Health Insurance: Proposals for Expanding Private and Public Coverage
Released: 2001-03-15T00:00:00

Letter

Background

deductible as a business expense; this subsidy also is not considered taxable income for employees. In addition, tax benefits are available to individuals who purchase nongroup private insurance directly from insurers (referred to as “individual insurance”) if the person is self- employed or has premium and medical expenses combined that exceed 7.5 percent of his or her adjusted gross income.

However, private insurance is not accessible to everyone. Some workers, including those working for small firms or in certain industries such as agriculture or construction, are less likely to be offered employment-based health coverage. Health insurance may also be expensive and potentially unaffordable for those paying the entire premium individually rather than receiving employment-based coverage where employers typically contribute to some or all of the cost. In addition, while all members of a group plan typically pay the same premium for employment-based insurance regardless of age or health status, in most states individual insurance premiums are higher for older, sicker individuals than for young, healthy individuals, potentially making them unaffordable.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) provided several important protections to improve the availability of private health insurance, particularly for individuals changing jobs or with preexisting health conditions. HIPAA included guaranteed access to coverage for those leaving group coverage and for small employers; however, it did not address issues of affordability. In addition, many states have enacted reforms that guarantee access to health insurance for certain high-risk individuals and small groups and that sometimes limit the premiums these persons and groups pay. While these federal and state private insurance market reforms provide important protections for certain individuals and groups, recent research finds little, if any, effect from these reforms on overall private insurance coverage rates. higher eligibility standards as long as they are within federal guidelines. SCHIP was established in 1997 to give states the choice of receiving enhanced federal funding to cover additional low-income children who do not qualify for Medicaid, generally those in families whose incomes are up to 200 percent of the federal poverty level. Unlike Medicaid, SCHIP is not an entitlement program, and states can halt enrollment once budgeted funds are exhausted. As of September 2000, HCFA reported that 3.3 million children were enrolled in SCHIP. Although Medicare primarily insures most Americans 65 years or older, it also provides coverage for some nonelderly individuals who are disabled or have end-stage renal disease.

Impact of Proposed Tax Incentives Will Depend on Their Size and Timing

Additional tax incentives proposed to encourage people to purchase health insurance vary in terms of who would be eligible, whether the tax incentive is provided to individuals or employers, and whether the incentive is a deduction that reduces taxable income or a credit that reduces total tax liability. The proposals share challenges that will affect their success in covering newly insured individuals. These challenges include (1) making the reduction in premiums large enough to induce uninsured persons to purchase health insurance or to encourage employers to offer coverage or increase their contributions to premiums, and (2) timing a subsidy to be available for low-income individuals at the time they pay their premiums, rather than after the end of the tax year.

Tax Deductions

their taxable income—potentially important if the employee must pay most or a large share (more than half) of the plan’s premium, since these employees are more likely to turn down employment-based coverage.

A tax deduction may be limited in its ability to induce uninsured individuals to purchase private insurance because most uninsured individuals do not earn enough for a deduction to make any or a significant difference in their net health insurance costs. In 1999, about 40 percent of the uninsured either did not file income tax returns or were in the 0 percent marginal tax rate and would not benefit from the deduction if they purchased individual insurance. Nearly 50 percent of the uninsured were in the 15 percent marginal tax rate, which, if they purchased qualifying health insurance, would allow them a 15 percent net reduction in their insurance cost. Analysts have generally agreed that this level of reduction would encourage few additional uninsured individuals to purchase health insurance. The remaining 10 percent of the uninsured, based on their marginal tax rates, would be eligible for a 28 to nearly 40 percent net reduction in the cost of their health insurance. While this level of reduction in net premiums may induce some individuals in higher tax brackets to purchase health insurance, it is less than some analysts have concluded would be necessary to lead to a widespread increase in coverage. For example, the Congressional Budget Office (CBO) reported that tax subsidies “would have to be fairly large—approaching the full cost of the premium—to induce a large proportion of the uninsured population to buy insurance.”

Tax Credits

higher-income individuals could be eligible for a partial credit or no credit. Because more than half of uninsured individuals would not have had enough income tax liabilities in 1999 to receive the full credit amount, some proposals would make the credit refundable so that more low- income tax filers and a number of those who would not otherwise file could receive a larger portion or all of the amount.

The number of individuals eligible for a tax credit would vary depending on the income thresholds specified in a proposal. For example, we estimate that in 1999 22 million uninsured Americans were in families that potentially would have been eligible for a tax credit available to single tax filers with $30,000 in taxable income and joint or head-of-household tax filers with $50,000 in taxable income. A recent study estimated that a tax credit of $1,000 for single coverage and $2,000 for family coverage with these taxable income thresholds could enable about 4.2 million—or nearly 20 percent of eligible individuals—to become newly insured. If income eligibility levels were twice as high, we estimate that 3 million additional uninsured individuals would have been in families potentially eligible for the tax credit, and the study estimated that a credit at this higher income eligibility level would result in another 0.5 million newly insured. a high premium of $7,154 for a 60- to 64-year-old smoker in urban Illinois.

Thus, in some states, a $1,000 tax credit could represent all or most of the premium for a young, healthy male or for someone purchasing a plan with a high deductible or limited benefits. On the other hand, a $1,000 credit could represent a small proportion of the premium for a comprehensive health plan for an older person or someone with existing health conditions. For many individuals, a $1,000 tax credit would likely represent less than half of a typical premium.

A tax credit’s ability to induce uninsured individuals to purchase coverage will also depend on the timing of the credit. Some low-income individuals who want to take advantage of a credit to purchase health insurance may find it difficult to do so if they must pay the premiums up front but cannot receive the credit until the following year after filing their tax return. To alleviate this problem, some proposals would allow advance funding of a credit, so that eligible individuals could receive the credit at the time they purchase the health insurance. There is limited experience with advance payments of tax credits for individuals, and establishing an effective mechanism could be administratively challenging. Procedures and resources to assess eligibility based on partial-year income information would need to be available nationwide. In addition, efficient and equitable procedures for end-of-year reconciliations and recovery of excess payments would be necessary. insurance because they are required to spend money up-front to get the tax credit, whereas EITC is an addition to income, not a reimbursement for an expense.

Tax Incentives for Small Employers or Those With Many Low-Wage Workers

To encourage more employers to offer coverage, some proposals would provide a tax subsidy to small firms or those with low-wage workers that often do not offer health insurance to their employees. Although at least 96 percent of private establishments with 50 or more employees offered coverage in 1998, only 36 percent of private establishments with fewer than 10 workers and about 67 percent of private establishments with 10 to 25 workers offered coverage. Also in 1998, among private establishments in which half or more of the workers were low-wage, only 31 percent offered health insurance to their employees, while other private establishments were nearly twice as likely to offer health insurance. that in 1996 37 percent of workers earning less than $7 per hour were offered coverage but turned it down, while only 14 percent of workers earning $15 or more per hour turned down coverage.

Many proposed or already available state-offered tax credits for employers provide only a temporary subsidy for the first few years an employer offers coverage. This may limit their potential for inducing employers to initiate and keep offering coverage. Experts we have consulted in our private insurance work told us that small employers are not likely to begin offering health insurance if they do not believe they will be able to do so permanently.

Some proposed employer tax credits are linked to small employers obtaining health insurance through a purchasing cooperative. We reported last year that several existing cooperatives gave small employers the ability to offer a choice of plans, but typically at premiums similar to those available outside of the cooperative. We also reported that most current cooperatives represented a small share of their local small group market (5 percent or less) and several had recently been discontinued or faced declining insurer or employer participation. Some analysts suggest that small employer purchasing cooperatives could be more effective in making coverage more affordable if they represented a larger share of the market. A significant employer tax credit linked to a small employer purchasing cooperative might stimulate participation and create larger market share, making them better able to secure lower-cost coverage for participants.

Success of Public Program Expansions Depends on State Responsiveness and Outreach

not currently eligible (such as childless adults) or raise income and asset eligibility standards. Another proposal would allow some near-elderly persons to buy in to Medicare. But many low-income people who currently are eligible for these public programs have not enrolled. Therefore, state outreach efforts to low-income individuals are key to the success of current and proposed programs.

Medicaid and SCHIP Expansions

Despite mandatory and optional state Medicaid expansions and the implementation of SCHIP in recent years, millions of low-income children and adults remain uninsured. Nearly 3 million children in households below the federal poverty level were uninsured in 1999 even though they would typically have been eligible for Medicaid. And although SCHIP now covers more than 3 million children, in 1999 there were nearly 6 million uninsured children in families with incomes below 200 percent of the federal poverty level (about $34,000 for a family of four)—the income threshold targeted by many SCHIP programs. Another 16.3 million adults with family incomes below 200 percent of the federal poverty level were uninsured, and nearly half of these had family incomes below the federal poverty level. use SCHIP funds to cover eligible children’s parents—but few other states have sought to do so. Also, 30 states have expanded Medicaid eligibility under section 1931 of the Social Security Act to disregard portions of an applicant’s income or assets when determining eligibility, which effectively increases the level of income and assets an eligible individual may have.

States’ willingness and ability to use additional federal flexibility will be key to efforts to expand public coverage. States with high uninsured rates typically have lower income eligibility thresholds for Medicaid than those with low uninsured rates. For example, the average Medicaid eligibility level for parents in the 13 states with high uninsured rates is 54 percent of the federal poverty level, compared with an average of 99 percent of the federal poverty level for the 29 states with low uninsured rates. Furthermore, states with low uninsured rates have been more likely to use available authority to expand coverage than states with high uninsured rates. Whereas 10 of the 29 states with uninsured rates significantly lower than the U.S. average have used section 1115 waivers to expand Medicaid eligibility, only 1 of the 13 states with uninsured rates significantly higher than the U.S. average has done so. Appendix I summarizes selected eligibility requirements and options that states have adopted for Medicaid and SCHIP.

States’ financial capacity may be a factor in what states have done to expand Medicaid and SCHIP to cover additional low-income individuals. States with high uninsured rates tend to be poorer and already cover a larger share of their population in Medicaid. On average, 16 percent of the nonelderly populations in the 13 states with high uninsured rates are in poverty compared with 10 percent in the 29 states with low uninsured rates. These high uninsured states also cover a higher proportion of their nonelderly residents through Medicaid (9 percent) than do states with low uninsured rates (7 percent).

Medicare Buy-In

sponsored retiree health benefits in 1997 than in 1991. Recent employer surveys indicate that this decline has not reversed since 1997. Further, with the aging of the baby boom generation, over the next decade the number of near-elderly individuals not yet eligible for Medicare will grow, which likely will increase the number of uninsured persons in this age group.

CBO estimates that few individuals would be able to afford the full premium that would be necessary to buy-in to Medicare—$300 to more than $400 per month initially. High-cost individuals who would face higher than average premiums in the individual insurance market would be most likely to opt for a Medicare buy-in, which would likely lead to premium increases over time. Subsidies to low-income individuals would encourage more lower-cost near-elderly individuals to buy in to Medicare.

Outreach Is a Key to Success of Public Program Expansions

Many low-income individuals who are eligible for Medicaid and SCHIP do not enroll. Some may be unaware that they or their children may be eligible, while the administrative complexity of enrolling and other reasons may discourage other eligible individuals from participating. Thus, outreach to low-income individuals to enroll in existing or expanded public programs is key to the success of the programs. We reported in 1996 that 3.4 million Medicaid-eligible children—23 percent of those eligible under federal standards—were uninsured. Another study found that in 1998 16 percent of children under 200 percent of the federal poverty level were eligible for Medicaid or SCHIP but were uninsured. for federal-state assistance for paying Medicare premiums and/or other out-of-pocket expenses not covered by Medicare were not enrolled.Recognizing the low participation by these individuals eligible for the Qualified and Specified Low-Income Medicare Beneficiary programs, last year the Congress enacted requirements that the Social Security Administration identify and notify potentially eligible individuals, and that the Department of Health and Human Services develop and distribute to states a simplified uniform enrollment application.

Proposals Could Unintentionally Lead to Crowd-Out Among Those Already Privately Insured

Efforts to expand private or public coverage to those currently uninsured can also provide new incentives to those already having private health insurance. Some currently insured individuals may drop employment- based coverage to get tax-subsidized individual insurance or enroll in Medicaid or SCHIP. While there was disagreement among analysts about the extent of crowd-out of private health insurance resulting from the Medicaid expansions in the late 1980s and early 1990s, concern led the Congress to include a requirement in SCHIP that states devise methods to avoid such crowd-out. While several approaches may offset the extent of crowd-out, some degree of crowd-out may be an unavoidable cost of expanding private or public coverage to insure those that are currently uninsured. For example, CBO analysts suggested that some displacement of private insurance is inevitable, particularly since some low-income families move in and out of private insurance coverage and public programs can allow these low-income families to achieve more stable insurance coverage. federal cost per newly insured person since much of the subsidy goes to those already covered. Moreover, some employers currently offering health insurance to their employees may discontinue offering coverage if their employees have tax preferences available for individually-purchased insurance. Similarly, even if employers continued sponsoring coverage, some employees—especially those who are young and healthy—may be able to purchase lower-cost insurance in the individual market, which could over the long-term increase the costs for some remaining in the group employment-based market. One study estimated that, among people electing a tax credit, nearly half would already be purchasing individual insurance, about one-quarter would shift from employment- based coverage, and another one-quarter would have previously been uninsured. Of those shifting from employment-based coverage, about one- fourth would be because the firm dropped coverage.

Similarly, when eligibility for public programs is expanded, employers with many low-income individuals eligible for public coverage may decide to discontinue coverage or individuals offered employment-based coverage may shift to public programs where they have lower or no premiums or other out-of-pocket costs. The absence of measures to reduce crowd-out can be significant. For example, a recent report indicated that one state that extended Medicaid coverage to parents with eligible children without a waiting period found that nearly one-third of those that became newly enrolled had previously had private health insurance. periods requiring individuals not to have had employment-based coverage for a certain time before becoming eligible for SCHIP. Other states have established cost sharing requirements (premiums or copayments) for SCHIP, thereby providing less of a financial incentive for low-income workers to switch from an employment-based plan where cost sharing requirements are common.

Concluding Observations

A variety of approaches have been proposed to increase private and public coverage among uninsured individuals. The success of these proposals in doing so for these diverse populations will depend on several key factors. The impact of tax subsidies on promoting private health insurance will depend on whether the subsidies reduce premiums enough to induce uninsured low-income individuals to purchase health insurance and on whether these subsidies can be made available at the time the person needs to pay premiums. The effectiveness of public program expansions will depend on states’ ability and willingness to utilize any new flexibility to cover uninsured residents as well as develop effective outreach to enroll the targeted populations. While crowd-out is a concern with any of the approaches, private or public, some degree of public funds going to those currently with private health insurance may be inevitable to provide stable health coverage for some of the currently 42 million uninsured.

Mr. Chairman, this concludes my statement. I would be happy to answer any questions that you or Members of the Committee may have.

GAO Contacts and Staff Acknowledgments

For more information regarding this testimony, please contact Kathryn G. Allen at (202) 512-7118 or John E. Dicken at (202) 512-7043. JoAnne R. Bailey, Paula Bonin, Randy DiRosa, Karen Doran, Betty Kirksey, Susanne Seagrave, and Mark Vinkenes also made key contributions to this statement.

Appendix I: Selected Medicaid and SCHIP Eligibility Standards Among States

Medicaid upper income eligibility standard for parents, as of March 2000 (percentage of federal poverty level)

SCHIP upper income eligibility standard, as of September 30, 2000 (percentage of federal poverty level)

Medicaid upper income eligibility standard for parents, as of March 2000 (percentage of federal poverty level)

SCHIP upper income eligibility standard, as of September 30, 2000 (percentage of federal poverty level) 140 Income eligibility level for parents assumes a family of three with one wage-earner, that all income is from earnings, and that only earned income disregards are taken.

Related GAO Products

Health Insurance: Characteristics and Trends in the Uninsured Population (GAO-01-507T, Mar. 13, 2001).

Federal Taxes: Information on Payroll Taxes and Earned Income Tax Credit Noncompliance (GAO-01-487T, Mar. 7, 2001).

Private Health Insurance: Potential Tax Benefit of a Health Insurance Deduction Proposed in H.R. 2990 (GAO/HEHS-00-104R, Apr. 21, 2000).

Medicaid and SCHIP: Comparisons of Outreach, Enrollment Practices, and Benefits(GAO/HEHS-00-86, Apr. 14, 2000).

Private Health Insurance: Cooperatives Offer Small Employers Plan Choice and Market Prices (GAO/HEHS-00-49, Mar. 31, 2000).

Private Health Insurance: Estimates of Effects of Health Insurance Tax Credits and Deductions as Proposed in H.R. 2261 (GAO/HEHS-99-188R, Sept. 13, 1999).

Children’s Health Insurance Program: State Implementation Approaches Are Evolving (GAO/HEHS-99-65, May 14, 1999).

Private Health Insurance: Progress and Challenges in Implementing 1996 Federal Standards (GAO/HEHS-99-100, May 12, 1999).

Low-Income Medicare Beneficiaries: Further Outreach and Administrative Simplification Could Increase Enrollment (GAO/HEHS-99-61, Apr. 9, 1999).

Private Health Insurance: Estimates of a Proposed Health Insurance Tax Credit for Those Who Buy Individual Health Insurance (GAO/HEHS-98- 221R, July 22, 1998).

Private Health Insurance: Estimates of Expanded Tax Deductibility of Premiums for Individually Purchased Health Insurance (GAO/HEHS-98- 190R, June 10, 1998).

Private Health Insurance: Declining Employer Coverage May Affect Access for 55- to 64-Year-Olds (GAO/HEHS-98-133, June 1, 1998).

Medicaid: Demographics of Nonenrolled Children Suggest State Outreach Strategies (GAO/HEHS-98-93, Mar. 20, 1998). (290044)