical care in order to compete for enrollees

if the enrollees have no other options. Insurance markets with little or no competition are thus unlikely to keep up with innovations in health care, and without market discipline plans may encourage excessive care and inappropriate treatments. A

second problem is ‘‘adverse selection’’: If individuals know their likely health insurance expenditures ahead of time, they can sign up for more generous insurance

when they know their expenditures will be high, undermining the pooling of risk

that is the key to insurance. Given a choice among plans, the healthiest people (with

the lowest expected costs) can save money by pooling together in the least generous

plan, or dropping insurance altogether, making the cost of the more generous plans

rise as the expected costs increase.5 Just as individuals with higher expenses want

27

6 Estimates include the likelihood of receiving employer-provided health benefits and the value

of the tax benefit of employer-provided health insurance. Source: John Sheils, Paul Hogan, and

Randall Haught, ‘‘Health Insurance and Taxes: The Impact of Proposed Changes in Current

Federal Policy,’’ October 1999, The Lewin Group, Inc.

more insurance, insurance companies want customers with lower expenses, and may

cater their plans to appeal to those with low risk.

Both of these incentive problems can lead to premiums that are higher than they

need to be, lower value care because efficient services are not offered, and increases

in uninsurance because people conclude that the coverage is simply not worth the

cost. The result of non-optimal coverage is inefficient health care use, with worse

health outcomes and avoidable costs due to disease complications that could have

been prevented with better coverage. The health insurance credit can improve the

functioning of health insurance markets by addressing these problems.

The vast majority of private health insurance in the U.S. is purchased through

employers. An important reason is that these purchases are subsidized through the

tax code: Employer contributions are not taxed, which provided an estimated $126

billion subsidy in 2000 (including $85 billion through the exclusion of employer contributions from income taxation and another $32 billion through their exclusion

from Social Security and Medicare HI taxes). This tax benefit is larger for those

with higher incomes, since they face a higher marginal tax rate (see Figure 2).6

Figure 2

Tax Benefits for the Purchase of

Employer-Sponsored Insurance

The current tax subsidy encourages provision of health insurance through employers. In addition, provision through employment forms a basis for risk pooling that

is largely independent of health status, at least in most large firms.

This is one of the main reasons that the health insurance available through individual (non-group) markets is often more expensive than comparable coverage

through an employer: the people who choose to obtain such coverage are those who

think they are likely to have higher health expenditures, raising premiums and

making the insurance even less appealing to those with lower expected costs. Furthermore, the administrative costs associated with these non-group plans are often

much higher. (These problems also afflict the market for small employers.) State

measures to reduce the cost or increase the availability of insurance in the nongroup market are discussed in more detail below. Unfortunately, some of the regulatory approaches intended to improve the availability of affordable coverage have

often done more harm than good, in effect discouraging participation in insurance

markets.

In contrast, the health insurance credit will increase participation in these individual markets, increasing risk pooling and improving market functioning overall.

An important question is the degree to which it would interfere with the functioning

of employer-sponsored group markets by inducing some employers to stop offering

insurance and some employees to stop taking the employer-sponsored insurance

28

7There are other restrictions: The credit cannot be applied to the purchase of ESI, and people

may not contribute to Archer MSAs in the same year that they claim the credit. Plans must

meet minimum benefit standards. Those participating in ESI or public programs may not use

the tax credits, although in some circumstances states may provide an additional contribution

to individuals who purchase private insurance through Medicaid or SCHIP purchasing groups.

Those over 65 (and thus eligible for Medicare) or anyone eligible for public insurance cannot

claim the credit. 8See, for example, Center on Budget and Policy Priorities, ‘‘Unemployed Workers Need Help

with Health Insurance,’’ October 2001; General Accounting Office Report HEHS–00–104R. 9Low cost policies are substantially less common in states with community rating than in

states without such regulation.

(ESI) they are offered. In practice, the health insurance credit has been structured

to complement employer-sponsored insurance markets.

LIKELY EFFECTS ON INSURANCE PURCHASES

The Administration’s health insurance credit would be available to people under

65 purchasing private health insurance coverage outside of plans offered by their

employer or a spouse’s employer. That is, both working and unemployed people who

do not already have tax-subsidized, employer-provided insurance (or insurance

through public programs such as Medicare or Medicaid) would be eligible.7 Workers

who are laid off and lose their insurance would be able to take advantage of the

credit regardless of whether or not COBRA continuation coverage was available to

them.

Individual Participation Decisions

Evidence suggests that the decision to purchase health insurance is quite sensitive to its cost. The President’s proposal provides a refundable tax-credit of up to

$1,000 for a single person and up to $3,000 for a family with two or more children,

with the credit phasing out between $15,000 and $30,000 for single filers and between $25,000 and $60,000 for other filers purchasing policies for more than one

person (or $25,000 to $40,000 if purchasing a policy for one person only). The effect

of the credits on participation in individual insurance markets depends critically on

the cost of the available insurance.

Some reports have placed the ‘‘mid-range’’ cost of family health insurance at approximately $7,000 per year, large relative to a $3,000 tax credit.8 This estimate is

likely overstated: it reflects the average cost of plans offered, not the best offer

available. In addition, many of these plans often provide near first-dollar coverage—

that is, all expenses, even predictable periodic and routine expenses, are covered,

and there are almost no copayments, coinsurance, or deductibles.

Expensive ‘‘first dollar’’ coverage may not make good economic sense. First, minimal copayments lead to a disconnect between cost and value in health care decisions, contributing to rising health care costs (and patient frustration with managed

care plans meant to control costs). As health care costs rise rapidly, such policies

will be even less sustainable. Second, reliance on minimal copayments in both private managed care and government health insurance plans has led to significant

regulatory intrusions and price controls, all of which adversely affect doctor-patient

decision-making. However well-intentioned as an approach to limiting cost increases, such intrusions may make it more difficult for patients to get both appropriate treatment and protection from very high medical expenses. Third, patients

will be much more likely to take an active interest in the value of the care they

receive when they face at least a portion of the cost.

Analysis by the Council of Economic Advisers finds that Preferred Provider Organization (PPO) policies with significantly lower premiums are almost always available. These plans, which are not ‘‘first-dollar’’ plans but which provide effective

health insurance assistance, are described in more detail in the Appendix. They

typically cover all major types of medical services and treatment, have per person

deductibles of $1,000 ($2,000 per family) while also covering preventive and emergency care, they generally provide significant discounts on all prescriptions and innetwork services, and they support a full range of provider choices. The average premium for a plan of this type was less than $3,000, and was less than $1,000 for

young individuals. For lower-income Americans, the proposed health insurance credit thus generally covers more than half of the premium the purchaser would face,

and almost always covers more than a third.9 Moreover, these prices are representative of actual coverage in the population, not the premiums available to just a few

very healthy people. A recent study by the health insurance distributor

eHealthInsurance found that three-quarters of premiums for individual health insurance plans that it sold were less than $2,000 and three-quarters of family preVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 E:\HR\OC\A970.XXX pfrm04 PsN: A970
29

10 eHealthInsurance is a leading national health insurance distributor of individual and small

group plans, and in 2001 analyzed 20,000 recently purchased policies. More than 80% of the

policies sold had comprehensive coverage. 75% were PPO plans, and 71% of those PPO plans

had deductibles of $1,000 or less. http://www.ehealthinsurance.com/ehealthinsurance/

eHealth2.pdf. 11Pollitz, Sorian, and Thomas, How Accessible is Individual Health Insurance for Consumers

in Less-than-perfect Health, Kaiser Family Foundation, June 2001; and eHealthInsurance Services, Inc. The original Kaiser study investigated whether the mock applicants with different preexisting health conditions were rejected by any insurer, not whether they actually received offers, and reported average offers, not the best offer, which is more indicative of the cost that

they would actually incur. All of the mock applicants received offers in every market tested,

with the exception of an HIV positive applicant. The best offer was often not much more expensive than the offer for healthy mock applicants. 12Marquis and Long, Worker demand for health insurance in the non-group market, Journal

of Health Economics, v. 14 (1995). 13 Note that their hypothetical credit had a somewhat different structure.

miums were less than $5,000.10 Similarly, another study found that people with all

but the most serious chronic illnesses were able to get affordable individual market

insurance offers in every market examined.11

The type of plans that those using the health insurance credit are likely to purchase have distinct economic advantages. The growth of PPO and similar plans in

the private sector reflects patients’ desires for more choice, and the health insurance

credit would allow individual purchasers to have the same choices. These policies

function well as true insurance, providing excellent protection against large unanticipated expenses caused by a severe illness or needed surgery, and assistance with

access to the full range of modern health care treatments. Patients who prefer lower

copayments could choose a Health Maintenance Organization-style plan that used

more restrictive networks and tighter control of care to keep the premium down.

The presence of the credit may encourage insurers to offer even more plans catering

to new insurance market purchasers, such as plans with good catastrophic coverage

but deductibles high enough to keep premiums in line with the size of the credit.

These plans would not only encourage the use of the credits, but would encourage

responsible and informed use of health resources.

The analysis also documented substantial differences across geographic areas in

the price of similar policies. This variation indicates that national averages can hide

substantial heterogeneity in cost and may provide a poor representation of the market facing most families. One cause of this variation may be differences in the cost

of care at the local level. (Another important source of variation is different state

regulatory environments discussed below.) Having more involved and informed consumers of health care and greater individual participation may help reduce geographic disparities.

In order to infer the effect of health insurance credits on the purchase of individual insurance policies, we need to know not only what insurance policies are

available, but how sensitive individuals’ decisions are to the price of the insurance

that they face. Estimates of this price sensitivity are difficult to obtain, but some

studies suggest that individuals are quite sensitive to large subsidies, and are thus

much more likely to buy insurance when they receive a 50 to 90 percent subsidy.12

Several different studies have examined the likely effects of the health insurance

credit on insurance purchases. Pauly, et al. (2001) find that a $1000 refundable tax

credit would likely increase the participation rate among the uninsured by 21 to 85

percent.13 Gruber (2000) finds smaller effects, closer to 10 percent, but analyzes

plans with premiums that are much more expensive than those described above.

Other studies focus on average premiums, not the best offers available. Even with

the most conservative assumptions, the health insurance credit would substantially

increase participation in health insurance markets. If even 15 percent of those uninsured for a full year (or 10 percent of those uninsured for part of a year or more)

take advantage of the health insurance credit, 6 million people would be newly covered. In addition, the credits would encourage those already purchasing non-employer coverage to purchase more comprehensive policies.

LIKELY EFFECTS ON MARKETS

The health insurance credit would likely significantly increase participation in

non-employer health insurance markets and increase the generosity of coverage selected. This increased, more generous participation would both increase the pooling

of risk and reduce administrative costs.

Individual Health Insurance Markets

The health insurance credit could increase the participation in individual markets

of a wide cross-section of Americans. As shown in the Appendix, it would cover a

30

14 A community can be defined broadly, such as all individuals in the state, or more narrowly,

with some differences permitted by age and/or geographical location, for example. Premiums in

community rated states cannot vary with factors such as occupation or health status. Some

states have modified community rating, allowing some, but only limited variation based on

health factors. 15The National Association of Health Underwriters found premiums for a 53 year old male in 14 states with high risk pools. The average premium in these 14 states was $5086. The average premium in our data for the 55 year old single male was $2597. The high risk policies

sought had $500 deductibles and generally had more comprehensive coverage. 16 Communicating for Agriculture, What is a Risk Pool?, 2002, www.cainc.org/riskpools/commonwealth.html. 17 Communicating for Agriculture, op cit; Communicating for Agriculture/National Association

of State Comprehensive Health Insurance Plans, Comprehensive Health Insurance for HighRisk Individuals, 1999.

lower percentage of the premium for individuals over 50 and those with chronic illnesses, for whom rates in the individual market are higher. While there is little evidence on this point, older and sicker people are likely less sensitive to the price of

insurance and would value the credit more highly, so even though their premiums

might exceed the maximum credit by more, they may increase participation in individual markets just as much as their younger, healthier counterparts. This broad

increase in participation, especially of younger and healthier people, would improve

the pooling of risk in the individual market (since insurers cannot perfectly underwrite individuals’ health risks).

There are several other regulatory reforms that affect the efficiency and availability of insurance through individual markets. In an effort to subsidize the insurance purchase of those with high expected medical expenses, some states have implemented regulations that limit or prohibit the extent to which insurers can vary

prices based on expected expenses. Some of these regulations have the perverse effect of driving people out of individual insurance markets.

States have several regulatory devices at their disposal, including restrictions on

the variation in premiums (rating bands), requirements on the fraction of premium

receipts that must be paid out in benefits (loss ratio restrictions), mandated benefits, restrictions against the exclusion of preexisting conditions, community rating

and guaranteed issue. In community rated states, insurers must offer all purchasers

in the same ‘‘community’’ the same rate.14 By prohibiting insurers from charging

higher premiums to those in high-risk categories and in effect averaging costs of the

high risk people with the lower risk people, this regulation is intended to hold down

the premiums for those who are expensive to insure. States with guaranteed issue

regulations require that insurers write policies for all comers. When coupled with

community rating (such as in Maine, New Jersey, New York, and Vermont), this

policy means that even those with very high expected health care costs will face the

same price as healthy people. The drawback of these policies and many other forms

of regulation is that the premiums facing most purchasers may be higher than they

would be in the absence of regulation, since the premium collected must be sufficient to cover the expected expenses of the group. Given higher premiums, the

healthiest individuals (those with low expected costs) may chose not to buy policies.

Regulation thus provides another cause for adverse selection, and a spiraling upward of premiums.

As an alternative to policies such as community rating, states can establish highrisk pools.15 These pools are often subsidized with general revenues or through

taxes on insurance companies. Broadly funded high-risk pools can subsidize the insurance purchase of people with consistently high medical expenses, without making

health insurance unappealing for others. Today, 29 states have adopted high-risk

pools (including some states, such as Kentucky and Washington, that used to have

guaranteed issue but found that it severely undermined their individual insurance

markets).16 States with adequate, broad-based funding for their risk pools are providing good insurance at affordable rates for people who would otherwise face high

premiums in the individual market, and are doing so without driving up rates and

reducing coverage.17

Finally, lower income people can also use Administration’s health insurance credit

in non-employer purchasing groups, including private affinity groups and statesponsored purchasing pools. Many states have already established purchasing pools

that allow individuals enrolled in their Medicaid or SCHIP programs to choose from

competing private plans. All states have competitive purchasing pools for their state

enrollees. Thus, states generally have an infrastructure in place to provide a group

coverage option, giving people using the credit another option for obtaining affordable health insurance choices.

31

18Garrett and Nichols, Workers without health insurance: who are they and how can policy

reach them, Urban Institute, 2001, cited in Blumberg, Health insurance tax credits: potential

for expanding coverage, Urban Institute, August 2001. 19Department of Health and Human Services tabulation of the March 2001 CPS, which includes data from 2000. 20 Cutler and Gruber, Does Public Insurance Crowd Out Private Insurance?, Quarterly Journal of Economics, 111(2), May 1996, 391–430.

Employer-sponsored Insurance Markets

The generosity of the credit would also influence the cost of the expansion of coverage. A very generous credit would induce more people to obtain coverage but, depending on its design, might also draw more workers away from current employer

coverage, either by leading them to opt out of taking up coverage that their employers offer or by inducing employers to stop offering coverage. The result would be a

relatively expensive incentive with relatively less net effect on coverage.

Employees who are eligible for ESI may forgo employer insurance and voluntarily

enter the non-group market if doing so allows them to select a policy that better

meets their specific needs. Single, healthy individuals may wish to use their credit

to purchase less generous coverage than the coverage offered by their employer. Employers may choose not to offer health insurance at all if many of their employees

can take advantage of the credit and purchase insurance individually, and receive

taxable wages in lieu of employer health insurance contributions. Insurance in the

non-group market carries higher administrative costs, which implies that such an

outcome would not be efficient in the short run. In the long run, as discussed above,

increased participation in individual insurance markets may improve their functioning such that they have similar risk pooling and administrative costs as group

markets.

Such arguments suggest that a tax credit that is too large may disrupt the ESI

market. In this case, the phase-out of the proposed health insurance credit and the

cap on the maximum amount are important features to ensure that there are minimal disruptions to the ESI market. Those low-income Americans who are eligible

for the largest credit are less likely to have employer-sponsored health insurance.

About 80 percent of uninsured workers are not offered health insurance by their employers.18 Only 36 percent of people under age 65 with income below 200 percent

of the Federal poverty line have ESI, while 77 percent of those above do.19 Furthermore, employers make the decision to offer health insurance based on all of their

employees, so they are unlikely to stop offering insurance simply because a minority

of their employees become eligible for the health insurance credit. Most employees

would be significantly better off with the uncapped, untaxed payments for their

health insurance, and with the administrative savings of group plans, than with the

capped credit and some additional taxable wages. Moreover, even if this minority

of employees dropped employer coverage because they could get more affordable

non-employer insurance, there would not be a large effect on overall employer

health insurance costs. Consequently, the impact of the proposed credit on employer

health insurance coverage would be minimal, and the majority of individuals taking

up the proposed health credit would be those who were either previously uninsured

or previously covered in the non-employer insurance market.

By comparison, research indicates that 50 percent or more of those who became

eligible for Medicaid in the expansions of the late 1980s and early 1990s lost private

coverage, suggesting that providing near first-dollar coverage (even in a government

insurance plan) requires much more substantial government funding to achieve

comparable reductions in uninsured rates.20

Some health policy experts and Members of Congress have proposed a broaderbased refundable tax credit—one that would also provide significant new subsidies

to all workers with employer-provided coverage. Because so many workers have employer coverage already, however, a tax credit for employer coverage would have a

far greater budgetary impact, and a much larger share of its costs would go toward

existing rather than new health insurance coverage. To limit the additional budgetary costs, many experts have proposed a gradual transition from the current tax

exemption to a system of tax subsidies for employer coverage that relies more on

credits. Although such a transition would probably encourage lower cost employer

coverage and increase the takeup of employer coverage by lower income workers,

it could have a significant impact on current employer plans, union negotiations,

and other issues affecting worker compensation. Thus, it seems less likely to be effective as an incremental, immediate step to improve insurance coverage significantly.

32

21Plan premiums typically vary by age. We choose one ‘‘young age’’ and one ‘‘old age.’’ Premiums for family policies vary by the age of the adults. 22We were unable to obtain information on regulations in the District of Columbia. We found

no individual policies available in Hawaii and no PPO plans in Maine, New Hampshire, or New

Jersey.

Labor Markets

Because this credit is available to all low-income uninsured Americans, it will provide both increased options for workers and an improved safety net for the unemployed. It can help ease transitions between employment, dislocation, and reemployment without distorting labor markets. Unlike employment-based insurance, parttime and seasonal workers will be able to keep the coverage they purchase with the

health insurance credit even if their jobs change.

CONCLUSION

The Administration’s health insurance credit will allow millions of Americans to

purchase good insurance through private markets. It will improve the functioning

of individual insurance markets, and will encourage high-value, high-quality care.

APPENDIX: THE COST OF HEALTH INSURANCE IN INDIVIDUAL

MARKETS

The Council of Economic Advisers performed quantitative analysis to document

the likely effects of the health insurance credit on the purchase of health insurance.

A key component of this is the cost of the insurance plans available through nongroup markets.

Data Description

To analyze the purchasing power of the proposed health insurance tax cut, we

compiled a data set of sample premiums. Using the web site

www.ehealthinsurance.com we collected data on premiums for low-cost traditional

indemnity (i.e., Fee-for-Service or FFS) plans and low cost Preferred Provider Organization (PPO) policies, in which patients can see physicians outside their network,

but with higher copayments. We obtained observations for one large and one small

city in each state. In each case we priced policies for six hypothetical purchasers.21

Our total number of observations is 1020 (2 plans x 6 families x 50 states x 2 cities,

less missing values for cases in which we were unable to find policies that satisfied

our criteria).22 Although the sample is small, it provides a starting point for an investigation of the affordability of insurance in the individual market. The purchaser

and plan types included in the sample were:

Purchasers: Plan Characteristics:

• 55-year-old single male • $1000 per person deductible

• 25-year-old single male • $2000–$3000 family deductible

• 25-year-old couple • covers office visits

• 55-year-old couple • covers emergency room care

• 25-year-old mother and daughter • 20% coinsurance or $30 copayment

• 25-year-old couple with two children

We attempted to obtain quotes for plans with characteristics as close as possible

to those listed above. While all the plans we sampled cover emergency room care

and all but 12 (those in New York City) cover office visits, the deductibles and coinsurance/copayments are occasionally higher or lower than our specifications. Overall, 92 percent of our single policies have deductibles of $1,000; 5 percent have higher and 3 percent have lower deductibles. Eighty-one percent of our family policies

have deductibles of $2,000 or $3,000, with 8 percent lower and 11 percent higher.

All of the plans have coinsurance of 20 percent, except for the plans in New York

City, which have no coinsurance, and the plans in Boston and Brockton, Massachusetts, which have 10 percent coinsurance. We also assumed that the individuals

were in good health, with no preexisting conditions, and were not smokers.

33

23 In the following, we focus on PPO premiums because they are lower and thus more likely

to be selected by those helped by the tax credit. Also, PPOs are the most commonly offered type

of plan by employers. In 2000, 75 percent of large employers offering health insurance coverage

offered a PPO plan, compared to 25 percent for a traditional indemnity plan and 51 percent

for an HMO (Mercer/Foster Higgins Mercer/Foster Higgins, National Survey of Employer-Sponsored Plans, 2000). Premiums for FFS plans follow the same pattern, but are higher. 24These premiums are similar to premiums that were actually purchased. In the 1996 Medical

Expenditure Panel Survey, the average premium paid by single policy holders for plans purchased in the non-group market was $1573; half of the individual premiums were between $600

and $1,992. The average family policy was $2,651; half of the premiums were between $600 and

$3650. (Accounting for the potential accidental reporting of supplemental plans by eliminating

the lowest 5 percent of premiums raises the average single plan cost for 18 to 39 year olds by

only $150.) There was substantial variation both by age and by specific plan. The average individual premium in the MEPS ranged from $1230 for those less than 40 years old to $1976 for

those 55–64 years old. (Statistics provided by Jessica Banthin at the Agency for Healthcare Research and Quality.) 25The average premium in 2001 for employer-provided health insurance was $2,652 for single plans and $7,056 for family plans (Kaiser Family Foundation, 2001 Kaiser/Health Research and

Educational Trust Survey). The average yearly contributions for employees for whom some contribution was required was $840 for a single coverage and $2868 for a family plan. Fifty percent

of employees paid no contribution for single coverage but only 18 percent for family coverage

(Mercer/Foster Higgins, National Survey of Employer-Sponsored Plans, 2000). 26 Because deductibles are measured on a per person basis with annual family caps of $2000- $3000 it is possible for a family with these policies to have substantial out of pocket expenses.

They are, however, protected against large expenses that might be incurred with a hospitalization, chronic condition, or serious illness. 27 Although we did not conduct as thorough an analysis, premiums for young women appear

to be only slightly higher on average (approximately $50 to $100 higher) and identical in some

states (these policies typically do not include maternity coverage). 28The fraction of employers providing retiree coverage has fallen sharply in recent years (Employee Benefits Research Institute, Health Benefits Data Book, Washington, DC, 1999).

Premiums and the Credit

This section provides summary information on the types of policies available.23

The discussion highlights not only national averages, but also the distribution of

premiums relative to the proposed health insurance credit.

Premiums vary substantially across states and across types of purchasers. Table

1 has summary statistics for PPO premiums by family type and appendix table A1

shows PPO premiums for the two cities in each state by type of purchaser.24 For

a family of four, annual premiums vary from $1,272 for Bloomington, Illinois to

$9,675 in Boston, Massachusetts (the Boston policy has relatively generous benefits).25 The average price for a family of four is $3,287.26 Premiums for young single

males are substantially lower, averaging just $975, or $25 below the proposed health

insurance credit.27 Premiums for individuals in their 50s are much higher. The average premium for a 55-year-old male is $2,749.

Table 1: Mean Annual Premium for PPO Plans

Characteristic Average Median Minimum Maximum

Younger Male $975 $772 $504 $4094

Older Male $2749 $2464 $1524 $6722

Younger Couple $2142 $1729 $1032 $7370

Older Couple $5145 $4613 $2904 $12099

Mother and Child $1931 $1518 $852 $7224

Family of four $3287 $2683 $1272 $9675

The differences in the prices faced by older and younger Americans are substantial: the average premium for an older couple is over $5,000 compared to $2142 for

a younger couple. These premiums are for a couple aged 55; older couples (not yet

eligible for Medicare) would face higher prices.28 However, there is also evidence

suggesting that older Americans may value health insurance more than younger

Americans and may therefore be more willing to devote a larger fraction of their

income to health insurance premiums, so that a $1,000-$2,000 tax credit would be

sufficient to stimulate purchases.

34

29The median deductible for in-network individual coverage for employer sponsored policies

was $250 in 2000 (Mercer/Foster Higgins, National Survey of Employer-Sponsored Plans, 2000).

Prices vary substantially across cities and states. We examine the distribution of

premiums with respect to the credit to which the purchaser would be entitled. Nearly three quarters of the PPO plans for young single men had premiums less than

the proposed $1000 health insurance credit and over 90 percent cost less than

$2000. Thus the health insurance credit would provide young men substantial assistance in purchasing a policy. In contrast, the subsidy covers much less of the policy premium for older single men: only 1 percent of plans have premiums below

$1000 and just 17 percent of plans were less than $2000. Younger families fare

much better than older Americans. A $3000 subsidy would cover half the PPO premium for a family of four in more than 90 percent of the plans. If children in a

low-income family are eligible for SCHIP or Medicaid, then a $2000 credit would

cover all of the cost for the mother and father in more than 70 percent of the plans.

These premiums are for plans that do not provide first-dollar coverage, yet as

noted earlier, provide comprehensive coverage for large expenses. Plans with lower

annual deductibles will be more expensive. To investigate the difference, we priced

health insurance policies with a $500 deductible but coverage similar to our sample

in other dimensions.29 We collected this information for families in 10 states, and

premiums were approximately 20 percent higher. The premium data presented assume that the individuals are in good health and are non-smokers. Just as premiums increase with age because expected medical expenses increase, plan availability and premiums also change with the underlying health of the beneficiary.

There is also substantial variation in price across insurers as well as variation in

the quality of service provided. For example, in Kansas City, Kansas, premiums for

family policies that fit our criteria range from $182.50 to $434. Consumers need to

shop carefully for plans, comparing prices and coverage to find the plan that best

suits their needs.

provide good, affordable coverage options for almost all persons

Mr. MCCLELLAN. That study indicates that the credit would

f who are eligible, particularly in conjunction with its use in highrisk pools and other purchasing group arrangements. Altogether, 6

million or more people who otherwise would be uninsured for some

or all of the year would get coverage under this proposal.

Moreover, the analysis by CEA, as well as the analysis of the

credit by Treasury professional staff, indicate that the vast majority of persons who use the credits would be those who were either

previously uninsured or those who are currently struggling to purchase nongroup health insurance on their own. About 16 million

people in this country buy nongroup coverage today, and receive little or no assistance from the government to do so.

Only a very small fraction of those with current employer coverage would use the credit. So while very attractive to those without good employer coverage today, the credit is generally not a better deal than the current uncapped tax subsidy of $120 billion per

year for employer-sponsored coverage.

This proposal is one key element in a broad set of Administration

proposals to help us create a more patient-centered health care system. The President believes that our private health system is the

best in the world because it encourages and rewards innovation to

get the best treatments to the patients who need them. He also believes that our health system faces serious problems today, problems of rising costs, problems of frustrations of doctors and patients

that they are losing control to health maintenance organization

(HMO) and government bureaucrats.

35

He believes that the best way to preserve the best features of our

private, innovative health system while addressing these challenges is to find solutions that are based on trust in patients working with health care professionals. By giving all Americans access

to affordable health care coverage options, we will not only enable

Americans to get up-to-date coverage that meets their needs, we

will also encourage high-quality, high-value care that is continuously getting better, and that has been the hallmark of our health

care system.

The Administration wants to work closely with Congress in a bipartisan fashion to make this vision a reality. At yesterday’s event

sponsored by the Robert Wood Johnson Foundation, there were

many stories presented of what a difference good coverage options

can make. Before coming to the Administration, while I was a Professor at Stanford, I also practiced in our internal medicine clinic

there, and I saw many stories myself of patients with chronic illnesses and other health problems who had difficulty getting ongoing care because of lack of health insurance.

We are pleased by the broad support in the community by groups

on the right and left, and in this Committee, for proposals to move

forward and to find common ground on addressing the problem of

the uninsured now. I think the Nation’s uninsured have good reason to be optimistic that help is coming soon. Thank you.

[The prepared joint statement of Mr. Weinberger and Mr.

McClellan follows:]

Statement of the Hon. Mark Weinberger, Assistant Secretary for Tax Policy,

U.S. Department of the Treasury, and Hon. Mark B. McClellan, Member,

Council of Economic Advisers

Mr. Chairman, Congressman Rangel, and distinguished Members of the Committee, we appreciate the opportunity to discuss with you today the President’s proposals for tax credits for the purchase of health insurance.

Mr. Chairman, the Administration looks forward to working with Congress, in a

bipartisan manner, to address the pressing need to expand access to health insurance for uninsured Americans. Almost 40 million Americans are reported to go without health insurance coverage for an entire year, and as many as 20 million more

are without health insurance coverage during some part of the year. In addition,

millions more Americans are struggling to afford rising health insurance premiums,

with little help from the government. The scope and persistence of this issue highlights the importance of our making progress this year.

The President’s proposals to introduce health credits for the purchase of health

insurance will enable millions of Americans to purchase private health insurance,

improving the functioning of private markets, empowering patients to make informed decisions, and increasing utilization of high quality health care. This proposal is part of a broader vision for promoting health care quality and access by developing flexible, market-based approaches to providing patient-centered health care

coverage for all Americans.

Health insurance credits use the infrastructure of the tax system to expand access

to health insurance. They are a common element of proposals from both Republicans

and Democrats. Many of the distinguished Members of this Committee have supported such proposals and sponsored such legislation in prior sessions of Congress.

We must seek to bridge partisan divides to come to agreement on this key issue

which enjoys such wide bipartisan support. To help do so, the President has proposed health insurance credits that build on the best features of previous proposals,

and that include new innovations to address past criticisms of tax credit proposals.

And the President’s budget backs up his agenda for using health insurance credits

to improve access to good coverage with over $100 billion in funding. We hope that

these steps forward will provide a foundation for decisive action in Congress this

year to address the serious problem of health care affordability and the uninsured.

36

The Problem of the Uninsured

In 2000, 14 percent of Americans reported that they were uninsured for the entire

year. They may go without effective health care, or may rely on inefficient episodic

care at hospital emergency rooms. As a result, our health system spends more than

it should on complications of diseases that could have been prevented and on inefficient ways of delivering health care. Even worse, the absence of insurance makes

it harder for Americans to work with health care professionals to stay healthy.

The uninsured population does not consist only of the poor or the unemployed.

In 1999, 81 percent of the uninsured population were in families with at least one

full-time worker. Furthermore, while 36 percent of the uninsured had incomes below

the poverty line, a large fraction, 29 percent, had incomes between 100 and 200 percent of poverty. Nearly three-quarters of the uninsured below 200 percent of poverty

are adults, many of whom do not live in households with children.

Insurance coverage differs significantly by race and ethnicity. In 2000, 32 percent

of Hispanics were uninsured, compared to 20 percent of blacks and 19 percent of

Asians. In contrast, just 10 percent of whites were uninsured.

The benefits of increasing participation in health insurance markets extend beyond the ability to have more control over their health care and health realized by

the individuals themselves. First, although some people without insurance could receive subsidized basic health care through emergency rooms, it is a very expensive

way to provide care, and it is either paid at governmental expense or is uncompensated care that imposes higher costs on others. Second, improved public health

through expanded health insurance coverage is important to control the spread of

disease. Third, as discussed below, greater participation in insurance markets allows better pooling of health risks—the insurance markets themselves work better.

Problems in Health Insurance Markets

The major goal of health insurance is to allow individuals to join together to reduce their risk of high medical expenses by sharing that risk. Individuals trade the

uncertainty of very unpredictable health care costs for the greater certainty of a

known premium and protection from very high medical expenses. An important element of insurance is thus the ‘‘pooling’’ of risk—people sign up for insurance before

they know how much they will spend on health care, and then the premiums of

those who have low expenses help subsidize spending on those with high expenses.

Another important goal of health insurance is to make sure that Americans have

access to the most innovative, high-value health care available. The American

health care system leads the world in Nobel prizes and in the development of new

drugs, devices, and other treatments to prevent and cure illnesses. To make sure

these impressive medical breakthroughs translate into good care, health care coverage must be innovative as well. One need look no further than the lack of prescription drug coverage in Medicare to understand the consequences of out-of-date

health care coverage. In the years ahead, far more breakthroughs are possible—such

as customized treatments based on a clear understanding of an individual’s genetic

makeup, and specialized ‘‘disease management’’ programs that rely on the Internet

and other modern telecommunications technologies that allow patients with chronic

illnesses not only to stay out of the hospital, but also out of the doctors office. Innovative health care coverage is essential for creating an environment for medical

practice that encourages innovation, value, and continuous improvement in health

care.

Several problems can interfere with the ability of insurance markets to achieve

these goals. A key problem is lack of choice and competition. As the President has

said, our health care system works best when it is centered on helping patients

work with health care professionals to decide the best possible treatments. To give

control to patients, Americans need the opportunity to choose the health care coverage that is best for them. Without good choices, patients do not have the power

to make sure that they are getting the best value from the health care system for

their own needs. Instead, government or health plan bureaucrats effectively make

decisions for them about what is covered, how their care is reimbursed, and how

treatments are provided. In other countries, this has led to queues for treatments,

poor quality, and lagging availability of innovative care. Our country has chosen another path: private sector health care based on trust in patients and their physicians. This path rewards innovation in delivering the best possible health care. But

the tremendous potential of our health care system is threatened when patients do

not have choices about how to get health care coverage. For this reason, the President strongly believes that we must take action to improve the health care coverage

options available to Americans.

A second problem is adverse selection. If only individuals whose health insurance

expenditures are likely to be high sign up for insurance, then the pooling of risk

37

that is the key to insurance is undermined. Just as individuals with higher expenses

want more insurance, insurance companies want customers with lower expenses,

and may design their plans to appeal to those with low risk.

Health insurance credits can help solve these problems in health insurance markets by making more coverage options affordable, increasing participation, and reducing adverse selection. Greater affordability and participation will encourage competition to provide coverage that delivers high-value, innovative care. Thus, well-designed health insurance credits reinforce the best features of our private, highly innovative health care system.

In the remainder of our testimony, we discuss the critical design issues in more

detail. Design issues include the mechanics of how people actually use the credits

to get assistance with health insurance purchases. To work effectively, especially for

families with modest means, credits must be refundable, advanceable, and nonreconcilable.

• Refundability means that the value of the credit does not depend on taxes

owed; even persons who owe no taxes can still receive its full value.

• Advanceability means that those eligible for the credit have the option of using

it when they are actually purchasing insurance, to reduce their monthly premium payments, rather than having to wait until they file their tax return at

the end of the year.

• Nonreconcilability means that eligible persons do not have to wait until they

know their actual income at the end of the year before they know exactly how

much assistance they are eligible to receive. Rather, they can be confident

that—as long as they are not committing fraud—they are entitled to the full

value of an advanceable credit.

Health insurance credits are not the only promising direction for a health care

policy that helps patients get high-quality, innovative care. There is no single approach that can work with the best features of all of our health care institutions

to help ensure that our health care system remains the best in the world. Given

the need for a broad approach to this problem, the President supports both an immediate temporary health insurance tax credit for displaced workers, as contained

in the economic security package, and a permanent new health insurance tax credit

to expand health insurance coverage for others that is not dependent on employment status. The President’s Budget also contains a number of other initiatives designed to expand health insurance coverage. These include: (i) an above-the-line deduction for the purchase of long-term care insurance; (ii) expanded flexibility of

health flexible spending arrangements; (iii) reform and permanent extension of Archer Medical Savings Accounts, to permit Americans to set up health accounts to

help them meet the out-of-pocket payments required in many health plans that do

not restrict choices of doctors and treatments; and (iv) an additional personal exemption for home caretakers of family members.

These proposals are designed to target a diverse group of people while improving

the functioning of insurance markets. In addition, as the President outlined in an

address on his health care agenda on Monday, the President’s budget includes many

other proposals to give all Americans access to high-quality, affordable options for

health care coverage. Together, these proposals will provide health security and additional health insurance coverage for millions of Americans, while preserving the

best features of our highly innovative health care system.

Permanent Health Insurance Credit for Americans Who Do Not Have Employer-Provided Coverage

Current law provides a number of tax incentives for individuals to obtain health

insurance coverage. Employer-provided health insurance and reimbursements for

medical care are generally excluded from gross income for income tax purposes and

from wages for employment tax purposes. Active employees participating in a cafeteria plan may pay their employee share of premiums and other medical care expenses on the same pre-tax basis. In addition, for self-employed individuals who are

not eligible for subsidized employer coverage, 70 percent of health insurance premiums are deductible for 2002, and 100 percent are deductible for 2003 and thereafter.

Proposal

However, as noted above, millions of Americans still are without health insurance

coverage. The refundable health insurance credit proposed in the President’s Budget

is designed to provide these incentives to assist uninsured individuals in purchasing

health insurance.

38

The credit is refundable, so even those without income tax liability can receive

the benefit of the credit. In addition, the largest subsidies will be targeted to lowincome families, and only individuals who are not covered by public or employerbased health insurance will be eligible for the credit. Therefore, the credit will be

of most help to individuals who are most likely to be uninsured—childless adults

who are generally not eligible for public insurance and persons in families with incomes too high to participate in public insurance programs and too low to find affordable coverage options in the private market. The credit will help families who

prefer the innovation and flexibility of private insurance options to public insurance,

and will enable families to obtain coverage for the entire family from the same providers. The credit is also designed to be available at the time the individual purchases health insurance. That is, people eligible for the credit can receive it in advance, before filing their tax returns, to reduce their monthly checks for insurance

premium payments. Finally, because the credit is based on income from the previous year, it is nonreconcilable—earning more income in the current year does not

reduce the value of the credit. We believe that the availability and certainty of the

advance credit will increase the credit’s attractiveness, making it more effective in

expanding health insurance coverage.

The proposal would create a refundable, advanceable income tax credit for the

cost of health insurance purchased by individuals under age 65. Individuals participating in public or employer-provided health plans would generally not be eligible

for the tax credit. In addition, individuals would not be allowed to claim the credit

and make a contribution to an Archer MSA for the same taxable year. Eligible

health insurance plans would be required to meet minimum coverage standards, including coverage for high medical expenses.

The credit would provide a subsidy of up to 90 percent of a capped amount of

health insurance premiums. The maximum credit would be $1,000 per adult and

$500 per child for up to two children. The maximum subsidy percentage of 90 percent would apply for low-income taxpayers and would be phased down at higher incomes. While the subsidy percentage would be phased down with income, the maximum premium that could be taken into consideration in calculating the credit

amount would be fixed at $1,111 for an adult and $556 for a child. These dollar

amounts would be indexed by the Consumer Price Index for all-urban consumers.

Individuals with no dependents who file a single return and have modified Adjusted Gross Income (AGI) up to $15,000 would be eligible for the maximum subsidy

rate of 90 percent and a maximum credit of $1,000. The subsidy percentage for

these individuals would be phased down ratably from 90 percent to 50 percent between $15,000 and $20,000 of modified AGI, and then phased out completely at

$30,000 of modified AGI. For example, the maximum credit for these individuals

would be $556 at $20,000 of modified AGI.

All other filers (including single filers with dependents, heads of households, and

joint filers) with modified AGI up to $25,000 would be eligible for the maximum subsidy rate of 90 percent, and the maximum credit of $1,000 per adult and $500 per

child for up to two children. The subsidy percentage would be phased out ratably

between $25,000 and $40,000 of modified AGI in the case of a policy covering only

one individual, and between $25,000 and $60,000 of modified AGI in the case of a

policy or policies covering more than one person.

The maximum credit for these other filers would vary by income and the number

of adults and children covered by a policy. For example, the maximum tax credit

would be $3,000 for a low-income family with modified AGI up to $25,000 who obtained a policy covering two adults and two or more children. The maximum credit

would be phased down to $1,714 as the family’s modified AGI rose to $40,000. For

a policy covering only two adults, the maximum credit would be $2,000 for families

with modified AGI up to $25,000 and $1,143 for families with $40,000 of modified

AGI.

Examples of the maximum credit:

(1) INDIVIDUALS WITH NO DEPENDENTS FILING A SINGLE RETURN

Modified AGI $15,000 $20,000 $30,000

Maximum Credit $1,000 $556 $0

(2) OTHER FILERS OBTAINING A POLICY COVERING ONLY ONE ADULT

Modified AGI $25,000 $30,000 $40,000

Maximum Credit $1,000 $667 $0

39

(3) OTHER FILERS OBTAINING A POLICY COVERING TWO ADULTS

Modified AGI $25,000 $40,000 $60,000

Maximum Credit $2,000 $1,143 $0

(4) OTHER FILERS OBTAINING A POLICY COVERING TWO ADULTS AND ONE CHILD

Modified AGI $25,000 $40,000 $60,000

Maximum Credit $2,500 $1,429 $0

(5) OTHER FILERS OBTAINING A POLICY COVERING TWO ADULTS AND TWO OR MORE

CHILDREN

Modified AGI $25,000 $40,000 $60,000

Maximum Credit $3,000 $1,714 $0

Individuals could claim the tax credit for health insurance premiums paid as part

of the normal tax-filing process. Alternatively, the tax credit would be available in

advance at the time the insurance is purchased. Individuals would reduce their premium payment by the amount of the credit and the health insurer would be reimbursed by the Department of Treasury for the amount of the advance credit. Eligibility for the advance credit would be based on the individual’s prior year’s tax return.

The credit would be used for qualifying health insurance purchased in the nongroup market. In addition, qualifying health insurance could also be purchased

through private purchasing groups, state-sponsored insurance purchasing pools and

state high-risk pools. At state option, effective after December 31, 2003, the tax

credit would be allowed for certain individuals not otherwise eligible for public

health insurance programs to purchase insurance from private plans that already

participate in State sponsored purchasing groups, such as Medicaid, SCHIP, or state

government employee programs.

States could, under limited circumstances, provide an additional contribution to

individuals who claim the credit in connection with purchases of private insurance

through Medicaid or SCHIP purchasing groups. The maximum state contribution

would be $2,000 per adult for up to two adults for individuals with incomes up to

133 percent of poverty. The maximum state contribution would phase down ratably

reaching $500 per adult at 200 percent of poverty. Individuals with income above

200 percent of poverty would not be eligible for a state contribution. States would

not be allowed to provide any other explicit or implicit cross subsidies.

The health insurance tax credit would be effective for taxable years beginning

after December 31, 2002.

Discussion

This proposal contains a number of important and innovative features. First, the

credit amount varies with family size and composition, reflecting the impact of these

factors in the non-group market. For example, two adults face higher premiums,

and will receive a larger credit, than a single adult. Likewise, families with children

face higher premiums, and will receive a larger credit, than families without children. Second, the credit is ‘‘advanceable,’’ and eligibility for the advance credit is

based on the individual’s prior year’s tax return. This design guarantees certainty

of the amount of the credit and makes it available at the time individuals purchase

health insurance; they do not have to wait until they file their tax returns after the

year is over. Third, the proposal allows the credit to be used toward private insurance purchased through private purchasing groups, state-sponsored insurance purchasing pools and state high-risk pools. This provision will increase coverage options, achieve economies of scale, and encourage risk pooling in the non-employer

market.

In designing a policy to expand health insurance coverage to the uninsured, one

concern is that the policy does not inadvertently decrease health insurance options

to those presently insured. Some have suggested that if the purchase of health insurance outside of the employer market became sufficiently attractive, employers

might stop providing health insurance coverage to their workers, potentially resulting in a net decrease in health insurance coverage among the population. Based on

these concerns, the Administration’s proposal has been carefully designed to avoid

‘‘crowdout’’ of subsidized employer coverage, and thus will expand coverage substantially. Several elements of the credit design contribute to this desirable result. Most

importantly, low-income individuals and families, who are least likely to have employer-based health insurance, will receive the largest incentives under this proVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 E:\HR\OC\A970.XXX pfrm04 PsN: A970
40

posal. In addition, the health credit subsidy rate decreases with income, requiring

larger individual contributions for any given policy and making it a less attractive

alternative to the employer-provided insurance at higher income levels. The health

credit is further limited by a cap on the amount of premium eligible for subsidy.

Although this capped premium amount is adequate for many individuals to purchase health insurance, it is typically less generous than most employer plans.

The credit is also designed to be targeted to the individuals who are most likely

to be uninsured during at least some part of the year. Approximately six million

such individuals are expected to gain coverage as a result of the credit. Most of

these individuals are neither offered employer-based insurance nor eligible for public programs over the course of their uninsured spells. The credit will provide a

strong new incentive for these persons to find coverage in the individual market.

It will also allow many families that are already purchasing coverage in the individual insurance market, and receiving very little government assistance in doing

so, to obtain better coverage at a lower out-of-pocket cost.

The credit will significantly increase participation and quality of coverage in nongroup health insurance markets. These improvements will not come at the expense

of employer group markets. Those low-income Americans who are eligible for the

largest credit are less likely to have employer-sponsored health insurance. Around

80 percent of uninsured workers are not offered health insurance by their employers. Only 36 percent of people under age 65 with income below 200 percent of the

federal poverty line have employer-sponsored health insurance, while 77 percent of

those above do. Furthermore, the generosity of employer-sponsored insurance is determined by the tax benefits for the group of employees, not the attractiveness for

low-income employees only. Tax benefits for employer coverage will remain large for

the middle- and higher-income workers that make up most of the employees of most

firms that offer generous employer-sponsored plans. Those workers’ incomes are too

high for them to get more attractive benefits from the proposed health credit. Thus,

employer-provided coverage will remain more attractive for firms that offer generous

coverage today. That is, the phase-out and cap on the credit ensure that employers

will continue to offer insurance and that employees will continue to enroll. The proposed credit will simply eliminate an inequity in the current system that disadvantages workers without employer coverage, helping them to purchase the coverage

that meets their needs.

Recent research also suggests that the credit would provide good, affordable

health insurance options for the vast majority of individuals who are eligible for the

credit. This is the subject of a detailed analysis by the Council of Economic Advisers.

The minority of less healthy persons who lack any insurance options and find insurance unaffordable or unavailable for their health status in the individual market

could use the credit to buy into the state high-risk pool for which the premium is

usually subsidized. The proposal also permits certain low-income individuals to purchase private insurance through other state-sponsored health insurance purchasing

groups. Coupled with the Administration’s other proposals for strengthening employer coverage and for providing more assistance to individuals with the greatest

health care needs, the health credit is a critical part of our approach for ensuring

that all Americans have good, affordable private health care coverage options.

This proposal is part of a broader Administration goal of achieving more patientcentered health care by encouraging innovations in the financing and delivery of

health care services. Market-based approaches such as this will encourage highquality, high-value coverage by giving patients the ability to choose the coverage

that best meets their needs. In turn, innovative coverage will permit Americans to

benefit from the tremendous potential of our health care system in the 21st century.

Health Insurance Credit for Displaced Workers

Because the permanent health insurance credit would not be effective until next

year, the President continues to support the immediate health insurance credit for

displaced workers, which was one component of the economic security bill supported

by a bipartisan group of centrist Senators and passed by the House last December.

The health credit for displaced workers is a refundable, advanceable tax credit

that could be claimed by unemployed workers for a period of up to 12 months. The

credit can be used to offset 60 percent of the cost of health insurance premiums for

unemployed workers and their families.

The credit can be applied to the purchase of COBRA or ‘‘super-COBRA’’ continuation coverage, and other types of qualified private non-employer health insurance.

Eligible unemployed workers include those receiving unemployment insurance benefits and those who would be eligible for benefits except that their rights to benefits

were exhausted or the period during which their benefits were payable ended.

41

The design of the health credit for displaced worker reflects the President’s goals

of providing targeted, quick assistance to Americans who have lost their jobs in the

recession. Because the proposal builds on the existing infrastructure of programs to

assist displaced workers, and because it strengthens all of the coverage options

available to displaced workers now, it can be fully implemented in a matter of a

few months. In particular, state workforce agencies will certify eligibility for the

health insurance credit when they certify that a displaced worker is eligible for unemployment insurance benefits. Almost all unemployed workers who lose their job

involuntarily are eligible for unemployment insurance, at least initially. The Administration also supports emergency grants to states to enable them to quickly provide

additional health insurance assistance, without the need for state legislative action.

Displaced workers can claim an advance credit at the time of purchasing health insurance coverage by providing their insurer their certification along with the remainder of the premium. The insurer will be reimbursed by the U.S. Treasury for

the amount of advance credits it provides.

We believe the displaced worker credit offers a number of advantages over competing proposals that limit tax credits or subsidies to COBRA-only policies. Medicaid

expansion is also not an ideal way to provide quick and efficient replacement insurance to the affected individuals.

A COBRA-only credit would provide no benefit to 40 to 50 percent of displaced

workers with health insurance, because they work for small firms not covered by

COBRA or they purchase non-employer policies. The alternative of forcing workers

not covered by COBRA into a State Medicaid plan would require these workers to

drop their current insurance coverage and possibly change health care providers if

they do not participate in Medicaid. Extending Medicaid to cover these displaced

workers would require State legislation, and would necessitate delays before State

legislatures were even in session to address this issue. Many States have made clear

that, because of tight budgets, they cannot afford such unprecedented expansions

beyond their core target populations anyway. Moreover, such expansions would take

away resources from their ability to fund better coverage for their priority populations: low-income children, families, and seniors.

In addition, a COBRA-credit would impose a costly new mandate that employers

would be required to implement immediately. The mandates are most burdensome

on smaller firms and those that have had significant layoffs—precisely the firms

that need the most help now to prevent further job losses. Further, a COBRA-credit

is poorly targeted to workers who lose their jobs because of the economic downturn.

At least 60 percent of those eligible for the COBRA-credit are workers who voluntarily leave their job, not displaced workers. According to independent estimates,

twice as many workers who have lost their jobs in the recession would be helped

by the health credit for displaced workers than by a COBRA credit or subsidy.

As a result, for a similar budgetary cost (and at no budgetary cost to States), the

health insurance credit for displaced workers would be available for a longer period

of time, would be more efficiently targeted, would offer workers a greater choice

among health insurance plans, and would not weaken employer incentives to continue to provide health insurance to their workers. The credit would also reduce adverse selection in both the employer market (because more healthy workers would

choose to remain in COBRA coverage) and in the individual market (because many

people who otherwise would have gone without health insurance will purchase coverage).

Conclusion

The absence of health insurance coverage for some 40 million Americans is a

problem calling for immediate solutions. The President’s Budget sets forth a package of solutions, including most importantly a proposal for the use of tax credits to

offset the cost of obtaining health insurance that has received broad bipartisan support. If enacted, this proposal can lead to a significant reduction in the uninsured

population and at the same time lead to improvements in the market for individually purchased health insurance, greater choice and flexibility for individuals in determining the coverage that best fits their needs, and improvements in the quality

and price of health care provided to all Americans. This Administration desires to

work closely with Congress, in a bipartisan manner, to make this vision a reality.

compliment the Administration in moving the dollar amount on the

Chairman THOMAS. Thank both of you very much, and I do

f credit from $2,000 to $3,000. I do find it ironic, though, that that

42

dollar amount is in competition with an unlimited amount which

requires no prioritizing whatsoever under the more traditional

fringe benefit structure, but you are moving in the right direction.

Second, I also want to compliment you on the flexibility that you

have begun to add. The idea that we would limit the way in which

the credit would be used is, I think, a valid criticism, and once

again you have at least moved in responding to that concern.

Statements were made in opening remarks, and others will make

the statement that this is modest, it certainly doesn’t cover that

many folk. It seems as though if you don’t have a solution for 40

million uninsured, you don’t have a solution at all. Does the Administration have some numbers which indicate the number of uninsured that would be covered under this particular proposal, and

if so, would you wish to present them to us?

Mr. WEINBERGER. Yes. The numbers for the health insurance

tax credit, our estimates are that 15.5 million would receive the

credit. Six million of these individuals would have been uninsured

for at least part of the year, and about 10 percent of the individuals

taking the credit would otherwise have received employer-provided

health insurance.

Mr. MCCLELLAN. So just to be clear, the vast majority of people

who are covered under this credit now are either uninsured, that

is 6 million, or not getting any assistance at all for purchasing

nongroup health insurance, and so they will be able to afford better

coverage. And the impact on the 160 million employer market is

negligible.

Chairman THOMAS. I thank you. The gentleman from New

York wish to inquire?

Mr. RANGEL. Thank you. I want to thank both of you for your

testimony. Mr. Weinberger, your opening statement was laced with

remarks about bipartisanship and working together, and I wondered whether you know what Committee you were testifying in

front of, because you have had a very limited experience of bipartisanship with this Committee.

And it would seem to me that if these are the hopes and aspirations that you would like to see, that you in the Administration will

have to dramatically do something in order to achieve these goals.

It would seem to me that for openers you might consider having

meetings with Democrats, people in the minority, and sharing

these views, rather than having us come to hearings and finding

out that the majority and the Administration have made up their

minds as to what the health care should be.

This is especially so when I know that you know that many people, including our leader, some that are very close to me physically

if not politically, have claimed that one of their targets is the employer-based health care system, as opposed to expanding health

care generally. Well, I am not opposed to people having political

goals, but sometimes they interfere with bipartisanship, which I assume you can understand. And if indeed some of us are paranoid

in believing that you are against employer plans and unions more

than you would be for health coverage, that is something that

should be discussed with honest people who have honest disagreements.

43

But I would suggest to you if you are serious about this goal of

bipartisanship, especially in an election year, we need outside help,

and I hope you would consider deciding how you intend to bring

about this goal, because I think that both parties can benefit in

working together. There is enough to fight about in November, but

health care should not be the subject of a partisan debate.

So I thank you for coming here, and you, Mr. McClellan, and let

me see where we go from here.

Chairman THOMAS. I thank the gentleman. The gentlewoman

from Connecticut wish to inquire?

Mrs. JOHNSON OF CONNECTICUT. Thank you very much, Mr.

Chairman.

First of all, I think it is very important that you have developed

a better mechanism of delivering a tax credit, and I think that I

don’t want that to be missed in this debate. For those of us who

have long been interested in a tax credit as a means of reaching

those who couldn’t afford the premiums for health insurance, that

issue of being able to deliver the credit in a way that doesn’t require people to carry the cost until the end of the year and then

deduct it, and to be able to deliver it to people who don’t pay

enough taxes to ever get the credit back, is very important.

And could you describe for the Committee a little bit as to how

that mechanism works, and as importantly, whether it would work

as well if we used that mechanism for all the uninsured as opposed

to just the unemployed uninsured?

Mr. WEINBERGER. A clarification. Is your question with regard

to the displaced worker credit or the health insurance credit, or

both?

Mrs. JOHNSON OF CONNECTICUT. Well, are you using the

same mechanism Mr. McClellan mentioned, that the uninsured

credit is also advanceable and refundable?

Mr. MCCLELLAN. Right.

Mrs. JOHNSON OF CONNECTICUT. So if you are using the

same mechanism in both instances, you need to talk a little bit

more about the mechanism and why it would work with the larger

group of the uninsured as well as with the smaller group. Because

with the smaller group, when you are unemployed you go for unemployment benefits, so at that time you can also get the credit

power.

Mr. MCCLELLAN. Right. Just to respond to the question about

mechanisms, I want to talk about both the displaced worker credit

mechanism and the health insurance credit mechanism, because

they are not the same.

From the standpoint of the user of the credit, though, they both

have a similar effect. You can write your premium check for the

portion of the health insurance cost that is not covered by the credit only, so when you are signing up for insurance, it is much cheaper. It is cheaper by the amount of the credit. You get it in advance.

The actual mechanics for doing it are a little bit different for the

two credits. For the displaced worker credit, the quickest way to

identify the people who need help and to get help to them is to

build on the strong existing infrastructure of unemployment benefits. That credit would be available through State and local work

force offices, which is the first stop that people usually make when

44

they lose their jobs, to find out about the income benefits available

to them, the training opportunities, the job search opportunities

and so forth.

Under our credit proposal, people would qualify for the health insurance credit as soon as they qualify for unemployment insurance

benefits. It is that simple. They would receive a number that they

could write on their check, and they would send in the check for

their portion of the premium, and the insurance company would

get reimbursed directly from the government for the remainder, for

the amount of the credit.

For the health insurance credit, that is a credit that’s value depends on income, so what is key there is a person’s or a family’s

income in the prior year. At the end of the year when you file your

taxes, you know how much money you had in that year. You let

the Internal Revenue Service (IRS) know that, and the IRS will notify you or get you the information on how much of a credit you

qualify for. And then once again you just write a check for the portion of the premium that you owe. The credit is paid directly to the

insurer, so that you don’t have to pay as much out of pocket for

health insurance.

Both of these mechanisms can be implemented very quickly. The

displaced worker credit we think we can have operational within

a few months of passage, and people in the meantime would have

the confidence of knowing that they are going to get 60 percent of

their health care costs covered. The health insurance credit would

be up and running next year.

Mrs. JOHNSON OF CONNECTICUT. One of the reasons I think

it is so important to move forward in the stimulus bill on this issue

is that we can then pilot that mechanism. But I would hope that

Members on both sides of the aisle would not allow the issue of

who talks to who to interfere with all of us talking together to take

advantage of this opportunity to have in the budget money for the

uninsured, and work on a mechanism and try it.

It is not going to be the sole solution, but we have all known,

both sides of the aisle, it was a critical component. And we have

a chance to move forward on that this year, and I hope anyone who

is really interested will let us know and be part of the solution.

Thanks. My time I think has expired.

Chairman THOMAS. I thank the gentlewoman. The gentleman

from California, Mr. Stark, wish to inquire?

Mr. STARK. Thank you, Mr. Chairman. Mr. McClellan, have you

read Professor Gruber’s testimony?

Mr. MCCLELLAN. No, sir, I have not had a chance to read his

testimony in full for today, but I have seen it and I am familiar

with the main points in it.

Mr. STARK. If you could, if you wouldn’t mind answering this

just with a note if you have, but he is suggesting that about 4 million people would leave employer-based coverage and that—I mean,

he doesn’t agree with your numbers. He says that health tax credits would reduce the number of uninsured by about 2 million. And

economists can differ, and I would just like to know where your research differs from his.

Ken Thorpe at Emory suggests that under this plan, the Federal cost for a newly insured person would be around $4,100, expanding

45

the State Children’s Health Insurance Program (SCHIP) would run

to $2,300. So there is some difference here as to how many people

would be in and how many would be out, and my guess is that a

little more empirical work would get there.

The line that I would like to follow with you guys is this: that

there is no guarantee that there wouldn’t be medical underwriting,

right? And that is in the interest of the insurance company. There

is nothing in this proposal to get the insurance companies to take

people with any kind of preexisting condition, and they are pretty

fussy about that. Bad back, a whole host of things, and those

things are eliminated.

The chart that we got from eHealthInsurance.com, from whom

we will hear later, in trying to get the lowest policy available in

each community for Members of the Committee, in round figures

only Seattle got below $2,900 approximately for a premium. So

what is out there today, lowest, now, for a family of four is about

$3,000. For us in the Federal Employees Benefit system it is about

$7,000 for the generous Blue Cross high option, which is in my

opinion a pretty good policy.

So there is no way that a $3,000 tax credit, which really drops

to $1,700 for a family of four in the $40,000 income bracket, so we

are not talking about $3,000 tax credit for a lot of people. And then

all of these policies that I have on my list have between $1,000 and

$2,000, most of them have $2,000, in Minnetonka it is a $6,000 deductible. What is in the water up there? But what I am—and many

of them, 10 of them have no maternity benefits, five of them don’t

have a prescription drug benefit, two of them don’t even cover

emergency room.

So I guess what I am getting at is that if we are going to cover

people, the credit isn’t adequate. Now, you can argue all over the

place, but I would challenge you, either of you, and then I would

stand corrected, shop for me in the market, in the individual market. You can get the rates. You can probably get them faster than

I can.

And show me in various communities what these people can get,

because you really are talking about tax credits of $1,700, with two

adults and one child, $1,400, one adult is $600. You aren’t going

to find much in the market that really covers people if they are not

going to have to come up with $2,000 or $3,000 more, and if they

lose their employer-based insurance, if that is correct, we haven’t

done much to help people.

I have no quarrel with giving a tax credit, but there is another

side to this. You have got to make the product available. And my

question is, would the Administration support controls on the private insurance market to make sure that these policies are available? What do you suspect, Mr. McClellan?

Mr. MCCLELLAN. The Administration certainly supports additional steps to help private insurance markets make this

available——

Mr. STARK. But I said controls on the insurance industry, which

would mean community rating or universal coverage non-underwriter. Would you support those sorts of controls to make these

products available at a reasonable cost?

46

Mr. MCCLELLAN. Our preference is to support the additional

steps that will actually make more affordable insurance available

to a wider number of people. I think the experience of States that

have tried community rating coupled with guaranteed issue requirements has been that the resulting price of premiums available

in the nongroup market is significantly higher, significantly higher

not only than policies for relatively healthy people in other States,

but significantly higher than policies in high-risk pools or other options that are available in other States.

But I certainly would like to work with you and your staff on

finding ways to reach the goal of making affordable health care

coverage options available to everyone. We just think that there

are probably some better ways to do it than restricting access to

coverage.

Mr. STARK. In Texas, for instance, a 55-year-old male smoker would pay $13,000 in the State’s high-risk pool. You know, what

good is this tax credit going to do that person? You could tell him

to quit smoking. I would join with you in that.

But my point is that high-risk for different insurance companies

means a lot of different things, and there is no way that I can see

that we can really say to the public we are giving them access to

decent medical care at a price they can afford. Because when you

add the deductibles and the other things that they will be out of

pocket in the current market, without some controls on that market, you don’t have a plan. And I would like to be proven wrong.

Mr. MCCLELLAN. Sure, sure. Well, to help address your concern, the Council of Economic Advisers did a study of policy availability in all 50 States, looking at multiple communities within

each State, and that is included in the CEA document that you

have available to you.

These policies were not first dollar policies. They were typically

preferred provider organization (PPO) plans that had preventive

care coverage, maybe emergency care coverage, and they did have

significant deductibles, but they gave people the option of going

outside of network, getting rid of the managed care red tape, getting whatever treatments they thought were best for them, while

still providing good catastrophic protection.

In addition, there are also some reasonably priced network plans

available that have much lower out-of-pocket payments——

Mr. STARK. That is good, Mr. McClellan—if I could just finish,

Mr. Chairman—for you and me. You are making more than

$100,000. So am I. But I am talking about the family with two

adults and two kids making $40,000. They don’t have anything left

for this high out-of-pocket. They get $1,700. And those are the people that we are not helping.

Mr. MCCLELLAN. Under our proposal, low-income families

would generally get access to coverage that was, for the plans that

we looked at, the average premium for a plan of this type was less

than $3,000, less than $1,000 for young individuals. Family coverage similarly had more than 50 percent subsidies available.

Mr. STARK. How much deductible, though, on top of the premium?

Mr. MCCLELLAN. Well, at most $1,000, if you buy an open PPO

plan. If you prefer a network plan with lower co-pays and smaller

47

deductibles, you can have more coordinated care at a lower out-ofpocket cost.

Mr. STARK. You make my point. One more time. You make my point. $3,000 to buy the policy. You give them $1,700, so they are

out $1,300 and another $1,000 to $2,000 deductible, and still—— Mr. MCCLELLAN. I think the bottom line here is that we end

up getting 6 million more people covered who wouldn’t have been

covered otherwise. So go back to Dr. Gruber’s analysis, and I have

worked closely with Jon on many issues. His study, it looks like it

is an analysis like one he did a year ago of a previous proposal that

was even a little bit different from ours then. It had different income limits. It examined a very rich first dollar plan, which is not

what we are aiming to provide affordable coverage.

Mr. STARK. It is this proposal that he—— Mr. MCCLELLAN. It did not address advanceability and other

issues to a significant degree. I am just saying his estimate, that

he says is of this proposal, is very similar to his estimate of the

previous proposal last year, which does not address issues such as

the availability of lower-cost plans which are widely available; the

income limits in our proposal; the effective advanceability mechanism in our proposal; the fact that some people want to get coverage for part of the year, not just the entire year. None of these

things are covered in his model.

And I put a lot of faith in the Treasury staff estimates of this

kind of analysis. They have done very accurate and effective and

comprehensive work on a very detailed model that has been in existence for many years and picks up a lot of subtleties in markets

that are very hard. You know, I come from an academic perspective, too, and we try to do our best, but often we are working alone,

without a dedicated professional staff.

So I put a lot of faith in those estimates, and beyond that, in

terms of crowd-out estimates, I just would point out that Dr.

Gruber’s research also shows that whatever you do for the uninsured, you need to be very careful about affecting employer coverage. For example, his research on Medicaid expansions indicates

that over 50 percent of the new coverage is people who would have

been covered elsewhere.

Mr. MCDERMOTT. Mr. Chairman—— Chairman THOMAS. I would make a request both of Members

and of the witnesses that the gentleman’s 5 minutes became 9 minutes and 40 seconds. However—— Mr. MCDERMOTT. Mr. Chairman, could we have the numbers

that he has? I don’t know if they are available. He said he has a

set of numbers there that some of us haven’t gotten copies of.

Chairman THOMAS. If the gentleman has numbers and wishes

to share them——

Mr. MCCLELLAN. There is a CEA analysis that should be on the

table with the other documents for the hearing, and the——

Chairman THOMAS. If the gentleman’s staff would distribute

the numbers. Last week it was charts, this week it is numbers. I

do believe it is important that everyone have the material that we

are discussing.

And the Chair wants to make a point that one of the reasons the

Chair allowed the gentleman from California the additional 4 minVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HR\OC\A970.XXX pfrm04 PsN: A970
48

utes was because the questions he was asking were important, and

there was a line of questioning that he wished to pursue.

However, the Chair wants to make it clear that if in fact the tax

credit has some impact on the employer-based system, any other

modifications would also have impact on the employer-based system, and I believe Professor Gruber shows that modifications in a

significant fashion on Medicaid would have a negative impact on

the employer-based system. So if we are going to make a point, we

need to make it on a broad basis, that any enhancement of any

other program would obviously result in a modest negative impact.

Also, we have to remember that we are not dealing with health

insurance in a vacuum and that the Federal level is the one to

make all of the changes, because frankly it is primarily a Statebased question, and there are a number of States—this has guaranteed issue—there are a number of regulations at the State level

that require adjustment.

But the final point that the gentleman made I think is an excellent one. I talked about the fact that we moved from $2,000 to

$3,000. That is a move in the right direction. I also underscored the

fact that the employer-based system is open-ended. One of the

problems in this system, the Chair believes, is not that we are not

spending enough money on health insurance, it is that it is

maldistributed under the current structure.

And if the gentleman wishes to enter into a discussion of capping

the employer-based system at a reasonable amount and redistributing that to require this one to be slightly larger, a redistribution

of the current tax benefits for health insurance, I think you will

find we can move rapidly to a much more handsome program for

those who now get nothing under the system. The gentleman from

New York wish to inquire?

Mr. HOUGHTON. Yes, Mr. Chairman, very briefly.

You know, purchasing insurance—I would like to address this to

Mr. McClellan if I could—purchasing insurance in the open market, as you know, is not easy. You know, many are denied coverage,

restricted benefits, things like that. So I guess the question I have

is, will adding a large tax subsidy and increasing the size of the

individual market change any of this? In other words, will the cost

go down?

Mr. MCCLELLAN. Yes, sir, it should help significantly with the

costs of coverage available in the insurance markets generally. We

have some analysis of this in the CEA study that I mentioned. The

simple idea is that if you give people subsidies, those who are

healthier and not participating in the insurance markets now

would begin to do so. That improves the risk pool available for everyone and reduces the costs of coverage available.

In addition, all of the people who are already purchasing in the

individual market, as I mentioned, there are 16 million of them

today, would generally have access to more affordable coverage as

well. They would be willing to buy more generous plans than they

have now in the case when they receive no subsidy at all.

We provide big subsidies for employer coverage. We are starting

to provide subsidies for the self-employed. But this group gets none

of those subsidies, and that is one reason their benefit packages

49

tend to be less. By providing a new subsidy, we move this entire

market in the direction of more generous, affordable coverage.

Mr. HOUGHTON. Thanks. That helps. Thank you.

Chairman THOMAS. The gentleman from Washington wish to

inquire?

Mr. MCDERMOTT. Thank you, Mr. Chairman.

I sure hope that we can have a discussion about this tax credit

business and not get the volume up too high. Mr. McCrery and I,

like Mr. Stark and Mr. Armey, spent a lot of time talking about

this. And certainly if you believe that private sector answers are

the way to go, tax credits, you have got to look at them, one way

or another. I happen to be somebody who believes that ultimately

the government will provide the whole thing, but that is—we are

getting to that.

But when we were looking at this, and we couldn’t figure out any

way to do it without using community rating, now I don’t think

there is anybody in this room—there might be somebody so out of

touch that they would think the insurance industry is going to let

us or encourage us or be supportive of us going to community rating and demanding that, so that the individual market is anywhere

reasonably available. I just want to take an example that I know.

Boeing is in the middle of laying off about 30,000 people at the

moment. These are aerospace mechanics who make somewhere between $40,000 and $60,000, depending on unemployment. They

have a policy that is worth $7,000 under their COBRA, so if they

want to go out and buy a COBRA policy, they have $7,000 to come

up with. Unemployment benefits in Washington State, as in Massachusetts, are the best in the country, $450 a week. That means

you get $1,800 a month to live on, and you are looking at a premium of about $600 to pay for your insurance.

Now, that is the maximum. If you are from Mississippi, the aver- age unemployment benefit is $190 a week. That means $800 a

month to live on. And it is—I cannot see how you—I mean, that

is what I said once in this Committee. I don’t know if anybody has

ever been unemployed.

When you have rent—we had a hearing in Seattle about 2 weeks

ago, and a woman who was laid off, working for the Westin Hotel,

is living on—she is living on the minimum benefit, which is around

$800 or $900 a month in Washington. Her rent is $510 a month.

Now, she is raising two daughters on $800 a month, or trying to,

on that unemployment. And interestingly enough, if she works

three shifts at the hotel, she gets insurance. If she works two

shifts, she doesn’t get insurance. So everybody is now working two

shifts a week, if they are working at all.

And when you take a benefit of $1,000 a month or whatever you

might say, and then talk about a reasonable place to live, no subsidized housing, so you are now spending, in her case more than

half her unemployment check goes for her rent. And I said to her,

‘‘Well, how much do you spend on food?’’ And she said, ‘‘Well, I

spend $100.’’ I said, ‘‘$100 a month?’’ And she laughed and said,

‘‘No, no, no. $100 a week for the three of us.’’

So now you have got $400 of food. Well, maybe you can cut that

back. Maybe $50 a week, right? But there is no economic way you

can make this possible for people, even if you give them all the

50

money up front, if you are talking about $3,000. Now, Jim and I

never could quite figure out what the figure was, or what percentage you had to subsidize, but this in my view does not work for unemployed people. And most of the uninsured people are not making more than $6 or $7 an hour. Most of them are somewhere around $25,000. They

are not, they are also not in much of a position to go out and buy

in the individual market. They don’t even have the—well, COBRA

is really no advantage, because you get jumped up in how much

you get. How did you pick $3,000? That is my question. Was that a number backed in to how many people you think are going to use it?

Mr. MCCLELLAN. The $3,000 figure for our health

insurance—— Chairman THOMAS. The gentleman’s time has expired. If the

gentleman will respond briefly to the question.

Mr. MCCLELLAN. Yes. The $3,000 maximum figure for the

health insurance credit was done to balance the need to give access

to affordable policies for lower-income families with a desire not to

have too generous of a subsidy and disrupt employer coverage.

That did it. That led to a very large number of people getting coverage.

And I just would also add that we also support, as part of the

economic stimulus legislation, assistance for workers who have lost

their jobs to cover 60 percent of their health care costs, along with

other benefits like emergency grants to provide additional assistance, and no cap on those benefits.

Chairman THOMAS. The gentleman’s time has expired. The gentleman from California, Mr. Herger, wish to inquire?

Mr. HERGER. Yes. Thank you very much, Mr. Chairman.

Mr. McClellan, I have several. I want to continue on this same

line of questioning, but I want to allow you plenty of time to respond, if I could. As we are hearing, there are some that are concerned that the tax credits would not work because they believe it

is so difficult to get insurance on an individual basis. A series of

questions, if you could.

Are those criticisms valid? And how does the President’s proposal

address these issues? And, finally, are the policies in the individual

market affordable?

Mr. MCCLELLAN. Very good questions. Thank you, sir.

The President’s proposal includes a number of elements to make

sure that virtually everyone has access to affordable policies. As I

mentioned, we did a comprehensive analysis of all 50 States to examine the actual premiums available to people who are purchasing

in the nongroup, the individual market. And, again, for the vast

majority of people, the vast majority of low-income families would

get 50 percent or more subsidy for the cost of their health insurance. And according to many academic studies, that level of subsidies is substantial enough to induce and allow most of them, to

buy coverage.

Beyond that, we also include a number of other elements to help

workers or individuals who may need additional help with the costs

of their health insurance. We allow the credits to be used in highrisk pools which, as Chairman Stark mentioned, in some States

51

have very high premiums, but in many States where they are wellfunded, broadly based, Minnesota and others, there is good coverage available for not much more than the cost of a general premium, certainly for much less than the cost of a community rating

requirement State’s policy.

In addition, we also support the use of these credits in purchasing groups that States could set up. States often have the infrastructure in place through competitive approaches that they are

taking in their Medicaid and SCHIP programs to do this, or

through the employer plans that they have available to their own

employees, another option for getting affordable coverage to people

who may not have the best options available in the individual market.

Altogether, we think this is a robust approach to making affordable coverage available to everyone who is now purchasing or has

no other option besides purchasing in the individual insurance

market. We need to make those options for those Americans much

better, since people who are not offered employer coverage and

since low-income people who are not eligible for public insurance

have the highest uninsurance rates in the country.

Mr. HERGER. Thank you very much, and I think that is the

crux of what we are trying to do. We are attempting to help those

who are currently unable to have health insurance be able to acquire health insurance. And I want to thank you and the Administration for, I believe, making a major step forward in attempting

to do this.

And I believe at the same time when we have—the more individuals we have out shopping around, I think that helps bring the

prices down. It brings about more competition. So I think there is

a number of side pluses that we have, as well as what you are

doing. I commend you and I commend the Administration.

I yield back the remainder of my time, Mr. Chairman.

Chairman THOMAS. I thank the gentleman. The Chair wishes

to note that there obviously are a number of Members engaged in

the debate going on on the floor, and they may not be able to be

here for a presentation of questions. They do, however, have questions, and Members can always submit those questions in writing.

We will make sure they are available to you, and we would appreciate a prompt response to those questions that are submitted in

writing.

The gentleman from Wisconsin, Mr. Kleczka, wish to inquire?

Mr. KLECZKA. Thank you, Mr. Chairman.

A quick question of Mr. McClellan. Mr. McClellan, in your estimation, will the Administration proposal serve to strengthen or to

diminish employer-sponsored health plans?

Mr. MCCLELLAN. The Administration’s package of health care

proposals will strengthen the employer market. As I mentioned,

this particular proposal——

Mr. KLECZKA. In what manner? How?

Mr. MCCLELLAN. The particular proposal we are discussing

now is going to provide good options to people who do not have employer coverage. In addition, the Administration’s budget also supports a number of proposals to strengthen employer coverage.

52

For large employers, that are already offering a range of choices,

we want to make it easier for people who are choosing plans that

require significant out-of-pocket payments to meet those payments.

We want to give them tax-free options for paying out-of-pocket

costs, through rollovers of flexible spending accounts and through

broader availability of——

Mr. KLECZKA. Now, that is a totally inadequate answer. Let me

address, Mr. Chairman, the audience, the people watching us on

FAT NET, and that is the second camera over there. This is not

an issue that we usually talk in this Committee, like alternative

minimum tax (AMT) for businesses, right? And you can sit there

and listen to that, and you folks over here can sit and write that,

but that is for the next guy.

This is an issue which directly affects everyone in this room and

viewing this hearing who has employer-sponsored health insurance. And that is the plan where we are in a group, there are sick

people, there are healthy people, there are young people, there are

old people, and the employer says, ‘‘Okay, you pay 20 percent of the

premium, I’ll pay the balance.’’

And that is the plan that about 177 million Americans have. It

is a system that works. But we are being told today that we are

going to replace that system, and you are going to hear comments,

‘‘No, we’re not. We’re just taking care of the uninsured.’’ That is baloney. That is nonsense.

And I refer you to the comments of our esteemed Chairman, who

indicated on December 14th that the current employer-based

health care system is fatally flawed. Okay? He thinks it is broke.

I have got employer-sponsored health care insurance. Works fine.

Okay?

The other comment that you should write about, folks, is that

Mr. Thomas will offer a bill this year to jettison the entire employer-sponsored health care system. That is what this is all about

today. And do you realize what a boon it would be to the employers

if they didn’t have to pay your 80 percent health insurance premium?

If you thought the AMT, repealing the alternative minimum tax

for companies was bad, and making that retroactive, having the effect of giving IBM a check for $1.4 billion, if you thought that was

bad, take a real close look at this one, because this is better for the

employers than that measly check. And what is going to happen to

you folks? You are going to go on an individual basis to an insurance company and try to get coverage, versus the group plan

where, again, you have sick, healthy, young, old.

Now it is you alone. And just like in the National Basketball Association during halftime, they have this game called ‘‘one-on-one,’’

that is what we are doing. It is one-on-one, the insurance company

and you and your family. And who do you think is going to win

that battle?

Let’s look at the premiums being offered by

eHealthInsurance.com, and they will be testifying later, for the city

that I hail from, Milwaukee, Wisconsin. All right. On average, the

annual premium is going to be $3,000. The deductible is $1,000, so

now that is $4,000.

53

And what is covered? Maternity, optional. Prescription drugs,

many of you have it in this room, not covered. Health insurance is

for when you get sick, when you have an emergency. This policy

being sold in Milwaukee, Wisconsin, does not cover the emergency

room, one of the reasons you have it in the first place. And office

visits, you have got a sick kid, you want to take them to see the

doc, or yourself, you are not feeling well, office visits aren’t covered.

So know full well what we are doing today is not trying to cover

some folks in this country who are uninsured, because the reason

they are uninsured is, their employer don’t offer it, if they are

working, or they can’t afford it. Based on the e-plans that we are

sharing with you today, they are still not going to be able to afford

it.

And if you are unemployed and you are not able to have the government help you with some COBRA coverage, after your rent or

your mortgage payment, your car and your bills and your food and

your clothes for your kids, there ain’t no money left in that unemployment check for health care coverage.

So what we are doing today, my friends, is sounding the death

knell for employer-sponsored health insurance, and make no mistake about it.

Chairman THOMAS. The gentleman indicated that the Chair

held certain positions, and then represented what those positions

were. I think those that he appealed to, both visually and in the

written media, need to understand what it was that he was saying.

He said the Chair believes that the employer-based health system form of insurance is fatally flawed. The fatal flaw is that it

doesn’t cover everyone. The only people it covers are those that are

employed. And if you were going to build a system, which we are

now looking at, the ‘‘uninsured,’’ we are trying to deal with those

who now do not have an employer-based system. If we got everyone

health insurance through their employer, it still would be flawed

because there are some folks who don’t work.

Mr. KLECZKA. Will the Chairman yield?

Chairman THOMAS. No. The flaw is that the system is not a

basis that can provide universal coverage.

Second, the gentleman said that you have a group plan with an

employer and an individual market if you don’t. Who today, in trying to build a plan for all Americans, would say that we will allow

those who are able to get up and go to work every day, carry out

functions at the work place, the healthiest Americans get the

cheapest price for their insurance? But those who are not able to

get up every day and work have to pay the highest price for their

insurance. No one would build a plan like that.

If we were to propose that the group plan, the lowest rate would

go to the healthiest Americans today, we would be absolutely opposed to that concept. Any economist will tell you that when you

look at wages and fringe benefits, they are totally related. The

more fringe benefits, the less in wages; the more in wages, the less

in fringe benefits.

Mr. KLECZKA. Will the Chairman yield?

Chairman THOMAS. It all comes out of the employee’s pocket,

and that at some point——

54

Mr. KLECZKA. Will the Chairman respond to the quote that he

is going to jettison the entire—— Chairman THOMAS. At some point employees need to realize

that the benefits they are getting come out of their pocket, and that

at some point an educated consumer perhaps would like to make

slightly different judgments for themselves on health insurance, if

it were available, than the employer makes for them.

Those are the points I would like you also to include as you examine the system. What we are talking about here is a modest attempt to augment a flawed system. It immediately gets escalated

to blowing up the employer-based system. I find it ironic that when

we try to reach out, the response is not a different or better idea,

it is once again fearmongering in terms of hanging onto a

system—— Mr. KLECZKA. Mr. Chairman, I object to that.

Chairman THOMAS. That was and is fatally flawed.

Mr. KLECZKA. Mr. Chairman. Mr. Chairman, a point of order.

Chairman THOMAS. The gentleman’s time has expired. The gentleman from Louisiana wish to inquire?

Mr. KLECZKA. There is no fearmongering here. I am basing my

comments, Mr. Chairman, on your statements. And you didn’t respond in your last set of remarks to your comment about jettisoning the entire employer-based system,

Chairman THOMAS. The gentleman is out of order.

Mr. KLECZKA. That is what I am talking about. If that is

fearmongering, then you were misquoted or you misstated your

point.

Chairman THOMAS. The gentleman is out of order. His time has

expired. The gentleman from Louisiana wish to inquire?

Mr. MCCRERY. Yes, Mr. Chairman. I am going to begin my remarks, and I may have a question, I may not, but I am going to

begin my remarks on a positive note and end my remarks on a

positive note. I can’t guarantee the substance in between.

But I commend the Administration for your efforts to address the

problem of the uninsured in this country. I do think that the problem of the uninsured is regrettable because of the lives of people

who are damaged by their lack of health insurance. I think it is

also regrettable because I think it is one of the things driving us

toward a single-payer system. It is one of the things driving us toward a movement for the government to take care of everybody in

terms of their health care.

And Mr. Kleczka, I guess he has left, but he tries to set this up

as a battle between the employer-provided health insurance advocates and those who want an individual market. I believe it is a

much bigger and more important battle than that. I believe it is

a battle between those who want a single-payer system, they want

the government to provide health insurance basically for everybody, and those of us who believe in a private market for the delivery of health care in this country.

Both views are legitimate, and those who hold the views are good

Americans and they want to do what is best, I believe. Jim

McDermott is one of those, Pete Stark is another, who believes in

the single-payer system, and most countries in the world have

some sort of single-payer system, so who is to say that they are

55

wrong and I am right. I believe we in the United States can find

a better way to do it, to provide a better quality of health care for

everybody than Great Britain or any number, Canada, other countries that have a single-payer system.

But I believe that is the battle, and the thing that I find troublesome about the Administration’s proposal is that it is a toe in the

water. You are just going a little ways to solve the problem of the

uninsured, and you are using tax credits to do it, and I believe it

will fail. Yes, it will provide coverage for a few more people, but

the whole concept of tax credits and the individual market will fail,

and that will add fuel to the fire for a single-payer system.

So I would like a much more ambitious program. Yes, I am one

who thinks that the employer system is flawed and we ought to go,

big time, from employer-provided health insurance to individually

owned and provided health insurance. I think that is probably the

only way we are going to avoid a single-payer system. But if we

go just a little ways and we don’t do insurance market reforms to

make sure that the individuals have access to insurance, if we

don’t do reforms in terms of either government-mandated or government-provided information to the consumer so that they can

make educated, informed choices for their health insurance, then

we will fail, and the only outcome will be for the government to

take over the program.

So I am unabashed in my support of going toward an individualbased system and away from an employer-based system, and make

no apologies about it. I am afraid, though, that what the Administration has proposed is too little. However, I commend you for trying.

Mr. MCDERMOTT. Mr. McCrery, would you yield to a question?

Mr. MCCRERY. Sure.

Mr. MCDERMOTT. I have some analysis by M.I.T., the Massachusetts Institute of Technology, and the Kaiser Foundation that

says that under the tax credit proposal, more than two-thirds of

those using the tax credit would be people who are already insured.

Is that——

Mr. MCCRERY. I have no idea, but reclaiming my time, the biggest threat, I would say to Mr. Kleczka, to the employer system,

employer-provided health insurance system, is cost. Cost.

As cost continues to go up, and we are getting double-digit increases this year in employer-provided health insurance, as those

costs continue to spiral upwards, you are going to have fewer and

fewer employers choose to provide health insurance to their employees. And it is a choice. There is no government mandate. They

don’t have to do it, and as costs continue to go up, fewer employers

will provide it and the employees will have to pay more and more

of the costs for that health insurance. That is the threat to the employer-provided health insurance system.

So what are we doing about cost? In this proposal, not much. Mr.

McClellan has talked about, well, it should bring down premiums

because you are going to give them these good risks in the system.

I think that is a bunch of baloney. You are not going to get enough

of them in the system to do much good overall on premiums.

And my time has expired, and I could say a lot more. I need

about another 20 minutes or so. But, Mr. Chairman, with that I

56

will—and I wanted to end on a positive note. I do commend the

President for—— Chairman THOMAS. The Chair thanks the gentleman. Others

don’t feel constrained in that way. I appreciate the gentleman, but

others haven’t felt constrained in that way. The Chair hates to disrupt someone on a roll.

Mr. MCCRERY. I thank the Chairman for his consideration, but

in view of the few number of people who are here, I will wait perhaps for a second round. Thank you.

Chairman THOMAS. The gentleman from Minnesota wish to inquire?

Mr. RAMSTAD. Thank you, Mr. Chairman, and thank you both

for your appearance here today and the work you are doing on this

important problem.

We all know the statistics: 39 million Americans, or more, who

don’t have health insurance, 8 million of the uninsured being children. As Mr. McCrery just stated, an 11-percent increase in health

insurance premiums. This really comes home to me when I go back

to Minnesota every weekend.

I know too many people in Minnesota who are unemployed because of the Bin Laden recession. I know too many families who

are hurting. I know too many adults and children without health

insurance in Minnesota, and they live in fear, true fear; fear of getting sick, serious illness; fear of getting injured and not having

health insurance. These people live in real fear, and they express

these feelings to me only too often.

So I applaud the Administration, the President, those of you who

are working with him in the Administration to address this problem. We have let it linger too long, the problem of displaced workers and the uninsured.

The proposal that we are talking about today, one of the positive,

very positive aspects I believe is the fact that it is a large umbrella.

If you lose your job, you are still unemployed, you are covered. You

don’t lose your health insurance. Certainly Medicaid is not the answer. Forcing millions onto welfare would only discourage the unemployed from working and threaten welfare reform.

I want to ask you—and again picking up where the gentleman

from Louisiana left off, because I share his concerns—I certainly

understand and agree with the concept of refundable tax credits in

the way you are proposing it, the way we have tried to advance it

here on the Committee. What about, to answer some of the criticisms affecting those people who are indigent, what about doing

what the first Bush Administration did, not only including refundable tax credits but also vouchers for the uninsured who are indigent?

Mr. MCCLELLAN. Good question, Congressman. Just to highlight that many people who are low income or have limited means

would be helped by our health credit proposals. The proposal for

displaced workers would give immediate assistance to the families

that you mention that you are seeing back in your district, who

have lost their jobs and are struggling to continue their health insurance or having to go without it.

All of them, all of them who have lost their jobs involuntarily

would be eligible for our displaced worker credit. In addition, peoVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 E:\HR\OC\A970.XXX pfrm04 PsN: A970
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ple who have low incomes would be eligible for up to $1,000 for

each individual and $3,000 per family under our health credit proposal.

Beyond these proposals, the President also has supported

strengthening every other aspect of our health care system. It is

not a one-size-fits-all health care system.

Mr. RAMSTAD. Pardon me. Just to interject, just to digress, so

that means people with no tax liability whatsoever—— Mr. MCCLELLAN. Absolutely, would get the full amount of the

assistance, so people—— Mr. RAMSTAD. Which is tantamount to a voucher.

Mr. MCCLELLAN. I don’t know if I would call it that, because

we are planning on having them, you know, just send in a check

for their portion of the premium, but it amounts to a direct payment for a large part of their health insurance costs.

Mr. WEINBERGER. Can I just add, Congressman Ramstad, the

way that it is structured with the advanceability gives real-time

money so that these individuals when they go pay their premiums

will get a subsidy amount that they will include with the premium

payment, so they will pay a lower cost for those premiums. So that

is advanceable. If they don’t want to take it that way or for some

reason they would also like to take it on their tax return, they are

also allowed to do it that way.

Mr. RAMSTAD. Well, I think this makes eminently good sense.

The other element of the plan that is very appealing, the flexible

spending accounts, the FSAs, I think again a very, very useful way

to approach this problem. Could you just briefly elaborate on the

FSAs? I think it is important to explain.

Mr. MCCLELLAN. Sure. The flexible spending accounts basically allow individuals to roll over $500 or to take that $500 out. The

purpose of doing that, of course, is currently a ‘‘use it or lose it’’ plan. So at the end of the year you find individuals making some

expenditures they might not otherwise want to make or need to

make, in order to use up that money in the account.

And so we give them the ability to roll this de minimis amount

over into a future year. It also, we hope, will increase the take-up

rate, because then people don’t have to try and target the amount

that they want to put in these flexible spending accounts to the

exact dollar that they otherwise would expect to spend.

Mr. RAMSTAD. Well, thank you very much. Just a final brief

comment. You know, some of the hyperventilating notwithstanding

here today, I truly hope we can work in a bipartisan, pragmatic

way and do something about this other than simply verbal exchange this year. There are a lot of people hurting and we need to

address the problem. You are addressing it. Thank you. I yield

back.

Chairman THOMAS. I thank the gentleman. The gentlewoman

from Florida wish to inquire?

Mrs. THURMAN. Thank you, Mr. Chairman.

Welcome, and we are glad you are here. I am going to go through

a scenario, and I will tell you it came from the Center on Budget

and Policy Priorities, but I think it sets it out in a kind of a way

that Members might understand a little bit of what is going on and

some of the concerns that we might have.

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And prefacing that and saying that I probably, like has already

been mentioned, was one of those that thought we ought to give tax

credits to farmers, tax credits to the self-employed and those. I

mean, I think we all have looked for ways to try to bring in the

uninsured into a system that works for them. But I am very concerned that we are disrupting something that is already taking

place in the marketplace, and really just looking at one system of

where we just give it to people outside of the system or move outside of the system, instead of closing some gaps that we have in

the system that is already there.

So the story is, if you assume a company provides a comprehensive health insurance play to its two employees, John is 28 with

a healthy family of three. The cost of the family coverage plan for

John through the employer-based system would be $3,000. Mary is

a 45-year-old woman with a family of three that has a history of

chronic, serious medical problems. The cost of a plan for Mary is

$12,000.

However, because both workers are in the same health insurance

pool, the health insurance cost through the company averages to

$7,500 a year. Since the company subsidizes 80 percent of the cost

of health insurance, it would contribute $6,000 per year for the cost

of health insurance and the workers would pay $1,500 a year.

If John instead buys health insurance for his family in the individual market, he might be able to purchase a policy that costs

about $3,600. It is a little bit more than the cost of a plan in the

employer-based system, since individual insurance is usually more

expensive than the employer-based coverage for the same level of

coverage. Because he and his family are in excellent health, they

can obtain a policy in the individual market.

Under the Administration’s proposal, with a tax credit of $3,000, John can save $900 a year by dropping his employer-sponsored

plan and buying a plan in the individual market. His net cost is

$3,600 minus $3,000 or $600, while he currently pays $1,500 for

his employer-based.

But if John drops out of his employer’s plan, then only Mary is

left in her company’s health insurance pool, and the average cost

of insurance for the firm rises from $7,500 to $12,000. If the company continues to subsidize at 80 percent of the cost of health insurance, the employer contribution toward her insurance would

rise to $9,600 because John is no longer there and available to

bring the average cost of insurance down.

Accordingly, Mary’s premium would rise from $1,500 to $2,400.

It is likely that Mary would be unable to afford the higher premium and continue to participate in her employer’s health insurance plan. She and her family would be eligible for a $3,000 tax

credit to buy health insurance in the individual market, but because of the medical problems obviously that would not work.

And just in a note, there in Florida you might know they closed

their high-risk pool. They were $100 million in deficit. Mary may

live in Florida. She has no place to go at that point.

But on the other hand, if Mary’s company may be unable to increase its contribution to the cost of health insurance, it might just

balk at increasing the company contribution by $3,600 per year,

making it more likely that Mary would be unable to afford the emVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 E:\HR\OC\A970.XXX pfrm04 PsN: A970
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ployee contribution, or decide against offering health insurance altogether, which the company could do, knowing that Mary has a

tax credit available to purchase coverage in that individual market.

In this very simple example, John has used his tax credit to buy

insurance in the individual market, but since he already had insurance, there is no net reduction in the number of uninsured people.

On the other hand, it may become harder for Mary.

I know that is a long thing, and I am sure that at some point— so the question is, you know, I understand why you are trying to

do what you are doing, but why would you not open this up, instead of being disruptive to the total market, to the businessman?

Why would you not put the incentive with the businessman as well

to offer that insurance and to give that tax credit? Why would we

just do it on an individual basis? I am very concerned about these

kinds of stories that we are going to come back and hear because

we have disrupted a market that is working.

Mr. MCCLELLAN. We totally agree with you about the importance of closing gaps in the system and strengthening all parts of

the system. Just one factual point on that example you gave. John,

the employee who would go outside of the pool and would take this

additional income, would have to pay taxes on that income, so it

is going to be worth substantially less. And, unless he was a very

low-income worker, he is not going to get the full value of this tax

credit.

So the result of that is that there isn’t very much crowding out

of employer coverage. Around 1 percent of employees who have

health care coverage now through their employers would take this

option instead. It is a very small part of the pool, and that is because there are such big tax subsidies through the tax deduction

for this unlimited into employer coverage, and there also are the

benefits of employer contributions and the pooling that employers

can provide.

In addition to implementing this proposal, however, we agree

with you that we ought to strengthen employer coverage. We have

proposals like the flexible spending account proposal, so that people

like Mary would have to pay less after tax in their out-of-pocket

health care cost. We have other proposals——

Mrs. THURMAN. But we already have a cafeteria plan. I mean,

we can do that today.

Chairman THOMAS. I thank the gentlewoman for showing some

of the flaws in the current system. The gentlewoman from Washington wish to inquire?

Ms. DUNN. Thank you very much, Mr. Chairman. And gentlemen, thank you for coming today. I have appreciated very much

the work that we have all done together over the last year, the 2-

hour meetings that we have done through many, many weeks, and

I think the consistency of your being available to answer our questions and work with us on a bipartisan basis needs to be noted for

the record.

I wanted to go back to something Mr. Kleczka was talking about.

The President and other folks who are supporting tax credits to reduce the uninsured I think are on the right track, but I really

would like your opinion on whether you believe that these tax credits might cause some employers to drop their health care coverage.

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And if you believe that that is where the incentives are headed,

what can we do right now to prevent that sort of erosion?

Mr. WEINBERGER. Congresswoman, as I think was discussed,

the purpose and aim of this credit was to have minimal disruption

of any insurance offered in the employer-provided market. When

you expand any incentive to individuals, there is a risk that some

might leave an incentive that they have somewhere else, like

through the employer-provided system. The same would be true if

you expanded Medicaid or any other type of proposal to cover people who currently don’t have benefits or try to aim at that market.

As we suggested, out of the 170 million people who are in the

employer coverage—that was the number, I think, that Mr. Kleczka used—our estimate is that less than 1.5 million or less than, 1

percent, would actually leave the employer market. The vast majority of people that would take the benefit of this incentive, again

which is aimed at those people who don’t have the benefit of employer coverage in these cases, are individuals outside that market.

And so, obviously this is an issue we have got to watch. It is important to look at how the effect of these individual incentives will

affect the employer market. But we designed this in a way that it

is targeted to those individuals who would least likely be in a position to leave the employer-provided plan.

Ms. DUNN. Good. That is important for us to note.

I wanted to ask you a question having to do with my part of the

country. I am from the Seattle area, and as you know, many folks

out there are currently losing jobs, work for Boeing, Northrop,

other companies, and so we are not in a great position right now.

In fact, we are number two on the list of the highest unemployment numbers in States around the Nation, after Oregon.

As we talk about the uninsured, I would like for you to reiterate

in a way that is easy to understand, the difference between your

policies and how you would approach the problems of the uninsured when it comes to coverage, and the unemployed.

Mr. MCCLELLAN. Can I highlight proposals that I think would

be of great assistance in the immediate future for people in your

district who have lost their jobs? And you are right, there are a

huge number of them. The President spent some time out on the

West Coast lately, and has seen firsthand how important it is that

we do something right away to help them.

Our displaced worker credit could be implemented within a few

months, and as soon as it is implemented, those workers would

know that they have got help on the way. They will know that premiums that they have to pay now are going to get reimbursed at

the end of the year, 60 percent of the premiums will, and they will

know that within just a few months they will able to pay much

lower costs for continuing their health insurance because they can

use the advanceable credit.

Sixty percent of their costs of health insurance, while they are

buying it, would be paid directly by the credit. And this would enable the vast majority of people, not only in your district but

around the country, who have lost their jobs to continue health insurance coverage, whether it is COBRA coverage if that is what

they prefer, or mini-COBRA coverage if they are in a State that

has similar laws to COBRA, that are not the same as COBRA but

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that allow people in small firms to continue their coverage, like

Washington does.

And it would also allow people who are purchasing coverage outside of their employer. Many displaced workers do not have employer coverage to begin with. That is 10 percent of the non-elderly

with health insurance today don’t have employer coverage to begin

with. They would get help.

So all of these displaced workers would get help quickly, without

the need for further State legislation to come up with matching

funds and set in place some new kind of unprecedented Medicaid

expansion, and without the need for mandates on employers like

Boeing that are facing enough problems right now without the government telling them yet more things that they have to do in a difficult economic time.

Mr. WEINBERGER. Congresswoman, could I just underscore one

thing that Mr. McClellan said, I think is important? Because the

proposal we have for the displaced worker would help those at Boeing, but it would also help all the small businesses in your State

as well. And that is one of the concerns we had about the COBRA

credit. Where small businesses generally don’t provide COBRA,

they would not qualify for this immediate benefit.

Ms. DUNN. I think that is very important, Mr. Chairman, and

I think that needs to be reiterated, this business of being willing

to cover COBRA payments that folks get when they work for big

businesses, but the fact is, the small businesses can’t provide that

sort of coverage. For example, if you work for a company that has

fewer than 20 employees and you try to get COBRA, as I once did,

you can’t get covered for anything. How do you suggest that we

incentivize small businesses to provide affordable health insurance

coverage?

Mr. MCCLELLAN. We have a number of proposals in our budget

to help small businesses provide affordable coverage. One of them

is our association health plan proposal, which would make it possible for small businesses to pool together just like large corporations do to offer a lower-cost range of health insurance options to

their employees. This is a proposal that is strongly supported by

the small business lobby, would enable groups like the Chamber of

Commerce, other organizations, to serve as a conduit for health insurance for those.

Chairman THOMAS. The gentlewoman’s time has expired. The

gentleman from Georgia wish to inquire?

Mr. COLLINS. Yes, sir. Thank you, Mr. Chairman.

You know, I very well understand the intent of what you are trying to do with your proposal on the tax credit. However, I have a

real problem with the tax credit provisions, because as you issue

a credit on one side, someone has to make it up on the other side

if you are going to have a balance in your Treasury. And, two, to

me you are creating an entitlement within the Tax Code, one that

is means tested, based on income.

So you have a situation where you are creating an entitlement

for certain incomes to be able to get a credit, a refundable credit.

Then you have others who will be paying the tax that covers that

credit, based on a means test. I don’t like that at all.

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It has been talked about the employer-based insurance, where

the employer provides insurance, versus privately purchased insurance. There is a real difference in employer-provided, whether it be

all of the premium or part of the premium for the employee, because the employer gets to deduct that from the cost of operation.

But if it is privately purchased insurance, the employee does not

get to deduct from their taxable income.

I will give you an example of a small business in a little town

in Georgia. It is a sub S corporation, three employees. Two of those

employees actually have other jobs also, and those two are covered

under group insurance or insurance from the other employers. One

employee is covered with a private policy paid for by that sub S,

but at the end of the year the premium for that policy has to be

added to the income of that employee, no deduction anywhere.

And based on your means testing, your entitlement program that

you are setting up through the tax credits, his income of he and

his wife would just exceed what you are trying to do, so he has no

assistance at all, but he will be paying additional income tax to

help support what you are doing. I think you are totally wrong in

your approach with the tax credit. I think what you need to look

at is how you can assist an individual for their income, as far as

a deduction for the cost of premiums.

You know, there are all types of programs out there when it

comes to health care. Some we are embarrassed to participate in

because it may make us appear to be indigent or it may make us

appear to be poor. But I am also concerned that we put in place

programs that disincentivize a person’s will to work because of increased, increased, increased government programs that offset that

will.

I would be very careful as to how I took an approach to this situation with tax credits. I am afraid the tax credits will come back

to haunt you in the end. Thank you.

Mr. MCCLELLAN. Representative, we certainly appreciate your

caution. I think a number of the comments here at the session

today have indicated how difficult and careful we must be in approaching the problem of uninsurance, and also how there is not

just a one-size-fits-all solution that is going to address every gap

and problem with our health care system.

We do think that health credits can provide important assistance

for some individuals who are having trouble purchasing individual

coverage today, but we don’t pretend that this is our whole solution

to the problem of uninsurance. We have a range of other proposals

that will strengthen employer coverage and that will also help people like the individual you describe get more affordable coverage.

For example, he could potentially be eligible for our health account proposal. This would allow him to deduct his out-of-pocket

payments for health care and to get better protection at a lower

cost for seeing the doctors that he wants and getting the treatments that he prefers. This is another part of our entire agenda on

health care coverage. So we would very much like to take steps to

help that kind of individual at the same time as we are helping

lower-income families.

A final point on this, on the refundable credit, is that it is not

based on your current income. The advanceability is based on prior

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year’s income, so that we are encouraging people to get help when

they need it most and then to get back into a good job that can provide them coverage as well.

Mr. COLLINS. Young man, take your blinders off and the plugs

out of your ears and listen to what people are trying to tell you.

Government can’t do everything for everyone. It won’t work. You

are digging a hole that we can’t get out of. We can’t financially

cover everything that you want to do.

We are debating campaign finance reform today. The biggest

problem in this town is, we use the Treasury to develop programs

for voter base, and we are digging the hole deeper and deeper, and

what you are doing with this is, you are using two shovels instead

of one.

I was at church Sunday. The pastor says, ‘‘Man who doesn’t

work, doesn’t eat.’’ Don’t put in place disincentives for man to

work, that the government is going to take care of everyone from

the womb to the tomb. It won’t work, fella. Take your blinders off

and the plugs out of your ears and listen to what people are trying

to tell you, people who are paying the bill. That happens to be my

business. That one person happens to be my brother-in-law. Thank

you.

Chairman THOMAS. I thank the gentleman.

Several Members have indicated they would like a brief second

round if possible, and if we can be brief in our questions and brief

in our responses, we might be able to accommodate the Members.

The gentleman from Washington?

Mr. MCDERMOTT. Thank you, Mr. Chairman.

I have been sitting here thinking about my aerospace mechanic,

so I am back to him. He is now unemployed, and he goes down to

the unemployment office, and I heard you say that he fills out his

application for his unemployment and while he is there, he fills out

an application for some kind of a tax credit for his health insurance.

Now, if he exercises his COBRA option and wants that money

applied to what he already has with Aetna or whoever it is, you

would send the money from the government directly to Aetna?

Mr. MCCLELLAN. Yes, sir, that is correct.

Mr. MCDERMOTT. And would you wait until his—where would

he send his part of it? Would he have to send it to Aetna?

Mr. MCCLELLAN. He would send, just like he would do otherwise, he would send his check to the insurance company for his

part of the premium, and the credit would make up the difference.

Mr. MCDERMOTT. So if he missed a payment and it ended his

insurance, how would you know when you should stop sending your

checks to Aetna because he isn’t covered anymore?

Mr. MCCLELLAN. Well, there would be a reconciliation mechanism in place to make sure that the employee is still eligible for

unemployment insurance and also is still making the actual payments on his health insurance. The insurance company couldn’t get

reimbursed by the government for a policy that they are not providing.

Mr. MCDERMOTT. So that would be one way you would get it

back. Now, let’s suppose he gets down the road and something happens and he says, ‘‘Wait a minute, I can’t afford $7,000 a year, so

64

I’ve got to reduce my costs here, and the jobs don’t seem to be coming back, so I want to go out and get one of these programs on

eHealth or whatever I can find somewhere for $3,000.’’ Now, can

he come back and change it with you?

Mr. MCCLELLAN. Yes.

Mr. MCDERMOTT. And so you are perfectly willing to allow him

to take a lesser coverage?

Mr. MCCLELLAN. Well, our goal is to help the people get the

coverage that they most prefer, the coverage that best fits their

needs. So if individuals are not eligible or are not offered good

COBRA options, then they would be able to use the credit for other

coverage choices, as well.

Mr. MCDERMOTT. So if this, you are essentially saying that if

this chart from eHealthInsurance is anywhere close to correct, you

would be willing to pay for a policy where there was no guaranteed

set of benefits, just you are going to send a premium out for $3,000

for something that might not cover the emergency room or doctor’s

visits or anything else.

Mr. MCCLELLAN. There are some coverage requirements in the

proposal and in the bill that passed the House, and they are consistent with a broad health insurance plan. Again, we think it is

in the best interest, especially these workers, as you mention, they

are on limited income, they are between jobs, and they need coverage that fits their unusual current circumstances. So we would

prefer to put our faith in them to choose the coverage that is best

for them, subject to the health insurance standards in the bill.

Mr. MCDERMOTT. One thing I didn’t understand, though. You

said the bill that passed the House had some coverage requirements. Which bill was that?

Mr. MCCLELLAN. This was the economic stimulus bill.

Mr. WEINBERGER. Yes, you are referring, Congressman, to the

Displaced Worker Credit which was part of the stimulus bill, so

that was the one.

Mr. MCDERMOTT. And there was coverage requirements in

there?

Mr. MCCLELLAN. Yes, there were HIPAA, Health Insurance

Portability and Accountability Act 1996, standards of coverage.

Mr. MCDERMOTT. Where were they? I mean, does anybody

know?

Chairman THOMAS. Yes, there were standards that are currently in the law—— Mr. MCCLELLAN. Accepted benefits that are currently in the

law, in HIPAA. It’s the same as current law, correct.

Mr. MCDERMOTT. So they covered major medical and doctor’s

office and so forth?

Mr. MCCLELLAN. They are the standards in law for private

health insurance premiums, for private health insurance plans.

Mr. MCDERMOTT. But that was only a guaranteed issue question, wasn’t it? Were there actual standards beyond that in terms

of what had to be covered?

Mr. MCCLELLAN. The HIPAA legislation describes what constitutes a health insurance plan for purposes of the legislation. It

excludes, you know, disease-only plans, narrow cap benefit plans,

things like that.

65

Mr. MCDERMOTT. Okay. Thank you.

Chairman THOMAS. The gentlewoman from Connecticut wish to

inquire?

Mrs. JOHNSON OF CONNECTICUT. Just briefly, I want to put

on the record very clearly because I think we forget, this Committee, this Nation provides $118 billion in subsidies to employerprovided health plans. There is no one listening to this hearing

that has an employer-provided insurance program that isn’t Federally subsidized, and a lot of us only want that same subsidy to go

to Mac Collins’ brother-in-law and people who don’t have health insurance.

Under my bill if you are at certain incomes it is a credit, at higher incomes it is a deduction. Everyone ought to have the same access to the subsidy of health insurance that we currently provide

to people who work, have employer-provided plans.

Now, I do not agree that we should get away from the employerprovided program. I like that. Employers do a lot of good bargaining, a lot of protection. You know, there are some good aspects

to that. And I like the Administration’s emphasis on allowing new

groupings, so individuals can use their tax credits or deductible

status to move into new groupings.

But I want to—I am going to assume you are going to answer

this question in the affirmative, because I want to really get to the

other question. I want you to take a look at my bill that does provide tax credits and then deductions. I know we can’t afford it now,

but it is the direction we need to go.

And then I want to just point out, in terms of the uninsured, and

actually in terms of the uninsured as a general problem, Mr.

McDermott proposed a bill with a 30 percent credit with a lot of

Democrat cosponsors from this Committee.

What we are talking about for the unemployed, and this is what

I want, really want to get to, on the floor we have an opportunity

to provide a 60 percent premium subsidy, double the subsidy that

has ever been proposed and more generous than my tax credit, I

believe, for unemployed people without health insurance. This is a

60 percent premium subsidy, so this is a powerful assist to the uninsured and unemployed. And I just hope that we won’t lose track

of what we are doing here.

And what I want to ask you is, what is the comparison between

our 60 percent subsidy for essentially all the people that are unemployed, versus their subsidy for just those who have COBRA or

have Medicaid coverage? Now, a lot of people who are working

don’t want to go on a welfare program, and Medicaid is a welfare

program. And a lot of States can’t afford to increase their welfare

spending right now anyway.

So this is a big difference, and we are going to be out there on

the floor this week or next week. We are going to have the chance

to vote to give people who are struggling with unemployment the

opportunity to have a 60 percent premium subsidy, whether they

work for a company who offers COBRA or whether they don’t. And

I think you need to give us a little better insight into the power

of the proposal you are recommending we work on, that we have

developed, versus the alternative that is going to be on the floor,

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that is going to help many fewer people with a much less powerful

subsidy. Now, that is my question.

Mr. MCCLELLAN. Congresswoman, we couldn’t agree more

about the need for bold action right now, and we think the proposal

that the House has developed, has already passed once, ought to

become law to provide this kind of assistance to people who have

lost their jobs. We think it is a far more effective proposal than others that have been put forth.

The President really laid out two goals for us on what our objectives should be in providing assistance with health care costs for

workers. We need a proposal that can be implemented quickly, we

need a proposal that can be targeted to all people who have lost

their jobs involuntarily, and this proposal wins on both counts.

COBRA subsidies are not only difficult to implement because

they impose new mandates on businesses, they are also poorly targeted to people who have lost their jobs involuntarily. Most of the

people who would be eligible and most of the subsidies under the

COBRA proposal would go to people who did not lose their jobs involuntarily.

The Medicaid proposals are not the right medicine for people who

want to continue their coverage, their private insurance coverage,

but don’t happen to be eligible for COBRA. It cannot be implemented quickly. As Chairman Thomas pointed out, most States are

not in a position to expand coverage to populations that are not

their core Medicaid populations, the low-income families and lowincome seniors that really do need help now, and that we really

want to help the Medicaid and SCHIP programs focus on.

So this is a far more effective way to get help to people who need

it quickly, and we appreciate your support for seeing it become law.

Mrs. JOHNSON OF CONNECTICUT. Thank you.

Chairman THOMAS. The Chair notes that we are under second

bells on a vote on the floor. Any other Member wish to inquire

briefly? The gentleman from Louisiana?

Mr. MCCRERY. Yes, Mr. Chairman, just to continue on my concern about the cost of health care, and I know that you all have

thought about that because I have had discussions with you about

health care costs and where they are going, and what we can do

to try to stem the upward spiral of health care costs. And I notice

that in your tax credit proposal, not for the unemployed but in general, you do cap that by income, so you limit that subsidy to lowincome folks, or really not low-income folks, but at least you cut it

off at $60,000 for a family, and that is a start.

The fact is that the tax subsidy that Mrs. Johnson spoke about

for employer-provided insurance is not the only subsidy that those

employees get. They also get a subsidy from their employer. So not

only do they get a tax break, and depending on your tax bracket,

I mean, it could average say 25 percent that you are going to get,

a cut on the cost of the premiums from the tax subsidy, but you

are also getting 50 percent, 75 percent subsidy from your employer.

So the employee that is getting that tremendous subsidy for his

health insurance has no idea generally what it costs, really, so he

has no price sensitivity in the marketplace. He doesn’t care generally how much health care costs. He knows it is covered, so he

gets it.

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When you subsidize something, you get more of it, and you are

going to subsidize more health insurance so we are going to get

more health insurance. But you are also subsidizing health care,

and you are going to get more health care when you subsidize it

more.

I am just wondering, since the Administration put in your proposal some cap here for your general tax credit, did you consider

and would you consider some cap on the tax subsidy that we provide, so that we can start to bring some price sensitivity back into

the marketplace for health care?

Mr. WEINBERGER. Well, we have not, as you know, designed

this proposal to look at the employer system. We have designed

this proposal to reach out to those people who are generally not

covered by the employer system, and the cap that we have was

aimed at actually trying to minimize to some degree what others

have raised, which was having employees leave the employer market in this circumstance.

What you are talking about, Mr. McCrery, obviously is a much

broader reform proposal, and we are certainly willing to sit down

and talk about that, but this proposal was not designed with that

type of a thought process in mind.

Mr. MCCLELLAN. I would also like to add that the President

certainly shares your goal of helping make sure that people have

affordable coverage options and they are not just given, you know,

one plan that provides very generous coverage and no other

choices. The President laid out on Monday, in his speech about his

agenda for the future of health care, the importance of giving all

Americans a range of choices about how to get their coverage, and

it is through that kind of competition that our private health care

system can find innovative and more cost-effective ways of delivering coverage. We need to encourage choice and competition. We

need to encourage better information. I think your ideas go very far

in that direction.

Chairman THOMAS. The Chair does find it ironic that the Administration, as the way you put it was that you put a cap on a

provision for those who do not have insurance so that we wouldn’t

undermine a system in which there is no limit on the availability

and therefore, as the gentleman from Louisiana said, no discretion

in price sensitivity. Some folks find that pretty ironic.

The Chair would indicate that we have a short time on this vote,

but thank you very much for your attendance and your indulgence.

The second panel requires some degree of electronic set-up, and to

allow that to occur, the Committee will stand in recess until 1:30,

at which we will then enter into the presentation and a discussion

with the second panel. The Committee stands in recess.

[Recess.]

Chairman THOMAS. The Chair thanks the Members of the

panel. Members will be coming back from the vote. As you may

know, there is a degree of construction going on, and we are currently running a gauntlet trying to get back and forth.

This panel will consist of Dr. Stuart Butler, Vice President, Domestic and Economic Policy Studies, Heritage Foundation; thanks

for being with us. Iris Lav, Deputy Director, Center on Budget and

Policy Priorities; Jeff Lemieux, Senior Economist, Progressive PolVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00071 Fmt 6633 Sfmt 6602 E:\HR\OC\A970.XXX pfrm04 PsN: A970
68

icy Institute, and Vip Patel, Founder and Chairman of

eHealthInsurance, Inc., in Sunnyvale, California.

Due to the antiquated wiring in this room, any attempt to go

electronically produces a reverb back through the system. And so

to assist Members, although logically we would probably like a general discussion and then some specific examples, the Chair will request that the other Members allow us to allow Mr. Patel to go

first, so that if there are any questions of his presentation, we can

conclude that and then perhaps turn that system off so that Members would not get the reverberation back through their microphones.

Each of you have a written statement. We will accept the written

statement for the record, and within the time allowed, you may respond to us in any way you wish to present your arguments or position. Mr. Patel, nice to see you again, and would you please begin

the panel?

STATEMENT OF VIP PATEL, FOUNDER AND CHAIRMAN,

EHEALTHINSURANCE, INC., SUNNYVALE, CALIFORNIA

Mr. PATEL. Mr. Chairman, Mr. Rangel, Mrs. Johnson, Mr.

Stark, and Members of the full Committee, over the last 5 years

the process for individuals seeking to purchase their own health insurance has gone through a dramatic positive transformation, and

in these next few minutes I would like to contrast the old, inefficient way of purchasing individual health insurance, a process

which took weeks, to a new way of shopping online, a process that

could take as little as an hour and in which the consumer is much

more empowered.

The old way versus the new way. First, in just finding a broker,

many people don’t know where to go to find a broker. In the old

way, people might turn to their friends for a referral and possibly

schedule a meeting with a broker days later. In this new way, people search on Yahoo or their favorite search engine. They are presented with a wide variety of resources for health insurance shopping, from insurance carriers themselves to thousands of health insurance brokers with Web sites, to national marketplaces like

www.ehealthinsurance.com.

In this example I am entering the zip code of Congressman

Stark’s district in California, which also happens to be the headquarters of eHealthInsurance. A full list of policy options will be

presented without entering any personally identifiable information,

and only the ages of those to be covered, so let’s input a family of

three. Please note the convenience of Web sites operating around

the clock, 24 by 7, and you can talk to a licensed professional on

a toll-free number.

Number two, comparison shopping across a wide range of insurance companies. In the old way, some brokers specialize in only one

or two insurance companies. For example, a broker may emphasize

a policy from Blue Shield because they could win that special trip

to Hawaii, and that may not be in the optimal interest of their customer. Hence, a consumer may need to see several brokers to explore a broad selection of options. But in this new way, consumers

can explore a wide array of options with one stop shopping. Take

69

a look at this first column here, a highly competitive marketplace

with a number of insurance companies fighting for your business.

Number three, getting an unbiased look at all the price alternatives. In the old way, a broker may ask about your employment

and budget to qualify which insurance products to recommend to

you, and of course the higher the price, the more commission made

by the broker. But in the new way, the full range of insurance

products of each company is presented to the consumer, and at

eHealthInsurance this is done by showing the lowest price all the

way to the highest price products, and I think here there is a 7X

delta between the lowest and the highest. We believe consumers

want unbiased presentation where they can sort by factors important to them, and here we will sort by deductible.

Number four, obtaining a clear, apples-to-apples comparison of

what you are buying. You know, health insurance is full of confusing, industry-specific jargon, and in the old way comparing options is made even more difficult when you are only able to see the

benefit information across a few policies on several different pieces

of paper. But in this new way there are online glossaries to instantly explain unfamiliar terms, such as the definition of an HMO

or a PPO.

And then most powerfully, with the click of a few buttons, a

number of different policies can be compared by a wide range of

features for apples-to-applies comparison. Consumers can pick from

HMOs, PPOs, MSAs (medical savings accounts), indemnities,

etcetera, but in this example let’s narrow our focus to comparing three different PPOs that all have a $1,000 deductible, that all

have 20 percent co-pay, to see what really makes them different,

and I think the details will be easier to see in the handout that

you have been given.

But in this example we find that if you are anticipating the need

for prescription drugs or maternity care, maybe the Health Net or

the Blue Shield products may be good, but if you are a single

healthy male, the Blue Cross PPO could be the best value. However, the deciding factor could be whether your favorite doctor is

part of the plan, and in most cases health plans make their physician directories available right online.

Finally, in the old way versus the new way of completing an application, it is no surprise that applying online gets the consumer

health insurance faster than communicating by mail.

Now, every day people approach eHealthInsurance with the

misperception that health insurance is prohibitively expensive, but

when they see the range of options, starting with some with very

low prices, many of them find that they can in fact afford health

insurance. And of course many more people could afford health insurance if the government were to provide economic assistance.

No one solution will solve the entire problem. Although some of

the unhealthy and impoverished uninsured need specific solutions,

I do believe honestly that tax credits represent one of the most

impactful solutions for the working uninsured and the newly displaced uninsured, which together make up over two-thirds of the

40 million uninsured population.

eHealthInsurance just performed an analysis of 20,000 single

policies sold, not just random quotes as you might find in some of

70

these documents, the actual sold policies in the United States representing 93 percent of the U.S. population. So this new data

shows that the average price of a policy was $159 per month or

$1,900 per year, with the majority of these policies carrying less

than $1,000 deductible.

And even more revealing is the average price by age bracket

compared to the percentage of the uninsured in each age bracket.

If for example under the Bush proposal you were able to offer a

$1,000 tax credit, then two-thirds of the uninsured, those 34 and

younger, could get a policy for the balance close to $50 per month,

and 80 percent of the uninsured, those 44 and younger, could get

a policy for the balance of $100 a month.

And with the recently passed House proposal, where the government pays for 60 percent of the premium, all age brackets could

be covered with a balance close to $100 per month, and you could

feel good about the fact that they are getting fairly comprehensive

policies with modest deductibles. With that type of impact in your

reach, now I’m not sure why anyone would be against a tax credit

that could help such a large segment of the uninsured.

[The prepared statement of Mr. Patel follows:]

Statement of Vip Patel, Founder and Chairman,

eHealthinsurance Inc., Sunnyvale, California

Introduction

• Mr. Chairman and Congressman Rangel, thank you for the opportunity to testify today and let me thank you both, and the Members of this Committee, for

your interest in, and work on behalf of the nation’s uninsured. I am present

today to tell you about the experience of eHealthInsurance and, to whatever extent possible, provide information to you to help you address the pressing need

to assist the uninsured in obtaining health care coverage.

• Yet first I want to briefly explain my background and more specifically, my passion for addressing the problem of the roughly 40 million uninsured Americans

today. Studies show that we need to help the uninsured because they allow

their health to deteriorate before seeking medical assistance. I understand this

first hand, having waited until suffering painful internal hemorrhaging before

visiting a health facility, only to be turned away to a county facility because

I was without health insurance. Studies also show that we need to help the uninsured because they face significant life disruption when they are caught seriously ill without health coverage. Again, I understand this vividly having

watched my maternal uncle, a then-uninsured member of my own family and

recent U.S. citizen encounter the life disruption of returning back to India to

obtain treatment after a stroke.

These personal experiences helped fuel my entrepreneurial spirit in becoming

the Founder of eHealthInsurance.

eHealthInsurance Helping Real People in Need

• eHealthInsurance is a nationwide marketplace for individuals, families and

small businesses to research a wide range of insurance companies and then

purchase the health insurance that best fits their needs. Surprisingly, 40% of

the people who complete applications with eHealthInsurance state on their application that they have been uninsured for a significant period of time—yes,

40% of eHealthInsurance applicants come from the uninsured. A number of

people approach eHealthInsurance with the misperception that health insurance is prohibitively expensive, but when they see the range of options, starting

with some very low prices, many of them find they can afford health insurance.

Of course, many more people could actually afford health insurance if the government were to provide economic assistance to overcome the affordability barrier.

71

Just as important as my own story are the stories of people who have used

eHealthInsurance to overcome their challenges of becoming or staying insured. Here

are some of their actual statements (taken from TV news story transcripts):

1. Donna Johnson of Sacramento, California is a 35-year old single mom with 12-

year-old son named Paul. She works as a manicurist, and Paul had asthma for

most of his life. The two were without health insurance for 11 years, and paid

more than $15,000 in medical bills out-of-pocket.

To not have health insurance, and to have either you be sick or your children

be sick and have to go to the doctor, you’re scared, you’re afraid that the doctors are going to turn you away, you’re afraid the hospitals are going to turn

you away because you’re not insured.’’

‘‘It’s the worst thing to have your kid in a hospital, hooked up to wires and

machines and you don’t have any money to pay for any of this. I didn’t know

what I was going to do.’’

When she heard about eHealthInsurance, Johnson went online to see if she

could get health insurance, even though she didn’t really think she could. To

her surprise, Johnson and her son were approved for coverage through

eHealthInsurance in a few weeks. She now pays $225/month and is fully covered, even with son Paul’s pre-existing condition.

‘‘I was just so overwhelmed by everything I had been through, all of the years

that I had gone through without the insurance, all the money that I paid,

(when I received the cards in the mail) I sat in my chair and I cried, because

it was just the best feeling that I had had in a lot of years.’’

2. Venus Campanelli of Chicago, Illinois is married, works part time, and has two

children. Her husband is self-employed.

‘‘We know now that we can afford (health insurance), we don’t have to worry

about that payment every month, and say ‘Oh, my God, this is taking a big

bite out of our budget every month.’ ’’

‘‘We got a cheaper deductible by half and the payments went down by half, for

basically more coverage.’’

‘‘Especially when you have little ones, they fall, they cut themselves. My son

had stitches, so (insurance) is important.’’

3. John Fritz, of San Jose, California was laid off from his job in 2001. He is married, with two children under the age of four.

‘‘(My) company did offer COBRA, but with the HR person rolling her eyes saying, ‘if you really want COBRA, here it is’ . . . ‘‘but it’s bloody expensive.’’ The

company’s COBRA premium would have been a little more than $1200/month

for Fritz’s family of four.

‘‘When you’ve got two kids, you’ve got immunizations and who knows what else

to worry about,’’ Fritz said.

He went to eHealthInsurance.com and found comparable coverage to his

COBRA plan for only $150/month with the doctors they wanted.

‘‘It wasn’t three weeks before we had to put it to use when my newborn daughter got pneumonia. So that covered the costs right there.’’

Real Data to Assist Policy Makers

• The employees of eHealthInsurance, whom I am representing here today, come

from all parts of the political spectrum. Hence, eHealthInsurance is non-partisan. Over the last several years, eHealthInsurance has advanced a challenge

to numerous policy makers to cut the uninsured by half by the year 2010.

We’ve met with Democratic and Republican leaders in the Senate, House and

with both the Bush and Clinton Administrations. Along with issuing the challenge, eHealthInsurance is prepared to help and to work alongside the Congress to accomplish this worthwhile objective.

• We discovered that policy makers and influencers seeking to help the uninsured are in real need of accurate information about the expense and comprehensiveness of health insurance purchased by individuals and families. Because of eHealthInsurance’s national reach and volume, offering 10,000 different plans from 100 different insurers, with licenses to sell insurance in all

72

50 states and the District of Columbia, we are in perhaps we are in a relatively

exclusive position to provide such information.

• That leads us to some new information we would like to share with the Committee today. In January 2002, eHealthInsurance pulled a recent sample of

20,000 individual (single) sold policies from its database of customers to better

understand the cost and comprehensiveness of health insurance policies purchased by individuals. The following data shows the costs of the plans actually

selected and benefits received by individuals buying on the private health insurance market. The purchasing behavior is representative of what people purchase in a health insurance plan when they pay for it themselves.

Premiums Within Reach Across Most of the Country

The average individual (single) premiums that consumers in this sample purchased is $159 per-member-per-month (PMPM) (which is slightly higher than the

average family policy at $110 PMPM). On an annual basis, this individual premium

amount equates to $1,900 per-person-per-year. This amount is substantiated when

compared to the average PMPMs of some of the nation’s largest individual health

insurance carriers. Such premiums are available to states representing 93% of the

U.S. population. Almost two-thirds of the uninsured population fall in age brackets

with an average annual premium of less than $1700, which is even below the overall average of individual premiums.

Health Insurance Premiums for Single Policies by Age Bracket

age <18 age

18–24

age

25–34

age

35–44

age

45–64

65 and

older (4) all ages

Average monthly premium per

single (1) $102 $123 $138 $182 $262 N/A $159

Average annual premium per

single $1,226 $1,481 $1,658 $2,178 $3,144 N/A $1,908

% of uninsured population by

age (2) 24% 18% 21% 17% 19% 1% 100%

% of U.S. population by age (3) 25% 10% 14% 16% 22% 12% 100%

(1) Source: eHealthInsurance, Inc. 2001, 20,000 single policies across states representing 93.5% of the U.S.

population

(2) Source: Health Insurance Coverage, US Census Bureau, issued Sept 2000

(3) Source: U.S. Census Bureau, Census 2000, with extrapolation

(4) Age 65 and older are covered under Medicare

State Population

% of

U.S.

Pop.

Avg.

monthly

premium

per

single:

all ages

Avg.

annual

premium

per

single:

all ages

Average

age

Guaranteed

Issue

(2)

Community

Rating

(3)

California 34,501,130 12.1% $143 $1,718 30

Texas 21,325,018 7.5% $143 $1,716 32

New York 19,011,378 6.7% $266 $3,198 35 Yes Yes

Florida 16,396,515 5.8% $287 $3,448 33

Illinois 12,482,301 4.4% $174 $2,088 32

Pennsylvania 12,287,150 4.3% $164 $1,962 31

Ohio 11,373,541 4.0% $153 $1,837 33

Michigan 9,990,817 3.5% $161 $1,934 32

New Jersey 8,484,431 3.0% $203 $2,436 38 Yes Yes

Georgia 8,383,915 2.9% $127 $1,521 30

North Carolina 8,186,268 2.9% $121 $1,450 34

73

State Population

% of

U.S.

Pop.

Avg.

monthly

premium

per

single:

all ages

Avg.

annual

premium

per

single:

all ages

Average

age

Guaranteed

Issue

(2)

Community

Rating

(3)

Virginia 7,187,734 2.5% $148 $1,778 32

Indiana 6,114,745 2.1% $136 $1,633 31

Washington 5,987,973 2.1% $129 $1,545 34

Tennessee 5,740,021 2.0% $155 $1,866 33

Missouri 5,629,707 2.0% $172 $2,066 31

Wisconsin 5,401,906 1.9% $174 $2,090 33

Maryland 5,375,156 1.9% $166 $1,986 31

Arizona 5,307,331 1.9% $139 $1,672 34

Minnesota 4,972,294 1.7% $165 $1,975 31

Louisiana 4,465,430 1.6% $166 $1,995 30

Alabama 4,464,356 1.6% $133 $1,602 27

Colorado 4,417,714 1.6% $151 $1,816 32

South Carolina 4,063,011 1.4% $137 $1,650 31

Oregon 3,472,867 1.2% $135 $1,625 30

Oklahoma 3,460,097 1.2% $133 $1,597 34

Connecticut 3,425,074 1.2% $153 $1,838 37

Iowa 2,923,179 1.0% $144 $1,723 34

Mississippi 2,858,029 1.0% $170 $2,038 31

Kansas 2,694,641 0.9% $121 $1,446 33

Arkansas 2,692,090 0.9% $146 $1,751 35

Utah (1) 2,269,789 0.8% $93 $1,117 28

Nevada 2,106,074 0.7% $166 $1,995 35

New Mexico 1,829,146 0.6% $164 $1,972 36

Nebraska 1,713,235 0.6% $185 $2,223 29

Rhode Island 1,058,920 0.4% $181 $2,174 32

Montana 904,433 0.3% $173 $2,073 31

Delaware 796,165 0.3% $165 $1,980 31

South Dakota 756,600 0.3% $165 $1,986 42

Alaska 634,892 0.2% $216 $2,592 32

District of Columbia 571,822 0.2% $143 $1,713 31

Wyoming 494,423 0.2% $128 $1,537 35

Totals 266,211,318 93.5% $159 $1,907 32

74

State Population

% of

U.S.

Pop.

Avg.

monthly

premium

per

single:

all ages

Avg.

annual

premium

per

single:

all ages

Average

age

Guaranteed

Issue

(2)

Community

Rating

(3)

Not Included: ...................... ............ ............ ............ ............ ............ ............

Massachusetts 6,379,304 2.2% N/A N/A N/A Yes

Kentucky 4,065,556 1.4% N/A N/A N/A Yes

West Virginia 1,801,916 0.6% N/A N/A N/A

Idaho 1,321,006 0.5% N/A N/A N/A Yes

Maine 1,286,670 0.5% N/A N/A N/A Yes Yes

New Hampshire 1,259,181 0.4% N/A N/A N/A Yes Yes

Hawaii 1,224,398 0.4% N/A N/A N/A employer

mandate

North Dakota 634,448 0.2% N/A N/A N/A

Vermont 613,090 0.2% N/A N/A N/A Yes Yes

18,585,569 6.5%

Total US 284,796,887

(1) Sample skewed young; age bands averaged

(2) Law requires all applicants to be issued a policy regardless of health

(3) Law requires policies to be priced independent of age and/or health

Several States Outside the Norm

In several states such as New York, uncompetitive market conditions can cause

significantly higher premiums across all age brackets.

Health Insurance Premiums for Single Policies by Age for Three Largest States

State Population

% of

U.S.

Pop.

Avg.

single

monthly premium:

all

ages

Avg.

single

monthly premium:

age 18–

24

Avg.

single

monthly premium:

age 25–

34

Avg.

single

monthly premium:

age 35–

44

Avg.

single

monthly premium:

age 45–

64

# of

Carriers

Actively

Pursuing

Individual

Business (1)

Guaranteed

Issue

(2)

Community

Rating

(3)

California 34,501,130 12.1% $143 $107 $132 $175 $238 7 No No

Texas 21,325,018 7.5% $143 $108 $124 $160 $228 7 No No

New York 19,011,378 6.7% $266 $243 $267 $282 $271 1 Yes Yes

(1) Number of insurance companies responding positively to offer from eHealthInsurance for expanding

members in individual market

(2) Law requires all applicants to be issued a policy regardless of health

(3) Law requires policies to be priced independent of age and/or health

Modest Deductibles and Co-payments

Data from this sample shows that there is a clear consumer purchasing preference

for lower deductibles. As shown in the chart below, greater than two-thirds of all

75

plans purchased have a deductible of $1000 or less, and close to half have

deductibles of $500 or less. Additionally, two-thirds of policies have office visit copayments of $20 or less.

Deductible % of Policies

Purchased Co-Pay % of PoliciesPurchased

$500 or less 43.5% $0 36.7%

$501 to $1000 25.9% $5 0.0%

$1001 to $1500 7.5% $10 9.3%

$1501 to $2000 7.8% $15 9.2%

$2001 to $3000 10.0% $20 20.1%

Over $3000 5.3% $25 6.2%

Total 100% $30 10.7%

$35 4.7%

$40 1.2%

$45 1.8%

Total 100%

Solid and Accessible Benefits

87% of policies purchased by individuals can be considered ‘‘comprehensive’’ in

coverage, where comprehensiveness is defined to include: Inpatient + Outpatient +

Labs&Tests + Prescription Drugs (85%). Consumers purchased mainstream health

insurance plan types that are relatively unencumbered with utilization restrictions

(e.g., HMO gatekeepers) or non-mainstream, minimal-coverage products.

Benefit Levels of Policies Selected Product Choices by Individual Customers

Benefit Coverage

% of

Policies

Purchased

Product Type

% of

Policies

Purchased

Comprehensive (1) 87% PPO 78%

Basic 13% HMO 10%

Total 100% Indemnity/Other 11%

Total 100%

(1) Comprehensive = Inpatient + Outpatient + Labs&Tests + Prescription Drugs (85%)

Tax Credits in the Individual Market: How Far Can They Go?

• In order to be effective in addressing the uninsured issue, we must identify realities of the various segments of the uninsured population. I find it helpful to

distinguish between the impoverished uninsured, working uninsured,

unhealthy uninsured and newly displaced uninsured or displaced workers.

They all require approaches unique to their population. Let me be clear. No one

solution will solve the entire problem.

• Although a tax credit is not the only solution for all of the uninsured, I believe

it is one of the most impactful opportunities for the working uninsured (25 million) and newly displaced uninsured, which together make up over two-thirds

of the 40 million uninsured population.

• By subsidizing the health insurance premiums in the form of $1,000 per person

such as proposed by President Bush, or 60% of overall premiums as recently

passed by the House, most of those eligible will be able to afford the discretionary income to pay the remaining balance. Their hard earned money together with government assistance will get many people over the finish line.

• If you were able to offer the uninsured a $1000 tax credit, then two-thirds of

the uninsured (those age 34 and younger) could get a policy for the balance of

$50/month. And 80% of the uninsured (those age 44 and younger), could get

a policy for the balance of $100/month. With the alternative proposal of the govVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00079 Fmt 6633 Sfmt 6621 E:\HR\OC\A970.XXX pfrm04 PsN: A970
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ernment paying for 60% of the premium, all age brackets could be covered with

a balance close to $100/month. Beyond this, we can feel good about the fact that

in most cases they are getting fairly comprehensive policies with modest

deductibles. With that type of impact, I’m not sure why anyone would be

against helping a large portion of the uninsured purchase tax credits for health

insurance.

Appeal for Incremental Progress on All Segments of the Uninsured

• Allow me to end briefly by sharing an observation from my experience with

health care policy, even if it is nothing more than an ‘‘outside perspective.’’ I

have encountered among proponents of 100% consumer based, employer based

or government based health care plans a recurring ‘‘all or nothing’’ mentality.

As policymakers strive towards such ends, I have found the result for the uninsured to be more of paralysis than progress. I do not believe that any one of

these approaches is the only solution to the 40 million uninsured. In fact, I

would suggest that because consumer, employer and government based health

care plans make up our insured population today and each will continue to be

necessary components in an appropriate way of a solution that will make significant progress on toward reducing the number of uninsured.

• The two largest segments of the total uninsured population are the impoverished uninsured and the working uninsured. The impoverished uninsured segment consists of 23 million out of 40 million individuals, 26% of which are

below 100% of the Federal Poverty Line (FPL) and 31% at 100-200% of the

FPL. The working uninsured comprise 25 of the 40 million. Obviously some of

the ‘‘impoverished uninsured’’ are also found in this segment. The largest portion of this population is found among small businesses with less than 25 employees.

• The smaller yet no less critical significant segments of the total uninsured population include unhealthy uninsured and newly displaced uninsured, both comprising approximately 2 million out of 40 million individuals. Although the

focus of our discussion today is the broad set of uninsured, it is helpful to identify some of the possible unique solutions needed to address these segments of

the uninsured population.

• For the 23 million individuals classified as impoverished uninsured, I was surprised at the number of people below 100% of the FPL that aren’t covered by

Medicaid. Perhaps Medicaid ought to be available to all individuals under the

FPL to guarantee health care coverage to the poorest of the poor. Furthermore,

I am eager to work with states to simplify SCHIP eligibility checking with an

online approach that we call ‘‘Inline with What’s Online.’’ Legislative directive

and funds for online eligibility verification at the national level can ensure

more effective distribution of SCHIP allotments.

• In order to address the larger segment of working uninsured, another place to

focus may be the regulations that cause insurers to reject individual coverage

for employees receiving assistance from an uninsured employer. Shouldn’t

small businesses that can’t afford to purchase or administer a group plan be

allowed and encouraged to reimburse employees to purchase an individual policy? Also, the working uninsured is a rich environment for implementation of

tax credits with meaningful amounts to assist with the cost of premiums in the

individual market.

• The segment of unhealthy uninsured represents those individuals with preexisting health conditions that cause insurers to deny them coverage. As I

learned more about our health care system, I discovered high risk pools which

are functioning in 28 states to offer guaranteed access for these ‘‘uninsurable’’

individuals. High risk pools subsidize the premiums for high cost individuals

while causing little or no economic disruption to the market. Yet the greatest

criticism of these plans is severe underfunding. Perhaps the federal government

should assist those states struggling under the financial burden of high risk

pools. And perhaps the federal government should be active in helping these

pools to develop in the remaining states.

Conclusion

• As the data I have presented today illustrates, while perhaps not the answer

for all of the uninsured, we believe a tax credit will allow a large segment of

the uninsured to put the cost of a private health insurance policy within easier

reach. Yet even as one of its advocates, I remind you that it is only one compoVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00080 Fmt 6633 Sfmt 6621 E:\HR\OC\A970.XXX pfrm04 PsN: A970
77

nent of a multi-oriented approach to a complex problem of the uninsured. I remember the words spoken to me in a conversation with a senior Senator regarding such complex issues: do the easy things first for incremental progress.

If we turn away ideas because they won’t solve the problem in its entirety,

there is a strong chance no one will be helped. Again, thank you for giving me

the opportunity to share these thoughts with you today and for your work on

behalf of the uninsured.

78

[An Attachment Is Being Retained In The Committee Files.]

Chairman THOMAS. Thank you very much.

Dr. Butler.

f STATEMENT OF STUART BUTLER, PH.D., VICE PRESIDENT, DOMESTIC AND ECONOMIC POLICY STUDIES, HERITAGE FOUNDATION

Dr. BUTLER. Thank you, Mr. Chairman, for the opportunity to

testify on the proposal to use refundable tax credits to make, in my

view, a real start on the task of eliminating the chronic problem

of uninsurance. Drawing from my testimony, I would like to emphasize three points to the Committee.

First, there is a long history of bipartisan support for refundable

tax credits as one critical ingredient in the solution for the problem

of uninsurance. Several Members of this Committee, as you have

mentioned, right across the spectrum, have in recent years supported or introduced bills to enact health tax credits, not just you

and Mrs. Johnson, Mr. Chairman, but Mr. Stark, Mr. McDermott,

and many others. A bipartisan coalition in the Senate also supports

the approach, and of course the President supports it.

To be sure, most Members who have introduced such legislation

emphasize it is not the total solution. In particular, they emphasize

that steps have to be taken to make group coverage more available

to the uninsured. I agree, and have included some suggestions on

this in my testimony, and I would be happy to discuss those further when we get to questions. But the bottom line is that there

is in fact wide acceptance of tax credits as one critical step toward

79

a solution, so I urge you to enact that step now and move on to

the other steps.

Second, I would urge the Committee to be skeptical about many

of the objections to tax credits leveled by critics. The claim that

helping the uninsured with a tax credit will somehow cause the

meltdown of the employer-based coverage system is especially misplaced. If a tax credit would cause a degree of so-called crowdingout, then of course exactly the same objection can be made against

any help to the uninsured, such as allowing uninsured families to

enroll in Medicaid or State children’s health insurance programs

(CHIP). In fact, studies by Professor Gruber and others show that

poorly designed Medicaid expansions or State health programs can

lead to as much as a one-for-one reduction in private insurance.

The critical task, then, is to design a tax credit, or indeed any

form of help to the uninsured, in ways that are least likely to reduce good coverage at the place of work. I urge the Committee to

look carefully at the Breaux-Jeffords-Snowe REACH Act in the

Senate. Their bill includes an additional smaller credit for workers

with employer-based coverage. That provision is designed to remove any incentive for employed workers to try to drop out of their

employer’s plan. Any tax credit program enacted by Congress also

in my view should deny the credit to a worker who drops out of

an existing employer-sponsored plan.

Another claim is that the proposed credit is not enough. I do

have to agree that a larger credit will have more impact than a

smaller credit. Nevertheless, the evidence indicates that the credits

being proposed would have a significant impact, enabling many of

the uninsured to afford a basic plan. And of course the Federal

credits could be supplemented by State assistance. It is also worth

noting that many States have artificially raised the price of coverage through unwise coverage mandates, and they should be encouraged to permit less expensive, more basic coverage to be offered.

There remains the need, however, to make affordable group coverage more available to families with poor medical histories. Washington should continue to work with the States to address that. As

I mention in my testimony, Congress can help by making such vehicles as association plans and an expanded Federal Employees

Health Benefits Plan (FEHBP) available within States. I would

note that Mr. Stark’s 1999 bill would have made the FEHBP available to the uninsured.

My third and final point, Mr. Chairman, is to urge the Committee to apply what I might call the Enron test to every proposal.

What would the proposal mean for the thousands of Enron workers

who have just lost their jobs? The Enron test indicates why proposals that would merely subsidize COBRA payments, either directly or with a restricted tax credit, are not the way to go. Such

proposals in effect say, ‘‘If you are fired, we will help you pay for

the health insurance, but only if you get it through the same company that just threw you out on the street.’’

Mr. Chairman, a tax credit for the unemployed must allow laidoff workers to get insurance that they can afford, and get it

through an organization that they can trust. Moreover, let’s also remember that 60 percent of low-income families do not even qualify

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1Kaiser Commission on Medicaid and the Uninsured, Uninsured in America: Key Facts

(Washington, D.C.: Kaiser Family Foundation, 2000). 2 Congressional Budget Office, The Tax Treatment of Employment-Based Health Insurance

(Washington DC, 1994), p. 8.

for COBRA coverage if they are laid off. Restricting help to COBRA

coverage would do nothing for them.

Mr. Chairman, it is not often that there is such a broad political

support in Congress and the White House for a tax measure that

would make such a difference to the daily problems of ordinary

Americans facing economic distress. I strongly urge the Committee

not to let this opportunity slip by.

[The prepared statement of Mr. Butler follows:]

Statement of Stuart Butler, Ph.D., Vice President, Domestic and Economic

Policy Studies, Heritage Foundation

Thank you Mr. Chairman for the opportunity to testify before the Committee on

this important subject. My name is Stuart Butler. I am Vice President for Domestic

and Economic Policy Studies at The Heritage Foundation. My testimony represents

my personal views on the issue of health care reform, and should not be construed

as representing any official position of The Heritage Foundation. After decades of

debate, there is broad bipartisan agreement that action must be taken to address

the problem of the uninsured. There is also a growing recognition that although the

traditional employment-based health insurance has in many respects been very successful in achieving good insurance coverage for million of Americans, for many

workers that system does not assure stable, continuous coverage. For example:

• There are very high rates of uninsurance among the employees of small

firms. According to a recent survey by the Kaiser Foundation, while 99 percent

of large firms offer insurance, only 55 of firms with fewer than 10 employees

do so. Among low-wage workers (defined as those who earned less than $7 an

hour in 1996), 45 percent are not offered insurance.1 One reason for this is that

employers trying to offer coverage to very small groups tend to face high administrative costs. According to data collected by the Congressional Budget Office,

overhead costs for providing insurance can be over 30 percent of premium costs

for firms with fewer than 10 employees, compared with about 12 percent for

firms with more than 500 employees.2

• The tax laws effectively force workers to accept coverage from their

employers. The current tax system excludes from taxable income (federal and

state income tax, and payroll taxes) all compensation provided in the form of

employer-sponsored insurance. The lack of virtually any practical tax relief or

similar assistance for the vast majority of workers without such coverage helps

explain the high uninsurance rate among employees of smaller firms and those

between jobs. The absence of such assistance has also discouraged the growth

of insurance offered through large organization with which workers may have

along term affiliation, such as their union or their church.

Spurred by these general concerns and by the more immediate issue of families

without insurance due to the economic slowdown and the direct effects of September

11th, Congress has three broad approaches before it. Namely:

• Approach 1: Expand government programs to include millions more

working families. It has always been the goal of some politicians and organizations to achieve a national single payer health system, and this would be a

step towards it. But besides the chronic problems besetting Medicaid as well as

national systems in Canada, Britain and elsewhere, there is strong resistance

to this approach among Americans, as well as within Congress and the Administration.

• Approach 2: Link any assistance to families remaining with their

former employer’s plan. Some proposals, such as that offered recently by the

Senate Democratic leadership, would provide assistance to laid-off workers, but

only if they continued to purchase coverage under COBRA. This, of course, does

nothing for workers without a plan offered by their current or former employer.

Moreover, in many cases laid-off workers cannot afford, or do not want, plans

offered through their former employer—an employer in many cases who has

abandoned them and may be in dire financial straits. Under this approach a

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former Enron worker—who has just lost his or her job and pension—would be

told they could get help for insurance but only if they used it to buy coverage

through the bankrupt firm that had thrown them onto the street.

• Approach 3: Offer a refundable tax credit for those for whom employersponsored insurance is not a viable or sensible option. A number of proposals, including one from the Administration, one passed by the House, and

plans offered in both chambers by a remarkably bipartisan group of members,

would provide a refundable tax credit for the purchase of insurance. These approaches make far more sense. They would allow a parallel ‘‘third way’’ system

to develop alongside employer-sponsored and government-sponsored coverage

for those Americans who want private insurance but also want the stability and

control that comes with a plan chosen by the family and organized through an

organization they trust—much as members of Congress are able to do through

the FEHBP.

As important as the technical merits, a tax credit approach is also the most

practicable option today precisely because it commands wide support in Congress and the Administration, and so can be achieved. To be sure, design

issues need to be addressed and choices made. A refundable tax credit for

health insurance can—and should be—enacted by Congress and signed into

law by President Bush.

Key Design Issues for a Tax Credit Program

There are several desirable elements for an effective tax credit, especially for laidoff workers and for low-income, uninsured populations

1) Eligibility ideally should include those with employer-sponsored coverage.

Ideally some level of credit should be available regardless of job status—i.e. available to the working uninsured and insured, and to unemployed workers. With a

properly designed credit, this eligibility criterion would eliminate any bias against

employer-sponsored coverage by providing the equivalent level of help to those with

or without that option. I suggest the committee examine Senate legislation offered

by Senator Jeffords and others (the REACH Act, S 590). This contains a lower credit

for employees with employer-sponsored plans. When combined with the exclusion,

this lower credit is designed to provide a level of subsidy for the out-of-pocket costs

of insured employees that is equivalent o the full credit available for the uninsured.

2) The credit should be refundable and advanceable.

To be meaningful to lower-income families, refundability is necessary. So is a

credit, rather than a deduction, is needed in order that families with low marginal

tax rates receive adequate help. A credit also should designed to be available ‘‘up

front’’ instead of requiring the family to wait until the end of the year. This can

be achieved simply enough through the tax withholding system for employed, taxpaying individuals—in the same way that other tax benefits, such as the mortgage

deduction or child care credit, are ‘‘advanced.’’ In addition, if the credit can be ‘‘assigned’’ to a health plan in return for a lower premium (much like federal employees

receive their government subsidy in the FEHBP), that would make a simple alternative method available for workers who do not file a tax return or do not wish to

use the withholding system. Assignment can be organized easily for a fixed or percentage credit with no income phase out. Income adjusted credits pose small complications but can be reconciled through the tax system.

An unemployed person with an assigned credit similarly would face a reduced premium. Alternatively, a tax credit for unemployed workers could be paid through the

unemployment insurance system. This would require a funds transfer between the

Treasury and the Department of Labor, with the money then distributed to state

unemployment offices (similar to the supplemental benefit programs delivered in

this way since 1958). The state unemployment offices could take on responsibility

for remitting premium payments to insurers. Unemployment offices would be required to inform the unemployed individuals about the tax credit and to provide

necessary participation forms. Unemployment offices, which are already responsible

for verifying unemployment, would be required to verify worker eligibility for the

credit.

3) Different forms of credit will have different impacts.

There are several forms of tax credits, each of which have subtly different effects.

One is a fixed dollar credit, as proposed by the President and others, such as Senator Jeffords, Representative Armey, and in 1999 legislation by Representative

Stark. This is simpler, making calculation of the after-credit premium cost easy for

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3Melinda Schriver and Grace-Marie Arnett, ‘‘Uninsured Rates Rise Dramatically in States

with Strictest Health Insurance Regulations,’’ Backgrounder 1211,(Washington: The Heritage

Foundation, August 14, 1998).

the insurer and recipient. Assignment of the credit would also be easy. For a given

budgeted amount, moreover, the fixed credit does concentrate the assistance to those

most financially needy. On the other hand, individuals with greater health care

costs would face 100 per cent of additional out-of-pocket costs if they needed elaborate coverage.

Another approach is a percentage credit, such as that included in the House stimulus package and in legislation offered in the past by several lawmakers, including

Representative McDermott. This approach would be more expensive if it also included a minimum at least equal to the fixed credit, but it would help families with

higher health care costs by reducing the marginal after-tax premium cost. In addition, by making it more affordable for younger, healthier individuals to purchase

more comprehensive plans, it would reduce adverse selection concerns.

Recent unpublished research by Emory University professor Ken Thorpe suggests

that there would be very little adverse selection at all with a credit equivalent to

the FEHBP subsidy (approximately 75 per cent).

4) Employers may be the best location through which most families get

coverage, even though employers are not necessarily the best sponsors

of coverage.

Most people in America pay their taxes through a place of work. This is a very

convenient system under which employers withhold income and Social Security

taxes and send the money to the government. In addition, employees typically adjust their withholdings to take advantage of any tax breaks for which they may be

eligible (for example, the mortgage interest deduction). Employers thus facilitate the

tax system, but they do not in any sense design or ‘‘sponsor’’ the tax code. They

could more appropriately be considered a clearinghouse for tax payments.

The place of employment would also is likewise particularly convenient and efficient for handling health insurance payments. With individual tax credits available,

employers who do not currently sponsor insurance could still carry out the critical

clearinghouse role for plan choices, tax adjustments, and premium payments. In

other words, smaller employers could handle the mechanical aspects of arranging

for payroll deductions and premium payments (similar to their role in the tax collection system) without having to sponsor a plan. With individual credits, eligible employees could join any plan available in their area, not just one sponsored by their

employer, and still obtain tax benefits. Thus, very small employers could play a very

important role in facilitating coverage without having to organize coverage.

5) Avoid minimum benefits requirements.

Some argue that any tax credit should be conditioned on the eligible family purchasing a health plan with a federally determined comprehensive benefits package.

This would be a mistake. A federally mandated comprehensive plan would be very

expensive, putting it out of reach for many families, and yet in many cases still

would not included certain benefits required by some families (this has, after all,

been a constant feature of Medicare). A comprehensive federal benefits package

(which would be the ceiling as well as the floor for most lower-income families)

would also invite provider lobbying to include often-marginal benefits. This pattern,

seen at the state level, could make insurance prohibitive to lower-income families,

as the experience of state mandates has demonstrated.3

If Congress unwisely insists on a benefits package, it should be for a minimum

package, primarily catastrophic insurance protection, and not comprehensive coverage. It should also be in the form of broad areas of coverage, such as hospitalization and major medical, similar to the requirements for plans in the FEHBP or the

California Public Employees’ Retirement System (CalPERS), rather than a precisely

defined set of specific benefits, such as Medicare fee-for-service.

6) Washington should work with states to make new forms of groups and

intermediaries available as vehicles for insurance.

The individual market does not have to be the only choice for coverage. Indeed,

with a tax credit reducing the obstacles to new forms of group emerging, it is likely

that other purchasing options—in some cases similar in structure to employer-based

coverage—would begin to emerge. This development can be hastened through government action.

Four types of groups are particularly attractive additions to traditional employersponsored coverage.

83

• Affinity groups. Several common institutions in American communities are

well placed to serve this function for insurance and as intermediaries negotiating with insurers on behalf of families. For example, unions as ‘‘friendly societies,’’ have had a long history of involvement in health care. In addition, many

religious denominations also have a long history of providing insurance services

for their congregations. For lower-income African Americans and others,

churches are a far more stable institution in the community than local public

health and small employers, and one that has the long-term social welfare of

families firmly in mind. These groups acting as insurers themselves, any more

than the Mailhandlers union does in the FEHBP, but instead as buying agents

that reach agreements with insurance plans that actually shoulder the risk.

• Associations. Various employment-related associations have arisen to group

people together to obtain insurance without the employer directly sponsoring

coverage. These include health purchasing cooperatives and coalitions and multiple-employer welfare arrangements (MEWAs), and they also face strict restrictions at the state level that affect their insurance arrangement and benefits.

There have been proposals in recent years to create new kinds of associations

that would be free from many state restrictions, particularly state benefit mandates.

• The Federal Employee Health Benefits Program (FEHBP). While technically an employer-based system, the FEHBP actually serves the equivalent of

a small country (with nearly 10 million covered individuals) and offers a broad

choice of plans. While a federal worker’s immediate employer does not sponsor

plans, the place of employment is still the ‘‘entry point’’ for selecting plans.

FEHBP plans are regulated at the federal level, through a combination of general statutory and administrative regulation supplemented by a process of negotiations between the Office and Personnel Management, on behalf of the federal

government, and plans wishing to market through the FEHBP. There have

been several proposals to open up the FEHBP to non-federal workers under various conditions, typically using a separate insurance pool. On a small scale, this

model could be implemented by states using their state employee plans.

• Large corporate health plans available to non-employees.

Tax credits to individuals would remove the current tax barrier to large corporations’ marketing their health plans widely to non-employees. This could

mean major and attractive new options, especially for the uninsured and for

the workers employed by very small firms.

It is quite common for large firms to take products developed initially as an

internal service to the firm and market them to external customers. For example, General Motors formed the General Motors Acceptance Corporation

(GMAC) out of its huge automobile loan service and markets a broad range

of financial services to non-employees. It is even possible for people with no

connection to General Motors to finance their house with a mortgage from

GM. But this does not happen with health insurance, principally because the

tax code provides no tax benefits to families buying health insurance from a

corporate plan that is not their employer

An individual tax credit would remove this obstacle, allowing families to join

any health plan while claiming the credit. This would dramatically change

the incentives in the current market, opening up a potentially large new market for existing corporate plans and an opportunity for many working families

to obtain coverage under these plans.

One firm whose activities hint at what could happen in a more liberalized environment is the John Deere Company. Intent on improving the health care

of its own employees while reducing costs, the company several years ago created its own Health Maintenance Organization (HMO). It then began to offer

coverage to other employers and purchased health operations to serve its new

market. The company, however, has not confined itself to offering its expertise and facilities only to employer groups. Its for-profit health division, John

Deere Health Care, also has offered coverage to individuals as a Medicare

HMO and provides managed care Medicaid services in several states. The

Deere Plan is also available to some federal workers under the FEHBP. Out

of more than 400,000 enrolled in Deere plans in the Midwest and Southeast,

less than 20 percent are John Deere employees. The tax code, however, makes

it very uneconomic for Deere to offer coverage to groups of working families

(except federal workers) other than through their employer.

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4Medicaid Budgets Under Stress: Survey Findings for State Fiscal Year 2000, 2001 and 2002,

(Washington DC, Kaiser Family Foundation, 2001), p. 12 5Michelle Doty and Cathy Schoen, Maintaining Health Insurance During a Recession: Likely

COBRA Eligibility (New York, NY: The Commonwealth Fund, 2001), p. 2

The federal government should work with the states to foster new forms of purchasing arrangements, in addition to the high-risk pools and other vehicles already

being for high-risk individuals. To do this, Congress could enact legislation to permit

a range of new kinds of groups, such as opening the FEHBP system to groups of

the uninsured in each state, and new forms of purchasing groups. The federal government could then enter into discussions with each state to create a federal-state

package of new forms of group insurance, selected from a ‘‘menu’’ of the federal options combined with state measures.

Problems with Other Approaches

Some alternative proposals before Congress would do not adequately provide targeted assistance for the low-income, uninsured populations. Among them:

• Medicaid/SCHIP expansion. Extending Medicaid eligibility for the uninsured

population raises a number of concerns. For one thing it segregates the uninsured population further from the rest of society with private coverage. Over 85

percent of the uninsured are in working homes. It makes little sense to require

these families to seek coverage from a welfare program rather than to help

them afford coverage they prefer. Moreover, if the family income rises and they

become ineligible for Medicaid, there would be another break in coverage. And

further, states are already facing severe budget shortfalls. Some 37 states overspent their Medicaid budgets in FY 2001, and this year Medicaid is already

over budget in 23 states according to a survey of state budget officers.4 States

are looking to keep health costs down, not burden themselves financially by expanding eligibility.

• COBRA-only subsidies. Subsidizing only COBRA coverage, through direct

subsidies or a tax credit, raises several problems. First, many unemployed

workers, especially low-income workers, do not qualify for COBRA. Some 42

million unemployed workers are ineligible for COBRA and 60 percent of lowincome families do not qualify.5 Second, it would give many families only the

‘‘choice’’ of a still-unaffordable comprehensive plan when their economic conditions would make only a leaner plan affordable even with a subsidy. And third

there is the ‘‘Enron problem.’’ It makes little sense to condition a subsidy on

remaining in coverage organized by the former employer who fired the worker

and has no other connection to the family, and who may also be facing severe

financial problems that could lead to coverage cutbacks.

• Subsiding the employer. Some proposals see to expand coverage by subsiding

employers who offer coverage. But this would be like pushing on a string. Credits or other subsidies for employers do not make small firms turn into good risk

pools. Even though a subsidy would help to offset the high administrative costs

borne by small employers, it would not make administration more efficient or

sophisticated, nor would it likely lead to a choice of plans. A subsidy would also

not deal with the ‘‘hassle factor’’ that causes so many small-business owners to

compete for workers by giving them cash instead of complex benefits.

Two Common Criticisms

Critics of tax credits raise a number of arguments, two of which are widely heard:

Argument 1: The proposed credit is not sufficient to afford coverage and

so the take-up rate would be low.

To be sure, a large tax credit would make insurance affordable to more families

than a small credit would, just a public program with a large budget would cover

more people than one with a small budget. If Congress were to raise the budget devoted to a tax credit program it would certainly be more effective. But there are

good reasons to believe that the Administration and Hill proposals for credits would

have a significant impact on the uninsured.

First, the individual market may not be as inaccessible as perceived. An EHealthinsurance survey shows that there are quite affordable coverage options

available in most states, especially those who do not impose a high level of mandated benefits.

Second, a federal tax credit should be considered a foundation upon which other

financing bricks are added. Put another way, a $3,000 federal credit puts the family

$3,000 closer to obtaining affordable coverage. Under current law, and with waivers

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6Mark Pauly and Bradley Herring, ‘‘Expanding Coverage Via Tax Credits: Trade-Offs and

Outcomes,’’ Health Affairs, volume 20, no. 1, January/February 2001, p. 16 7 A recent study found that automatic enrollment for 401(k) plans boosted participation rates

from 37 percent to 86 percent for such voluntary pensions, with even sharper increases for

young and lower-paid employees. See Brigitte Madrian and Dennis Shea, The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior, National Bureau of Economic Research Working Paper No. 7682, May 2000, p. 51. 8David M. Culter and Jonathan Gruber, ‘‘Medicaid and Private Insurance: Evidence and Implications,’’ Health Affairs, volume 16, no. 1 (January/February 1997) pp. 194–200. 9 Richard Kronick and Todd Gilmer, ‘‘Insuring Low-Income Adults: Does Public Coverage

Crowd Out Private?’’ Health Affairs, volume 21, no. 1 (January/February 2002), p. 235.

from the federal government, state governments can provide families with SCHIP

and other funds to subsidize the purchase of private coverage. The federal government should combine a tax credit program with an aggressive waiver initiative designed to complement the federal credits. In addition, if workers could join large

pools utilizing a credit, many small employers in a competitive labor market would

have the incentive to make contributions on behalf of their employee’s coverage as

well, especially those employers who do not offer coverage because of the administrative cost.

Third, the take-up rate of coverage is likely to be greater than some estimates,

even at the credit levels now under discussion. A recent study by Pauly and Herring, for instance, estimates that a fixed tax credit equal to 50 percent of the cost

of a standard plan would lead to a 48 percent reduction in the number of uninsured.6 Determining the take-up rate is difficult—as it is with, say, expansions of

Medicaid. Two contributing factors are illustrative. If alternative government programs (and emergency room care) is inexpensive to families, this has the effect of

‘‘crowding out’’ tax credit-subsided coverage, leading to lower take-up rates. But if

these alternatives are less available or more costly the take-up rate would be much

higher. The ease of obtaining the subsidy and signing up for coverage is also a significant influence. With assignment and automatic enrolment at the place of work,

take-up rates likely would be quite high. Evidence from pension plans indicates that

an automatic enrollment system for health insurance could have dramatic effects on

sign-up rates.7

Argument 2: A credit would ‘‘crowd out’’ traditional employer-sponsored

plans.

Some critics maintain that providing a tax subsidy to the uninsured is inefficient

because many employers currently providing insurance would drop their employees’ coverage.

The simplest response to this charge is that it applies, of course, to any proposal

to help the uninsured, including expansions of public programs. Indeed, there have

been a number of studies of ‘‘crowd out’’ in Medicaid and other programs, and these

indicate a significant substitution effect. Cutler and Gruber, for instance, found a

range of crowd out effects for Medicaid expansions in the late 1980s and early

1990s, depending on exactly what was measured. The decline in private coverage,

as a share of the persons who enrolled in Medicaid directly as a result of the expansions was as much as 50 percent.8 A new study of state-based expansions of coverage, by Kronick and Gilmer, indicate a variety of crowd-out effects depending on

the design of the program. Oregon and Washington, for example, reduced

uninsurance with very little crowding out of private insurance, while in Tennessee

almost half of the increase in publicly covered individuals resulted from a decline

in private coverage. In Minnesota almost all the enrollment in the new public plan

‘‘was accompanied by a decline in the number of privately insured persons and virtually no change in that of uninsured persons.’’ 9

The answer is not to do nothing, of course, but to recognize that tax credits are

no different from other approaches in having some substitution effects. In some

cases substitution is actually desirable. It is beneficial, for instance, if it means

workers using a tax credit can obtain permanent coverage through a large non-employer group, rather than using the tax exclusion to obtain impermanent coverage

through a small employer that does not meet their needs is very costly. Steps should

be explored to reduce unwelcome crowding out, however. The smaller credit available in the Jeffords REACH act for individuals with employer-sponsored coverage

likely would reduce crowding out, for instance. In addition, it would be wise to include a prohibition against workers dropping out of an employer-sponsored pool and

claiming the credit—not just to discourage crowding out but to prevent the employer’s risk pool being undermined.

In conclusion, it is vital that Congress seizes the opportunity before it to make

a real down payment on helping the uninsured through a mechanism that has

86

strong support in each chamber and in the White House. A tax credit for insurance

not provided through the place of employment is a sensible step that Congress could

take this year, while it also take steps to improve the availability of group coverage

throughout the states. Taking this step would be consistent with the objective

shared by both conservatives and liberals of achieving a health system in which a

family’s access to health care and coverage, and the help they get to afford care,

does not depend on where they work.

are very unidirectional, so you probably need to get fairly close to

Chairman THOMAS. Thank you very much. Ms. Lav? The mikes

f it and talk directly into it.

STATEMENT OF IRIS LAV, DEPUTY DIRECTOR, CENTER ON

BUDGET AND POLICY PRIORITIES

Ms. LAV. Thank you. Thank you, Mr. Chairman. I am Iris Lav,

Deputy Director of the Center on Budget and Policy Priorities. The

Center is a nonprofit policy institute here in Washington that specializes in both fiscal policy and in programs and policies affecting

low- and moderate-income families, and I appreciate the invitation

to be here today.

My testimony largely focuses on the Bush Administration’s proposal to provide a refundable tax credit to families and individuals

who do not participate in employer-based coverage for the purchase

of private health insurance. We welcome the Administration’s commitment of significant resources to insurance coverage, but we view

a tax credit as the wrong approach for solving the problems of the

uninsured.

There are three major problems: the weakening of the employerbased system through which the large majority of insured Americans currently obtain quality health insurance coverage; the vagaries of the individual insurance market for anyone except the young

and healthy; and the inadequate size of the credit relative to the

cost of insurance for low- and moderate-income families. None of

these problems can be solved in the context of a tax credit approach without causing other problems or taking actions that I

think all of us would agree are not politically feasible.

First, the tax credit would lead some employers to drop or not

offer coverage. Employers will feel that employees can use the credit to buy coverage on their own. The credit also will draw younger,

healthier workers away from employer coverage into the individual

market. This leaves older, sicker workers in employer insurance

pools, driving up the average cost of coverage. In response, employers will raise employee contributions, leading more younger,

healthier workers to opt out. This insurance death spiral, in which

employers ultimately cannot afford to offer insurance, would leave

older and less healthy workers to find insurance on the individual

market.

The nature of this individual market is the second problem. In

the individual market, insurers generally can vary premiums based

on age and medical history and can deny coverage altogether, yet

many of the uninsured are in the very categories for whom insurance in the individual market is unavailable or prohibitively expensive. Over half of all uninsured adults have a history of serious

medical conditions such as cancer, heart disease, and diabetes, or

87

they smoke, or they are obese. Moreover, two-thirds of lower income uninsured adults above age 50 have been diagnosed with a

chronic condition. So, you know, when you look at the CEA data,

they are talking about the cost for a healthy person. They are not

talking about these people who are uninsured.

The third issue is whether the proposed tax credit can make insurance affordable for the populations that it is intended to reach.

A healthy family of four with income of $25,000 that receives a

$3,000 tax credit would have to spend more than 17 percent of the

family’s gross income to purchase a mid-range policy on the individual market.

One might consider ways to fix these tax credit problems, but unlike some of my colleagues, I don’t think such fixes are practical.

For example, one could mandate employers to offer or administer

insurance, or mandate States to implement reforms in the individual market, but that is probably not in the cards.

Moreover, a tax credit is highly inefficient. Professor Jon Gruber

of M.I.T., who has been discussed greatly this morning, did look at

this proposal in testimony submitted for this hearing, and found

that 10.5 million people would take up the Administration’s tax

credit, but because of employers dropping and employees switching,

the net reduction in the number of uninsured ends up being only

1.9 million out of that 10.5.

What is a better approach? Expand the programs we already

have in place for low- or moderate-income populations, where the

bulk of the uninsured are. A number of States already have expanded to include parents, and some include other adults, under

SCHIP, and others would do so if funding were provided. This approach provides quality insurance that does not exclude people

with medical problems.

Finally, I would like to say a few words about the proposals to

cover workers who have become uninsured in this economic downturn. The House stimulus proposal for a tax credit for unemployed

individuals eligible for unemployment insurance, that they could

use to either purchase COBRA or health insurance in the individual market, raises some of the same questions with respect to

the individual market.

Consider a 55-year-old laid off construction worker who worked

for a company too small to offer COBRA. If he has a history of

heart problems, he probably would not be able to use the tax credit

to access insurance in the individual market, and certainly not at

an affordable price. And there would be no help under the proposal

for those not eligible for unemployment insurance, which includes

a lot of low- and moderate-income people.

A better approach would be to provide a deeper COBRA subsidy

coupled with a largely Federally paid option for States to cover unemployed workers under Medicaid. This would provide quality insurance, either employer-provided or the comprehensive Medicaid

benefit, regardless of age or health status. It also would be likely

to cover more workers than the House plan. The Congressional

Budget Office estimates 7 to 9 million workers could be covered, depending on the Federal Medicaid matching rate.

Thank you, Mr. Chairman.

[The prepared statement of Ms. Lav follows:]

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1 U.S. Department of Treasury, General Explanations of the Administration’s Fiscal Year 2003

Revenue Proposals (February 4, 2002), p. 18-21.

Statement of Iris Lav, Deputy Director, Center on Budget and Policy

Priorities

I appreciate the invitation to testify today. I am Iris Lav, deputy director of the

Center on Budget and Policy Priorities. The Center is a nonprofit policy institute

here in Washington that specializes both in fiscal policy and in programs and policies affecting low- and moderate-income families. The Center does not hold (and

never has received) a grant or contract from any federal agency.

My testimony today largely focuses on the Bush Administration’s health insurance coverage initiative in the fiscal year 2003 budget: a proposal to provide a refundable tax credit for the purchase of private health insurance to families and individuals not covered by employer-based coverage. This proposal would cost $89 billion over 10 years and would account for the vast majority of the new resources the

Administration is proposing in the health insurance coverage area.

While we welcome the Administration’s commitment of significant financial resources to provide assistance to the 39 million Americans without health insurance,

we view a tax credit as the wrong approach for solving the problems of the uninsured. The Administration’s tax credit proposal suffers from a number of significant

flaws, including likelihood that it will materially weaken the employer-based health

system through which the large majority of insured Americans currently obtain

quality health insurance coverage. While it might be possible in theory to design a

tax credit that would better address this and other concerns about the Administration’s proposal, it is highly unlikely that such a tax credit would be politically viable

at this time because it would require some combination of mandates on employers

to offer insurance, states to reform individual insurance markets, and/or individuals

to remain in employer-provided insurance.

This testimony also suggests that there is a superior alternative to a tax credit

in covering the uninsured: an expansion of Medicaid and the State Children’s

Health Insurance Program (SCHIP).

In addition, a section of this testimony addresses approaches to helping the unemployed maintain health insurance during the current economic downturn. Subsidizing the purchase of COBRA insurance would help maintain coverage for substantial numbers of unemployed people who otherwise could not afford to pay the

pay the COBRA premiums. A tax credit for purchase of insurance in the individual

market would be of limited help to low-income or older and sicker unemployed workers. Moreover, if such a credit were extended beyond the unemployed, it would post

the same risks as the Administration’s plan.

Finally, the appendix to this testimony addresses another health initiative in the

Administration budget that, like the health insurance tax credits, threatens to undermine employer-provided insurance. This is the proposal to expand Medical Savings Accounts.

Tax Credit for the Purchase of Health Insurance in the Individual Market

The Administration is proposing to provide a refundable tax credit to individuals

and families not participating in employer-based health insurance or public health

insurance.1 Families with two or more children could receive a tax credit of up to

$3,000 annually to pay for health insurance primarily in the individual market, so

long as the subsidy does not exceed 90 percent of the premium cost. Individuals

could receive a credit of $1,000. (The tax credit also could be used for individual

health insurance purchased through private purchasing pools or state high-risk

pools where such pools exist). The credit would not be available to families with incomes above $60,000, and the subsidy would begin to phase down once a family’s

income reached $25,000. (Similarly, individuals making $30,000 would not be eligible for the credit, with the subsidy beginning to phase out when an individual’s income reached $15,000.)

Under the proposal, the credit could be issued in advance (rather than waiting

until a family or individual filed a tax return after the year was over); insurers

would reduce the premium cost by the size of a family’s credit and be reimbursed

by the Federal Government. States would also have the option of letting certain tax

credit recipients purchase coverage in their Medicaid or SCHIP managed care plans

(or through their state employees’ health plan if no managed care plans are available), but there would be no requirement that states do so.

89

2 Jonathan Gruber, Tax Subsidies for Health Insurance: Evaluating the Cost and Benefits, National Bureau of Economic Research (February 2000); Judith Feder, Cori Uccello, and Ellen

O’Brien, The Difference Different Approaches Make: Comparing Proposals to Expand Health Insurance, Kaiser Family Foundation (October 1999); Leonard E. Burman and Amelia Gruber,

First Do No Harm: Designing Tax Incentives for Health Insurance, National Tax Journal (May

2001); Linda Blumberg, Health Insurance Tax Credits: Potential for Expanding Coverage, Urban

Institute (August 2001).

Likely Weakening of the Employer-Based Health Insurance System

The principal concern with the Administration’s tax credit proposal is that the

availability of the tax credit could lead some employers to cease providing coverage

to their workers and induce new employers not to offer coverage.

Analysts from M.I.T., the Kaiser Family Foundation, and the Urban Institute all

have written that enactment of a tax credit of this design (open to individuals currently eligible for employer-based coverage) could encourage firms not to offer health

insurance coverage to their employees because firms would know their workers

could now get a tax credit to purchase coverage in the individual market.2 For example, new research by Professor Jonathan Gruber at M.I.T. shows that the Administration’s proposal would draw four million people out of employer-provided insurance. Gruber’s research shows that 2.4 million people would be dropped from group

insurance by their employers—one million of which will move to nongroup insurance

and 1.4 million of which will become uninsured. Overall, the research shows that

for every person gaining insurance under this proposal, two persons will be leaving

the group insurance market.

Substituting the purchase of health insurance in the individual market for group

coverage through an employer is particularly troublesome. It could seriously disadvantage older and less healthy workers, many of whom would not be able to obtain coverage or could obtain coverage only at exorbitant costs. In most states, insurers can vary premiums for health insurance policies offered in the individual

market on the basis of age and medical history and can refuse to cover people entirely. If employers that otherwise would offer coverage decline to do so because of

the availability of a tax credit of this nature, the consequences could be serious for

many older and less healthy workers, who generally would have to pay far more

than the tax credit would provide to secure coverage in the individual market. Moreover, the individual market often denies insurance entirely to people with certain

health conditions.

Aggravating this problem is the fact that under the Administration’s proposal,

some workers whose employers do offer coverage and ask their employees to pay a

share of the premium could opt out of employer-based coverage and use the tax

credits instead to purchase insurance in the individual market. Such a move could

be attractive to young, healthy employees. These young and healthy workers could

have a double advantage. Because they are a low risk, the policy they could buy

in the individual market may be cheaper than the average cost of the employer-provided coverage, especially if they choose more limited coverage. In addition, if the

tax credit covers 90 percent of this cheaper coverage, the tax credit subsidy may be

larger than the premium subsidy their employer provides. Thus these young and

healthy workers could find it financially advantageous to opt out of employer coverage and move into the individual market. Professor Gruber’s research indicates

that approximately 1.5 million persons would voluntarily switch from their group

policies to nongroup policies.

But if these workers—largely those who would get the lowest cost policies in the

individual market—opt out of employer coverage, the pool of workers remaining in

employer plans would become older and sicker on average, which in turn would

drive up the costs of employer-based insurance. This phenomenon is known as ‘‘adverse selection.’’ Once adverse selection starts and the cost of employer-based insurance begins to rise, additional younger, healthier workers would be induced to abandon employer-based coverage and use their tax credit instead, because they now

could personally do better in the individual market using the tax credit.

In this way, a vicious cycle—sometimes called an insurance death spiral—could

be set in motion. The increase in premiums for employer-based coverage that ultimately could occur could induce many employers either to cease offering health insurance or to increase substantially the amounts their employees must pay for insurance. The end result would likely be that many older and less healthy individuals would eventually lose their employer-based coverage and become uninsured or

underinsured or have to pay exorbitant amounts for decent coverage.

Intensifying the risk that many firms might not offer coverage is the recent return

of a high rate of inflation in health care costs, which are now rising at double-digit

90

3 Jonathan Gruber, Written Testimony before the House Ways & Means Committee (February

13, 2002). 4 CBPP analysis of Health Interview Survey, 1997.

5 U.S. Census Bureau, Health Insurance Coverage: 2000 (September 2001); Elisabeth

Simantov, Cathy Schoen and Stephanie Bruegman, Market Failure? Individual Insurance Markets for Older Americans, Health Affairs (July/August 2001). 6 CBPP.

rates in many areas. Institution of the tax credit could provide a rationale for some

employers seeking to cut costs to drop or not to institute coverage.

On balance, M.I.T. professor Jonathan Gruber finds that 10.5 million people

would take up the credit. Of those, roughly one-third, 3.3 million people, would have

been uninsured. But because the credit would cause a lot of churning in employerprovided insurance, some people become newly uninsured. The net reduction in the

number of uninsured is only 1.9 million people.3

Some tax credit supporters have argued that additional changes to this type of

tax credit could lessen the likelihood that the tax credit would weaken the employer-based health insurance system. For example, the credit could be limited only

to those persons not currently eligible for employer-based coverage. Changing the

design in this way would not, however, eliminate the incentive for employers to drop

existing coverage. Employers that know their workers can turn to a tax credit to

obtain coverage in the individual market may be more reluctant to offer coverage.

In addition, it is difficult to imagine how a credit limited to those not eligible for

employer-provided health insurance could be administered. It would require the Internal Revenue Service to determine whether a person is eligible for insurance

through their employer or their spouse’s employer. Administering such a credit

would require massive new reporting requirements for employers and an entirely

new—and arguably inappropriate—burden for the IRS.

Going in the opposite direction, one could say the credit could be used by employees to pay for their contribution to the cost of health insurance. Such a proposal

could help uninsured employees who are offered insurance but cannot currently afford their premiums obtain coverage through their employers. However, these credits could also encourage firms to lower their contributions, and thereby substitute

public money for employer contributions. Since a ‘‘maintenance of effort’’ requirement for employers would not be popular and would be impossible to administer,

employers—rather than the employees for whom insurance is not affordable—could

reap the benefit of such a credit.

There is a design of a tax credit that arguably could avoid the type of damage

to the employer-based system discussed above. It would include a mandate on employers to offer coverage—so employers would not be tempted to drop coverage—and

a mandate on individual workers with employer-based coverage to use their tax

credit solely for the purchase of insurance through their employer’s group—so

healthy employees would not opt out of employer coverage to save money. Such requirements certainly are not politically feasible. Moreover, they would result in the

substitution of public funds for employer contributions and thus would constitute a

much more expansive, and costly, credit than the Bush Administration has proposed.

Limited Access in the Individual Market

The Administration envisions that most tax credit recipients would primarily use

the credit to purchase health insurance in the individual market. However, many

of the uninsured face significant barriers to obtaining insurance in the individual

market. More than one quarter of all uninsured adults suffer from serious medical

conditions such as cancer, heart disease and diabetes and over half (53 percent)

have a history of serious medical conditions, smoke, or are obese.4 One quarter of

non-elderly uninsured adults are over 45 and among lower-income uninsured adults

above age 50, some 39 percent reported a limited disability and 66 percent had been

diagnosed with a chronic condition.5 All of these are people for whom insurance in

the individual market is either expensive or unavailable. By contrast, only a small

segment of the uninsured population, 15 percent, are young adults ages 19–34 who

do not have children and lack problematic health conditions.6

As noted, these sicker and older individuals who constitute such a large percentage of the uninsured likely would be unable to access adequate health insurance in

the individual market without paying exorbitant amounts. This is because the individual market is generally unregulated. The individual market generally permits individual medical underwriting, that is insurers can vary premiums based on age

and medical history and can deny coverage entirely. For example, according to the

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7Lori Achman and Deborah Chollet, Insuring the Uninsurable: An Overview of State HighRisk Health Insurance Pools, Commonwealth Fund (August 2001). 8Karen Pollitz, Richard Sorian and Kathy Thomas, How Accessible is Individual Health Insurance for Consumers in Less-than-Perfect Health?, Kaiser Family Foundation (June 2001). 9 Achman and Chollet. See also Sally Trude and Paul B. Ginsburg, Tax Credits and Purchasing Pools: Will This Marriage Work?, Center for Studying Health System Change (April

2001). 10 U.S. General Accounting Office, Private Health Insurance: Potential Tax Benefit of a Health

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

Commonwealth Fund, only 16 states require that insurers provide a plan to most

applicants—and that does not necessarily mean an affordable plan.7

A recent Kaiser Family Foundation study used hypothetical families and individuals to apply for coverage in the individual health insurance market (the hypothetical applicants were structured to test the medical underwriting process through

60 applications in eight geographic markets). The study found, as expected, that

older and sicker people are often unable to obtain coverage in the individual market.8 This means that under the Administration’s proposal, a family containing

older or sick members could find itself excluded from coverage or charged premiums

that are unaffordable, even with a tax credit. Alternatively, such a family could be

offered a plan that is affordable but does not provide coverage for a variety of medical conditions. For example, the Kaiser study used the hypothetical ‘‘Crane’’ family,

consisting of two adults and two children. In this family, while one child, ‘‘Cindy,’’ is in excellent health, the older brother, ‘‘Colin,’’ has asthma. The family received

an offer of insurance under each application in every market but 15 percent of the

offers excluded coverage of Colin entirely and more than half excluded coverage of

Colin’s asthma.

In addition, many plans in the individual market do not offer comprehensive coverage required by older and sicker families and individuals. For example, they may

require high deductibles of $1,000 or more and may not cover maternity care, preventive benefits, and mental health services. Others may set limits on prescription

drug coverage.

The Administration purports to respond to this concern by allowing tax credit recipients to buy coverage through high risk pools as well as other private purchasing

pools. However, according to the Commonwealth Fund and other researchers, the

success and scope of these mechanisms has been limited.9 While more than half the

states operate high-risk pools, participation is low—only 105,000 people participated

in 1999. Such pools also often impose high premiums, deductibles and other costsharing that limit affordability and may provide limited benefits (for example, excluding mental health and maternity care or capping prescription drug costs). Participants may also face a preexisting condition exclusion for some period of time.

The Administration also suggests that that certain low-income individuals would

be permitted to use their tax credits to buy into comprehensive public coverage. It

is uncertain how many states would elect this option and open their Medicaid and

SCHIP managed care plans to tax-credit recipients. Furthermore, the persons most

in need of these buy-ins to public coverage are sicker, high-risk individuals who cannot otherwise obtain coverage in the individual market. Adding these individuals to

the current Medicaid and SCHIP managed care risk pools (which currently tend to

include healthier families and children, rather than the elderly and disabled who

cannot be enrolled on a mandatory basis in managed care), could raise Medicaid and

SCHIP costs significantly.

Alternatively, reforms to the individual health insurance market could be added

to the Administration’s tax credit proposal. In other words, the federal government

could mandate that states enact certain insurance reforms to ensure access for tax

credit recipients including: guaranteed access (insurers have to offer coverage to all

applicants), minimum benefits (all plans provide at least some standard comprehensive coverage), and community rating (premiums cannot vary by age, medical history, or both or can vary only within certain limits). While some states have adopted

some of these market reforms, it seems politically unlikely that the federal government at this time would require all states to take these steps.

Inadequate Size of the Tax Credit

The tax credit is of inadequate size to make health insurance affordable for many

low- and moderate-income families. Health insurance can be expensive. According

to the General Accounting Office, the mid-range premium for family insurance in

the non-group market exceeded $7,300 in 1998.10 Nevertheless, even without factoring in the increases in health insurance premium costs since 1998 for the GAO

estimate, a family of four with income of $25,000 that receives a $3,000 tax credit

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11Simantov. 12 eHealthInsurance, The Cost and Benefits of Individual and Family Health Insurance Plans

(June 2001). Based on the study’s cost-per-member-per-month estimates. 13 Burman. 14 Blumberg.

would have to spend $4,300 in health insurance premiums ($7,300 minus $3,000).

That would constitute more than 17 percent of the family’s gross income to purchase

insurance at this price. The family would have additional out-of-pocket costs for

deductibles and co-pays before they could receive any benefit from having the insurance.

Similarly, the Commonwealth Fund looked at premiums for relatively comprehensive individual health insurance with a $250 deductible for a single healthy adult

age 60 in 15 cities. The median annual premium was $5,688.11 Even with a tax

credit of $1,000, a 60 year-old with income of $15,000 would still have to pay over

30 percent of his gross income to obtain insurance. Of course, a less healthy person

is likely to pay even more, if they are not excluded entirely from the individual market. Furthermore, in some high-cost geographic areas, higher premiums could consume still-greater percentages of family income. Studies indicate that such expenditure levels are beyond what most low- and moderate-income families can afford.

Some supporters of the Administration’s tax credit proposal may argue that family coverage in the individual market is far more affordable than GAO determined.

According to a study by an online health insurance broker, the average premium

cost was estimated to be between $3,600 and $4,500 for families of three who have

actually obtained coverage in the individual market through the broker.12 That average, however, is likely to have been skewed downward considerably by the better

risks associated with younger, healthy individuals who are most able to access insurance in the non-group market as well as the potentially less generous benefits

provided. For example, this average is not the average premium offer made; applicants that turned down the offer of health insurance because it was too expensive

would not be factored into the average cited by the study. (And it does not indicate

the number of applicants who were denied coverage entirely.)

One could argue that the problem could be solved by increasing the size of the

credit. Increasing the size of the credit, however, involves a trade-off. While a larger

credit could make health insurance in the individual market more affordable for

some tax credit recipients, it also would intensify the likelihood that the adverse effects on the employer-based system would occur. This is because a larger credit

would make it more attractive for employers to cease offering health insurance coverage, as well as increase the probability that young, healthy individuals would prefer to leave employer-based coverage.13

Continued Timing Problems for Advance Payment of the Credit

A number of studies have pointed out that to be effective—especially for low- and

moderate-income families—the credit must be available at the time the insurance

premiums are due rather than at the end of the year when taxes are filed. Lowincome families on tight budgets would have difficulty paying health insurance premiums during the year and then waiting until the tax filing season in the following

year to be reimbursed through a tax credit.14 The Administration proposes to address this timing problem by permitting advance payment of the tax credit. Insurers

would discount premiums paid by tax credit recipients and be reimbursed for the

discount by the federal government. Eligibility for the advance credit would be

based on the taxpayer’s prior year tax return.

There is a drawback to basing eligibility for an advance credit on the prior year’s

tax return. The incomes of low- and moderate-income families fluctuate significantly

during the course of a year due to changes in family situation, job losses or changes,

overtime pay and other variables. Consider a taxpayer with prior year income that

is too high to qualify for the credit this year. This year, his work hours are reduced

considerably with the result that he no longer qualifies for health insurance coverage through his employer. His income has declined sufficiently to be eligible for

the tax credit, but he is not eligible for the advance credit. Since he likely has many

obligations to meet with his reduced income, he is unlikely to be able to purchase

health insurance and wait for a reimbursement at the end of the year. He probably

would remain uninsured.

Alternatively, one could base eligibility for advance payment of the credit on this

year’s income. This creates a different set of problems. A person could purchase insurance using an advance payment now, but later in the year find that increases

in income have made him ineligible for the credit based on his annual income. If

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15Gruber, Written Testimony; Feder et al.; Memorandum from Joint Committee on Taxation

to the Senate Finance Committee (September 13, 2001). 16Gruber, Written Testimony. 17 Centers for Medicare and Medicaid Services, ‘‘The State Children’s Health Insurance Program Annual Enrollment Report’’ (February 6, 2002). 18Office of Management and Budget, Analytic Perspectives (February 4, 2002), p.297.

a reconciliation process is then required at tax time, this person would owe—up to $3,000—to the IRS. Based on experience with advance payment of the Earned Income Tax Credit, fear of owing money to the IRS at tax time would likely deter most

families from using the advance payment option. Without the financial resources

necessary to pay for premiums up-front, such families would not benefit from the

tax credit.

Lack of Cost Effectiveness

In addition to the significant concerns with the tax credit proposal, as discussed

above, the tax credit proposal is not likely to be a cost-effective way to reduce the

ranks of the uninsured, since the large majority of those who would use the credit

are expected to already have insurance. Analysts from M.I.T. and the Kaiser Family

Foundation have estimated that under somewhat similar tax credit proposals, more

than two-thirds of those using the tax credit would be people who already were insured.15

For example, as noted above, Jonathan Gruber of M.I.T. projects that 10.5 million

persons would take up the Administration’s tax credit. On its face, this appears to

be a large population receiving assistance through the tax credit. However, only 3.3

million people would have been previously uninsured; more than two-thirds of tax

recipients would have already had insurance. In addition, under his estimates, employer dropping would cause 1.4 million people formerly with employer-based coverage to be unable to find coverage and become uninsured. The net reduction in the

number of uninsured ends up being only 1.9 million (which constitutes only 18 percent of the total number of recipients).16

As a result, relatively little of the benefit of the credit would go to reducing the

ranks of the uninsured. Instead, a large share of the credit’s substantial cost would

go either to provide people who already are insured in the individual market with

a tax cut or to shift people from their current insurance arrangements (primarily

through employer-sponsored coverage) to different insurance arrangements.

A Better Alternative: Expansion of Public Programs

As I have discussed, the tax credit proposed by the Administration could threaten

the stability of the employer-based health insurance system through which the overwhelming majority of Americans obtain coverage. In addition, the tax credit would

favor young, healthy families and individuals over older, sicker persons who most

need comprehensive and affordable health insurance coverage.

An effective alternative that avoids these pitfalls is an expansion of the State

Children’s Health Insurance Program (SCHIP). For example, bipartisan legislation introduced in this Congress would provide $50 billion in new SCHIP funds to states

to expand Medicaid and SCHIP coverage to the low-income parents of children eligible for those programs. In 2000, some 34 percent of parents—6.9 million—in families with incomes below 200 percent of the poverty line ($29,260 for a family of

three) were uninsured. This is partly the result of limited coverage within the Medicaid program; the Medicaid income eligibility level in the median state is only 69

percent of the federal poverty line (about $10,000). Just as SCHIP facilitated coverage expansions for low-income children, additional federal SCHIP funds could be

provided for states to expand Medicaid and SCHIP coverage to parents. While suffering from a slow start, the SCHIP program is now highly successful. As the Department of Health and Human Services announced last week, a total of 4.6 million

children were enrolled in SCHIP last year which constitutes a 38 percent increase

from 2000 (3.3 million children were enrolled in fiscal year 2000).17

A number of states such as Arizona, California, New Jersey, Rhode Island, and

Wisconsin have already used SCHIP to expand coverage to parents, as well as other

adults. However, the ability of states to continue to expand coverage, as the Administration has urged states to do, is threatened by a lack of sufficient SCHIP funding.

The Balanced Budget Act of1997 instituted a 26 percent reduction in federal SCHIP

funding for the fiscal years 2002, 2003 and 2004—a reduction of over $1 billion each

year. Because of this reduction, in the Administration’s budget, OMB projects that

SCHIP enrollment will decline by 900,000 people, mostly children, between 2003

and 2006.18 While the Administration has appropriately proposed to extend SCHIP

funds scheduled to expire in the next two years which will help delay or avert some

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19Lisa Dubay, Expansions in Public Health Insurance and Crowd-Out: What the Evidence

Says, Kaiser Family Foundation (October 1999); Kathleen Call et al., ‘‘Who Is Still Uninsured

in Minnesota? Lessons from State Reform Efforts,’’ Journal of the American Medical Association

(October 8, 1997), p.1191–95; Leighton Ku, Marilyn Ellwood et al., ‘‘The Evolution of Medicaid

Managed Care Systems and Eligibility Expansions,’’ Health Care Financing Review (Winter

2000); Jeremy Alberga, Wisconsin’s BadgerCare Program Offers Innovative Approach to Family

Coverage, Robert Wood Johnson Foundation (January 2001); Amy Lutzky and Ian Hill, Has the

Jury Reached a Verdict? States’ Early Experiences with Crowd-Out Under SCHIP, Urban Institute (June 2001); Richard Kronick and Todd Gilmer, Insuring Low-Income Adults: Does Public

Coverage Crowd-Out Private?, Health Affairs (January/February 2002). 20Matthew Broaddus and Leighton Ku, Nearly 95 Percent of Low-Income Uninsured Children

Now Are Eligible for Medicaid or SCHIP, Center on Budget and Policy Priorities (December

2000). 21Leighton Ku and Matthew Broaddus, The Importance of Family-Based Insurance Expansions: New Research Findings about State Health Reforms, Center on Budget and Policy Priorities (September 2000); Jeanne Lambrew, Health Insurance: A Family Affair, Commonwealth

Fund (May 2001); Lisa Dubay and Genevieve Kenney, Covering Parents Through Medicaid and

SCHIP: Potential Benefits to Low-Income Parents and Children; Kaiser Family Foundation (October 2001); Elizabeth Gifford, Robert Weech-Maldonado and Pamela Farley Short, ‘‘Encouraging Preventive Health Services for Young Children: The Effect of Expanding Coverage to Parents,’’ Pennsylvania State University, presentation at the Academy for Health Services Research

and Health Policy Conference, Atlanta, June 12, 2001.

of these enrollment declines, it is likely states will have insufficient funding over

the long-term to further expand coverage. As a result, states need additional funding under the SCHIP program. This public expansion proposal would provide a

number of advantages:

• A public expansion will not substantially encourage individuals to drop employer-based coverage, nor will it induce employers to no longer offer health insurance to their workers—especially as compared to the likely effects of the Administration’s tax credit proposal. Research has found that only a modest percentage of the additional individuals covered through public expansions had employer-based coverage.19 For example, an examination of Minnesota’s Medicaid

expansion to adults and children found that only seven percent of enrollees gave

up private insurance (both employer-based and individual market) to join the

program, of which less than half previously participated in employer-based coverage. In Wisconsin, which expanded coverage to parents up to 185 percent of

the federal poverty line through its BadgerCare program, only 6 percent of the

25,000 families screened had access to employer-based coverage prior to enrolling in the SCHIP program..

• The coverage will be accessible and affordable to the populations served. Unlike

the individual health insurance market, public programs are open to any eligible individual irrespective of their age or medical history. In addition, both the

Medicaid and SCHIP programs have limits on premiums, deductibles and costsharing to ensure that participating families and individuals can afford out-ofpocket costs. For example, SCHIP families are not permitted to incur cost-sharing that exceeds 5 percent of family income.

• Public coverage would provide comprehensive benefits that would meet the

needs of older and sicker families and individuals. Both programs establish federal benefits standards that are intended to provide comprehensive health insurance coverage. Under Medicaid, states must provide certain minimum benefits such as hospital and physician coverage. Under SCHIP, separate state programs must generally provide a benefits package that is equivalent to several

benchmarks including the Blue Cross-Blue Shield Standard Option under the

Federal Employees Benefits Health Plan (FEBHP).

• Expanded coverage of parents would also have the added benefit of increasing

coverage of children who are currently eligible for, but not enrolled, in the Medicaid and SCHIP programs. Although nearly 95 percent of uninsured children

in families with incomes under 200 percent of the federal poverty line are now

eligible for Medicaid and SCHIP, substantial numbers of eligible children remain uninsured.20 Research has found that extending health insurance to lowincome parents in the same programs boosts coverage of their children. In

states that have expanded publicly funded coverage to include working parents,

enrollment rates among children are significantly higher.21

Insurance for the Unemployed

The House of Representatives late last year passed an economic stimulus proposal

that included a tax credit certain unemployed individuals could use to purchase

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COBRA coverage or health insurance in the individual market. The tax credit would

be equal to 60 percent of the cost of health insurance. Only workers currently eligible for unemployment insurance could receive the tax credit. If the tax credit is used

in the individual market, the worker must have previously had insurance for 12

months.

Many workers who become unemployed do have difficulty affording the COBRA

continuation coverage for which they are eligible. With the costs of a family health

insurance policy under COBRA averaging more than $7,000, it is unlikely that

many unemployed workers—particularly those with low or moderate incomes—could

afford to maintain their insurance. A 60 percent tax credit subsidy, however, still

leaves the necessity to pay 40 percent of the COBRA premium. A family getting by

on unemployment insurance is quite likely to find an average after-credit premium

cost of $2,800 (in addition to deductibles and co-pays) unaffordable. So this proposal

is most likely to help families that are unemployed, receive unemployment compensation, but also have sufficient resources from savings or another worker in the

family that can be used to pay these health insurance premiums.

The aspect of the plan that would make the tax credit available for the purchase

of insurance in the individual market is even more problematic. As noted above, the

individual market is largely unregulated and lacks the advantages of group insurance purchased through employers. Many plans sold on the individual market impose high deductibles and offer limited coverage. Furthermore, premiums in the individual market can vary based on risk factors such as age and medical history. The

new proposal lacks substantive insurance-market reforms to ensure that individual

health insurance policies that provide adequate coverage will be made available at

affordable prices to unemployed workers in the individual health insurance market.

Under the proposal, states would have to guarantee that some form of individual

coverage is made available to laid-off workers who previously had employer-based

coverage, but similar requirements are part of current law and most states comply

with them simply by allowing individuals who otherwise cannot secure coverage to

purchase insurance through high-risk pools. As described above, policies sold

through high-risk pools generally are unaffordable and the coverage provided is usually limited; as a result, few individuals purchase insurance through these pools.

Only individuals who are receiving Unemployment Insurance payments would be

eligible for the tax credit included in the House stimulus bill. This would leave out

a substantial number of low-income unemployed workers, including most part-time

workers and more recently employed workers, many of whom have recently left welfare for work.

A better proposal would provide a deeper COBRA subsidy—delivered through a

direct payment arrangement with insurers and employers so those without minimal

up-front resources could use it—coupled with an option for states to cover under

Medicaid (with a 90 percent federal match) those unemployed persons who do not

have COBRA coverage or who cannot afford their share of the COBRA premium.

This is similar to the proposals included in the Senate Finance Committee stimulus

package. This alternative proposal covers a significantly larger proportion of the unemployed, since it is not limited solely to those covered by Unemployment Insurance.

In addition, a COBRA plus Medicaid option assures that most older, sicker unemployed persons can access the comprehensive insurance they need. For example, a

55 year old construction worker who becomes unemployed may have worked for a

company too small to be required to offer COBRA. If he has a history of heart problems or any one of a number of other serious conditions, he probably would not be

able to access insurance in the individual market. But he could be eligible for comprehensive insurance through the Medicaid program.

The tax credit approach to helping the uninsured has still one more drawback.

If the tax credit in the House stimulus bill is enacted, subsequent efforts almost

surely will be made to broaden this credit into a general individual health insurance

tax credit—of the type included in the Administration’s budget—that can be used

to purchase insurance in the individual market by employed as well as unemployed

individuals. As described at length above, such a general individual health insurance credit could have deleterious effects on insurance coverage.

Conclusion

The tax credit that the Administration proposes poses a threat to the employerbased health insurance system. While this proposal may expand coverage to some

currently uninsured Americans, many others who have insurance through their employers may lose their coverage and become uninsured. It is theoretically possible

to design a tax credit that does not have as many negative effects, but doing so

would require substantial reform of the individual insurance market and some comVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00099 Fmt 6633 Sfmt 6621 E:\HR\OC\A970.XXX pfrm04 PsN: A970
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22These proposals are analyzed in the following papers. Edwin Park, Health Insurance Proposals in Administration’s Budget Could Weaken the Employer-Based Health Insurance System, Center on Budget and Policy Priorities (February 2002); Edwin Park, Administration’s Budget

Includes Additional Health Tax Cuts That Primarily Benefit Higher-Income Individuals, Center

on Budget and Policy Priorities (February 2002). 23 U.S. Department of Treasury, General Explanations of the Administration’s Fiscal Year

2003 Revenue Proposals (February 4, 2002), p. 26–29. 24 Emmett B. Keeler, et al., ‘‘Can Medical Savings Accounts for the Nonelderly Reduce Health

Care Costs?’’, Journal of the American Medical Association (June 5, 1996), p.1666–71; Len M.

Nichols et al., Tax-Preferred Medical Savings Accounts and Catastrophic Health Insurance

Plans: A Numerical Analysis of Winners and Losers, Urban Institute (April 1996); and American

Academy of Actuaries, Medical Savings Accounts: Cost Implications and Design Issues (May

1995).

bination of mandates on employers, states, and/or individuals—all of which is not

likely to be politically acceptable. A far better alternative to address the problem

of the uninsured would be to provide states additional federal SCHIP funds to expand coverage to parents of children eligible for public programs. That has the side

benefit of encouraging enrollment of eligible children who are not currently enrolled

in those programs.

For the immediate problem of helping the unemployed maintain health insurance

coverage, the House-passed proposal for a tax credit for people receiving unemployment insurance would reach only a limited group of the unemployed and, given the

problems with the individual insurance market, would fail to provide many older

and sicker workers with the insurance they need. A deeper COBRA subsidy delivered directly through insurers and employers coupled with a largely federally-paid

option for states to cover unemployed workers under Medicaid could provide better

coverage to more unemployed workers.

APPENDIX

Expansion of Medical Savings Accounts

The Administration’s fiscal year 2003 budget proposal includes additional tax proposals related to health care, including a proposed expansion of Medical Savings Accounts.22 In this appendix, I would likely to briefly address concerns with the MSA

proposal, which like the tax credit, is likely to weaken the conventional employerbased health system.

Established under a limited demonstration project scheduled to expire at the end

of this year, MSAs are tax-advantaged personal savings accounts available to the

self-employed and employees at small businesses who are covered by high-deductible

health insurance policies. Funds in MSAs may be used to pay for a wide range of

out-of-pocket health care costs. They also may be retained in the MSA accounts and

placed in investment vehicles such as stocks and bonds, with the investment earnings accumulating tax-free in the accounts. The funds may be withdrawn for nonmedical purposes upon retirement. As a result, MSAs can be used as a tax shelter.

Despite the findings of an array of analyses by respected research institutions

that widespread use of MSAs could destabilize the health insurance market (findings the demonstration project has failed to dispel), the Administration is proposing

a package of MSA changes that have long been pushed by insurance companies that

sell MSA policies and conservative policy institutions. The Administration proposes

to repeal most current protections and limitations on MSAs, to make MSAs more

lucrative as tax shelters for affluent, healthy individuals (and hence more attractive

to such individuals), and to allow unlimited expansion of MSAs across the country.23

The risks of such a course are great.

Adverse Selection and Its Effect on Conventional Health Insurance

Research by the RAND Corporation, the Urban Institute, and the American Academy of Actuaries has found that premiums for conventional insurance could more

than double if MSA use becomes widespread.24 This is because of the extensive ‘‘adverse selection’’ in the health insurance market that would likely ensue. If MSAs

become broadly available, substantial numbers of healthy, affluent individuals may

opt for them in lieu of conventional, employer-based group insurance policies. As a

result, those remaining in group insurance would be less healthy, on average, and

premiums for conventional group insurance would have to increase.

High deductible policies and MSAs are most attractive to younger, healthy individuals, because such individuals do not expect to incur significant health costs and

thus can anticipate accumulating significant amounts in their tax-advantaged MSA

accounts. MSAs can be particularly attractive to higher-income individuals, a group

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25 U.S. General Accounting Office, Medical Savings Accounts: Results from Surveys of Insurers

(December 1998), GAO/HEHS–99–34. 26GAO.

that also tends to be in better health than people with lesser incomes, since they

can benefit handsomely from the tax sheltering advantages of MSAs, which are

worth the most to those in higher tax brackets. The attraction of MSAs to healthy,

affluent individuals would be significantly enhanced under the Administration’s proposal, which would alter the rules governing MSAs in ways that would make the

accounts more lucrative as tax shelters. While evidence is very limited, in a preliminary survey of insurers in 1998, the General Accounting Office found evidence that

MSAs may indeed be encouraging adverse selection in health insurance markets.25

The increase in premium costs that would be expected to result if use of MSAs

becomes widespread and significant numbers of healthy individuals withdraw from

employer-based plans could lead many employers either to cease offering coverage

or to raise the percentage of premium costs that their employees must pay. Such

steps would make insurance less affordable and likely cause more people to become

uninsured.

Increased Use of MSAs as a Tax Shelter

The Administration’s proposal would also make MSAs more attractive as a tax

shelter to healthy, affluent individuals by removing or weakening many safeguards

Congress enacted to prevent MSAs from turning into a significant tax shelter opportunity.

MSAs are similar to tax-deductible Individual Retirement Accounts in that the deposits an individual makes in these accounts are tax deductible and the earnings

that accumulate in the accounts are tax-free. (The funds in the account are never

taxed as long as they either remain in the account or are withdrawn for medical

purposes; the funds are subject to taxation if withdrawn for non-medical purposes,

just as funds in tax-deductible IRAs are subject to taxation when they are withdrawn.) MSAs differ, however, from IRAs in one key respect—there are no income

limits on MSAs that prevent wealthy people from making tax-deductible contributions to them. Indeed, the higher an individual’s income, the greater the tax benefit

an MSA provides. By opening MSAs for widespread use and eviscerating a number

of the current limitations and safeguards on MSAs, the Administration’s proposal

would essentially enable high-income individuals to circumvent the IRA income limits by using MSAs for the same purpose—as tax shelters to accrue substantial assets over time on a tax-advantaged basis. At retirement, funds can be withdrawn

from MSAs penalty-free for non-medical purposes. In the same GAO survey of insurers, there were indications that MSAs were in fact being marketed primarily as taxsheltered savings vehicles rather than as sources of tax-sheltered funds for reimbursement of medical expenses. The report stated that insurers were targeting certain segments of the insurance market such as highly-paid professionals, farmers,

ranchers, partnership firms and association groups.

f26

Chairman THOMAS. Thank you, Ms. Lav.

Mr. Lemieux?

STATEMENT OF JEFF LEMIEUX, SENIOR ECONOMIST,

PROGRESSIVE POLICY INSTITUTE

Mr. LEMIEUX. Thank you, Mr. Chairman.

The Progressive Policy Institute (PPI) has long argued that tax

credits should be a cornerstone for a renewed push toward universal health coverage. That is not to say that tax credits alone are

enough to do the job. They are not. We will also need expanded

safety net programs and greatly improved purchasing pools or

other purchasing arrangements, so that people can use their tax

credits in an efficient, fair, and secure market, but tax credits are

a very important building block.

98

I think that past efforts to get universal coverage have failed

mostly because they caused uncertainty about the fate of employerbased coverage, which workers value very highly. However, I think

that universal coverage can be achieved in the coming years, in

this decade, perhaps, in a series of responsible, practical steps that

enhance rather than threaten work-based coverage.

I think the first step, as you have already been working on, is

to help the newly unemployed maintain their coverage. By preventing those with insurance from losing it when they lose their

jobs, we can at least stop the number of uninsured from rising.

The second step is to actually reduce the number of uninsured

by making certain that all Americans have good choices of health

insurance at reasonable group rates; that they can exercise those

choices in the most convenient and secure setting possible, that is

usually their place of employment; and that financial assistance

based on tax credits, like we have been discussing today, is provided to help those with low incomes.

And we have heard from virtually every witness, I think, and

many Members, that to be effective at reducing the uninsured tax

credits have to be both refundable and available in advance, when

people need the money to purchase their coverage. Both the Housepassed proposal for temporary tax credits for displaced workers and

the Administration’s proposed permanent tax credits for individual

coverage pass those tests of refundability and payment in advance.

The temporary tax payments for displaced workers also seem to

me to pass the crucial test of not threatening employer-based coverage. However, I believe the Administration’s proposal for permanent tax credits for individual health coverage would in fact still

disrupt employer-based coverage, in spite of their new mentions of

purchasing groups in this year’s version, and therefore shouldn’t be

enacted in its current form.

I have some suggestions to improve both proposals. They are

very technical. They are explained in more detail in my prepared

statement.

Some of the highlights: I encourage Committee Members to consider increasing the percentage subsidy for the temporary tax credits for displaced workers from 60 percent to a higher number, say

75 percent or more. I think that would better ensure that very few

workers actually lost their health coverage when they were unemployed. And, perhaps surprisingly, I think that could help reduce

employers’ overall health costs by virtually eliminating adverse selection in the COBRA market.

Furthermore, I think we need to make sure that those temporary

tax credits follow people to their new job for a time. Even if you

get a new job, you might not be eligible for health insurance for

a long period, and those tax credits, if they were to follow people

to their new job, that would provide a good incentive to help people

go ahead with their job search.

Second, the Administration’s proposal for permanent credits for

individual health insurance needs to be expanded to include employment-based coverage, and should be made available through

payroll deduction at the workplace. And with the balance of my

time, let me try and explain that last point, why the AdministraVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00102 Fmt 6633 Sfmt 6602 E:\HR\OC\A970.XXX pfrm04 PsN: A970
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tion’s tax credit should be extended to people with employer-based

coverage.

I think the biggest flaw in the Administration’s proposal there is

that it doesn’t allow people who get health coverage at work to receive tax credits even if their incomes are very low. First, that is

unfair, since low-income people who already struggle to afford

work-based coverage would get nothing. They would have an incentive to drop out of their employer’s coverage and switch to other,

often higher paying jobs that didn’t offer coverage because in general, as we know and as you have said, Mr. Chairman, businesses

that don’t offer benefits like health insurance can afford to grant

higher wages instead.

Under the Administration’s proposal, low-income workers would

have a particularly strong incentive to take higher wages instead

of the employment-based health benefits, and then use the tax

credit to purchase individual coverage if they can. To save their

employees the hassle of switching into no-benefit jobs to take advantage of the credits, and to retain valued employees in some

cases, some small businesses would just stop offering coverage in

the first place.

I believe the better path toward universal coverage is to make

mainstream group coverage available through tax credits, and easily affordable through tax credits, and easily available at every

workplace, whether or not the employer offers to help pay for that

coverage. And I am heartened by the fact that even our friends at

the Heritage Foundation, which has previously proposed some individualized health insurance reform proposals, they are now publishing papers that go through exactly how we can get tax credits

available at the employer level, and I think that is extremely helpful.

To sum up, the PPI strongly supports the effort to make refundable tax credits an integral part of health reform and covering the

uninsured. The tax credits shouldn’t favor employer coverage or individual coverage. The right policy would be a better balance than

the policies the Administration has put forward. Tax credits should

be available in both markets so that both markets are strengthened, but one market shouldn’t be favored over the other. Thank

you.

[The prepared statement of Mr. Lemieux follows:]

Statement of Jeff Lemieux, Senior Economist, Progressive Policy Institute

Thank you, Mr. Chairman, Representative Rangel, and committee members, for

inviting me to testify on using tax credits to increase the number of Americans with

health insurance. My name is Jeff Lemieux, and I am the senior economist for the

Progressive Policy Institute (PPI). Prior to this position I worked for the Bipartisan

Medicare Commission, the Congressional Budget Office, the Health Care Financing

Administration (HCFA), and an economic forecasting firm then known as DRI/

McGraw-Hill.

Universal health coverage is a national imperative. It can be achieved in a series

of responsible, practical stages, and the PPI has long argued that tax credits should

be a cornerstone of that effort. The first step is to help the newly unemployed maintain their health insurance. By preventing those with insurance from losing it when

they lose their jobs, we can at least prevent the number of uninsured from rising.

The second step is to reduce the number of uninsured Americans by making certain that all have good choices of health insurance at reasonable group rates, that

they can exercise those choices in the most convenient and secure setting possible

100

(usually their place of employment), and that financial assistance (based on tax

credits) is provided to help those with low incomes.

After a few general comments, my remarks focus on two specific proposals: the

temporary tax credits targeted to displaced workers receiving unemployment insurance that the House passed in December as part of the debate on economic ‘‘stimulus,’’ and the proposal for permanent means-tested tax credits for individual health

insurance that was included in the President’s budget.

By tax credits for health insurance, I am referring to tax credits that are both

refundable—that is, fully paid even to those whose incomes are so low that no income tax liability is owed—and available ‘‘in advance,’’ when the insurance is purchased. Otherwise, low-income workers most at risk of being uninsured would be

unable to take advantage of the credits. Both the House-passed proposal for displaced workers and the Administration’s tax credits for individual coverage pass

those tests.

Two of the greatest strengths of the U.S. economy are our work ethic and the

flexibility of our labor markets. Now more than ever, Americans move into and out

of the workforce and particular jobs, sometimes working part-time and sometimes

overtime, sometimes working for large or small firms or several firms at once. Freelance and independent work is common.

Labor market flexibility is both economically efficient and socially helpful. It allows us to tailor our skills and work styles closely to our social and family needs.

However, we need to do much more to adapt benefits like health insurance to the

realities of the modern workplace. Specifically, we should strengthen the bond between work and health insurance, and ensure all Americans have a fair chance to

obtain good coverage, no matter how or where they work.

The foundation of health coverage in the U.S. is subsidized group health insurance, arranged through employers. Past pushes for universal coverage have failed

primarily because of uncertainty about the fate of work-based health coverage,

which people value very highly.

The main reasons for the success of employment-based health insurance are the

subsidies and the group insurance pools. Subsidies provided by employers make

health insurance desirable even for the young and healthy, and group pooling makes

coverage fair and affordable, even for those who are older and more likely to need

extensive health care services. Getting health coverage through employers is also

convenient and reassuring. Employers handle the paperwork and payroll deduction

of premiums, and can help resolve disputes with health plans.

The one major problem with employment-based coverage is choice: Too few workers have a wide choice of health plans. Employers may switch health plans abruptly,

severing employees’ relationships with health providers. And workers routinely have

to switch health plans when they change employers.

On the other hand, the market for individual health insurance is small, fragile,

and problematic. Although availability varies from state to state, individual coverage can be hard to get or even unaffordable, especially for people with health

problems—precisely those who most need health coverage. Fear that only persons

with hidden illnesses will apply for coverage causes insurers offering individual coverage to ‘‘load’’ premiums with extra amounts to hedge against unseen risks.

In sum, the market for employment-based coverage is robust, but often lacks

choices, which can thwart continuity of health care. The market for individual coverage is weak and unpredictable—in ways that also reduce choice and continuity.

Ideally, public policy should help employers offer a wide menu of health insurance

choices. That would allow workers to stick with a plan they like, even if they switch

jobs. Since more and more workers are self-employed, we must also improve individual coverage. That market needs the best features of employer coverage: It

should be more predictable, affordable, fairly priced, and available to all.

The best policy would be a combination of tax credits and new group purchasing

arrangements. That would help inject choice into the market for employer coverage,

and would bring choice, subsidies, and group coverage to people who can’t get workbased coverage.

Ideally, tax credits shouldn’t favor employer or individual health coverage. The

current tax law favors employment-based coverage, but the Administration’s proposal of permanent tax credits only for individual coverage is an overreaction, favoring individual coverage, especially for lower-income workers. The right policy is a

balance. Tax credits should be available in both markets, so that both markets are

strengthened.

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Temporary Tax Credits for Transitional Health Coverage

The House-passed bill would give a 60 percent, uncapped tax credit for either

COBRA continuing health coverage or individual coverage. In general, displaced

workers receiving unemployment benefits would be eligible for up to 12 months.

The PPI has argued that tax credits for COBRA coverage would be beneficial not

only to displaced workers, but also to employers. Under COBRA, most workers who

are laid off are allowed to remain in their employer-based health plan for up to 18

months, provided they pay the full premium (their share plus the employer share)

and a small administrative fee. The problem is, the full premium for employmentbased coverage averages about $200 per month for self-only coverage or around $600

per month for family coverage.

Since COBRA coverage is very expensive, many laid-off workers choose to remain

uninsured, gambling that they won’t get sick before they find another job. However,

workers who already have a chronic health condition generally accept COBRA coverage, despite the high cost. Otherwise they would have no protection against high

medical bills they know they will face.

In the jargon of health insurance, employers offering COBRA coverage experience

‘‘adverse selection,’’ that is, healthier-than-average ex-workers decline the continuing coverage, and sicker-than-average workers accept. Even though the workers

who accept coverage pay the full premium, their costs are actually higher than average, which drives up the premium for the employer’s whole group. Although only

a small fraction of ex-employees accept the coverage—approximately 25 percent—

it still drives up employers’ health costs.

Based on past estimates from the Congressional Budget Office, over half of laidoff workers would accept COBRA coverage with a 60 percent subsidy. In my opinion,

that would certainly reduce adverse selection by drawing younger and healthier

workers into COBRA pools. It could even reduce employers’ overall costs because the

reduction in costs associated with adverse selection could be enough to offset the additional cost of increased participation.

However, there is one way to be sure: raise the subsidy rate from 60 percent to

75 percent or more. As the subsidy increases, it is reasonable to assume that each

subsequent person enticed to purchase coverage is a little healthier than those who

would have purchased at a lower subsidy. At a 75 percent subsidy, most unemployed workers could afford to stay on COBRA, adverse selection would probably be

very small, and employers’ overall costs would be more likely to decline.

The House-passed proposal also allows the tax credits to be used for individual

coverage. That is important, because firms with fewer than 20 employees are not

required to offer COBRA coverage, and workers laid-off from those firms would not

be able to continue their employer-based coverage in any event. The bill also allows

workers eligible for COBRA to use the tax credit for individual coverage instead.

Allowing workers eligible for COBRA to use the credit for individual coverage

doesn’t change the relative price of health insurance they face. Previously, a laidoff worker could choose COBRA or individual coverage with no subsidy. With a percentage subsidy of any amount, the relative price doesn’t change. Economists would

say that the substitution effect in that case is zero—because the price of COBRA

didn’t change with respect to the price of individual insurance, there is no reason

for people to change their decision between the two.

However, there also could be a so-called income effect. That is, the presence of

a subsidy gives the worker a higher net income after purchasing health insurance—

that effect can also impact purchasing decisions. In this case, I think it is reasonable

to assume laid-off workers would be very concerned about holding on to their familiar employer-based health coverage. Although any income effect in this case would

probably be faint, I believe it would work in the direction of people choosing COBRA

coverage.

In sum, under current law a laid-off worker eligible for COBRA faces a choice of

COBRA or individual coverage with no subsidy. Most go uninsured. With a subsidy

of 75 percent or more, most would choose insurance. Those who would have purchased COBRA without any subsidy would almost certainly choose COBRA over individual coverage if equal percentage subsidies were offered. Those who would have

purchased individual coverage would probably stick with that too, although some

may switch to COBRA if subsidies were offered.

We don’t know whether COBRA-eligible workers who otherwise would have been

uninsured would choose COBRA or individual coverage after a tax credit was offered. Some would probably choose individual coverage. Therefore, the improvement

in adverse selection in the COBRA market would not be as great if subsidies were

also available for individual coverage—as in the House-passed bill—compared with

proposals that would restrict the subsidy to COBRA coverage alone.

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Permanent Tax Credits for Individual Coverage

The Administration proposes to give low-income people who can’t get health coverage at work a refundable tax credit of up to 90 percent of their premium up to

limits of $1,000 per covered adult and $500 per child, up to two children. Therefore,

the maximum credit would be $3,000 for a two-adult, two-child family. The proposal

would allow the tax credits to be used for individual coverage, or coverage obtained

through a purchasing group or high-risk pool.

These tax credits would be available in full for single people with annual earnings of $15,000 or less, or families with earnings of $25,000 or less. The credits would

phase down to zero for individuals with annual incomes of $30,000, one-adult families with incomes of $40,000, or two-adult families with incomes of $60,000 a year.

The proposal would use a novel procedure to make the credits available in advance: People would prove their eligibility based on their previous year’s tax data.

Individuals would present their earlier tax forms to an insurance company or purchasing group to demonstrate eligibility; then the credit would be deducted from

their premium. That is an unwieldy procedure—it requires insurance companies or

purchasing groups to adjudicate eligibility based on personal tax returns. However,

workers would not be obliged to ‘‘reconcile’’ the tax credits they received in that

manner on their end-of-year tax forms in order to calculate their tax credits with

greater precision and up-to-date income data.

The biggest flaw in the Administration’s proposal is that it does not allow people

who could get health coverage at work to receive tax credits, even if their incomes

are very low. That is unfair, since low-income people who can’t afford coverage at

work (or who struggle to afford work-based coverage) would get nothing. They would

have an incentive to switch to other (often higher paying) jobs that don’t offer coverage.

In general, businesses that don’t offer employee benefits like health insurance can

afford to grant higher wages instead. When they decide to hire or retain a worker,

businesses focus on the cost of the total compensation package, not the split between

cash wages and non-wage benefits. Of course, individual workers may not always

be able to trade benefits for wages, because they may not have a wide choice of jobs

with different mixes of compensation available to them at any one time. But in the

overall economy and over a sufficient period of time, the choice of health benefits

versus higher wages is very real.

Under the Administration’s proposal, low-income workers would have a particularly strong incentive to take higher wages instead of employment-based health benefits, and then use the tax credit to purchase individual coverage. To save their employees the hassle of switching into no-benefit jobs to take advantage of that incentive (and to retain valued employees), some small businesses would just stop offering coverage in the first place. That would reverse the recent trend toward more

small employers offering coverage to their employees.

Second, because its tax credits would cover up to 90 percent of a premium, the

Administration’s proposal could spawn the development of inferior insurance plans

for low-income people. For example, the Administration’s plan would give an indi- vidual purchasing a $1,000 policy a tax credit of $900 (90 percent of $1,000). Similarly, someone purchasing a really cheap $500 policy would get a tax credit of $450

(90 percent of $500). The Administration’s tax credit would pay 90 percent for pre- miums costing up to roughly $1,110 (the maximum $1,000 credit is approximately

90 percent of $1,110). The problem is: any coverage valued at $1,110 or less is probably pretty meager coverage. (For example, the average premium for self-only coverage purchased through employers is about $2,400.) Low-rate insurance would be

better than nothing, but it might not really solve the core problem: getting everyone

access to high-quality medical care.

One simple way to improve the Administration’s proposal may seem

counterintuitive: reduce the maximum percentage of a health insurance premium

the tax credit could cover from 90 percent to 50 percent across the board. That

would give people incentives to purchase full coverage—for example, a person wish- ing to obtain the full $1,000 credit would have to purchase health insurance worth

$2,000, which is closer to the value of mainstream coverage. Those wishing to purchase cheaper, less generous coverage could still do so, but they wouldn’t get the maximum $1,000 credit, and the credit couldn’t cover more than half of the premium in any case. Because young and healthy workers could not get the full credit

for cheap, barebones coverage outside the workplace, they would have a stronger incentive to stick with employer-based coverage (and their employers would have a

much weaker incentive to drop coverage on their behalf).

On the downside, fixing the Administration’s tax credit so that it could cover at

most 50 percent of the premium would reduce the number of very young or healthy

people who would be induced to purchase insurance. It would give them an incenVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00106 Fmt 6633 Sfmt 6621 E:\HR\OC\A970.XXX pfrm04 PsN: A970
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tive to purchase more expensive coverage with a richer set of benefits than might

otherwise be available.

However, we should not try to get health insurance to young, healthy people by

discouraging employer-based coverage or encouraging low-rate benefits. The better

path toward universal coverage is to make mainstream group coverage affordable

and easily available at every workplace (whether or not the employer helps pay for

coverage) and in every state.

Therefore, a second way to improve the Administration’s proposal would be to

allow low-income workers to use the credits toward the purchase of employer-based

coverage. Since employer-paid health premiums are already excluded from employees’ incomes, the caps on tax credits for employer-subsidized coverage should be

lower than those for individual coverage. That would keep the tax treatment of employer coverage and individual coverage roughly equal, and thereby eliminate incentives tilted toward one form of coverage.

Finally, the tax credits should be administered—at least as an option—through

the workplace. All employees, on their first day on the job and each year thereafter,

should receive an enrollment form for health insurance. At the very least, that enrollment form should contain a menu of options. States should take on the role of

ensuring that options for reasonably priced group coverage were available, ideally

through purchasing groups. A special version of the Federal Employees Health Benefits program could be used as a backup, if states didn’t ensure a choice of coverage

was available.

Employers who sponsor coverage would deduct premiums from employees’ paychecks, as they do now. In addition, they would add back to an employee’s pay the

tax credit for which the employee was eligible, up to the amount of the employee’s

share of the premium. In effect, companies would give tax credits to their employees

as they purchased coverage, right on their paychecks. The government would pay

employers back contemporaneously, through bookkeeping adjustments in the

amounts withheld and sent to the federal government for employees’ tax payments.

Employers who do not sponsor coverage would nevertheless give their employees

enrollment forms for at least one menu of health plans. (Those employers could provide options from other insurance companies or groups, but at the very least would

supply a form for a menu of health plans put together by the state.) Like firms that

sponsor coverage, they would handle payroll deduction of premiums, forwarding

those payments to the purchasing group. They would also add back to employees’

paychecks the tax credits for which the employees were eligible. Again, the company

would be reimbursed for the tax credits via its business tax arrangements.

How would employers know whether or not an employee was eligible for a tax

credit? The employee’s hourly wage could be used as a guideline. A schedule of hourly wages could be drawn up to match the Administration’s annual earnings limits.

Tax credits provided on employees’ paychecks should probably also be reconciled

on their end-of-year tax returns. At the end of the year, the company would show

the amount added to workers’ pay from the tax credit on their W–2 forms. Then

workers would file for the tax credit on their tax returns; that would be the final

determination of exactly how much they would receive. The IRS could add a worksheet on the W–4 form so that employees with multiple jobs or a spouse who works

could figure an appropriate amount to add to their pay.

Reconciling tax credits advanced through the workplace or health insurers could

reduce the number of people willing to take them in the first place, if they feared

having to pay the money back at the end of the year. But it would also allow workers whose employers paid 100 percent of the premium for health insurance (and received less in wages as a result) to share in the credit. That is the only truly fair

way to distribute tax credits, and it would ensure there were no incentives for employers to reduce the share of health premiums they pay.

Conclusion

While the latest economic indicators signal improvement, I believe for several reasons that the economic recovery is likely to be weak, and unemployment will keep

rising for some time. Meanwhile, after a long period of slow growth, health insurance premiums are increasing rapidly. The combination of a slow economic growth

and rising health premiums will cause the number of the uninsured to rise, perhaps

significantly.

The PPI strongly supports the effort to make refundable tax credits an integral

part of a renewed drive toward universal health coverage. I encourage committee

members to increase the subsidy level of the temporary tax credit for displaced

workers from 60 percent to 75 percent or more, to better ensure that few workers

would lose health coverage and that employers’ health costs would be reduced. The

Administration’s proposal for permanent credits for individual health insurance

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should be expanded to include employment-based coverage, and should also be made

available through payroll deduction at the workplace. In any event, the percentage

of the premium for those tax credits should be reduced from a high of 90 percent

to a flat 50 percent to encourage comprehensive coverage.

ing, Mr. Lemieux, is that the mechanism is okay, it is just the meChairman THOMAS. Thank you very much. So what I am hearf chanics surrounding it, the way in which it is utilized. But the tax

credit itself, if it is done correctly, is a model that your group would

support.

Mr. LEMIEUX. Yes, sir. Tax credits should be a cornerstone for

the drive toward covering the uninsured.

Chairman THOMAS. Thank you.

Ms. Lav, in describing the potential horrors of this system, I am

not quite clear, do you believe that the Federal law would preempt

State law that is now in place?

Ms. LAV. No, I don’t think we would go in that direction at all.

Chairman THOMAS. Okay.

Ms. LAV. I mean, I think that that is one of the problems, you

know, that you cannot. It is very difficult to fix this individual insurance market, and that is the reason you can’t rely on it. I was

saying we certainly are not going to mandate States to do this.

Chairman THOMAS. All right. Then do you know that the provision that we proposed has guaranteed issue in it?

Ms. LAV. Well, you know, guarantee issue is, you know, as under

HIPAA is one thing, but it is guarantee issue at what price? And

when we are talking about credits for low- and moderate-income

people, you know, if somebody is willing to issue them a policy at

an exorbitant price, it is not any real benefit or choice for them at

all.

Chairman THOMAS. And do you understand that the legislation

was not a fixed dollar amount, but rather a percentage of the cost

of the premium with no cap on it?

Ms. LAV. You are talking about the displaced worker?

Chairman THOMAS. Yes.

Ms. LAV. Yes.

Chairman THOMAS. So that that argument I believe is much

less significant if you are provided with a percentage of the cost

with no cap.

Ms. LAV. Well, I think if you are living on unemployment insurance, you are going to have trouble paying the other 40 percent——

Chairman THOMAS. No, no. No, I understand all that, but the

way you presented it, it was as though if people didn’t realize what

was in the legislation and it was a fixed dollar amount.

The other thing that I find interesting is the current State laws

in all 50 States have guaranteed renewal provisions. And if I were

to take the time and go through and look at what States currently

provide, all 50 States, for example, require approval of product design, consumer protections, premiums, the provisions which encourage pooling. I just have a very difficult time, for someone who in

criticizing it could certainly criticize it because it doesn’t do

enough, but that what you have done is created some arguments

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which I don’t believe are valid, and that you immediately then shift

to doing more of the same.

Do you agree with Professor Gruber that if you were to enhance

Medicaid as you indicated, that it would in fact also undermine the

employer-based system?

Ms. LAV. I believe that Professor Gruber has been misquoted

here this morning. I am sorry he was not at this hearing to speak

for himself, since his name has been invoked so much.

But as I understand it, his data suggest that there is no more

than 20 percent displacement from Medicaid expansions, and that

the larger data, what has been cited is from a study that was

counting people who actually—as being part of the displacement

who actually were not eligible for Medicaid, parents of the children.

So I think that data that has been quoted here is not—— Chairman THOMAS. Do you believe it is realistic to assume that

most States in their current fiscal condition would raise the percent

of poverty to cover many of these displaced workers who, as we

have discussed, are not really low-income people? Is that a realistic

possibility?

Ms. LAV. Well, you know, the Senate Finance Committee proposal was talking about a 90 percent match and, I mean, some people were even talking about a 100 percent match. I think the real

issue is how do you get some insurance to these people that is insurance that they actually can use, that is not going to cost them

an amount that people cannot afford when they are on unemployment insurance, and that will be available to them even if they

happen to have diabetes or some other problem which hasn’t prevented them from working, but will prevent them from getting insurance. And so I think there has to be a very, very generous or

even a full Federal contribution, but I think the mechanism is a

much better one than throwing people onto the individual market.

Chairman THOMAS. And if you provided a 100 percent—I find

it ironic that you would use ‘‘match’’ in reference to 100 percent— if you gave the insurance away, would that not have an impact on

the employer-based system?

Ms. LAV. For unemployed people? No. I mean, you know, if you

are talking about people who are unemployed. It would certainly if

you were doing it on the, for the——

Chairman THOMAS. Uninsured.

Ms. LAV. Regular credit, but if you are doing it for the displaced

worker—and you would have to have, you know, an income cap.

You couldn’t let States decide to do it up to 450 percent of poverty.

You would have to do it, you would have to place a cap on it, but

that certainly is possible.

Chairman THOMAS. Indeed, there would be a number of mandates.

Ms. LAV. But I think 90 percent is what the Center was advocating.

Chairman THOMAS. There would be a number of mandates that

you would have to place on States to make it work.

Dr. Butler, thank you very much. I do believe that the Progressive Institute has also matured in its thinking, in terms of the

way——

Dr. BUTLER. I am glad to see they have come along so well.

106

Chairman THOMAS. Yes. But it is a pleasure to have both of

you with us.

In terms of the eHealth, Mr. Patel, if we are talking about a

credit which is now going to be built into the system, how difficult

would it be to modify the software so that people could see what

their actual out-of-pocket cost would be, if in fact that were available?

Mr. PATEL. That is a fairly straightforward exercise. It is an additional column that would, under individual single policies, show

a minus $1,000. And if they were able and willing to put in their

income bracket, then we could show how that scales based on that.

But the computational logic in the display is pretty straightforward.

Chairman THOMAS. And is someone able to kind of reverse engineer a plan? That is, if I were looking for one that did prescription drugs in some way but didn’t cost more than X dollars a

month, can you input parameters for a plan and then see if any

match it?

Mr. PATEL. We made it simple for people to put in parameters

such as deductibles, co-pays, and they can sort on deductibles, premiums, and other items. When it comes to line item benefits, and

that is where our apples-to-apples comparison chart may get pretty

straightforward, but not as simple as simply typing in the word

‘‘maternity.’’

Chairman THOMAS. Thank you. Also, I note that there are some

folks, perhaps even some on this panel, who are not as computer

literate as either they would like to be, or perhaps many people out

there. The argument is that this is still very, very exotic stuff, and

we are dealing with a limited number of people. One of the terms

of the art are a number of hits on a particular site. I mean, obviously if 2,000 or 3,000 people a month access this, it is a pretty

limited universe. What are we looking at in terms of the number

of hits on eHealth?

Mr. PATEL. If you don’t mind me modifying the question, ‘‘hits’’

sometimes are misconstrued because the numbers become inflated.

Unique visitors to our site are approximately half a million per

month.

Chairman THOMAS. Well, that is significantly different because

unique visitors could in fact visit the site several times, making different comparisons, and under the normal ‘‘hit’’ terminology each

of those would be counted as a hit. You are talking about

unduplicated counts. Is that another way of saying it?

Mr. PATEL. We have a mechanism to screen out duplicated visits from the same computer. Hence, these are truly unique visits

from unique computers. Hits sometimes include different graphics

and different pages——

Chairman THOMAS. Yes. Absolutely.

Mr. PATEL. And again, it is just misconstrued.

Chairman THOMAS. So you are talking, if we could say this in

a rough way, and perhaps it is too distorted, but I mean half a million head of households kind of thing looking at it, which then

when you add up the number of people that could be impacted by

this, gets into possibly the millions fairly quickly, and this is someVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00110 Fmt 6633 Sfmt 6602 E:\HR\OC\A970.XXX pfrm04 PsN: A970
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thing that I think will only grow exponentially. So I do want to

thank you for your presentations, all of you.

The gentleman from California wish to inquire?

Mr. STARK. I would be glad to yield to Mr. McDermott.

Chairman THOMAS. The gentleman from Washington is elevated to the top of the list.

Mr. MCDERMOTT. I was certainly counting on Mr. Stark to lead

this off.

Chairman THOMAS. Does the gentleman wish to defer to someone on this side?

Mr. MCDERMOTT. No, I have a couple questions.

Chairman THOMAS. Okay.

Mr. MCDERMOTT. As you might guess. On the eHealth stuff, I

thought the last witnesses were a little bit—well, I don’t know— I felt misled a bit, in their talking about these health care plans

for which you would pay. And they said, well, the definition is in

the bill we passed last year, so I went and got it. And it says,

‘‘Qualified health insurance means insurance which constitutes

medical care.’’ Now, I don’t think you would call that a defined benefit program. That is about as wide-open a definition, as

unmeaningful a definition of health care, as I can imagine your

paying for.

So when I looked at the eHealth, I looked at the Blue Cross of

California for $127, and I suspect, and I don’t know enough, I need some help, that you line up these $127 policies for young people.

I mean, those would be people who say, ‘‘I haven’t got enough

money for health insurance, so here is a change, and I’m going to

go get this.’’ But I notice one thing about it is that it doesn’t have

any maternity benefits, just exactly what you would expect young

people to probably need at some point.

And then you get over into things like pharmaceutical benefits,

and you are talking about formularies and a whole bunch of things

here. Most people don’t—I mean, and that is for $470 a month. I

keep thinking about my laid-off Boeing worker—and the Chair is

gone. The Chair says you are going to get 60 percent. Now, do I

understand that means if it is a $7,000 policy, you get 60 percent

of that? You get $4,200? And that somebody in another company

that is getting a $3,000 policy, they get $1,800? Is that it? So we

are going to have all kinds of levels of benefits, depending on how

well people guess about what their health is going to be. Am I seeing how you are constructing this? It is a guaranteed payment, not

a guaranteed benefit package, is what I am getting at.

Mr. PATEL. Mr. McDermott, if I can address the pieces that I

understand, specifically about the quotation, we put in two 40-yearold adults as well as a child, and so the prices you are seeing reflected in this chart are about 40 year olds. And they have a choice.

It is a 40-year-old male—actually it is a 42-year-old male, a 41-

year-old female, and a child that is 5 years old. Here what we are

demonstrating is that there are options——

Mr. MCDERMOTT. Are they assumed to be absolutely healthy?

No medical underwriting in this at all?

Mr. PATEL. Yes. At that point the quotation is typically on what

is called Tier 1 pricing data, so it is unadjusted average prices that

the health plans actually sell. But I should point out that some of

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the plans don’t include maternity. The first one doesn’t, the much

lower priced one at $127 per month for all three individuals, but

the $457 policy as well as the $470 policy do include maternity benefits. They are much more robust policies.

And what I am pleased to report to you today actually is, you

know, we have an affiliate relationship with the union organization

that serves those specific Boeing employees that you mentioned,

the SCPEA union, southern California Professional Engineering

Association, and off of their own web site they have a pointer to

eHealthInsurance, understanding that sometimes COBRA policies

can be very expensive, and they would like their people to be empowered to go and shop and find a policy that is right for them.

And so I am happy that we are able to serve some of those constituents in the Boeing area.

Mr. MCDERMOTT. But you do recognize that they are going to

have less benefits when they come to your—when they leave that

Boeing contract and come down onto your Web site, they are looking at less benefits.

Mr. PATEL. I haven’t done the comparison.

Mr. MCDERMOTT. But it wouldn’t surprise you.

Mr. PATEL. It wouldn’t surprise me if there is a difference. But this is a fairly robust policy, when we look at the $450 per month

for three people. It includes most aspects of a plan that—— Mr. MCDERMOTT. One week of your unemployment would pay

for it, but of course you are going to get this six times, 60 percent

of $7,000. You get $4,200 from the government, so you have only

got to make up $3,000, huh? If you can do that.

Mr. PATEL. Yes, for the COBRA policy. That is challenging. For

a policy that someone might buy on their own, I think this would

equate to—— Mr. MCDERMOTT. So you are really suggesting it would be better to leave the Boeing COBRA policy and go down and get one of

these individual policies.

Mr. PATEL. It would be cheaper for some people to do that. For

those that have health conditions, and where the policies might be

more expensive, it is better for them to stay with the COBRA.

Mr. MCDERMOTT. Thank you.

Mr. MCCRERY. [Presiding.] Mr. Houghton?

Mr. HOUGHTON. Thank you very much.

I am sorry I wasn’t here for your testimony, Mr. Patel, but you

know one of the criticisms of allowing people to purchase individual

policies outside the employer structure is that there aren’t good

policies available on the market, and yet I think you had mentioned something like 87 percent of the policies that you served

were sort of comprehensive. I mean, is this sort of representative

of the general outside market, or it is just something that you are

involved with?

Mr. PATEL. No, I believe what we are demonstrating here is statistically significant and representative of the majority of the

United States. You know, on our site we have 10,000 different

plans across 100 different health insurance companies, and so the

information that we release, when we actually look at the data, we

wanted to know, are these bare-bones policies or are they of real

substance?

109

And that is where we found that, you know, two-thirds of the

policies had less than a $1,000 deductible and that 87 percent of

them are what we considered comprehensive. And that is a very

vague term, but it is where we used kind of the equivalent of what

is in Medicare A, Medicare B, and some med supplement with prescription drugs to constitute what is comprehensive, and we found

that 87 percent of these policies were in fact meeting the definition.

Mr. HOUGHTON. Good. Well, that is helpful. Thank you very

much.

Mr. MCCRERY. Mrs. Thurman?

Mrs. THURMAN. Hello, and thank you for being here today and

giving us an opportunity to kind of discuss the issues versus just—

you know, so we can see where some of the problems are and

where potentially we could actually do things to help.

Mr. Patel, I am very familiar with your information and have

worked with you, and anything that can give somebody an opportunity to look and be able to see what might be available to them

I think is a good idea. You mentioned, though, in your model that

you had a 41-year-old, a 42-year-old, and a child. What was the average income? Was there an income in that?

Mr. PATEL. No, we don’t have income data. When we ask people

to apply for health insurance, they don’t share that information.

Mrs. THURMAN. So part of the problem that we have might

even be as to understanding, with the tax credits that were being

talked about, there may be several of these people that would

never be able to, really be able to use that because of the income

level that they are at. I mean, we may find that, which I think is

quite frankly one of the issues we even have with the uninsured

issue of unemployed, because it is based on last year’s salary, not

this year’s, and you have a Boeing employee that was at $30,000

who would not have an opportunity to participate, in my estimation, with any of this.

Mr. PATEL. I could say absolutely yes. I wanted to be very clear

that this is not the solution for everyone, and that impoverished individuals will absolutely need a specific solution. And this would

represent people in my own family, it would represent people that

I have worked with as a Big Brother, that they will need certain

programs to help them overcome the affordability barrier. They

have not a single dollar of discretionary income to provide toward

health insurance. And I have been shocked to find that in some

places people below 100 percent of the Federal poverty level even

don’t qualify for Medicaid.

Mrs. THURMAN. The other question that I have, and maybe this

is to Dr. Butler, you know, as I talked about earlier, certainly the

issue that is going on in Florida, we have not taken a new highrisk person in since like 1991, somewhere around there. They have

got a $100 million deficit. But one of the other things that we are

hearing is there is very limited, if any, ability to go out on an outside market as an individual. Maybe in what Mr. Patel is looking

at, which is a PPO, is an HMO, managed care, but there are several areas of this country, as we know, that don’t have even those

instruments available to them.

110

What kind of research have you done in looking at this tax credit

that shows that even if you had a tax credit, that you would have

an insurance instrument available to you as an individual?

Dr. BUTLER. I think there are two ways of responding to that.

The first is just to amplify what Mr. Patel said, that one of the advantages of a credit that is available for people to go outside say

COBRA coverage or any other insurance is that they then can look

and they can seek the kind of coverage that is available, that fits

their needs.

The second point is that once you provide a subsidy in some way,

the market will change, just as the market changed for employerbased coverage once the IRS ruled that you could get a tax exclusion for it. In other words, once you start to put money in people’s

pockets, then other kinds of markets begin to develop. I am not

suggesting that we take a laissez faire approach. I have suggested

in my testimony that—— Mrs. THURMAN. Can I ask something in there?

Dr. BUTLER. Yes.

Mrs. THURMAN. In the self-employed, is there a cap on their

tax credit? Could they only make up to a certain amount? I don’t

know the answer to that.

Dr. BUTLER. You mean under current law?

Mrs. THURMAN. Yes, under current law. If they made $80,000

a year, can they still get the—— Dr. BUTLER. I believe it is a straight deduction. Yes, it is a deduction, I believe, without any limit. A credit is much more advantageous for people at the lower income level.

Mrs. THURMAN. And then maybe you two all can give me some

ideas of what you are finding out there on the open market for individual instruments of insurance.

Ms. LAV. I mean, unlike the eHealth or the CEA, there was a

Kaiser study which looked at people that had—and went beyond

the surface to the individual underwriting with people that actually

had real life problems, which as I said, half of the uninsured and

two-thirds of the low-income older uninsured have. And they found

lots of refusals, lots of exclusions, downright refusals, lots of exclusions of whatever that person’s problem was, which may be why

they need the insurance, and insurance premiums that were two

or even three times the basic premium that we are talking about

here today. So I think that is really what you would find in the real

world.

Mr. MCCRERY. I am sorry. I am going to try to get Rob Portman

in before we go vote, and then Pete Stark.

Mr. Portman.

Mr. PORTMAN. Thank you, Mr. Chairman, and thank you for

your testimony today and your patience in waiting for us. I guess

I have a couple more elementary questions. First, Mr. Patel, I

would appreciate your talking a little bit about some of the current

opportunities out there, and maybe the additional opportunities

that would come with a more vigorous individual market.

And I think Dr. Butler is right, I think the market will change.

How much it changes is uncertain in health care. We have seen

that, and that is one reason we have a problem today, is that the

market hasn’t adjusted as some of us thought it might, even in the

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current configuration, particularly for smaller businesses. And, you

know, I have constituents back home who are coming to me now

and telling me woes that sound a lot like 1992, 1993 and 1994. You

know, in my own town of Cincinnati we have had a pretty aggressive HMO health care market, and now we are seeing 11, 12, 15,

20 percent increases for smaller businesses.

The first question I would have is really for anybody, but Dr.

Butler may be the most qualified to answer it, and that would be,

what are other countries doing in terms of the individual market?

Most countries have more of a socialized or nationalized system, I

suppose, that are developed countries. But do you have any comparative information on this development of an individual market

that might be successful?

Dr. BUTLER. Well, I don’t have it off the top of my head. In the

British market about 10 percent of people are involved in the individual market, or small groups, based on the place of employment.

In Switzerland there is in fact an interesting combination of a national program and national subsidy and a requirement for insurance, with private plans being made available to people.

Mr. PORTMAN. Is it like the British system, where you opt out

of the national plan, or is it something you do concurrent—— Dr. BUTLER. Unfortunately, in the British system you don’t opt

out in the sense of getting your money back. You have to buy twice.

Mr. PORTMAN. Right.

Dr. BUTLER. But some people, many people choose to do that

because of the deficiencies of the government-sponsored system in

Britain.

Mr. PORTMAN. I guess the question I would have is, is there

any experience in any other country that we have where we have

gone to an individual market and we have been able to see the

kinds of affordable health care for individuals that we all like to

see in this country? I know you have some ideas about pooling, and

particularly among small business—— Dr. BUTLER. Well, I would look at the—I think a good equivalent of what you are talking about is the very health plan that you

are in, the Federal employees system, which although it is technically an employer-based system, it is in fact 10 million people

shopping as individuals for plans. That is what it actually is.

Mr. PORTMAN. Right.

Dr. BUTLER. And we see a very rich market there and a very

effective market.

Mr. PORTMAN. But that market, that depends on a very

healthy subsidy as well.

Dr. BUTLER. I don’t disagree with that, but all I am trying to

point out is that there is a very strong market there for what is

a subsidized individual system, and that if you were to provide a

subsidy certainly at the 75 percent level, which is what we are

talking about in the FEHBP, I think you would solve almost all the

problem. If you are not going to get that far, you are obviously not

going to solve as much of the problem.

I am just making the point that a market has developed, a very

effective market, in the FEHBP system, based on subsidizing people directly and having advanceability, because you get a lower premium and the plan itself gets a direct payment, which is exactly

112

what the Administration is arguing for. So I think you actually

have in place, right before you, the basic structure of a market that

would develop if you did provide this subsidy.

Mr. PORTMAN. There was discussion earlier about the efficiencies in various plans, and I think it was Ms. Lav who talked

about some of the inefficiencies in an individual market, and yet

there are a lot of inefficiencies in the current system. And when

you think about it, the way in which we subsidize now through the

employer-based system, there are obviously some plans that get a

larger Federal subsidy than others based on the kind of plan that

is offered.

And the question is, on the individual market, can you overcome

some of those inefficiencies by providing more of a blanket subsidy,

in essence, or caps on the kinds of plans that are being offered, so

you don’t have a Cadillac plan and a Ford plan and then some with

no plan at all, all of which are subsidized by the Federal government. Do you have a response to that?

Ms. LAV. Well, while there are inefficiencies in almost all of

these systems, I think what you are doing is making it worse with

the individual market, because in the employer plan, in the

FEHBP, you are not saying some people can get insurance if you

are healthy and some people, if they are not healthy and you really

need it, don’t get insurance. And so I think that is the ultimate in

efficiency, which is what is throwing people on the individual——

Mr. PORTMAN. But we have built safeguards into the system already, and we could always do more, correct?

Ms. LAV. I am sorry?

Mr. PORTMAN. We have already built in safeguards with regard

to preexisting conditions and other prohibitions on exclusions.

Couldn’t you build that into a system?

Ms. LAV. Not unless you are willing to go to some kind of community rating or price control so people could actually afford it if

they are sick, because insurers always will have the advantage, if

they can, to shed the individuals who they think are going to cost

them money. And they won’t want to take them up, and unless

they have to take them up, just as in the FEHBP the insurers have

to take all comers, then it is not going to work.

Mr. PORTMAN. Right. Thank you, Mr. Chairman.

Mr. MCCRERY. Mr. Stark?

Mr. STARK. I guess I will just have to ask you to raise your

hands, but I am going to guess that we could provide Medicare for

the under-65 population for probably $3,000 a year. It was $4,000

for the 55 to 65, for the buy-in, so I am extrapolating. Kids are only

about $1,000, so you can fuss with me about the $3,000, but I am

pretty close.

If you add a maximum co-pay of $1,000, one exposure to the hospital, and $100 for the doctor, you are talking about at most $4,000

for a plan that—I handed out this list of benefits that I got off the

e-group—that is probably just as good as that, and most of those

had a $3,000 premium and a $1,000 co-pay. So you could have

Medicare with completely open enrollment and community rating,

and why would anyone therefore object if using this tax credit, we

allowed people to purchase Medicare as an alternative?

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That is all we would need to keep the insurance companies honest. If they want to compete, let them compete. And we already

have it for the seniors, where obviously the private insurance didn’t

want to compete. And so I would be perfectly willing to say, ‘‘Okay,

let’s do it,’’ but just let Medicare offer a plan at budget net and cost

as we do now, with the subsidy for part B no higher, and go at it

that way. Who would object to that?

Dr. BUTLER. I think you would immediately see, of course, the

adverse selection against Medicare, which is one of the big concerns

with that. The people who would quickly and immediately take

that option would be the people with the highest cost.

Mr. STARK. Yes, but our first concern is the guy who doesn’t get

any insurance through the highest market.

Dr. BUTLER. I understand that. I am just trying to point out

that the cost of providing that coverage—— Mr. STARK. It is interesting to see how the conservatives always

worry about the poor people and the sick people first, that they are

jamming it to us rich healthy people. I like that, Stuart. You are

true to form. Always worry about the rich people, never give a hoot

for the poor. At least you are consistent.

Dr. BUTLER. Well, I think my record is very clear on that, Congressman.

Mr. STARK. Yes, your record is very clear. You don’t give a rat’s

behind for the poor and the indigent. All you worry about is rich

people getting their tax breaks.

Dr. BUTLER. Congressman, I—— Mr. STARK. Your career is outstanding in that regard.

Dr. BUTLER. If you look at the proposals that I have actually

put forward, you will find that in fact I, like Mr. McDermott and

Mr. McCrery have been more radical than most in terms of saying

we should in fact remove the subsidy almost entirely from the rich

people who get the current exclusion, and provide it almost entirely

to middle—and low-income people, and I am on the record as saying that.

Mr. STARK. Well, all I have to say to you is, ‘‘Bunk.’’

Mr. MCCRERY. I have a related question to Ms. Lav, kind of the

flip side of this. Ms. Lav, I appreciate your objections of a subsidy

or a tax credit with respect to very low-income people, that a tax

credit is not going to do them any good if they have to come with

$1,000 or $2,000 out-of-pocket to make it, to pay the full premium.

My question to you, though, is would you be willing to cap the current tax subsidy for employer-provided health insurance in order to

finance more generous tax credits for low-income people?

Ms. LAV. I don’t think that particular tradeoff would be a very

good one, because—— Mr. MCCRERY. Why not?

Ms. LAV. Even though I am saying that the tax credit is inadequate, my written testimony reflects this, I am not really willing

to say that there should be a bigger tax credit, because the larger

the tax credit, the more you are pulling away from the employerprovided system. I actually would like to see—— Mr. MCCRERY. Okay. Well, let’s say we are going to expand

Medicaid. Let’s say we are going to expand Medicaid. That costs

money, too. How about capping the tax subsidy on employer-proVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00117 Fmt 6633 Sfmt 6602 E:\HR\OC\A970.XXX pfrm04 PsN: A970
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vided health insurance to pay for the increase in the Medicaid program? Would you be in favor of that?

Ms. LAV. I actually have not analyzed that trade-off, so I am not

really prepared to——

Mr. MCCRERY. So you are saying you could maybe live with a

cap on the tax subsidy for health insurance?

Ms. LAV. I am not saying that. I am saying that, you know, I

think we do not want to ruin the part of the health insurance system that works well, and I think that is the employer-provided system. So I think we would have to go very, very cautiously there.

We don’t want incentives for employers not to provide insurance,

and they already are having incentives not to. You know, we already have very rapidly rising health care costs right now, and so

I don’t think this is the time to necessarily dump on employers in

that way.

I mean, I know economically it is passed on to the employees,

you know, in the long run in the trade-off for wages. But I think

that in the first instance right now I think employers would look

at it as a problem. So I am not willing to say that, you know.

I mean, I think if we were ever getting to the point where we

were looking at a comprehensive solution to, you know, to try and

move toward universal coverage, that would be one among many,

many elements that could be considered.

Mr. MCCRERY. So you wouldn’t reject that out of hand?

Ms. LAV. That would be one among the elements in a comprehensive solution.

Mr. MCCRERY. Thank you very much for that concession, and

thank you all very much for the work that you have done and continue to do on this problem of the uninsured. Mr. Patel, I think if

for no other reason we should thank you for illustrating very clearly how providing very coherent, cogent information to consumers is

possible, and certainly we do that through the Medicare Program,

through Medicare+Choice. You have done it for your company. And

so it is possible to provide that kind of good information to consumers so they can make good choices.

Thank you all. This hearing is concluded.

[Whereupon, at 2:35 p.m., the hearing was adjourned.]

[Questions submitted from Mr. Doggett to Mr. McClellan and Mr.

Weinberger, and their responses follow:]

Council of Economic Advisors, and

U.S. Department of the Treasury

Washington, DC

May 23, 2002

Question 1

I was pleased to hear that the Administration is concerned about the

plight of the uninsured, yet I was disappointed to learn that its proposal

relies too heavily on individual insurance coverage. In many states, there

are no ‘‘guaranteed issue’’ or ‘‘community rating’’ requirements on private

insurers, so consumers looking for individual coverage, even with a tax

credit, will pay higher than average rates or face denials and exclusions for

preexisting conditions.

(a) How does the President’s proposal ensure that affordable and comprehensive policies are available for those uninsured consumers using your

proposed tax credit to purchase coverage in the individual health insurance market?

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(b) The Kaiser Family Foundation, the Center for Studying Health System Change, Consumers Union and others conclude that without substantial reforms, health coverage in the individual market is often prohibitively

expensive or inadequate, particularly for low-income individuals in poor

health. Would you support individual health insurance market reforms—

such as a ‘‘guaranteed issue’’ requirement already adopted in some states—

to ensure that uninsured individuals can actually receive coverage in the

individual market?

(c) Please provide me with any evidence you have that refutes the claim

made by Dr. Jeff Lemieux, in his testimony at the February 13, 2002 hearing, that ‘‘Because [the Administration’s proposed] tax credits would cover

up to 90 percent of a premium, the Administration’s proposal could spawn

the development of inferior insurance plans for low-income people.’’

(d) Please provide any evidence you have that conclusively demonstrates

that individuals with low-income or poor health can find comprehensive

insurance—with prescription drug coverage and modest cost-sharing—in

the individual health insurance market.

1a) Analysis by the Council of Economic Advisers finds that Preferred Provider

Organization (PPO) policies with significantly lower premiums are almost always

available. These plans are not ‘‘first-dollar’’ plans, but they provide effective health

coverage. They typically cover all major types of medical services and treatment,

have per person deductibles of $1,000 ($2,000 per family) while also covering preventive and emergency care, they generally provide significant discounts on all prescriptions and in-network services, and they support a range of provider choices.

The average premium for a plan of this type was less than $3,000, and was less

than $1,000 for young individuals. For lower income uninsured Americans, the proposed health insurance credit thus typically covers more than half of the premium

the purchaser would face, and generally covers more than a third. Such affordable

policies are substantially less common in states with community rating than in

states without such regulation. This analysis is supported by an independent survey

of its clients by eHealthInsurance, and by a survey of the actual inquiry and purchasing behavior of persons who seek policies in the individual market by the Coalition for Affordable Health Insurance.

These affordable policies aren’t just for those in perfect or good health. Analysis

by the National Association of Health Underwrititers (NAHU) found that individual

health insurance was available and affordable for those with various chronic conditions, including people with allergies, past surgeries, depression, and heart conditions.

1b) First, this interpretation of the Kaiser study is misguided. The National Association of Health Underwriters (NAHU) participated in that research and has issued

a written response disagreeing with Kaiser’s interpretation of the data http://

www.nahu.org/news/Kaiser-NAHU—Analysis.doc) While Kaiser focuses on the fact

that average premium offers are higher for people with chronic or preexisting conditions, the lowest offer that the applicants received in each of the geographic areas

that was studied was actually not much higher than the rate for healthy applicants.

Except for the one person who was HIV-positive each of the individual received an

offer of insurance. Furthermore, many states have high-risk pools that would help

those who could not get affordable insurance in the individual market.

This does not suggest that guaranteed issue regulations are effective in expanding

coverage. States with guaranteed issue regulations require that insurers write policies for all comers. When coupled with community rating (such as in Maine, New

Jersey, New York, and Vermont), this policy means that even those with very high

expected health care costs will face the same price as healthy people. The drawback

of these policies and many other forms of regulation is that the premiums facing

most purchasers may be higher than they would be in the absence of regulation,

since the premium collected must be sufficient to cover the expected expenses of the

group. Given higher premiums, the healthiest individuals (those with low expected

costs) may chose not to buy policies. Regulation thus provides another cause for adverse selection, and a spiraling upward of premiums. In fact, in many states with

guaranteed issue the premiums for people with the many of the preexisting conditions studied by Kaiser would face much higher premiums than they would in individual markets without such regulations. According to NAHU, ‘‘almost all of the applicants [with chronic conditions] would have faced vastly higher health insurance

costs’’ in states with guaranteed issue and community rating. We are currently

studying proposals for improving high-risk pools. These pools canprovide access to

insurance for persons with pre-existing conditions without excessively raising costs

for healthy persons, and are functioning well now in many states.

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1c) The health insurance tax credit proposal has coverage requirements that exceed current HIPAA standards. Our standards would require coverage of catastrophic expenses for in and out patient care. These standards of coverage are consistent with benefits included in a broad health insurance plan and with the plans

described in the CEA Health Insurance White Paper. Our standards ensure that

policies that did not provide meaningful coverage of serious illness would not be eligible for the credit. Just because the plans are less expensive and do not provide

first-dollar coverage does not mean that they are inadequate. Covering large expenses is the most important aspect of insurance, and the health insurance credit

would work in conjunction with existing markets to enable millions more to have

this kind of protection. Moreover, in addition to protection against the cost of major

medical needs many of the policies examined also provide for inexpensive periodic

screening and access to discount services should a medical problem arise.

1d) As discussed above, for lower-income Americans, the proposed health insurance credit typically covers more than half of the premium the purchaser would face

for insurance that provides access to the private market, and generally covers more

than a third. Please refer to the CEA Health Insurance White Paper’s appendix on

this point. A recent study by the health insurance distributor eHealthInsurance (of

people purchasing their policies) found that three-quarters of premiums for individual health insurance plans that it sold were less than $2,000 and three-quarters

of family premiums were less than $5,000. Many cost-effective plans include some

prescription drug coverage. A Kaiser study, analyzed carefully by the National Association of Health Underwriters, found that even hypothetical applicants with chronic

conditions could generally get health insurance in every market they surveyed and

that it wasn’t that much more expensive. The NAHU analysis is supported by a recent study by the Council for Affordable Health Insurance, Real People, Real Coverage, which surveyed Member companies and found that 81 percent of actual applicants got a policy and 70 percent got their policies at standard rates.

Question 2

In Texas, the Medicaid and SCHIP programs have had some success in

ensuring that low-income families have access to medical care, including

care for preexisting illnesses and disabilities. In your testimony at the February 13, 2002 hearing, you questioned the accuracy of estimates by Dr.

Jon Gruber concerning the cost-effectiveness of tax credits relative to expansions of public insurance.

(a) On a per-insured-individual basis, is the tax credit you propose more

or less expensive than an expansion of existing public insurance programs?

(b) How many previously uninsured individuals would your proposal

cover?

(c) Under your proposal, how many currently insured individuals would

move from employer (group) coverage to individual (nongroup) coverage?

(d) How do your estimates from the preceding three questions compare

to those estimates of proposals to expand public insurance programs?

(e) Please provide any evidence you have to support your answers to the

preceding four questions.

2a) A February 2002 Kaiser study estimates the annual public cost of the tax credit per newly insured person is $2,757. There are several reasons that this estimate may be much too high. For example, an author of the Kaiser study noted that

he assumes policies cost $10,000 in the individual market. When the authors follow

more standard assumptions and allow for access to less expensive health insurance

(with premiums more in line with the range we find available in the marketplace),

many more previously uninsured people take up health insurance and the cost per

newly insured person is only $1,527. Even a narrow expansion of public insurance,

such as expanding Medicaid to parents (mandatory Medicaid/CHIP expansion to

parents with incomes up to 200% of the Federal poverty level), would be more costly, at $2,974 per newly insured person, than the tax credit proposal. This is true

even though Medicaid plans typically provide limited choices of providers and treatments, and documented problems in access to care in many states. And most uninsured Americans would not even be eligible to benefit from that proposal.

2b) Research and independent analysis by Treasury experts indicates that the tax

credit will allow 6 million or more Americans who would otherwise be uninsured

during the year to gain one or more months of coverage. The credit covers a substantial portion of the premium most currently uninsured people would face in the

private individual insurance market, thus increasing participation in and enhancing

the efficiency of the individual market for health insurance.

2c) According to the estimates of the Department of Treasury’s professional staff,

approximately 15 percent of those using the credit would be individuals who move

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from employer to individual (nongroup) coverage. This amounts to about 1 percent

of those currently with employer coverage. The credit is designed to minimize such

crowdout; as noted below, however, crowdout is a substantial problem for Medicaid

expansions.

2d) The current estimates of switching from employer to public health insurance

coverage in Professor Gruber’s most recent work (in reports sponsored by Kaiser and

by the Center for Budget and Policy Priorities) and in the larger Kaiser study which

he references, most likely underestimates the amount of switching that would occur

in a new public insurance expansion. There is a large body of academic economic

research that finds considerable amounts of such switching in Medicaid expansions.

Much of that research has been done by Professor Gruber himself; in his study that

was peer-reviewed and published in an academic journal (David Cutler and Jon

Gruber, Does Public Insurance Crowd Out Private Insurance?, Quarterly Journal of

Economics, 111(2), May 1996, 391–430), Professor Gruber found that at least 48 percent and up to 75 percent of the takeup of Medicaid expansions represented replacement of private health insurance coverage. In a recent review, Kronick and Gilmer

conclude that most studies find about 20 percent, on average, of the increase in

Medicaid enrollments from past Medicaid expansions came through the crowding

out of private insurance. They find relatively more crowdout for Medicaid expansions to relatively high income levels, between 100% and 200% of the federal poverty line than at lower income levels.. Moreover, individual state measures intended

to prevent this crowding out were ineffective [Kronick and Gilmer (Jan/Feb 2002)

‘‘Insuring low-income adults: Does public coverage crowd out private?’’ Health Affairs 21.1, 225–240]. Thus, it is likely that further Medicaid expansions to higher

income levels than those observed in the past would result in even greater crowdout

of employer coverage.

Furthermore, measures intended to reduce crowd out in public programs such as

requiring a previous lack of insurance, run the risk of encouraging individuals to

go without insurance in order to qualify for a benefit. In contrast, the health insurance tax credit provides a broad incentive to immediately purchase insurance before

an injury or illness occurs.

Question 3

3. RAND, the Urban Institute, the American Academy of Actuaries, Consumers Union and others, conclude that expansions to MSAs will undermine access to health insurance and lead to the creation of lucrative tax

shelters.

(a) Please provide any evidence or quantitative analyses you have that

refutes the claim made by Iris Lave, in her testimony during the February

13, 2002 hearing, that the ‘‘Administration’s proposal would made MSAs

more attractive as a tax shelter to healthy, affluent individuals by removing or weakening many safeguards Congress enacted to prevent MSAs from

turning into a significant tax shelter opportunity.’’ (b) What actions do you propose to prevent such exploitation of MSAs?

(c) How many previously uninsured individuals would obtain coverage

through the Administration’s MSA proposal?

(d) What tis the per-insured-individual cost of the Administration’s MSA

proposal?

(e) Please provide any evidence you have to support your answers to the

preceding three questions.

3a) Lowering the eligible deductible for MSAs will make them more appealing to

families at all income levels including moderate income families. Currently about

one-third of returns reporting an MSA deduction reported AGI of $50,000 or less.

Lowering the deductible will make the MSA plans more attractive to families with

moderate health expenses and will thus reduce the possibility that ‘‘adverse selection’’ between MSA plans and conventional insurance will be a problem. Indeed,

many Americans are now purchasing plans with deductibles in line with our proposed MSA requirements, and also with coverage of basic and preventive health

care, even though they are receiving little assistance from the government with

these out-of-pocket costs.

3b) As indicated above, lowering the minimum MSA deductible will most likely

make these plans much more attractive to moderate income individuals. The

amount that can be contributed to an MSA under the President’s proposal cannot

exceed the maximum annual deductible, ($2,500 in the case of a single policy). The

cap on the maximum contribution limits the extent to which a high income individual will contribute more than a moderate income individual to an MSA and limits the extent to which an MSA can be used as a tax shelter for healthy high income

individuals. Rather, the proposal is designed to enable the millions of Americans

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who are facing rapidly rising out-of-pocket costs in their insurance plans to get access to the same tax-favored status for those costs as already exists for employer

payments toward health insurance premium payments. In addition, according to the

Congressional Research Service, higher-income individuals tend to be older and to

use more medical service, futher mitigating the extent to which MSAs can be used

as a tax shelter. Indeed, since tax-free contributions cannot exceed the policy deductible, the allowable contributions into the MSAs will be reduced (and are more

likely to be consumed by even modest use of medical services), rendering MSAs an

even less effective tax shelter.

3c) The primary proposal for expanding private health insurance is the refundable, advanceable tax credit, targeted to lower and moderate income families. The

primary purpose of the permanent extension and expansion of MSA is to provide

additional opportunities to employers and employees to find cost effective ways to

provide insurance and choice. We also support proposals to expand public insurance

coverage.

3c) Under the current law forty percent of the MSA accounts appear to have been

opened by individuals who had been previously uninsured. And all remaining individuals are able to purchase policies with more affordable protection against high

expenses, and they also get new tax subsidies for out-of-pocket expenses.

3d) As explained above the primary purpose of the MSA proposal is to provide

greater choice and to make coverage more affordable for the millions of Americans

with employer coverage who are facing rapidly rising out of pocket costs. In addition, the proposal provides greater tax equity for families who choose cost effective

coverage, and families who choose coverage with broad provider networks (and higher out-of-pocket payments) rather than narrow, closed-panel HMO plans with low

out-of-pocket costs.

Question 4

Nearly one-quarter of the uninsured have access to employer-sponsored

coverage but do not purchase it. Despite a subsidy from their employers,

many of these individuals cannot afford the premiums for coverage.

(a) What does the Administration’s proposal do to assist these uninsured

individuals?

(b) Would you support a tax credit that is available in both the individual

and employer-sponsored insurance markets?

4a) First, many of these low-income uninsured individuals will be eligible for the

Health Insurance Tax Credit and thus will have the option of purchasing insurance

with the credit. Second, we encourage the development of high-risk pools, statesponsored pools, and other targeted assistance programs. Most states already have

such programs, and additional Federal support as envisioned in the House-passed

economic stimulus bill would enable those who faced high premiums on the individual market to purchase affordable coverage.

4b) Plans to subsidize the purchase of insurance through employers are very expensive, on top of an unlimited tax deduction worth a total of $120 billion a year

already. Several studies have shown that extending a health insurance credit to

those who choose to purchase health insurance through their employers is very expensive and does not result in a large decrease in the uninsured per dollar spent.

For example, one PPI proposal was estimated by the proponents to cost $40 billion

per year Such a credit could result in simply shifting the burden of health insurance

premiums from employers to the Federal government.

Question 5

The Administration’s proposed FY2003 budget for the Department of

Health and Human Services reveals contradictions in spending priorities.

While there is a modest increase for Community Health Centers (CHCs)

and the National Health Service Corps (NHSC), there are severe cuts to

funds for medical professionals’ training as well as funds for coordination

among health providers. In fact, cuts to the Health Professions Nurse Loan

Program and the Community Access Program alone are more than twice as

large as the meager funding increase for CHCs and the NHSC. According

to the Administration’s budget data, that represents approximately $398

million in cuts compared to $158 million in funding increases. This is on

top of the Administration’s decision to allow significant cuts in Medicaid

funding aimed at providers serving large numbers of the uninsured.

(a) At a time when hospitals face significant staff shortages, how do your

proposals address the concern that the same Community Health Centers

supported by the Administration are unable to find sufficient medical

staff?

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(b) As the President stated during his February 11 speech at the Medical

College of Wisconsin, Medicaid and SCHIP play vital roles in providing

medical care to vulnerable families. However, many states face financial

constraints that threaten the vitality of these two crucial programs. What

actions do you propose the Administration take to help states avoid detrimental cuts in both benefits and eligibility for Medicaid and SCHIP?

What the Congressman refers to as allowing ‘‘significant cuts in Medicaid funding

aimed at providers serving large numbers of uninsured’’ is actually the closing of

a loop-hole that allowed States to bill the Federal government inappropriately for

billions of dollars in excess Federal matching funds. The Medicaid law prohibits

State financing practices that increase Federal Medicaid spending beyond statutory

matching rates. Recent studies by the Inspector General of the Department of

Health and Human Services and by the Congressional Budget Office have identified

provider payment policies that have allowed billions of dollars in Federal Medicaid

funds to be used for purposes other than that intended including nonhealth expenditure. It was clearly not the intent of Congress as expressed in the Medicaid law to

allow states to collect such excess funds. The Administration has taken steps to increase State accountability while also increasing State flexibility, and will continue

to work to implement the Medicaid law effectively.

5a) The Administration supports several proposals to encourage people to enter

the medical professions and to target more medical professionals to underserved

areas. The Budget significantly increases funding to finance scholarships for health

professionals from disadvantaged backgrounds, and to encourage additional providers to locate in medically underserved areas. The Budget includes $99 million to

help boost the supply of nurses by providing grants to schools of nursing.

5b) Medicaid and SCHIP are valuable programs that bring health insurance to

millions of low-income families. The Federal government already pays a large share

of the costs of these programs and matches States’ spending between 50 and 76 percent for Medicaid and 65 and 83 percent for SCHIP. Finally, in the FY 2003 budget,

the Administration has proposed allowing States to keep $3.2 billion in SCHIP

funds, which were set to return to the Treasury at the end of this fiscal year and

the next. This additional funding will assist states in maintaining their current coverage levels, and will ensure that no state has insufficient Federal matching funds

to expand their SCHIP program if they wish to do so. The Administration is eager

to work with any state that wants to take advantage of these matching funds, and

has proposed a range of initiatives such as the ‘‘HIFA Model Waiver’’ for quick apStatement of Cori E. Uccello, Senior Health Fellow, American Academy of

proval of any new state proposals to assist lower income populations.

[Submissions for the record follow:]

f Actuaries, and Roderick E. Turner, Chairperson, High-Risk Pools Work

Group, Task Force on Health Insurance Rate Filing

The American Academy of Actuaries is the public policy organization for actuaries

practicing in all specialties within the United States. A major purpose of the Academy is to act as the public information organization for the profession. The Academy

is non-partisan and assists the public policy process through the presentation of

clear actuarial analysis. The Academy regularly prepares testimony for Congress,

provides information to Federal elected officials, comments on proposed federal regulations, and works closely with state officials on issues related to insurance. The

Academy also develops and upholds actuarial standards of conduct, qualification

and practice, and the Code of Professional Conduct for all actuaries practicing in

the United States.

Introduction

The American Academy of Actuaries appreciates the opportunity to comment on

issues related to providing tax credits to decrease the number of uninsured. The

Academy was asked to address three issues related to options for expanding health

insurance to displaced workers and the expansion of high-risk pools: (1) whether a

tax credit would result in a corresponding increase in premiums on the policies that

displaced workers could purchase, (2) whether costs would increase for employers

and/or insurers if displaced employees were not required to complete their COBRA

eligibility before they could purchase a HIPAA qualified health plan in the nongroup market using their government subsidy, and (3) the level of funds necessary

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1The bill changes the prior coverage requirement to be HIPAA eligible from 18 months to 12

months for these people.

to provide a premium buy down for participants in high-risk pools. We will address

each of these issues in turn.

Will Insurers Increase Premiums in Response to Tax Credits for Displaced

Workers?

Whether insurers will increase premiums in response to providing tax credits for

displaced workers depends on the duration of the credit, whether the credit is temporary or will be available to all future displaced workers, and any underwriting

restrictions imposed on non-group insurers. Generally, credits of limited duration

(e.g. 12 months) likely will have less effect on premiums than credits of longer or

unlimited duration. Similarly, credits that are temporary (i.e. available only to

workers displaced within a given time frame) will have less effect on premiums than

credits available to all future displaced workers. Premiums for non-group insurance

issued on a guaranteed basis may be more affected by tax credits than premiums

for non-group insurance that is underwritten.

H.R. 622 would provide tax credits equal to 60 percent of premiums for up to 12

months for workers losing their jobs between March 16, 2001 and December 31,

2003. Credits can be applied to the 2002 and 2003 tax years. Non-group coverage

is available to displaced workers on a guaranteed issue basis if they are HIPAA eligible,1 but the only plans available on a guaranteed issue basis are the HIPAA

plans in their state of residence. Given this scenario, it is unlikely that insurers

would significantly increase premiums if tax credits were provided to these displaced workers.

Most non-group policies are written on an individual policy form. These policies

are regulated by state insurance departments that must approve the rate levels.

The insurance departments have criteria that these types of policies must meet before the department will approve a rate increase. These criteria are based on the

experience of the contract and are compared against required loss ratios (incurred

claims divided by earned premiums). They would not allow for a rate increase without justification based on claims experience. Generally, states use past claims experience, but expected future changes in experience may be submitted in some instances. In other words, companies are not free to set the rates at whatever level

they choose. Furthermore, all policyholders of similar demographics must be

charged the same premium. In other words, one person could not be charged a higher premium than another person with similar demographics simply because he’s a displaced worker. For these reasons, individual policies would not see a significant

increase in premium if a tax credit were made available.

In some states, policies that are not regulated like individual policies can be sold

in the non-group market. These are written using a trust vehicle. The rates on these

products can be set by the company without approval from the insurance department. However, much like any other industry, competition will act to keep rates

low. If Company A raises its rates above Company B, it risks losing its customers.

Some states do not use a high-risk pool for the HIPAA guaranteed issue mechanism. If for any reason a certain company in such a state would get a disproportionate amount of HIPAA eligibles, the company could affect its overall claims experience enough for it to require an increase in rates. The increase needed would depend upon the proportion of HIPAA eligibles it obtains compared to what it had

planned for in its pricing. Even if this rate increase should be needed, it likely

would be much lower than the level of the 60 percent tax credit. In these states,

both HIPAA eligible and non-eligible people are subject to extra premium surcharges based on their health conditions.

In states that use high-risk pools as the HIPAA mechanism, an increase in the

number of insureds in these mechanisms may increase the amount of funding required. This could increase the assessments made to insurance carriers. Currently,

the level of assessment is usually around 1 percent of total premiums charged by

the carriers. Even if the assessments doubled or tripled over time, which would

seem unlikely, the rate increase this would cause would be minimal compared to

the 60 percent tax credit.

What is the Impact of Eliminating the Requirement That COBRA Eligibility

Be Exhausted Before HIPAA Non-group Eligibility?

Currently, HIPAA requires that individuals exhaust their COBRA eligibility before becoming eligible for a HIPAA qualified plan in the non-group market. One option being considered in conjunction with providing tax credits to displaced workers

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2 Charles D. Spencer & Associates, Inc. ‘‘2000 COBRA Survey: One in Five Elect Coverage,

Cost is 154% of Active Employee Cost.’’ Spencer Research Reports (Chicago, IL, August 25,

2000): 329.04.–1. 3Paul Fronstin. ‘‘Health Insurance Portability: COBRA Expansions and Job Mobility.’’ EBRI

Issue Brief No. 194 (February 1998).

is eliminating this requirement. In other words, displaced workers would be allowed

to use tax credits for either COBRA coverage or non-group coverage, or they could

move to a HIPAA qualified policy at any point during their COBRA coverage period,

including immediately at termination of the group coverage.

Currently, COBRA suffers from adverse selection and premiums collected from

COBRA participants fall below claims for these participants. In 2000, average

COBRA costs exceeded the average costs for active employees by 54 percent.2 Although people are more likely to elect COBRA coverage if they are unhealthy, demographics can also explain part of the difference in costs between active workers and

COBRA participants. COBRA participants are older than active participants,3 presumably because younger COBRA eligibles can find less expensive coverage in the

non-group market, especially if they are healthy. COBRA coverage can be an attractive option, however, for older COBRA eligibles.

An important issue is whether costs would go up, compared to the current environment, for employers and/or non-group insurers if displaced workers were not required to complete their COBRA before being eligible for a HIPAA qualified plan

in the non-group market. To help address this question, it is useful to consider the

insurance options for workers terminating employment.

Workers terminating employment can be assumed to be in one of two categories

based upon health. They either can or cannot qualify for a medically underwritten

health insurance policy in the non-group market. For each of these health categories, displaced workers today can go to one of three insurance status categories

after losing employment (assuming that they do not get another employer based

plan or go to a government program). For people who can pass underwriting, the

three insurance categories are: COBRA, a non-group policy, or uninsured. For people who cannot pass underwriting the three insurance categories are: COBRA,

HIPAA eligible plan (after exhausting COBRA eligibility), or uninsured.

For people who could qualify for a non-group policy, the effect of a tax credit

would be to make coverage more affordable. As a result, many people who chose to

go uninsured in the absence of a tax credit would be encouraged to purchase coverage. This influx of relatively more healthy people initially into both COBRA plans

and the non-group marketplace would improve the experience of both plans. In addition, in the current environment, some people who would pass underwriting may

choose to purchase more limited and inexpensive plans in the non-group market

rather than the more expensive COBRA plans which often have richer benefits than

people choose to buy in the non-group market. A tax credit may induce some of

these people to stay with their COBRA plan rather than go to the non-group market. This may especially occur among younger displaced workers. This would improve the experience of the COBRA plan, but could worsen the non-group experience

by removing some of the better risks.

On the other hand, some of the unhealthy people who went uninsured in the absence of a tax credit would now purchase a COBRA plan or a HIPAA eligible plan.

This influx of relatively unhealthy people could worsen the experience of both

COBRA and HIPAA non-group plans. It is also possible that some relatively

unhealthy people currently enrolled in a more limited non-group plan would instead

choose to stay in COBRA if it offers more comprehensive coverage. While this would

happen with less frequency than the other situations it would shift some of the

poorer risks from the HIPAA non-group plans to the COBRA plans.

The net effects on the COBRA and non-group markets of a tax credit for displaced

workers, combined with an elimination of the requirement of exhausting COBRA

eligibility before HIPAA eligibility, are unclear. In particular, it is unclear whether

the influx of healthy participants would offset the higher costs of new unhealthy

participants. To answer this question, we would need more information on the relative share of the displaced worker population that is unhealthy and the effect of

reducing premium costs on the COBRA and non-group purchasing behavior of displaced workers by health status and other demographics, especially age.

Subsidizing High-Risk Pools

We have been asked to estimate the funds needed to provide a premium buy-down

for participants in state high-risk pools. Specifically, how much it would cost the

Federal Government to provide a subsidy to all states if the subsidy were predicated

on reducing the premium to a level lower than normally associated with high-risk

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4 Communicating for Agriculture, Inc. Comprehensive Health Insurance for High-Risk Individuals: A State-by-State Analysis, Fifteenth Edition, 2001/2002, Fergus Falls, MN: Communicating

for Agriculture & the Self-Employed (2001).

pools today. In particular, H.R. 622 would provide states grants of up to 50 percent

of the losses they incur in connection with the operation of a pool, if premiums

charged under the pool were restricted to no more than 150 percent of the premium

for applicable standard risk rates. Although the Academy could not estimate the

specific cost to the Federal Government for such a proposal within the timeframe

required for this statement, we can provide some insights into this issue.

Communicating for Agriculture prepares periodic reports that provide detailed information on state risk pools, including operating statistics. According to the most

recent report published in 2001, 29 states have created high-risk pools, including

24 that use the risk pool for portability under HIPAA.4 Total enrollment in these

pools in 2001 exceeded 127,000 individuals, and continues to grow. In 2000, risk

pool expenditures totaled $691 million, including $651 million in incurred claims

and $40 million in administrative costs. Premiums, however, covered only $391 million of expenditures, with the remaining funding coming from assessments on

health insurers or other entities ($250 million) and from state appropriations.

State risk pools provide a source of health insurance coverage to individuals who

might otherwise be unable to purchase insurance due to health conditions. Premiums charged for coverage under these pools exceed the standard rates for healthy

individuals in the non-group market, but fall below what would be charged in the

non-group market in states that allow for higher premiums for unhealthy individuals. Most states cap premiums for coverage in high-risk pools at no more than 200

percent of average standard rates. Indeed, for the risk pool to qualify as the HIPAA

portability option, premiums must be capped at 200 percent of the standard rates,

or less. However, several states cap risk pool premium rates at lower amounts. For

instance, Minnesota, Oregon, and California cap premiums at 125 percent of standard rates. Many other states cap premiums at 135 to 150 percent of standard rates.

An important consideration regarding the costs associated with lowering the premium cap is how the costs associated with individuals entering the pool at the lower

premiums compare to the costs for those already entering the pool at the higher premiums. If premiums are reduced, some individuals who do not buy a high-risk pool

product due to the expense would likely buy one in the future. It is possible that

the experience of these people would not be as bad as the current high-risk pool population. They would, however, be expected to generate claims in excess of their premium in most cases. This would create additional dollar losses for the program that

would not have existed before the subsidy. To induce states to lower their premium

caps, it is likely that an additional subsidy would be needed to cover these new

losses, as well as the subsidy needed for the current population.

One potential method of assessing the extent to which experience of the new entrants would differ from the current pool is to examine how the loss ratios of risk

pools with higher premium caps differ from loss ratios of risk pools with lower premium caps. Presumably, if lower premium caps encourage a broader, relatively more

healthy, risk pool, loss ratios for states with low premium caps would be lower than

those with high premium caps. An examination of loss ratios for state risk pools,

however, reveals no clear trend between loss ratios and premium cap percentages.

The lack of any discernable trend may reflect differences in the calculation of the

base rates to which the premium cap percentages are applied. In addition, some

state pools actually charge rates lower than the maximums prescribed, some states

charge different rates to HIPAA-eligible vs. other pool insureds, and some states

have a low-income subsidy program. Other differences may also contribute to the

lack of correlation between loss ratios and premium caps, including how eligibility

for the pool is defined and whether the enrollment is capped. All of these differences

would need to be considered when determining the relative risk of new entrants if

premiums were lowered.

Estimating the Federal subsidy required to encourage risk pools to lower their

premium caps would also need to consider additional factors. First, the incremental

growth in pool enrollment that may be experienced when premium caps are reduced

would need to be estimated. These estimates need to recognize that even without

changes in premium cap percentages, enrollment in most risk pools is growing, in

part due to the economic downturn. Perhaps more important, enrollment growth

would also need to be estimated for pools that have capped enrollment. Second, increases in health care costs will further increase the difference between premiums

paid to risk pools and the claims incurred. Finally, how the Federal Government defines risk-pool losses will affect the amount of subsidy. Defining losses broadly as

the difference between claims and administrative costs less premiums will require

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higher Federal subsidies than if losses are defined as net of assessments. However,

the more narrow definition of loss will penalize states that partly fund their risk

pools through assessments rather than solely through state appropriations, which

might lead them to reduce or modify their assessment methodology.

Statement of the Communicating for Agriculture and the

Self-Employed, Inc., Fergus Falls, Minnesota

f COMMUNICATING FOR AGRICULTURE URGES CONGRESSIONAL

SUPPORT FOR REFUNDABLE TAX CREDITS FOR HEALTH INSURANCE

CA Calls on Congress to also Extend Health Insurance Deductions for

Individuals; Strengthen Association Health Plans; Support Risk Pools;

Increase Competition

WASHINGTON, D.C.—In calling for support for the President’s position on refundable, advanceable tax credits for the purchase of health insurance, Wayne Nelson,

president of Communicating for Agriculture and the Self-Employed (CA), reminded

Congress that any legislative solution must address not only the problems of those

who have employer-based insurance, but also those who purchase individual health

insurance policies. ‘‘We have long supported refundable tax credits to assist those nearly 40 million

Americans who are now uninsured,’’ said Nelson. ‘‘And, a great many of this 40 million will not have access to employer-based insurance and must look for assistance

in the individual marketplace.’’

Nelson said his organization, which represents farmers, ranchers and small rural

businesses all across the country, initiated a Campaign for Consumer Choice and

Lower Health Costs last year specifically designed to support legislative changes

that would level the playing field for those Americans who purchase individual

health care coverage. In addition to refundable tax credits, the Campaign calls for:

• Extending the health insurance deduction to 100 percent for all self-employed

AND individuals who pay for their own insurance;

• Strengthening and expanding association health plans for individuals;

• Creating risk pools serving as health safety nets in every state to support workable access guarantees for those who otherwise would not be covered in the individual insurance market;

• Continuation and expansion of MSA accounts to offer more choices and help

lower health costs for individuals and the self-employed; and

• Restoring competition and choice to make health insurance more affordable for

individuals and the self-employed.

Communicating for Agriculture and the Self-Employed is a 30-year-old national,

non-profit, rural membership organization long known for its work on health care

reform, tax reform, and rural and agricultural policy issues. CA is made up of farmers, ranchers, small businesses and other self-employed members in all 50 states.

For more information on CA contact the Web site at 

fSelfEmployedCountry.org.

Statement of Jonathan Gruber, Ph.D., Professor of Economics,

Massachusetts Institute of Technology, Cambridge, Massachusetts

I am pleased to have this opportunity to provide an analysis of the implications

of the President’s proposed health insurance tax credit for health insurance coverage

and public sector costs. I am a Professor of Economics at MIT and have been doing

research in health economics for more than a decade. I am an Associate Editor of

the Journal of Health Economics, the leading journal of the Health Economics field,

and a co-editor of the Journal of Public Economics, the leading journal in the field

of taxation and public finance. I am also a Faculty Research Fellow at the National

Bureau of Economic Research, where I direct the Program on Children.

Over the past few years, through work with the Kaiser Family Foundation, I have

developed a microsimulation model to analyze the implications of tax credits for

health insurance. In this testimony, I would like to discuss the results of using this

model to analyze the President’s budget proposal. These results are part of an ongoing project with the Kaiser Foundation to estimate the effects of tax credits and

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public program expansions designed to expand coverage for the uninsured; the full

results from that project will be publicly released soon.

Background on the Model

The results that I discuss below come from a very detailed microsimulation model

of health insurance decisions. This model takes what the we know about individual,

firm, and insurer behavior, and uses that to predict what will happen to health insurance coverage, and public sector costs, when insurance policy changes. This approach is broadly similar to the approach used by the Congressional Budget Office

or Joint Tax Committee in scoring legislation, although there are of course many

differences in the particulars of execution.

This model takes as its base the 1999 Current Population Survey, updated to

2001 dollars. This nationally representative survey that allows me to estimate, for

the entire nation, the impact of policies such as tax credits. On to that data I have

matched information on the cost of both group and nongroup insurance from publicly available sources, in order to estimate the baseline from which policy changes

would move us.

The core of the model is a set of ‘‘behavioral responses’’ which map changes in

insurance prices (due to subsidies) to individual, firm, and market behavior. These

behavioral responses are developed through a careful reading of the health economics literature, incorporating both my research and that of others, and through careful consultation with a range of experts in academia, the private sector, and the government.

This model has been used extensively to analyze a variety of tax policy options.

The results from some of this analysis was presented in ‘‘Tax Subsidies for Health

Insurance: Costs and Benefits,’’ Health Affairs, 19(1), January/February 2000, pages

72–85. The model has been continually developed and updated since that earlier

work.

The President’s Proposal

The purpose of this letter is to present my results from analyzing the President’s

proposal for a health insurance tax credit in his FY 2003 budget. I am not analyzing

or incorporating any other of the President’s health proposals. The salient details

of the tax credit are:

• The credit is a refundable tax credit towards the purchase of nongroup health

insurance. It may not be used for public or employer-sponsored health insurance

purchases.

• For single filers, there is a credit of up to 90% of the costs of the nongroup plan,

with a maximum credit amount of $1,000. This credit amount is available up

to $15,000 of modified AGI; it then phases out fully by $30,000 of AGI.

• For joint filers, there is a credit of up to 90% of the costs of a nongroup plan,

with a maximum credit of $1,000 per adult and $500 per child, up to $3,000

total. This credit is fully available up to $25,000 of family income, and then

phases out fully by $40,000 of family income (if only one adult purchases insurance) or $60,000 of income (if more than one adult or any children purchase insurance).

• The credit can be used either retrospectively or in advance; in the latter case,

the Treasury Department would pay the credit directly to the insurer.

• There are future provisions to allow the credit to be used to purchase into group

insurance pools. I do not model those here, as they presume the availability of

pooling mechanisms that would need to be developed for this purpose. I focus

only on the effectiveness of this credit in the context of the nongroup insurance

market.

This credit structure is very similar to that analyzed in my earlier work. In that

work, I raised the crucial issue of advanceability. Since most of the uninsured have

low incomes, and low asset holdings, it will be quite hard for them to pay in advance

the costs of insurance and then be reimbursed for those costs more than one year

later when they get their tax refunds. The President proposes to solve this problem

through the advanceable credit described above.

An important question is how effective this approach will be in practice. There

are two reasons to be skeptical that this will be fully effective. First, if individuals

who claim the credit in advance, and whose incomes then turn out to be higher than

expected, are asked to ‘‘repay’’ the advance credit amount at tax time, this could

deter many individuals from claiming advance credits. Second, even if there is no

‘‘reconciliation’’ of this form, there may be wariness about using advance credits.

The experience of the Earned Income Tax Credit (EITC) is informative here. Advance payment of the EITC is available, and for almost all taxpayers this would be

125

more sensible than getting the refund in a lump sum the next year. Moreover, safeguards are in place so that individuals are very unlikely to ‘‘overclaim’’ their EITC

(e.g. that there is little odds of a reconciliation problem). Yet, fewer than 1% of EITC

claimants do claim their credit in advance.

As a result of these limitations, I find it highly unlikely that advanceability will

be fully effective. In my estimates below, I therefore make the assumption that it

is half-effective: that is, for half of individuals, the credit is treated as advanceable,

but for the other half, it is not.

Results of Analysis

The results of this analysis are presented in Table 1, which shows the aggregate

impacts of the tax credit. The first row of the table shows the aggregate costs. The

next panel shows the takeup (in persons in the first column, and as a percent of

group size in the second column) and costs by previous (before policy change) insurance status groups. The next panel shows the change in the size of each insurance

group due to the policy. The final row shows the revenue cost per newly insured

person.

My analysis suggests that:

• This policy will cost $5.2 billion per year.

• There will be 10.5 million persons who takeup the credit. Of those, roughly onethird (3.3. million) are the uninsured.

• There will be a very sizeable movement of almost 4 million persons out of employer-provided insurance. A total of 2.4 million persons will be dropped from

group insurance by their employers. Of those, one million will takeup nongroup

insurance, but 1.4 million will become uninsured. And 1.5 million persons will

switch from their group policies to nongroup policies.

• With 3.3 million previously uninsured taking the credit, but 1.4 million persons

who previously had employer-provided coverage becoming uninsured, there will

be a net reduction in the number of uninsured of 1.9 million.

• The net result is a public cost per newly insured person of almost $2,800.

Thus, the tax credit does have its intended effect of significantly increasing the

purchase of nongroup insurance by the uninsured. But it also has an unintended

effect of slightly eroding the group insurance market, so that the net reduction in

the uninsured is fewer than 2 million, or 5% of the existing number of uninsured.

Sensitivity to Insurance Cost Assumptions

One of the key debating points about those modeling tax credits for health insurance is the extent to which individuals will find low cost nongroup plans on which

they can use their tax credit. This is an important issue because the costs of

nongroup insurance plans are so high. For a 40 year old male in excellent health,

the average cost of nongroup insurance is roughly $2,000 per year. But these costs

rise dramatically with age and poor health status. Indeed, in my data, for the typical uninsured family the cost of a nongroup policy is estimated to be roughly

$10,000.

My estimates assume that individuals and families who purchase nongroup insurance will pay these average market prices for that insurance. But some claim that

the individuals will use this credit to avail themselves of new, low cost insurance

options. This claim is hard to evaluate without the policy actually being passed, but

it merits consideration.

Thus, Table 2 summarizes the results of my analysis under the base case, and

under two alternative assumptions about nongroup policy costs. The first assumption is that half of all persons are able to obtain nongroup policies at 25% below

the average cost in the market. The second is that half of all persons are able to

obtain policies at 50% below their average cost in the market. This second assumption in particular is fairly extreme. Even for a healthy 40 year old male, obtaining

a policy for $1,000 would involve a deductible on the order of $3,000, a 20% copayment, a $5,000 out of pocket maximum, 20% coinsurance on drug costs, and no coverage of mental health or other professional services (according to actuarial analysis

done for the forthcoming Kaiser Family Foundation project).

This first two columns of the table shows that there would be a modest effect of

a 25% premium reduction. The reduction in the number of uninsured increases from

1.9 to 2.2 million, with only a small increase in costs to $5.4 billion per year. But

there is a much larger effect of assuming a 50% premium reduction, as shown in

the second two columns. In that case, the number of uninsured falls by 3.6 million,

with costs rising to $6 billion per year. There is also a much larger displacement

of the employer insured, with the number of employer insured falling by 6.9 million

(1.9 million of whom end up uninsured).

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Discussion

The results from this analysis suggest the advantages and disadvantages of the

President’s tax credit proposal. The main advantage is that this proposal delivers

benefits to a large number of taxpayers (at least 10 million) at a relatively low cost

($5 billion per year). This helps reduce the inequities of the existing system of tax

subsidies, whereby those with employer-provided insurance (and the self-employed)

receive tax subsidized insurance and others do not.

The main disadvantage is that this policy has a very modest impact on the number of uninsured in the U.S. My central estimates suggest that the number of uninsured will be reduced by fewer than 2 million, or 5% of the existing number of uninsured. This amount equals roughly the rise in the uninsured estimated to be caused

by the recent rise in unemployment, according to a recent analysis by myself and

the Kaiser Family Foundation (available at http://www.kff.org/content/2001/6011/

6011.pdf). Thus, this proposal on net does not reduce the number of uninsured from

where it was one year ago.

The other disadvantage of this approach is that it displaces, rather than

supplementing, the group insurance market. The group insurance market remains

the most effective way to delivering insurance benefits, through its use of large

pools to minimize the variation in health risk to insurers. My estimates suggest that

for every one person gaining insurance coverage, two persons will be leaving the

group insurance market.

The limited impacts of this credit should not be surprising, given that it covers

such a small share of the costs of insurance in the nongroup market. As a result,

this credit does much more to help pay the costs of those already buying insurance

than to raise insurance coverage; roughly two-thirds of those taking the credit in

all my analyses are those who already have private insurance coverage.

A central question is the extent to which the effectiveness of this credit will be

boosted by the availability of ‘‘low cost’’ insurance options. As shown above, if half

the population is able to find an insurance policy that lowers the cost of their insurance by half, the reduction in the uninsured almost doubles at very little additional

cost. But I am quite skeptical of claims that low cost policies can raise the effectiveness of this tax credit, for two reasons. First, if such low cost policies exist today,

why are there still 40 million uninsured Americans? The answer is that most Americans do not want catastrophic-type coverage; they apparently would rather be uninsured than buy low premium, high out-of-pocket-cost policies. The enormous out of

pocket costs that are typically associated with these low cost policies make them unattractive to the uninsured.

Second, the very reason that such policies can be low cost is that they are only

purchased by the very healthiest individuals for whom they are affordable; in other

words, there is ‘‘virtuous selection,’’ as opposed to ‘‘adverse selection.’’ If a credit allows less healthy persons to purchase these policies, they will have to raise their

prices to adjust for this higher cost risk pool. In other words, low prices on these

policies today do not guarantee low prices in the world of a health insurance tax

credit; it seems likely that those low price policies will increase in price once more

‘‘typical’’ persons are buying them.

I would also like to emphasize the central nature of two aspects of this tax credit

policy. First, this credit is refundable. Roughly half of the uninsured do not pay

taxes, so that a nonrefundable credit does them no good. Indeed, my model suggests

that the number of uninsured would fall by less than half a million persons if this

credit were not made refundable. Given debates over tax credit refundability in

other contexts, it is important to recognize the importance of making any health insurance credit refundable.

Second, this credit is very tightly targeted to the lowest income families in which

most uninsured reside. Increases in income limits would do very little in terms of

increasing the impact of this policy, but would dramatically raise costs. For example, I have reestimated this model for the same proposal as that included in the

President’s budget, but raising all income limits by 50% (e.g. the credit for singles phases out from incomes of $22,500 to $45,000). The results of doing so, illustrated

in Table 3, are striking. The takeup by the previously uninsured goes up from 3.3

to almost 4 million. But there is a very large rise in the erosion of the group market,

including an increase in those moving from group insurance to uninsured of over

600,000. As a result, there is almost no impact on the net change in insurance coverage; the reduction in the number of uninsured goes only from 1.9 to 1.95 million.

But costs go up by over one-third, to almost $7 billion per year.

Thus, raising the income limits actually had pernicious effects on the insurance

market on net: the reduction in the uninsured was unchanged, but there was a

much larger net movement from group to nongroup insurance. As a result, the total

cost of the policy rose by over one-third with no gain in insurance coverage. This

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finding highlights how important it is to keep tax policies tightly targeted. If the

tight targeting proposed by the President is loosened at all as this bill becomes law,

it will greatly reduce its public policy benefits.

Table 1: Refundable Credit for Non-Group Insurance

Number of

Persons

(Millions)

Percent of

Insurance

Category

Net Cost

($2001

Millions)

Total Cost in $2001 5231

Total Takeup of Subsidy 10.47 4.4 —

Previously non-group 4.25 43 3066

Previously uninsured 3.3 7.5 3263

Previously employer-insured 2.57 1.6 ¥958

Previously Medicaid 0.35 1.9 ¥140

Total Change in Population Size

Non-group 6.19 62.6 —

Uninsured Ø1.89 Ø4.3 —

Employer-Insured ¥3.99 ¥2.5 —

Firm dropped to non-group 1.03 0.7 —

Firm dropped to uninsured 1.36 0.9 —

Switch to non-group 1.54 1 —

Uninsured due to decreased Contributions 0.05 0 —

Medicaid ¥0.35 ¥1.9 —

Cost per Newly Insured ($2001) $2772

Table 2: Refundable Credit for Non-Group Insurance—25% and 50% Premium Reductions

25% Premium Reduction 50% Premium Reduction

Number of

Persons

(Millions)

Net Cost

($2001

Millions)

Number of

Persons

(Millions)

Net Cost

($2001

Millions)

Total Cost in $2001 5404 6017

Total Takeup of Subsidy 11.91 — 15.45 —

Previously non-group 4.37 3119 4.48 3128

Previously uninsured 3.84 3755 5.56 4833

Previously employer-insured 3.26 ¥1253 4.79 ¥1546

Previously Medicaid 0.44 ¥217 0.63 ¥398

Total Change in Population Size

Non-group 7.4 — 10.68 —

Uninsured Ø2.16 — Ø3.62 —

Employer-Insured ¥5.01 — ¥6.9 —

Firm dropped to non-group 1.7 — 2.55 —

Firm dropped to uninsured 1.63 — 1.88 —

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Table 2: Refundable Credit for Non-Group Insurance—25% and 50% Premium Reductions—Continued

25% Premium Reduction 50% Premium Reduction

Number of

Persons

(Millions)

Net Cost

($2001

Millions)

Number of

Persons

(Millions)

Net Cost

($2001

Millions)

Switch to non-group 1.58 — 2.3 —

Uninsured due to decreased

Contributions 0.05 — 0.06 —

Medicaid ¥0.44 — ¥0.63 —

Cost per Newly Insured ($2001) $2503 $1663

Table 3: Refundable Credit for Non-Group Insurance High Phaseout Scenario: 50% Increase in Phaseout

Levels

Number of

Persons

(Millions)

Percent of

Insurance

Category

Net Cost

($2001

Millions)

Total Cost in $2001 6981

Total Takeup of Subsidy 12.47 5.3 —

Previously non-group 4.58 46.3 3806

Previously uninsured 3.98 9.1 4234

Previously employer-insured 3.54 2.2 ¥922

Previously Medicaid 0.37 2 ¥137

Total Change in Population Size

Non-group 7.86 79.6 —

Uninsured Ø1.95 Ø4.4 —

Employer-Insured ¥5.6 ¥3.5 —

Firm dropped to non-group 1.64 1 —

Firm dropped to uninsured 1.97 1.2 —

Switch to non-group 1.91 1.2 —

Uninsured due to decreased Contributions 0.07 0 —

Medicaid ¥0.37 ¥2 —

Cost per Newly Insured ($2001) $3581

The Healthcare Leadership Council (HLC) is a coalition of chief executives of the

Statement of Mary R. Grealy, President, Healthcare Leadership Council

f Nation’s leading health care companies and organizations representing all sectors

of health care. Our members are committed to advancing a market-based health

care system that values innovation and provides affordable, high-quality health

care. HLC would like to thank the Committee for focusing today on tax credits for

the uninsured and for the opportunity to submit this statement.

The HLC believes there is no greater health care priority in this Nation than the

over 40 million individuals who are without health care coverage. The health consequences to those not having health insurance are well documented. They tend to

get sick more often because they do not receive the preventive and diagnostic care

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that so many of us take for granted. They miss more time on the job and statistics

tell us they will die too early. In addition, we must consider the consequences to

our Nation’s overall well-being from having such a large population of uninsured,

including productivity losses and the strain on health providers caused by uncompensated care. The President and the Congress should be highly commended for giving the issue of the uninsured the attention it deserves.

The HLC supports a three-pronged approach for the uninsured. This includes: (1)

refundable tax incentives to encourage the purchase of insurance of the consumer’s choice, including employer-offered coverage; (2) improvements in the current Medicaid program and State Children’s Health Insurance Program (S–CHIP), including

enrollment of those currently eligible and using program dollars to expand private

coverage; and (3) increased efforts to facilitate awareness of the importance and

availability of health insurance, especially among small businesses.

President Bush has demonstrated a strong commitment to the uninsured by in- cluding more than $90 billion in his recent budget to begin mapping the way to coverage for a significant number of the uninsured. The majority of this funding would

provide a health tax credit to help families purchase insurance plans in the nongroup insurance market. The HLC believes this is a significant first step toward a

universal, market-based health care system. It is our goal to work with the Administration and Congress to encourage the development and expansion of this proposal. The HLC also supports the President’s proposed medical savings account and

flexible spending account amendments which will make these products more effective coverage options.

These proposals, as well as proposals to increase funding for community health

centers, assist hard-to-insure families and individuals in purchasing coverage from

state risk pools, and maximize use of existing S–CHIP funds, are all indicative of

the Administration’s resolve to strip away the diverse array of access barriers encountered by the uninsured.

The members of HLC are committed, as well, to raising awareness of this national

problem and bringing solutions to those lacking health coverage. In June of 2001,

we formed the national Health Access America campaign because we believe that

all Americans should have access to today’s modern medical miracles and life-enhancing technologies and treatments. Under this campaign, HLC members have

committed their leadership, energies and resources to help solve the Nation’s uninsured crisis.

In addition to our Health Access America campaign, the HLC continues to highlight model programs throughout the country that promote health coverage and access, presenting them with our ‘‘Honor Roll For Coverage’’ award. In 2001, we recognized Virginia’s model waiver program, that allows S–CHIP funds to be used for employer coverage, and South Carolina’s Communi-I-Care program, which provides

care to individuals who are not eligible for public assistance or employer-based insurance. In May 2002, the HLC will present our fifth Honor Roll for Coverage award

to Sacramento County in California. Sacramento has based its program on that of

a previous HLC Honor Roll awardee, and works with small employers to increase

access to coverage for their employees.

The HLC is also committing resources to continued research on the characteristics

of the uninsured and potential solutions to reduce the number of uninsured. Some

of our findings and observations that will bring a critical perspective to the topic

of today’s hearing include:

Characteristics of the Uninsured. Four out of every five uninsured persons are

in families with at least one employed family member. In other words, 15 percent

of the Nation’s population is uninsured and only a small percent of these people—

16 percent—are in families where no members are employed. Of the uninsured in

working families, 39 percent turn down an offer of insurance from an employer—

usually because they can not afford it, and 61 percent are not offered employer insurance. These striking figures suggest that refundable tax incentives could serve

to bridge the premium gap between what an employer and employee are each able

to pay for a health insurance policy. Such tax incentives could encourage many employers not now offering coverage to do so, and will also aid those not offered health

insurance by their employer.

True tax equity. For low income workers, the current levels of tax credits being

discussed for the purchase of non-group insurance are greater than the value of the

current exclusion from Federal income taxes of average health insurance benefits

paid by an employer. A commonly-discussed health insurance tax credit amount for

families is $3,000. However, for families with income levels between 200 to 300 percent of the Federal poverty level ($35,000 to $53,000 for a family of four), the tax

exclusion for employer-paid health insurance is worth only about $661. For families

130

between 300 and 400 percent of poverty, the exclusion is worth only about $802.

Thus a refundable health tax credit would be particularly valuable for low income

workers, even those who are offered insurance by their employers.

Maintenance of employer offers of insurance. The cost of tax incentive proposals to reduce the uninsured presents a challenge. This is especially true for proposals that allow tax incentives to be used for those with employer offers of insurance. This is because legislative ‘‘scorers’’ (Joint Tax Committee, Congressional

Budget Office, Office of Management and Budget) incorporate assumptions that

many of those already receiving employer-based insurance will be ‘‘bought out’’ with

Federal dollars and current employer expenditures will cease. However, employers

are paying for benefits given to workers as a form of wages. The extent to which

employers will reduce their contributions toward health insurance for employees

when a subsidy such as a tax credit is offered can be demonstrated by looking at

economic studies examining experiences with wage subsidies. HLC has examined

two studies (Katz, 1996 and Witte et. al, 1998) in which general wage subsidies and

child care subsidies from the government did not reduce overall benefit spending efforts by employers.

An additional consideration in regard to employer maintenance of effort for health

benefits is raised when targeting credits to only lower income employees. It is unlikely that employers would discriminate by reducing their premium contributions

only for low-income workers receiving the subsidy, while maintaining the current

contributions for higher income workers not eligible for the subsidy.

Limits of the S–CHIP and Medicaid programs. Evidence suggests that we are

reaching the limits of effectiveness in reducing the number of uninsured through the

S–CHIP and Medicaid programs. While S–CHIP and Medicaid have proven valuable

for providing health care to very low income populations, only about half of individuals currently eligible for Medicaid and S–CHIP actually participate. A number of

reasons have been cited for low participation rates including the fact that participation rates of means-tested public insurance programs decline as incomes rise. A

large number of those not participating are those who became eligible upon the inception of S–CHIP, when more children in families with higher income levels were

offered public insurance. This pattern of lower participation among higher income

persons is also evident in other government health care subsidy programs, including

the Qualified Medicare Beneficiaries (QMBS) and Specified Low-Income Medicare

Beneficiaries (SLMBs) programs. Researchers have concluded that substantial outreach is necessary to overcome barriers to participation, such as the possible stigma

associated with public programs.

These data suggest that eligibility alone, without considerable investment to remove existing barriers to participation, will not efficiently increase insurance coverage. Many eligible individuals in the higher income categories of Medicaid and S–

CHIP, as well as income categories under consideration for Medicaid and S–CHIP

expansions, are connected to the workforce. Therefore solutions involving employer

insurance may be more effective in increasing coverage rates for these populations.

Careful targeting. All Americans deserve access to affordable health coverage

options. However, current budget constraints may require a phased-in approach for

covering all the uninsured. As coverage rates increase, the marginal cost of each

newly-insured individual increases because greater numbers of the uninsured are

dispersed within populations of already covered persons. However, carefully targeted tax incentives to reach limited populations can bring down the costs per

newly-insured. For example, targeting the credits toward populations less likely to

already have coverage such as low-income families or workers in small businesses

or even a combination of these can help to reduce the cost of such an approach and

still reach many currently-uninsured persons. The HLC has modeled a number of

targeted tax incentive policies and would be happy to share them with the Committee.

Another population to consider targeting with tax incentives is dependents of

lower income workers not eligible for S–CHIP or Medicaid. Small and medium sized

businesses offering insurance to their employees contribute, on average, 48 percent

of the premium amount for employees, and only about 24 percent for dependents

of employees. Not surprisingly, in many cases, low income employees frequently cannot afford insurance for their dependents. Policy makers should take this fact into

account when designing targeted tax incentives policies for the uninsured.

Conclusion

Mr. Chairman, the Healthcare Leadership Council appreciates your substantial

efforts on the uninsured this past year and applauds you for your ongoing work to

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find ways to solve the Nation’s most pressing health care issue. The uninsured must

be our national health care priority for 2002. This multi-faceted problem will require

a variety of approaches and we look forward to working with you and the Administration to find concrete solutions.

Thank you for the opportunity to share HLC’s views today. We stand ready to assist this Committee in any way as you work toward solutions that will allow all

Americans to enjoy the benefits of our Nation

f’s health care system.

Statement of the National Association for the Self-Employed

The National Association for the Self-Employed (NASE) is pleased to have the opportunity to submit the following statement for the official record. We thank Chairman Bill Thomas, Ranking Member Charles Rangel, and Members of the Committee

for addressing the issue of health care tax credits.

The National Association for the Self-Employed (NASE) is a bipartisan, non-profit

small business trade association founded in 1981 that represents over 200,000 members nationwide. Ninety percent (90%) of our membership consists of small businesses with five (5) or fewer employees. The NASE’s primary goal is to help the selfemployed meet the challenges of making their businesses successful and one of the

self-employed community’s largest challenges is obtaining access to affordable

health coverage.

Below are various statistics of which I am certain the Members of this Committee

and witnesses of this panel are aware.

• There are approximately 24 million small businesses in our Nation. They account for 99.7 percent of America’s employers and employ 53 percent of the private workforce.

• There are approximately 43 million uninsured Americans in our Nation and

that number increases as the unemployment rate increases. Approximately 62%

or 24.5 million of the uninsured have a family head that is self-employed or

working in a firm with fewer than 100 employees. (Source: Employee Benefit

Research Institute data from the Census Bureau’s March 1998 Current Population Survey).

• According to the General Accounting Office’s October 2001 report on Private

Health Insurance, only 36% of employers with fewer than 10 workers offered

health coverage to their employees despite the fact that they represent about

61% of small employer establishments. The report cited the primary reason

small employers gave for not offering coverage was cost.

These statistics are telling us is that Congress and the Administration must focus

their efforts on small business access to affordable health care in order to effectively reduce the number of uninsured in our Nation.

The National Association for the Self-Employed strongly believe that health care

tax incentives including tax deductions and tax credits for the self-employed are

necessary to provide affordable health coverage.

Self-Employment Health Insurance Tax Deduction

Tax credits and deductions are a viable solution to begin addressing the existing

insurance inequities in the Tax Code. A new idea in tax policy is to create parity

between employer provided health insurance and health insurance for the self-employed.

Currently, premiums for an employer who sponsors health coverage for his/her

employees are not subject to FICA withholding tax (Social Security and Medicare).

Employees that utilize an employer sponsored health plan are also not subject to

FICA withholding tax (Social Security and Medicare) and thus enjoy health insurance premiums free from income tax and FICA tax. However, self-employed individuals are subject to the self-employment tax (Social Security and Medicare) on health

insurance premiums for themselves and their dependents. The result is that the

self-employed pay a tax premium on health insurance of up to 15.3% of the cost of

that insurance.

To explain this further here is an example:

John works for Widget Company, a small business with only two employees, including the owner. Widget Company provides employer paid health insurance for it’s

two employees and their dependents. Widget Company appropriately deducts in

total, the cost of the employee health insurance on its business tax return as an ‘‘ordinary and necessary’’ business expense as authorized by the Internal Revenue

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Code. Further, none of the health insurance premiums are included in the employee’s W–2 income and are therefore free from Federal income tax and FICA withholding tax (Social Security and Medicare). The preferential tax treatment of the

health insurance premiums provides a significant tax benefit Widget Company and

for employee John. Since John does not include the value of the premiums anywhere

in his taxable income, he has received a tax benefit of up to 35% of the insurance

cost. Note that Widget Company has not paid any income tax or FICA tax on the

premiums either.

John leaves Widget Company and becomes self-employed doing the same types of

business processes he did for Widget. The cost of health insurance premiums are

not deductible as an ‘‘ordinary and necessary’’ business expense and are therefore

subject to Federal income tax and self-employment tax (Social Security and Medicare). The health insurance premiums may qualify for a limited deduction from

gross income as a ‘‘self-employed health insurance deduction’’ on page 1 of John’s

individual income tax return (Form 1040). Even if John can utilize the income tax

deduction for 70% of the premiums, he must still pay income tax on 30% of the premiums. In addition, John must pay self-employment tax (Social Security and Medicare) on 100% of the premiums. In total John has a tax detriment for purchasing

health insurance of up to 25% of the premium cost.

This process is another example of the current inequities in the Tax Code that

are detrimental to the self-employed. By allowing the self-employed to claim their

health care premiums as a business expense the net cost health insurance premiums will be reduced by up to 25%, which is a significant reduction. Note that allowing premiums to be an ‘‘ordinary’’ business expense would not affect current income tax deductions after 2002.

Acceleration of 100% Deductibility of Health Insurance

Acceleration of 100% deductibility of health insurance for the self-employed is another important tax deduction that would greatly assist the self-employed community. Currently it will be phased in by 2003. However, the NASE feels that sooner

is better than later. We would like to see 100% deductibility available in years beginning after 2001.

Refundable Tax Credit

A tax incentive such as a refundable tax credit should be made available for the

purchase of health insurance coverage for all individuals. It would cover 100% of

the cost of health insurance coverage for up to $500 for individuals and $1,000 for

families. The refundable tax credit should be made available to those individuals

whose employer does not sponsor or contribute to an individual or family health

plan for their employees and for the unemployed. Self-employed individuals would

have the opportunity to utilize either the self-employed health insurance deduction

or the refundable tax credit but not both.

Conclusion

We here in Washington D.C. discuss issues through facts, figures and legislative

solutions. But there is also a personal face to the current health care issues that

plague the self-employed and small business community. Recently, NASE member,

Lance Kisby, a Pediatric Dentist in Needham, Massachusetts had contacted the

NASE office to tell his story on how the high costs of health care are affecting his

small business. Dr. Kisby informed us that his health insurance premiums have

changed from $522 per month to $945 per month. These increases have forced him

to pass along some of the cost to his patients by raising his fees 5% and to work

longer hours to cover the loss of profit due to the higher health care costs. Dr. Kisby

remarks, ‘‘As a self-employed person, I recognize that there are so many hours in

a week and that I can only raise my fees so much and still be competitive while

also having money to feed my family.’’

Dr. Kisby’s story characterizes the plight the self-employed face in attempting to

acquire and provide affordable health coverage for themselves and their employees.

Health care tax incentives would go a long way to solve not only the problem of

small business access to affordable health care but to also alleviate the growing

ranks of the uninsured.

f

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iKaiser Family Foundation, ‘‘State Health Facts On-line.’’

Statement of Sister Karin Dufault, Ph.D., Chair of the Board, Providence

Health System; Seattle, Washington; PeaceHealth, Bellevue, Washington;

Providence Services, Spokane, Washington; and Swedish Health Services,

Seattle, Washington

Thank you, Chairman Thomas and Members of the Committee for accepting our

statement on the issue of health care tax credits to decrease the numbers of uninsured individuals and families in the United States. As a coalition of non-profit

health care systems with hospitals, nursing homes, physician groups, a health plan

and other facilities in the states of Alaska, Washington, Oregon, Montana and California, we are gravely concerned about the harmful effects of so many people in the

communities we serve who live without adequate access to basic health care because

they are uninsured or under-insured.

According to recent estimates, as many as 21 percent of Californians have no

health insurance; Montana and Alaska’s rates of uninsured are nearly 20 percent,

and Oregon and Washington’s rates of uninsured are at 14 and 13 percent, respectively.i These estimates do not account for likely increases as a result of the economic recession and the corresponding rash of job layoffs in our communities.

As health care providers, we experience the impact of this problem on a daily

basis, as many of the uninsured receive their only health care in our emergency departments. While it goes without saying that this is not good medicine for these individuals, the societal implications of this situation are even more profound: many

of our emergency rooms are functioning now at full capacity 24 hours a day and

are increasingly forced to divert patients to other hospitals nearby as a result of too

much patient volume. The increasing number of uninsured individuals seeking care

in hospital emergency rooms threatens access for everyone who needs serious emergency care, regardless of health insurance status.

As such, we applaud President Bush and the Members of this Committee for your

efforts to address this issue that is critical to our communities and the people we

serve. We support any initiative that will achieve greater coverage in a manner that

is equitable for all Americans and is an efficient use of government resources.

However, our support for the Bush Administration’s tax credit proposal as a

mechanism to expand coverage must be qualified by some critical concerns:

1) We believe the amount of the tax credit proposed by the White House will not

lead to significantly expanded coverage for low-income uninsured; in order to

truly reach the most people, the tax credit should be considered as one component of a package of policy changes, along with an expansion of eligibility and

Federal funding for public health insurance programs, such as Medicaid or

SCHIP.

2) As currently proposed, the tax credit will not improve the opportunity for coverage for those people who are currently unable to obtain insurance in the individual market due to a combination of age, chronic illness or other expensive

medical needs—who might otherwise be able to afford a standard insurance

package.

The Benefits of a Health Insurance Tax Credit

In addition to opening the door to coverage for at least a portion of the uninsured,

a tax credit for individuals to purchase health insurance offers some desirable potential consequences. These are: 1) greater equity between the effective cost of insurance purchased on the individual market as compared to employer-sponsored

coverage; 2) improved choice for individuals among health insurance plans; and 3)

a potential improvement in the affordability of individual coverage.

Equity—Under current law, individuals (those who aren’t self-employed) purchasing coverage on the individual market must pay taxes on the income used to

purchase insurance, whereas those who have employer-sponsored coverage escape

taxation on the benefit. With a tax credit, individuals would receive some offset to

their income taxes analogous to the benefit received by those in the group market.

Choice—By offering a tax credit to purchase individual coverage, the penalty for

a person opting out of his or her employer plan is lessened. Assuming the individual

is not otherwise in the ‘‘uninsurable’’ category, this would potentially increase the

number of plans from which an individual could choose.

Potentially Improved Affordability of Individual Coverage—Assuming the tax

credit is large enough to encourage enough people to purchase coverage, the greater

numbers of new enrollees would serve to help plans spread risk and improve their

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iiStatement of Mark V. Pauly, Ph.D., Professor, Health Care Systems, Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania. Testimony before the Subcommittee on

Health of the House Committee on Ways and Means, April 4, 2001. iiiPauly, testimony before the Subcommittee on Health of the House Committee on Ways and

Means, April 4, 2001. ivPauly, testimony before the Subcommittee on Health of the House Committee on Ways and

Means, April 4, 2001. vFamiliesUSA, ‘‘A 10-Foot Rope for a 40-Foot Hole: Tax Credits for the Uninsured,’’ September 2001. viFamiliesUSA, September 2001. viiPauly, testimony before the Subcommittee on Health of the House Committee on Ways and

Means, April 4, 2001.

ees—estimates suggest as many as 18 million—armed with a tax subsidy enter the

individual market, market forces could serve to make such coverage more affordable.ii This would be enhanced by options for pooling risk in state employee benefit

programs and other programs (SCHIP, etc.) as proposed by the Bush Administration.

Problems with a Health Insurance Tax Credit

While a health insurance tax credit offers some potential benefits, it also has

some weaknesses as an approach to significantly reducing the number of uninsured.

First, in order for a tax credit to stimulate significant take-up rates by low-income

persons, it must cover between 25 and 50 percent of premium costs.iii The level of

subsidy proposed by the Bush Administration, based on research of average premiums in the individual market, would not achieve that level for most people outside the large group market. Second, creating such a tax credit is administratively

complex and raises questions about how subsidies would be determined and distributed. Third, individuals with chronic illness or other medical conditions that require

expensive treatment and/or pharmaceutical costs find individual coverage prohibitively expensive or simply not available at present.

Achieving Affordability—Professor Mark Pauly of the Wharton School at the University of Pennsylvania, a proponent of tax credits, noted in testimony before the

House Ways and Means Subcommittee on Health last year that ‘‘there is a very pronounced ‘notch’ or ‘threshold,’ below which credits have small effects and above

which effects become much larger. For example, we estimate that a credit of half

the premium for an average policy will reduce the number of uninsured by half,

whereas a 25 percent credit will only affect a few people, primarily those who aren’t

wage workers.’’ iv

According to research by the advocacy group Families USA, the average annual

premium for individual coverage in four of the states we serve—Alaska, California,

Oregon and Montana—ranges from $2,191 for a healthy, non-smoking 25-year-old

woman to $5,280 for a healthy, non-smoking 55-year-old woman.v Based on these

premiums, the Bush proposed $1,000 tax credit for individuals and $3,000 for families would likely fall short of meeting the 50 percent for even the healthiest individuals and families. Moreover, out-of-pocket costs, which can reach as high as $10,000,

are not factored into this equation.vi

Professor Pauly, in his Health Subcommittee testimony, also bemoans the characteristics of the individual market: ‘‘The most problematic feature of proposals to

make credits available for private insurance is the current rather unimpressive

state of the private individual insurance market in the United States . . . the main

problem in this market is that administrative costs are high.’’ Pauly states that a

significant number of new buyers in this market would likely increase quality and

reduce risk screening and premium costs.vii However, there is no assurance that sufficient numbers would take up individual coverage at the level of the President’s tax

subsidy.

Complexity in Administration—Ensuring that recipients of a tax credit aimed at

low-income individuals and families utilize the credit in large numbers requires that

it be designed to account for a range of circumstances. For example, the tax credit,

even if designed as a refund, must be available to recipients such that they have

enough liquidity to pay monthly premiums. Low-income families and individuals

often don’t have enough money available with each paycheck to cover the cost of

premiums, even if they know they will receive a refund of part of the cost at yearend. Fluctuating income—a common characteristic of low-income workers—also may

create problems in their ability to pay for monthly premiums. Addressing these concerns and others will place new burdens on the Treasury, which administers and

enforces the federal tax code and would therefore be responsible for administrating

the tax credit. Finally, such an approach would add complexity to the already ByzVerDate 11-MAY-2000 16:35 Jul 15, 2002 Jkt 079970 PO 00000 Frm 00138 Fmt 6633 Sfmt 6621 E:\HR\OC\A970.XXX pfrm04 PsN: A970
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viiiLori Achman and Deborah Chollet, Mathematica Policy Research, Inc., ‘‘Insuring the Uninsurable: An Overview of State High-Risk Health Insurance Pools,’’ August 2001. ix Achman and Chollet, August 2001.

antine tax code. The sheer complexity of the tax code may serve as a barrier to takeup rates on the part of low-income individuals and families.

Access to Coverage for ‘‘Uninsurable’’ Individuals—The effects of market forces

and phased-in options to allow the tax credits for purchasing coverage through

state-sponsored purchasing groups or government employee programs will likely improve access for some of the uninsured. However, many people eligible for the tax

credit will remain uninsured under the Bush proposal due to their poor health status. Even those who are currently able to enroll in a state high-risk pool face prohibitive premium costs. For example, the annual individual premium range for Washington State’s high risk pool is $1,370 to $8,734 per person; in Oregon it is $1,620

to $6,120 per person; in California it is $1,300 to $10,284 per person; in Alaska it

is $1,394 to $12,188 per person and in Montana it is $2,127 to $5,762 per person.viii

In a recent research paper on state high-risk pools, Lori Achman and Deborah

Chollet of Mathematica Research, Inc. conclude that ‘‘the small size of pool enrollment is attributed to their high premiums and, in many states, to the very limited

benefits they offer. Moreover, because all states must find ways to cover shortfalls

between premiums earned and costs incurred, some have capped enrollment; most

do not conduct extensive advertising or outreach to attract enrollment.’’ ix

Conclusion: Tax Credits Combined with Public Program Expansion

In our view, tax credits for health insurance are one piece of what should be a

package of legislative proposals designed to bring about incremental reductions in

the number of uninsured in the United States. Because the Bush tax credit proposal

is likely to prompt only a fraction of the uninsured to purchase coverage, we urge

that Congress and the White House consider one or more of the following additional

steps to expand coverage for the poorest and the most difficult to insure. These are:

• MEDICAID/CHIP EXPANSION. Expand eligibility under Medicaid and/or

CHIP for all persons below 150 percent of the Federal poverty level, including

legal immigrants. States should have the option of implementing this expansion

either as an extension of the existing Medicaid program or as a separate program with a private insurance benefits package (e.g., subject to minimum benefits requirements).

• EXPANSION OF THE FEDERAL EMPLOYEES HEALTH BENEFITS

PROGRAM (FEHBP). Permit individuals without access to employer-sponsored coverage to obtain benefits through FEHBP. FEHBP participating plans

are required to cover all eligible applicants without pre-existing condition exclusions regardless of health status during annual open enrollment periods for persons who have maintained continuous coverage for at least one year. Allowing

individuals to access this risk pool would reduce their premium burden and further spread risk for the FEHBP.

• OUTREACH AND ENROLLMENT FOR MEDICAID/CHIP COVERAGE.

Remove barriers to enrollment in Medicaid and CHIP and expand outreach to

special populations.

• FUNDING TO STRENGTHEN THE HEALTH CARE SAFETY NET. Even

with significant improvements in levels of coverage, many will continue to go

without health insurance for various reasons. As such, it is critical that funding

be increased for community health care safety net providers. We recommend

Congress and the White House provide $500 million annually in grants to local

communities to enhance collaboration and cooperation among safety net hospitals and clinics.

We applaud the members of this committee and the White House for pursuing in

earnest strategies to improve access to health care and basic social justice for our

nation. We look forward to working with our Congressional representatives and the

White House in this vital endeavor.

Æ