The TAA Reform Act established the HCTC to help certain individuals pay for health coverage by establishing a tax credit for 65 percent of the premium cost for qualified coverage. Individuals receive the HCTC in two ways—either in advance on a monthly basis or after the end of the year when they file their federal income taxes. Individuals are not required to itemize deductions or to owe federal income taxes in order to receive the HCTC. IRS provides the end-of-year HCTC to the individual, while tax credits claimed in advance are paid to the health plan in the form of a premium payment. For the advance credit, the HCTC program remits payments directly to the health plan; however, the individual must pay the full premium out of pocket until enrollment is complete. Individuals receiving the HCTC in advance may claim the credit at the end of the year for any months in which they were eligible for the HCTC but did not receive it in advance. Three groups of individuals may be eligible to receive the HCTC for themselves and their qualified family members: 1. TAA recipients. These are individuals who lost their jobs due to imports from or a shift in production to certain foreign countries. For workers to be eligible for TAA, Labor must certify petitions, filed by or on behalf of an employee group, indicating that the workers lost employment as a result of foreign competition. Once Labor has certified the petition, state workforce agencies determine individual worker eligibility for TAA benefits. To be eligible for the HCTC, TAA- eligible workers must first be eligible for a trade readjustment allowance, which extends income support after unemployment insurance is exhausted, and as a condition of receiving this income support must enroll in training to develop job skills for reemployment, or must receive a waiver from training. Because the trade readjustment allowance is not available to eligible workers until 60 or more days after the employee group files a petition to receive TAA certification from Labor, trade-affected workers cannot become eligible for the HCTC until this time. 2. Alternative trade adjustment assistance (ATAA) recipients. Individuals who qualify for this assistance have lost their jobs as a result of trade-related layoffs and found new jobs within 26 weeks at lower pay and earn $50,000 or less in their new jobs. The ATAA program, initiated in August 2003, provides certain workers who are aged 50 and over and lacking transferable job skills with a wage subsidy to help offset this salary reduction. Labor must certify that an employee group lost employment as a result of foreign competition and that ATAA applicants are included in this group. State workforce agencies are responsible for determining an individual’s eligibility for ATAA benefits. 3. PBGC beneficiaries. These individuals receive payments from PBGC because their pension plan was terminated when their former employer went bankrupt or experienced other severe financial difficulties. To be eligible for the HCTC, PBGC beneficiaries must be aged 55 or older and be either currently receiving benefits or have received a lump sum payment from PBGC after August 5, 2002. Unlike TAA-eligible individuals, PBGC beneficiaries do not have to be associated with trade-affected industries in order to receive the HCTC. In order to be eligible for the HCTC, individuals in these three groups must also be enrolled in qualified health coverage and meet certain other criteria. These criteria include that the individual cannot be eligible to be claimed as a dependent on someone else’s tax return; cannot be imprisoned on the first day of the month he or she seeks to receive the HCTC; and cannot be enrolled in other, nonqualified health coverage, such as Medicare or health coverage through the Department of Defense health system. The TAA Reform Act specifies 10 types of qualifying coverage that are eligible for the HCTC, including 3 automatic options that do not require any action on the part of the states and 7 options that only meet the definition of qualified health plans if a state elects to make them available and ensures that they meet certain criteria. The TAA Reform Act designates the following three options that are automatically qualified as coverage eligible for the HCTC: COBRA continuation plans. An eligible individual may use the HCTC for COBRA coverage. Under COBRA, employers with 20 or more employees must offer 18 to 36 months of continued health coverage to former employees and their dependents who lose health coverage under certain circumstances, such as when an employee is terminated or retires. Generally, health plans may charge individuals purchasing COBRA continuation coverage no more than 102 percent of the total premium. Spousal coverage. An eligible individual may claim the end-of-year HCTC for group market coverage obtained through a spouse’s employer, provided the employer contributed less than 50 percent toward the cost of coverage. The advance HCTC cannot be used to purchase coverage through a spouse’s employer. Individual market plans. An eligible individual may use the HCTC for individually purchased health coverage, provided that the coverage was purchased at least 30 days prior to the separation from employment that resulted in the individual becoming eligible to receive TAA benefits or PBGC pension payments. In addition to the three automatic options, the TAA Reform Act allows states to designate seven other coverage alternatives for HCTC recipients. Most states have chosen to designate one or more of the following three state-qualified options: Arrangements with insurers or other plan administrators. States may make arrangements with issuers of health insurance coverage (that is, health insurers), group health plans, employers, or other plan administrators to provide coverage eligible for the HCTC. States electing to provide state-qualified HCTC coverage through an arrangement with a health insurer may designate insurers offering either individual market or group health plans. State high-risk pools. Some states have established high-risk pools to provide health coverage to individuals unable to purchase coverage elsewhere, typically because of a preexisting health condition. To qualify for the HCTC, high-risk pools must (1) cover, without preexisting condition limits, individuals leaving group coverage who are eligible for guaranteed coverage under the Health Insurance Portability and Accountability Act of 1996 (HIPAA); and (2) offer premium rates and covered benefits consistent with the National Association of Insurance Commissioners Model Health Plan for Uninsurable Individuals Act in effect as of August 21, 1996. State-based continuation coverage, or mini-COBRA. Because the COBRA provisions only apply to plans maintained by employers with 20 or more workers, some states have enacted so-called mini-COBRA laws requiring insurers providing coverage to plans maintained by employers with fewer than 20 workers to offer continuation coverage to such plans. The other four types of coverage that states can designate as qualified plans are (1) a health coverage program for state employees, (2) a state- based health coverage program comparable to that offered for state employees, (3) an arrangement with a private-sector health care coverage purchasing pool (that is, a cooperative of employers or other groups or individuals that negotiate with one or more health plans), and (4) a state- operated health plan that does not receive any federal financial participation (thereby excluding Medicaid and the State Children’s Health Insurance Program). These seven state-qualified coverage options must provide qualified individuals—that is, individuals who have at least 3 months of prior creditable coverage at the time they seek to enroll in a state-qualified HCTC plan—four consumer protections. These consumer protections are (1) guaranteed issue, whereby insurers must guarantee enrollment and must permit the individual to remain enrolled as long as he or she pays premiums; (2) the prohibition of preexisting condition restrictions; (3) nondiscriminatory premiums, such that the premiums charged to HCTC enrollees may not be greater than the premiums for similar individuals not receiving the HCTC; and (4) benefits that are substantially the same as coverage provided to similar individuals who are not receiving the HCTC. While the fourth consumer protection requires the benefits to be similar to coverage offered to non-HCTC individuals, it does not specify what benefits must be included. The TAA Reform Act authorized states to use national emergency grants to help with costs related to the implementation of the HCTC and established grants to promote high-risk pools. National emergency grants. To help with HCTC expenses, states can apply for two types of national emergency grants: bridge grants and infrastructure grants. Bridge grants could be used to pay for up to 65 percent of the cost of health coverage for eligible individuals until the federal advance HCTC became available in August 2003. After August 2003, states were permitted to use remaining bridge grant funds to assist eligible individuals with paying their premiums during the HCTC enrollment process. Infrastructure grants were intended to assist states with start-up and administrative costs related to the HCTC. High-risk pool grants. To promote high-risk pools, states were offered new grants, called seed grants, to provide funds for the establishment of qualified high-risk pools, and operating grants, to reimburse states for up to 50 percent of losses incurred by high-risk pools meeting certain criteria. Seed grants also can be used to convert an existing high-risk pool to a qualified high-risk pool—that is, one that meets the requirements contained in the Public Health Service Act for individuals eligible for protections under HIPAA. Although IRS is responsible for administering the HCTC program, three federal departments—Treasury, Labor, and HHS—share responsibility for implementing the HCTC and grants to states contained in the TAA Reform Act. (See table 1.) To implement and administer the HCTC, Congress appropriated to IRS $70 million for fiscal year 2003, to remain available through fiscal year 2004, and $35 million for fiscal year 2004, to remain available through fiscal year 2005. Separate funding was provided for HCTC payments. In addition, PBGC—a federal corporation created by the Employee Retirement Income Security Act of 1974—is responsible for submitting, on a monthly basis, the names of PBGC beneficiaries potentially eligible for the HCTC to the HCTC program office. State responsibilities include identifying TAA individuals who are potentially eligible for the HCTC and, if the state so chooses, making state-qualified health coverage options available. Enrolling for the advance HCTC involves multiple entities, including federal agencies, a state workforce agency, and health plans. Potential eligibility begins with a qualifying event—either a worker loses employment as a result of foreign competition or a retiree’s pension plan is terminated. These individuals must then undergo an eligibility determination process for TAA or have PBGC assume payment of their pension. The enrollment process for HCTC can begin once a state sends to the HCTC program office the names of individuals receiving or eligible for income support through the trade readjustment allowance or PBGC sends a list of names of beneficiaries aged 55 or older. The HCTC program office mails an HCTC package to each of these individuals. Individuals may enroll for the advance HCTC if they meet the eligibility criteria, which include purchasing qualified health coverage. Once an individual successfully enrolls for the advance HCTC, the HCTC program office sends an invoice for the individual’s 35 percent share of the premium, and, when this payment is received, the remaining 65 percent is added and the full premium amount is forwarded to the participating health plan. Figure 1 provides an overview of the steps required for TAA recipients and PBGC beneficiaries to enroll for the advance HCTC and to have payments made to the qualifying health plan in which they enroll. End-of-year HCTC recipients must complete many, but not all, of the steps outlined above for advance HCTC enrollees. They must experience a qualifying event, be determined eligible for the trade readjustment allowance or PBGC payments, have their names sent to the HCTC program office by a state workforce agency or PBGC, and have qualified health coverage. Instead of enrolling with the HCTC program office, however, individuals claiming the end-of-year HCTC must submit required documents, which include proof of premium payment and a form designed for the HCTC, to the IRS along with their federal tax return. In addition, individuals who receive the advance HCTC may also claim the end-of-year HCTC for the months that they did not receive the advance HCTC, including months prior to August 2003, when the advance credit was first made available, and the months during the enrollment process before advance payments are made to their health plans. For 2003, 19,410 individuals received about $37 million in payments for themselves and dependents for the advance and end-of-year HCTC, the majority by filing for the credit on their end-of-year tax return. For July 2004, enrollment for the advance HCTC was about 13,200, about 60 percent of whom were PBGC beneficiaries. An HCTC program office survey in October 2003 (early in the implementation of the advance HCTC) indicated that advance HCTC enrollees were, on average, older and had lower incomes and educational attainment than nonenrollees, but both groups reported similar health status. Comparable data for end-of-year HCTC recipients and nonrecipients were not available. According to officials from states, qualified health plans, and a union, several factors may have limited the participation in the advance and end-of-year HCTC to date. These factors include the newness of the program, the fragmentation and complexity of the TAA certification and HCTC eligibility determination and enrollment processes, the length of time—typically 3 to 6 months—that the individual must pay the full premium while establishing eligibility for and enrolling in the advance payment, and the ongoing cost of the individual’s share of the premium once the advance HCTC payments have begun. For 2003, about $37 million was paid on behalf of 19,410 HCTC recipients, most of whom (12,594 individuals) claimed the HCTC solely on their end- of-year tax return. Many of these individuals may have received the HCTC to pay for qualified health insurance covering dependents as well as themselves, but data were not available on the number of dependents covered by the end-of-year HCTC. The advance HCTC became available in August 2003, and 3,696 individuals received both the advance HCTC—for the months beginning on or after August—and the end-of-year HCTC—for the months they paid 100 percent of their insurance premium. Another 3,120 individuals received the HCTC only in the form of an advance payment. (See fig. 2.) Of the $37 million paid, about $23.8 million was paid on behalf of those who filed solely for the end-of-year HCTC, $2.8 million for those receiving the advance HCTC only, and $10.7 million for those who claimed both forms of the credit. According to the HCTC program office, for 2003, about 24,000 taxpayers filed claims for the end- of-year HCTC, and about 8,000 of these claims were denied. Some of the individuals whose claims for the end-of-year credit were denied were not on the list of potentially eligible individuals prepared by the state workforce agencies and PBGC. In addition, some of those denied were age 65 or older. Enrollment for the advance HCTC increased from about 4,000 individuals at the start of the program to about 13,200 individuals in July 2004. (See table 2.) In this month, roughly 40 percent of enrollees were TAA recipients, while the remaining 60 percent were PBGC beneficiaries. Individuals also used the advance HCTC to cover their qualified family members. In May 2004, approximately 12,900 individuals were enrolled to receive the advance HCTC for themselves and about 7,800 family members. Nationwide, as of July 2004, Pennsylvania had the highest number of individuals enrolled for the advance HCTC (2,265), followed by North Carolina (1,636) and Ohio (1,090). Most individuals enrolled for the advance HCTC were clustered in nine states—Illinois, Indiana, Maryland, Michigan, North Carolina, Ohio, Pennsylvania, Virginia, and West Virginia. These nine states accounted for two-thirds of all individuals enrolled for the advance HCTC, although fewer than half of all potentially eligible individuals resided in these states. Several of these states recently experienced large trade-related layoffs at steel and textile companies. For example, Pillowtex, a household textile manufacturer headquartered in North Carolina, closed manufacturing and distribution facilities in North Carolina and Virginia and terminated more than 4,500 employees in July 2003. In April 2003, PBGC assumed pension plan payments for 95,000 workers and retirees from the Pennsylvania-headquartered Bethlehem Steel Corporation. (See app. I for the number of individuals enrolled for the advance HCTC by state.) Determining the actual rate of participation in the HCTC is difficult because reliable data on the total number of individuals actually eligible for the HCTC are not available. States and PBGC are responsible for identifying and reporting individuals who are eligible for TAA and PBGC benefits, while the responsibility for assessing the health coverage and tax eligibility HCTC criteria lies with the HCTC program office. Therefore, individuals identified by states and PBGC are considered only potentially eligible for the HCTC because IRS also needs to determine that they meet health coverage and tax criteria before receiving the HCTC. Some of the individuals identified by states and PBGC as potentially eligible may have other health coverage that would disqualify them from receiving the HCTC. For example, the October 2003 HCTC program office survey found that about half of those identified as TAA recipients or PBGC beneficiaries, but who were not enrolled for the advance HCTC, were in fact ineligible because they had other coverage, such as Medicare or through a spouse’s employer. Similarly, in the HCTC program office’s February 2004 survey, many respondents reported multiple reasons that made them ineligible for the HCTC, including being claimed as a dependent on someone else’s tax return, not meeting the age eligibility criteria, or having other health coverage from sources such as the military or the Federal Employees Health Benefits Program. Based on an HCTC program office survey of 1,200 respondents conducted in October 2003, advance HCTC enrollees were, on average, older, were less likely to have children, and had lower income than potentially eligible nonenrollees. Both groups, however, reported similar health status. Specifically, advance HCTC enrollees were an average of 4 years older than nonenrollees, had 12 percent lower household pretax income, and lower educational attainment than nonenrollees. There was no statistically significant difference in self-reported health status between enrollees and nonenrollees in the advance HCTC program. Seventy-four percent or more of enrollees and nonenrollees reported being in good health, while 3 percent of enrollees and 6 percent of nonenrollees rated their health as poor. (See table 3.) Demographic data for those who received the end-of- year HCTC were not available at the time of our analysis. According to officials we interviewed from states, participating qualified health plans, and a union representing affected workers, the number of individuals receiving the HCTC was lower than expected. We identified several factors that may help explain the limited number of individuals receiving the advance and end-of-year HCTC to date. In addition to the newness of the advance payment option, these factors included the fragmentation and complexity of the eligibility and enrollment process, the gap in time before the advance payments are available, and the affordability of the individual’s share of the premiums. State workforce agency and health plan officials reported that the process for trade-displaced workers to become eligible and enroll for the HCTC was fragmented and complex. Between the time workers lost employment and the time they enrolled for the advance HCTC, they interacted with two different federal agencies (Labor and IRS), their state’s workforce agency, and a health plan. Each entity performed a discrete part of the eligibility determination and enrollment process, without any single entity being responsible for overall coordination. In four of the eight states we reviewed, workforce officials reported that displaced workers seeking help with the advance HCTC often had to make multiple calls to different federal and state agencies. For example, a state workforce agency official reported that displaced workers who called the HCTC program office about the advance HCTC—prior to their name being sent from the state— were referred to Labor, which in turn referred them back to the state workforce agency. An official from another state workforce agency reported that the state workforce agency does not deal with health coverage issues, so displaced workers who called with questions or difficulties about their health plan were referred to the HCTC program office or the health plan. State and union officials reported that this level of fragmentation could be difficult to navigate, especially for individuals with limited education or those who worked in large companies and were accustomed to centrally coordinated benefits administration. Currently, individuals must navigate the eligibility and enrollment process largely on their own. State and health plan officials suggested developing a coordinated outreach strategy to help individuals who have difficulty with the advance HCTC enrollment process. For example, officials reported that HCTC information sessions attended by representatives from the PBGC, state workforce agencies, HCTC program, and qualified health plans were held in some states that had experienced large layoffs. According to officials, these information sessions helped bring all the key players together in one location and enabled individuals to walk from one station to the next and complete the enrollment process on the same day, if they chose to. State officials reported that the requirement that individuals first qualify for the trade readjustment allowance—income support available under the TAA program after unemployment insurance is exhausted—added to the time and complexity of the advance HCTC eligibility and enrollment process and could limit participation. Individuals cannot qualify for the trade readjustment allowance until at least 60 days after the petition for TAA certification has been filed with Labor. In addition, in order to qualify for this benefit, individuals must be in training or have a waiver from training, which must be recertified monthly by the state workforce agency. State officials said that removing the requirement to first qualify for the trade readjustment allowance would expedite the enrollment process and could enable additional dislocated workers to receive the advance HCTC. Another factor that complicates and could limit participation in the advance HCTC is the time required to enroll for the advance HCTC. In our survey of state workforce agencies conducted in March 2004, 30 states responded that TAA recipients had difficulty receiving the HCTC, and 17 of these 30 states reported that it took too long for eligible individuals to receive the advance HCTC because of the way the enrollment process was structured. The multiagency, multistep process for eligibility determination and enrollment resulted in a significant gap between the time individuals lost employment or their retirement plan was terminated and the time they began receiving the advance HCTC. It typically took from 4 to 6 months for newly displaced trade-affected workers to become eligible for and receive the first advance payment. (See fig. 3.) For new PBGC beneficiaries, the time required to become eligible for and receive the first advance payment typically was 3 to 6 months. The elapsed time in becoming eligible and enrolling for the advance HCTC also meant that in some instances individuals potentially eligible for the HCTC were required to make certain decisions that would affect future health coverage for themselves or their spouse before they knew whether they would be eligible to receive the advance HCTC. For example, some displaced workers are offered the option of paying for COBRA coverage at the time of separation from their employers, and individuals who enroll in COBRA may use the advance HCTC to pay 65 percent of their COBRA premiums once they have completed the advance HCTC enrollment process, which typically can take 3 to 6 months. Eligible individuals who decline COBRA coverage—such as for affordability concerns—or do not have COBRA as an option and become uninsured for more than 63 days risk losing guaranteed access to state-qualified health coverage and other consumer protections. Because it typically takes 3 to 6 months after losing employment before beginning to receive the advance HCTC, maintaining coverage for this 63-day period can be very expensive for displaced workers, and some may opt not to pay for this coverage in part because they have difficulty affording it. In our survey of state workforce agencies, 20 of the 30 states that said that TAA recipients had difficulty receiving the HCTC reported that breaks in coverage of 63 days or more are causing individuals to lose access to one or more consumer protections, such as guaranteed access to coverage or no preexisting condition exclusions. However, officials we interviewed from five state- qualified HCTC health plans reported that they have voluntarily extended one or more consumer protections to individuals with more than a 63-day break in coverage, for example offering all HCTC applicants guaranteed access to coverage and in some cases waiving preexisting condition exclusions for enrollees. Some of these health plan officials indicated that the decision to offer all HCTC applicants the same consumer protections was made for ease of administration, and this practice may be revoked in the future at the discretion of the plan. State, health plan, and union officials also expressed concern about gaps in HCTC program eligibility rules that can affect the spouses and other dependents of PBGC beneficiaries who enroll in Medicare. Specifically, when a PBGC beneficiary enrolls in Medicare, the beneficiary loses eligibility for the HCTC. According to current eligibility rules, the spouses and other dependents of these individuals also lose eligibility for the HCTC even if they are not yet eligible for Medicare. A union official reported that when some PBGC beneficiaries attended an HCTC information session and became aware of this rule, they expressed reservations about enrolling in the HCTC, stating that they needed more time to think about whether to apply. According to state workforce officials, health plan officials, and union representatives we contacted, the affordability of qualified HCTC coverage was another factor affecting participation rates. HCTC-eligible individuals have either lost employment, often involving a reduction in income, or retired and are receiving a fixed pension from PBGC. Research indicates that as premiums consume an increasing share of income, participation rates decline. For example, one study found that, among populations with incomes up to 300 percent of the federal poverty level, more than half of the target population would participate when premiums represent 1 percent of income, but only one-sixth would participate when premiums represent 5 percent of income. The affordability of qualified health coverage options can be problematic even with the HCTC. During the 1- to 3-month period before the health plan receives the first premium payment from the HCTC program, HCTC enrollees are required to pay 100 percent of the premium out of pocket, which for a single person would represent 36 percent and for two persons would represent 72 percent of the average monthly unemployment insurance benefit of about $1,128. The ongoing 35 percent share of the average HCTC premiums in mid-2004 for a health plan covering a single individual and a plan covering a single individual and one other family member would have required 13 percent and 25 percent, respectively, of the average monthly unemployment insurance benefit. In addition to these premium costs, HCTC enrollees must pay any deductibles, coinsurance, or copayments that are required by their health plan. In our survey of state workforce agencies, 24 of 30 states reporting that TAA recipients had difficulty receiving the HCTC said that the ability to pay premiums while waiting to receive the advance HCTC was a factor contributing to this difficulty. In addition, 22 of the 30 states indicated that the lack of affordable health coverage was a reason individuals may be having difficulty participating in HCTC. The state workforce, health plan, and union officials we interviewed reported that, even with a 65 percent subsidy, the remaining 35 percent share might cost too much to be affordable for many displaced workers and retirees. From August 2003 through April 2004, 60 percent of advance HCTC enrollees obtained coverage through automatically qualified health plans, primarily COBRA, and 40 percent of individuals receiving the advance HCTC purchased coverage through a state-qualified plan. Comparable data on the coverage purchased by end-of-year recipients were not available. More than two-thirds of the states designated state-qualified plans, with most states choosing to provide coverage through arrangements with insurers or high-risk pools. The types of benefits available for purchase with the HCTC varied both within and across the different automatic and state-qualified coverage options. For example, COBRA plans, which were a continuation of employer-sponsored group market coverage, tended to offer lower deductibles than state-qualified high-risk pools and more comprehensive benefits than the coverage provided through arrangements with insurers, most of which were individual market plans. The cost of HCTC coverage for advance credit enrollees varied widely depending on the number of people covered, the type of coverage purchased, and whether the HCTC enrollee was a TAA recipient or a PBGC beneficiary. The cost of HCTC coverage was also affected by the different ways in which premiums are set in the group and individual market. Cumulatively, from the time the advance credit became available in August 2003 through April 2004, the majority (60 percent) of advance HCTC enrollees obtained coverage through one of the automatically qualified coverage options specified in the TAA Reform Act. Most HCTC enrollees (56 percent) used the advance HCTC to purchase COBRA coverage, while 4 percent remained enrolled in the individual market plans they held 30 days prior to the separation from employment that resulted in their becoming eligible for TAA benefits or PBGC payments (see fig. 4). Nationwide, about two-thirds of TAA recipients enrolled for the advance HCTC purchased COBRA coverage, whereas about one-half of PBGC beneficiaries enrolled for the advance HCTC selected COBRA plans and one-half selected state-qualified plans. Only a small percentage of advance HCTC enrollees of either type purchased automatically qualified individual market coverage. (See fig. 5.) As of July 2004, 36 states had designated state-qualified HCTC coverage options, and about 84 percent of all individuals identified as potentially eligible to receive the HCTC lived in these states. Most states providing state-qualified coverage did so through arrangements with one or more insurers (18 states) or high-risk pools (17 states). Three states (Indiana, Maryland, and Texas) designated both their high-risk pool and an arrangement with an insurer as state-qualified HCTC plans. Thirteen states designated mini-COBRA plans, and in 4 of these 13 states (Kentucky, Missouri, New Jersey, and Wisconsin) mini-COBRA plans were the only state-qualified coverage option available. Federal officials reported that few individuals eligible to receive the HCTC had access to mini-COBRA coverage because the number of TAA recipients and PBGC beneficiaries whose former employer had fewer than 20 employees—thereby making them eligible for mini-COBRA coverage—was estimated to be very small. (See app. II for a list of state-qualified HCTC coverage options by state.) According to the HCTC program office, 15 states—whose combined population represented less than one-fifth of all individuals potentially eligible to receive the HCTC—had yet to make a state-qualified HCTC plan available as of July 2004. Three of these states—Arizona, Idaho, and Washington—have designated state-qualified plans, but these plans were not open to enrollment as of July 2004. Among states that have not designated a state-qualified plan, California had the largest number of potentially eligible individuals. State workforce and insurance department officials in California reported that because no health plans in the state had agreed to participate in the HCTC program, potentially eligible individuals without access to COBRA or another automatically qualified coverage option were unable to use the HCTC because they could not purchase qualified coverage. In the 15 states that did not make a state-qualified HCTC plan available, some potentially eligible individuals may not have been able to use the HCTC to purchase automatically qualified coverage. Although the extent to which this has occurred is unknown, there are several reasons why potentially eligible individuals in these states may be unable to receive the HCTC. First, if a former employer discontinued its employee health coverage, individuals potentially eligible for the HCTC would not likely have access to a COBRA plan. According to a Commonwealth Fund study, federal officials estimate that between 40 percent and 60 percent of individuals eligible to receive the HCTC likely do not have access to COBRA coverage. In addition, individuals who have COBRA coverage and are eligible to receive the HCTC for longer than the 18 to 36 months that COBRA is available will also need to enroll in another form of qualified coverage when their COBRA benefits expire in order to maintain the HCTC. Second, individuals with coverage through their spouses’ employer may not qualify for the HCTC because many companies that offer health coverage contribute more than 50 percent toward the cost of their workers’ health coverage premium—both for the cost of coverage for an individual worker and for the cost of family coverage. In 2003, for example, the average percentage of total premiums paid by employers for family coverage was 73 percent. Third, HCTC program office officials reported that only a small percentage of individuals were likely to have purchased coverage in the individual market at least 30 days prior to the separation from employment that resulted in their becoming eligible for TAA benefits or PBGC payments. While these officials could not provide a precise estimate, a national survey reported that fewer than 6 percent of all working Americans purchased individual market coverage in 2002. The benefits offered to HCTC recipients varied across coverage types and from plan to plan. In the seven states we reviewed that designated state- qualified health plans, we found that COBRA coverage generally included lower deductibles than high-risk pools and offered more comprehensive benefits than arrangements with insurers. When health plans offered a choice among benefit packages or deductible amounts, HCTC recipients typically selected more comprehensive benefits and lower deductibles. COBRA benefits are typically identical to the benefits provided to working individuals covered by an employer’s group market health plan. The majority of health plans offered by employers in 2003 provided coverage for mental health services and prescription drugs, with preferred provider organization (PPO) health plans having an average annual deductible of $275. (See table 4.) In addition, the Pregnancy Discrimination Act requires employers with 15 or more employees to cover expenses for maternity services on the same basis as coverage for other medical conditions. The majority of the 36 states that designated state-qualified health plans did so through arrangements with one or more insurers selling individual market coverage. Of the 7 states we reviewed with state-qualified health plans, 6 provided state-qualified HCTC coverage through an arrangement with one or more insurers, all of which sold coverage in the individual market (see table 5). Health coverage purchased in the individual market typically includes more restrictions on covered benefits and higher deductibles than group market coverage offered through an employer. In the six states we reviewed that designated arrangements with insurers as state-qualified plans, we typically found higher deductibles and one or more restrictive benefit limitations for maternity care, mental health coverage, and prescription drugs than would be typical for employer-sponsored group market coverage, including COBRA plans. Limitations on these benefits included lower maximums on annual or lifetime coverage, higher cost sharing, or, in some cases, no coverage at all. For example: One state-qualified HCTC health plan in Texas did not offer any coverage for maternity care except for treatment of pregnancy-related complications. One state-qualified HCTC plan in Ohio limited mental health coverage to 10 days of inpatient coverage and 10 outpatient visits per year. State-qualified health plans in Maryland, New York, and Pennsylvania required a separate deductible for prescription drug coverage, while one state-qualified health plan in Ohio did not provide coverage for brand name prescription drugs. Appendix III provides more information on the variation in benefits across state-qualified HCTC plans in the seven states we reviewed that had state- qualified plans. State-qualified HCTC plans provided through arrangements with insurers in four of these six states offered HCTC recipients a choice of deductibles—ranging from $250 to $5,000—while plans with no deductible were available in New York and some counties in Pennsylvania. When offered a choice among deductible amounts, the majority of HCTC recipients in these four states generally purchased coverage with the lowest deductibles available, typically $1,000 or less. (See table 6.) Three of the seven states we reviewed that had state-qualified health plans designated their high-risk pools as state-qualified plans. These state- qualified high-risk pools generally offered benefits similar to those offered in the employer-sponsored group market, but almost always required higher deductibles. Compared with the average $275 deductible for employer coverage in 2003, the high-risk pool deductibles available to HCTC recipients in the states we reviewed generally ranged from $500 to $5,000. All of the qualified high-risk pools in these states provided HCTC recipients with a choice of deductibles, with the majority of HCTC recipients selecting the lowest option available in two of the three states. (See table 7.) In addition to a choice of deductibles, state-qualified HCTC plans in three states (Maryland, North Carolina, and Pennsylvania) offered enrollees a choice of benefit packages. HCTC recipients in these three states typically selected the option providing more generous coverage, as in the following examples: The Maryland high-risk pool offered two plan options—a PPO plan with a $1,000 deductible and 20 percent coinsurance for most services, and an exclusive provider organization (EPO) plan with no deductible and $20, $30, and $250 copayments for physician visits, specialist visits, and hospital admissions, respectively. The majority of HCTC recipients (56 percent) selected the EPO plan. North Carolina provided state-qualified coverage through an arrangement with an insurer, which offered a choice between two benefit packages— one with more comprehensive coverage that included lower copayments for physician and hospital care and no separate deductible for prescription drugs, and a second option with higher copayments for physician and hospital care and a separate $200 prescription drug deductible. Most (80 percent) HCTC recipients selected the more comprehensive coverage. In western Pennsylvania, the state-qualified plan provided coverage for hospital and surgical expenses and certain preventive services with no deductible and no coinsurance. HCTC recipients also had the option to purchase a separate plan that added coverage for prescription drugs and physician and specialist visits, with these benefits subject to a $750 deductible and 20 percent coinsurance. Almost 90 percent of HCTC recipients purchased the optional coverage. The cost of qualified coverage for advance HCTC enrollees varied according to the number of individuals covered, whether the advance HCTC enrollee was a TAA recipient or a PBGC beneficiary, and the type of qualified coverage purchased. For example, in April 2004, the average total monthly premium for advance HCTC coverage—representing both the individual and federal share—was $404 for one person and $812 for two people. In the eight states that we reviewed, the cost of coverage for HCTC recipients was partly determined by the premium-setting practices of qualified health plans. The amount paid for qualified coverage by advance HCTC enrollees nationwide varied according to the number of individuals covered as well as whether the enrollees were eligible for the HCTC because they received TAA benefits or because they received PBGC payments. For example, the national average total advance HCTC premium—representing both the enrollee’s 35 percent share and the government’s 65 percent contribution—for a qualified plan covering one individual in April 2004 was $404, versus $812 for a qualified plan that covered two individuals. PBGC beneficiaries, who were on average older than TAA recipients, typically paid more for advance HCTC coverage, both for COBRA as well as state-qualified plans. The average total premium for TAA recipients receiving the advance HCTC in April 2004 was $480, compared to $661 for advance HCTC enrollees receiving PBGC pension payments. Receipt of the advance HCTC reduced the share of the premium paid by enrollees, on average, to $168 for TAA recipients and $231 for PBGC beneficiaries. (App. IV provides average total monthly premiums by state for TAA recipients and PBGC beneficiaries receiving the advance HCTC.) Monthly advance HCTC premium costs ranged widely nationwide, depending on the type of qualified coverage purchased (see fig. 6). State- qualified HCTC coverage was, on average, more expensive than COBRA for plans that covered one individual or an individual and one other family member. However, when more than three individuals were covered on a plan, COBRA coverage was more expensive, on average, than the state- qualified options. These premium comparisons do not reflect differences in benefits among the different types of coverage. Even with the tax credit, most advance HCTC enrollees paid more for their 35 percent share of qualified coverage than individuals purchasing health coverage through an employer. For instance, in July 2004, the average advance HCTC enrollee paid $137 for the 35 percent monthly share of COBRA coverage for one person or contributed $293 toward family coverage. In comparison, according to a 2003 national survey on employer benefits, the average employee paid $42 per month to purchase one-person coverage or $201 per month for family coverage purchased through their employer. However, without the 65 percent subsidy provided by the HCTC, the average advance HCTC enrollee continuing COBRA coverage would likely have had to pay the entire $390 per month for one-person coverage or $837 per month for family coverage. The cost of coverage for HCTC recipients within and across the eight states we reviewed was partly determined by health plans’ premium- setting practices. As they do for non-HCTC applicants, state-qualified health plans in the majority of states we reviewed that had designated such plans adjusted premium rates to take into account enrollees’ demographic characteristics, including their health status. Other premium- setting practices affecting the cost of state-qualified HCTC coverage included raising premiums to compensate for offering coverage on a guaranteed issue basis and, in some cases, automatically charging HCTC recipients higher premiums than what would typically be charged for healthy individuals for whom they are not required to offer coverage on a guaranteed issue basis. Although most state-qualified health plans had not analyzed the extent to which HCTC recipients utilize services, preliminary evidence suggested that insurers have not found the majority of these individuals to be in poor health. Health plans’ premium-setting practices depended on the type of state- qualified coverage offered. In four of the six states we reviewed where state-qualified HCTC coverage was provided through arrangements with insurers offering individual market plans (Maryland, North Carolina, Ohio, and Texas), insurers took each applicant’s health status and medical history into account when determining premiums, a process known as medical underwriting. The other two states (New York and Pennsylvania) charged the same rates for all enrollees. High-risk pools in the states we reviewed generally charged enrollees different rates based on their age (Illinois, Maryland, Texas), gender (Illinois, Texas), or county of residence (Illinois, Texas). One high-risk pool (Texas) also charged tobacco users higher premiums than nontobacco users. Unlike COBRA or other group market coverage, where premiums are based on the history of medical costs and demographic characteristics associated with a group of individuals who are employees of a company or related companies, eligibility and premiums in the individual market in many states are based largely on each individual’s health status and risk characteristics. Typically, the extent to which insurers selling coverage in the individual market can raise premiums for older individuals or those with existing health conditions is determined by each state. While the premiums charged by insurers selling coverage in the individual market may vary substantially, the premiums charged by state high-risk pools are generally set between 125 percent and 200 percent of the standard premium that an individual in good health would typically pay for coverage in the individual market. Regardless of health status, HCTC recipients purchasing COBRA coverage would be charged the same rate as the rest of the employee group, while those purchasing coverage through a high-risk pool would pay from 125 percent to 200 percent of the standard premium charged to healthy individuals. HCTC recipients purchasing coverage through an arrangement with an insurer would likely be charged varying premiums based on their health status and other demographic characteristics, with some unhealthy, high-risk individuals paying more, and in some cases substantially more, than 200 percent of the rates charged to individuals in good health. For example, in one state we reviewed, the insurer offering qualifying coverage to HCTC recipients charged individuals rated in their poorest health category 580 percent of the premium charged to those rated in their healthiest category. For state-qualified HCTC insurers, particularly those in the individual market, having to provide guaranteed issue coverage to certain HCTC recipients presents additional risk. For example, if an individual applicant with 3 months of prior creditable coverage has a costly chronic medical condition, such as juvenile-onset diabetes or heart disease, which would otherwise typically result in that applicant being denied coverage, the cost to the insurer may outweigh the premium paid, resulting in a loss to the insurer. To compensate for this additional risk posed by the guaranteed issue requirement, federal officials have granted permission for state- qualified HCTC health plans to charge higher premiums to individuals rated in the poorest health categories—individuals who would otherwise be turned down for coverage—as long as the additional premiums are actuarially justified and pass state insurance department review. One insurer we interviewed that sold state-qualified coverage in multiple states, including one of the states we reviewed, used differing practices in setting premiums for HCTC recipients in these states. In the state we reviewed, this insurer reported that it had originally planned to offer coverage on a guaranteed issue basis to all HCTC enrollees, regardless of whether they had 3 months of prior creditable coverage, and to automatically charge them 200 percent of the standard premium that it would typically charge a healthy applicant. After the state department of insurance rejected this premium-setting practice, the health plan set up a two-tier pricing system whereby healthier individuals who passed medical underwriting were charged the standard premium, while those who did not pass underwriting were charged 200 percent of this rate. Although this insurer modified its pricing method in the state we reviewed, the insurer said that it continued to automatically charge all HCTC recipients a higher- than-standard premium in two other states where it sold state-qualified coverage. Thus, although the guaranteed issue provision ensures that qualified individuals will have access to HCTC coverage, regardless of age or health status, it also means that the healthiest HCTC recipients may pay more for such coverage than they otherwise would in the individual market without guaranteed issue. Without this consumer protection, however, HCTC recipients with certain preexisting medical conditions would likely be unable to purchase coverage from state-qualified health insurers selling individual market health plans. Two states we reviewed (Maryland and Texas) offered state-qualified HCTC coverage through both the state high-risk pool and through an arrangement with an insurer. Because of the way health plans in these states set premiums, less healthy HCTC recipients were likely to find the high-risk pool coverage to be the less expensive of the two state-qualified options, while healthier HCTC recipients were generally able to purchase less expensive coverage through the arrangement with an insurer. For example: In Maryland, the health plan offered through an arrangement with an insurer charged less healthy HCTC recipients 200 percent of the standard premium typically charged an applicant in good health, whereas the state high-risk pool charged all applicants 150 percent of the standard rate. In Texas, high-risk pool rates were set at 200 percent of the standard premium, while the state-qualified HCTC plan offered through an arrangement with an insurer charged HCTC recipients rated in the poorest health category 4.7 times as much as those rated in the average health category and 5.8 times as much as those rated in the healthiest category. Most of the state-qualified plans in the seven states we reviewed that had such plans reported that they have not analyzed the extent to which HCTC recipients utilize services, which would be one indicator of the health status of the population receiving the HCTC. Officials from some of these plans stated that they are collecting health service utilization data for individuals receiving the HCTC but that they will need at least a full year’s worth of data before drawing any conclusion as to the overall health status of the TAA and PBGC populations. However, on the basis of preliminary medical underwriting data that were provided by HCTC state-qualified plans in two of the states we reviewed, more HCTC recipients have been placed into the healthy or standard risk categories than into the poorest health categories designated for this population. One health plan indicated that fewer than half of its enrollees receiving the HCTC were placed in below-average rating categories, while the other reported that one-fifth of its HCTC enrollees were categorized as worse-than-average risks. IRS’s HCTC program office met the statutory time frames for implementing the HCTC, enabling individuals to claim the end-of-year HCTC for December 2002 on their income taxes and making the advance HCTC available on August 1, 2003. To meet these time frames, the HCTC program office coordinated closely with other federal agencies, state agencies, and private health plans and used private contractors extensively. These stakeholders generally reported that the collaborative effort to implement the HCTC went well and that the HCTC program office was responsive to implementation issues that arose. For example, these implementation issues included instances where individuals who were not eligible for the credit claimed and received the end-of-year HCTC for 2002, while others who were eligible and claimed it did not receive the payment. IRS has been recovering payments made in error and revised its forms and processes to reduce these problems for the end-of-year HCTC for 2003. Implementation issues for the advance HCTC included the unwillingness of certain health plans to accept advance credit payments; delays in health plans’ receiving correct payments when premiums changed; and inaccurate state eligibility lists that jeopardized individuals’ receipt of the advance HCTC. The HCTC program office reported that, from February 2003, when work began to set up the advance HCTC, through April 2004, start-up costs for design, development, and implementation of the HCTC were about $69 million. After restructuring the HCTC program office to transition from implementation activities to operating activities, costs for the HCTC were expected to be about $40 million for the year starting July 1, 2004, and reflected a reduction in contractor staff, although contractors will continue to perform the majority of the administrative and operational work. According to federal officials, in order to implement the HCTC on time, IRS’s HCTC program office coordinated closely with federal agencies, state agencies, and health plans and received extensive support from private contractors. Implementation efforts for the end-of-year and advance HCTC met the statutory deadlines contained in the TAA Reform Act, making each form of the HCTC available for December 2002 and by August 2003, respectively. While IRS’s HCTC program office had primary responsibility for implementing the HCTC, officials from this and other federal agencies involved in its implementation—HHS, Labor, and PBGC— reported that instituting the advance HCTC in particular was a cooperative effort that went well. Officials from workforce agencies and health plans in the states we reviewed largely concurred, stating that the HCTC program office was helpful in implementing the HCTC and addressing issues that have arisen. Meeting the 1-year implementation time frame for the advance HCTC was challenging for state workforce agencies, however. According to our survey of state workforce agencies conducted in March 2004, 71 percent reported that implementing the advance HCTC had been somewhat or very difficult. For example, as figure 7 shows, state workforce agency officials were less satisfied with the timeliness of the information they received from the HCTC program and Labor to implement the advance HCTC than they were with the assistance itself. HCTC program officials stated that, while individuals were able to claim the end-of-year HCTC for premiums paid in December 2002, IRS was unprepared to verify these claims and some credits were paid or denied in error—that is, some individuals received the HCTC who should not have and other individuals who were eligible for it did not. These errors were the result of mistakes individuals made on their tax returns—partly because of limited information in IRS’s tax publications and communications for 2002 about how to claim the HCTC—and errors IRS staff made in processing each claim manually. Claims for the end-of-year HCTC in 2002 were still undergoing review as of June 2004, and the HCTC program reported that of the $2.9 million disbursed, about $465,000 had been improperly paid to ineligible individuals. More than half of this amount (about $243,000) had been recovered, and IRS continues to seek recovery of the rest. HCTC program officials stated that for those who do not pay back the credit, future tax refunds would be offset by the outstanding amount. Additionally, IRS is in the process of auditing 577 claims (about 2 percent of the total) for 2002 that were for greater amounts than were expected. As of June 8, 2004, about half of the audits had been completed, and about 85 percent of the HCTC amounts claimed were disallowed. To reduce the number of ineligible individuals receiving the end-of-year HCTC for 2003, HCTC program officials instituted new procedures and reporting requirements. For example, all tax records were prescreened against state workforce agency and PBGC eligibility lists to identify who was potentially eligible to receive the end-of-year HCTC. As of May 2004, HCTC program officials reported that this screening had prevented about 8,000 ineligible individuals from improperly claiming the end-of-year HCTC on their 2003 tax returns. However, this prescreening only identified whether an individual was potentially eligible for the HCTC at any time during the year, not the specific month or months in which he or she might have been eligible. IRS provided tax professionals with information about the HCTC and mailed each individual who was identified as potentially eligible for the credit in 2003 information about how to claim the end-of- year HCTC. Additionally, the IRS tax form used to claim the end-of-year HCTC was revised to include clearer instructions to help filers determine whether they were eligible for the credit, and individuals were required to attach copies of invoices and payments for each month in 2003 for which they claimed the end-of-year HCTC. This procedure does not, however, ensure that the individual purchased qualified health coverage. Therefore, potentially eligible individuals could have claimed the end-of-year HCTC in 2003 for more months than they should have or for coverage that did not qualify for the credit. Advance HCTC payment and implementation issues prompted the HCTC program to change some of its procedures, but not all issues have been resolved. One such payment issue for which the HCTC program adapted its procedures was the refusal of some automatically qualified health plans to accept the advance HCTC from IRS. HCTC program officials reported that certain health plans refused to accept payments from IRS, primarily because they found the process to register to receive advance payments burdensome or they did not want to receive electronic payments. According to these officials, health plans had to register in the primary vendor database for the federal government—the Central Contractor Registration (CCR)—and accept electronic payments in order to receive advance HCTC payments. The CCR requirement was reported to cause delays, and some plans, especially smaller ones, refused to accept electronic payments or did not have the necessary systems to process them. To encourage health plans to participate, the HCTC program office changed its registration process for health plans—it no longer requires plans to register with the CCR—and now issues paper checks if a health plan will not accept electronic payments. HCTC program officials reported that these changes have prompted some plans to agree to participate. However, as of June 2004, 211 health plans still refused to participate. Most of these were COBRA plans that covered few HCTC-eligible individuals. Because these 211 plans refused to accept payments, about 447 individuals who had tried to enroll for the advance HCTC had to wait until the end of the year to claim the HCTC. Officials from two COBRA plans told us why their plans did not accept advance payments: an official from one plan stated that too few individuals qualify for the HCTC for the plan to consider participating, while an official from another plan was concerned that the advance HCTC would encourage less healthy individuals to retain coverage and that this would result in financial losses for the plan. Nevertheless, a total of more than 600 health plans covering more than 13,000 individuals have agreed to receive the advance HCTC as of June 2004. An unresolved payment issue identified by 3 of the 10 state-qualified plans we contacted in the states we reviewed was the receipt of incorrect advance HCTC payments from IRS when premiums change. While officials from most of the state-qualified plans we interviewed (6 of 10) reported that either they did not experience any problems with advance HCTC payments or that any problems they experienced had been resolved, the most common unresolved issue, reported by officials from three of the plans that identified ongoing issues, dealt with the receipt of incorrect payments when premiums changed. This problem was attributed largely to the time it takes for HCTC enrollees to notify the HCTC program of the new premium and for the HCTC program to adjust the allowable premium amount. For example, one plan reported that payments from IRS are incorrect—usually less than the required amount—for a couple of months after a premium change. To mitigate this problem, two officials from state- qualified plans suggested that the health plan, rather than the HCTC enrollee, notify the HCTC program of premium changes. Officials from two COBRA plan administrators that had a large number of advance HCTC enrollees stated that they did report premium changes directly to the HCTC program. However, HCTC program officials reported that some plans prefer not to report the changes to HCTC because it is outside their normal procedures or they have few members receiving the advance HCTC. An implementation issue affecting enrollees, for which the HCTC program revised its procedures, concerned how the program office responded to enrollees’ payments that were less than the requested amount or late. According to HCTC program officials, between August 2003 and February 2004, more than 1,700 individuals who had enrolled for the advance HCTC were terminated temporarily from the advance HCTC because their payments to IRS were less than their 35 percent share or they were late. Approximately 55 percent of the individuals who were terminated subsequently reenrolled for the advance HCTC. HCTC program officials noted that the initial billing and payment procedures generated numerous calls to the customer service center because individuals received multiple invoices for their 35 percent premium amount, some of which they received late because of mail delivery problems. To mitigate this confusion and the burden of reenrolling individuals who had been dropped, the HCTC program office changed its billing and payment procedures in March 2004. Under the revised procedures, only one invoice would be sent each month and, instead of terminating individuals whose payments were less than the required amount, the HCTC program office would add a 65 percent HCTC proportional to the payment they receive and forward this amount to the health plan. The HCTC enrollee would be responsible for paying any outstanding difference to the health plan directly. HCTC program officials told us that since making these changes, no advance HCTC enrollee has been terminated as a result of payments that were less than the required amount or late. Additionally, officials we interviewed from five of the health plans in the states we reviewed reported that they were lenient in applying their payment rules to ensure that plan members did not lose coverage as a result of problems with the advance HCTC. For example, an official from one health plan reported that the plan had extended from 30 to 90 days the grace period for advance HCTC members to pay their monthly premiums. The HCTC program office has also changed its procedures to address the receipt of incomplete lists of potentially eligible individuals from state workforce agencies. HCTC program officials reported that the lists state workforce agencies provide on which the HCTC program office relies to determine eligibility for the advance HCTC were incomplete for many states and that verifying that individuals remained eligible for the advance HCTC was time consuming. Some states also reported problems with transmitting these data to IRS. Ohio, for example, reported that the HCTC program office does not always receive all of the names of potentially eligible individuals that it sends. HCTC program officials reported that from October 2003 through March 2004, the lists of TAA recipients potentially eligible to receive the HCTC submitted by about one-third to more than one-half of states (16 states to 28 states) failed to include the names of all eligible TAA recipients. Since October 2003, the HCTC program office has audited these states’ lists and asked the workforce agencies to confirm that their transmissions were correct if any of the individuals enrolled to receive the advance HCTC from the previous month failed to reappear as eligible. During the first 6 months in which the HCTC program office performed these audits, it identified 2,984 individuals who were enrolled to receive the advance HCTC in a previous month but whose names dropped from the state lists in the current month. The state workforce agencies determined that approximately 55 percent (or 1,648) of these individuals were still eligible for the advance HCTC and that their names should not have been dropped from the list. Thus, without this audit process these individuals would have erroneously lost eligibility for the advance HCTC. However, HCTC program and Labor officials reported that this verification process is a burden on HCTC program staff and the states. HCTC program officials reported that they did not track advance payment errors that occurred as a result of mistakes made by IRS. While these officials acknowledged that some mistakes did occur, such as late payments or accounting errors, they said that the majority of payments were timely and accurate and that problems were resolved at the time they occurred. Likewise, most officials from health plans we spoke with reported few problems with IRS’s payments; problems identified included payments containing incorrect identification numbers or payments for incorrect amounts. IRS established the HCTC program office with primary responsibility for overseeing and coordinating efforts for the HCTC. The HCTC program office is responsible for resolving operational and legal issues and monitoring the overall progress of the HCTC on a day-to-day basis. An executive steering committee, composed of affected federal agencies and contractors, also was established to provide guidance to the HCTC program office. The majority of officials on the HCTC program’s executive steering committee are IRS or Treasury officials. High-level officials from each of the other federal agencies involved with the HCTC—Labor, HHS, and PBGC—as well as the IRS and Treasury officials are voting members. Officials from IRS’s primary private contractor and a subcontractor— Accenture and The Lewin Group, respectively—are nonvoting members of the committee. This committee meets monthly to provide guidance on policy, legal, and programmatic issues. To meet the implementation date for the advance HCTC, IRS relied on contractors. According to HCTC program officials, IRS staff work closely with contractor staff and oversee their work on an ongoing basis. For example, within the HCTC program office are six project teams, each of which is managed by a senior-level IRS staff person. Paired with each senior-level IRS staff person is a senior contractor staff person, and most of the staff performing specific operational tasks for the HCTC are from the contractor. While the senior IRS and contractor staff share responsibility for their project team’s work, the IRS staff person establishes the direction of the work on the basis of the HCTC program’s strategic plan, sets priorities, and brings knowledge about IRS’s processes to the team. IRS and contractor staff responsibilities are also clarified in the contract documents. For example, IRS contract documents state that the government responsibilities include defining the rules under which the program will function and that the primary contractor’s responsibilities include designing and administering the HCTC program according to these rules. IRS officials in the HCTC program reported that close collaboration between government and contractor staff helped them implement the advance HCTC in a timely manner. Officials from IRS’s contracting office reported that oversight of the primary HCTC contractor responsible for developing and maintaining much of the HCTC program office’s infrastructure is conducted in several ways. IRS contracting officers include direction on how work is to be completed in work requests, as well as reporting requirements and deliverables. For example, one work request required the contractor to report daily on the handling of calls received by the call center for a few months in 2003. IRS staff in the specific area where the work is to be done review and approve each work request under the contract, monitor the contractor’s work, and make recommendations to the contracting official regarding whether the completed work is acceptable. Additionally, IRS contracting officials reported that they review monthly status reports, cost documents, and deliverables submitted by the primary contractor. However, the HCTC program office has not instituted performance measures and is currently working on draft measures and preliminary goals for fiscal year 2005. To implement and administer the advance HCTC, Congress appropriated $70 million to IRS for fiscal year 2003, which will remain available through fiscal year 2004, and $35 million for fiscal year 2004, available through fiscal year 2005. HCTC program officials expected that costs to administer the HCTC program—from the time that work by the primary contractor began in February 2003 through June 2005—would be about $116 million. These costs, broken down by major activities, included about $33 million for design and development work during February 2003 through April 2004. Implementation costs to establish the systems that would be used on an ongoing basis and costs to administer the advance HCTC for the first 9 months it was available were reported to be about $36 million for May 2003 through April 2004. In May and June 2004, the HCTC program office engaged in a planning process during which it restructured its operations and determined how it would transition from implementation activities to operating activities. Costs to reorganize and administer the HCTC during this 2-month transition period were expected to be about $6 million. After transitioning to operating activity levels, officials expected that costs for the HCTC would be about $40 million for the year July 2004 through June 2005, and IRS officials reported that they are identifying ways to further lower operating costs. Included in this $40 million are about $32 million for operating costs and about $8 million for program enhancements such as software updates. In total, the majority (at least $97 million) of the approximately $116 million to administer the HCTC—from its early 2003 start-up through mid-2005 operations—was expected to be paid to IRS’s contractors. (See table 8.) From start-up through June 2004, IRS’s primary contractor was responsible for most of the work for the HCTC. The contractor’s responsibilities during this time included assisting in the development of eligibility and payment processing policies and procedures, maintaining and operating the program office, and establishing a call center. While IRS had an average of 9 full-time-equivalent staff assigned during this time to design, develop, implement, and transition the HCTC program to ongoing operational service levels, the primary contractor had an average of 243 full-time-equivalent staff working on these activities. Starting July 1, 2004, HCTC program officials expected that operating and enhancement costs for the next 12 months would be about $40 million. This figure also reflects a decrease in contractor staff. These costs reflect a reduction in service levels and IRS’s assumption of more of the administrative responsibilities for the HCTC. HCTC program officials stated that reduced service levels means that, for example, the HCTC program will focus on responding to issues raised by health plans rather than providing as much individual-level outreach to health plans as they had in the past. IRS’s primary contractor is expected to continue to perform the majority of work for the HCTC, and officials reported that there would be a decrease in the amount of work done by the contractor, with contractor staffing to decrease to 167 full-time-equivalents. There would be a slight increase in the amount of work done by IRS, with no increase in the number of IRS staff positions designated but with hiring done to fill vacant positions to reach a total of 17 full-time equivalents. As of August 2004, 45 states received national emergency infrastructure grants from Labor to help them set up mechanisms to administer the HCTC, and 11 states received national emergency bridge grants to help pay a portion of the premiums. In total, $45 million, or half of the $90 million in available national emergency grant funds, was awarded. In response to our survey of state workforce agencies, two-thirds of the states that did not apply for the bridge grants said they did not have systems in place to implement the grant. A total of 21 states received high-risk pool grants from CMS as of August 2004. Sixteen states received high-risk pool operating grants to offset losses in state high-risk pools, and 6 states were awarded a seed grant for establishing a new high-risk pool (1 state received both a seed and an operating grant). As of August 2004, less than half of the $80 million in funds available for high-risk pool operating grants had been awarded, as well as less than one-fifth of available high-risk pool seed grants. CMS officials reported that one reason seed grants were not more popular is that states were reluctant to take on the ongoing financial obligation of a high-risk pool. (App. V lists the states awarded national emergency grants and high-risk pool grants and the amounts awarded.) As of August 2004, half ($45 million) of the $90 million available for national emergency grants had been awarded—about $7 million for infrastructure grants and about $38 million for bridge grants. Most states received national emergency grants, with 45 states receiving infrastructure grants and 11 receiving bridge grants. For fiscal year 2002, $60 million was appropriated for national emergency grants, including $50 million for bridge grants and $10 million for infrastructure grants. An additional $30 million was appropriated for fiscal year 2003 for both bridge and infrastructure grants. While bridge grants were originally awarded to provide individuals with a 65 percent subsidy prior to the implementation of the advance HCTC in August 2003, Labor has expanded the use of bridge grants to cover the 1- to 3-month gap period during the HCTC enrollment process when individuals must pay 100 percent of their premiums out of pocket. Five states—Maine, Maryland, North Carolina, Ohio, and Virginia—are using bridge grant funds to cover this gap period, and more states are in the process of seeking funds for this purpose. State officials reported that these grants are important to help individuals cover premiums during the advance HCTC enrollment process and that the availability of these funds during this period could increase eligible individuals’ interest in and receipt of the HCTC. In March and April 2004, the HCTC program piloted an initiative called “HCTC National Emergency Grant Bridge Support Activities” to support states that received bridge grant funds. The pilot was tested in Maryland and Virginia and involved three activities. First, the HCTC program began asking individuals in these states when they applied for the credit to consent to the HCTC program sharing certain private enrollment information with state officials, such as names, addresses, and enrollment status. According to the HCTC program, most individuals (80 percent) in these states consented to this at the time of enrollment. The HCTC program office then sent a report to states weekly showing HCTC enrollment status, contact information, Social Security number, and eligibility type for all TAA recipients and PBGC beneficiaries who had consented to disclosure of this information. Pilot states were encouraged to use this information as a tool for outreach and for determining an individual’s eligibility for bridge grant payments. Second, the HCTC program office offered support to states in promoting their bridge grant program to potentially eligible individuals. Third, the HCTC program office provided ad hoc support to bridge grant states on questions regarding HCTC eligibility and enrollment. Virginia reported that it used the consent reports to conduct outreach such as mailing application forms to potential eligibles, as well as to monitor enrollment status to avoid potential overpayments. Maryland used the consent reports to contact prescreened PBGC beneficiaries and offered them bridge services, including mailing out application packages, and Maryland officials said that the pilot experience helped improve federal and state coordination. The HCTC program and Labor have agreed to expand the bridge grant pilot to other states. In response to our survey of state workforce agencies in March 2004, officials cited a variety of reasons to explain why they did not apply for bridge or infrastructure national emergency grants. For example, officials in two-thirds of the states that did not apply for the bridge grants said that they did not have systems in place to implement the grant. The rest of the states cited a variety of reasons for not applying, including difficulty with the grant application process, insufficient TAA workers or activity, no need for the funding, and prohibitive administrative costs. One state indicated that it was hesitant to assist individuals with obtaining health coverage because it was unable to make decisions about health insurance coverage. Of the five states that Labor reported had not received infrastructure grants, two said that they did not require funding from the grant and another said that it had to complete some system changes before applying for a grant. One state said it would be applying for the grant in the future, and another was not sure whether an application had been submitted. (See table 9.) Almost half of the states (21 states) received high-risk pool grants as of August 2004. Six states were awarded seed grants of between about $53,000 and $1 million for establishing a high-risk pool and 16 states received operating grants to offset losses incurred by their high-risk pools. As of August 2004, $4 million of the $20 million available for seed grants had been awarded to establish new high-risk pools, and less than half (about $30 million) of the $80 million available for high-risk pool operating grants had been awarded. CMS was reviewing an application from the District of Columbia, as of August 2004, and Vermont’s application will be withdrawn because legislation to create a high-risk pool in Vermont was not enacted by its state legislature. (See app. V for a list of high-risk pool awards to states.) According to a CMS official, one reason more states did not apply for high- risk pool seed grants was that states’ fiscal concerns made them reluctant to take on the ongoing financial obligations of a new high-risk pool, which typically enrolls individuals with a history of high medical costs, incurs costs potentially higher than the premiums received from enrollees, and requires subsidization from taxes on local insurers or other revenue sources. CMS officials also said that several states that had high-risk pools were not eligible for the high-risk pool operating grant because they did not meet the eligibility criteria. The operating grant is available only to qualified high-risk pools that meet certain eligibility criteria, and the award amounts are based on the number of uninsured individuals in each state. In addition to meeting the criteria for a qualified high-risk pool contained in the Public Health Services Act, eligibility criteria for receipt of the grant included restrictions on the premiums charged, the number of plan choices available to enrollees, and the availability of mechanisms to fund ongoing losses incurred by the pool. California and Texas, where the numbers of uninsured people are among the highest in the nation and therefore would have been eligible for proportionately larger shares of the grant funds, were among the states that did not meet these criteria. California did not qualify because its high-risk pool did not meet the qualified high-risk pool requirement that eligible individuals have immediate access to the pool, and Texas did not qualify because the premiums for its high-risk pool were set above the allowable limits. Three other states—New Jersey, Idaho, and Oregon—that applied for an operating grant were turned down because their arrangements did not meet the definition of a qualified high-risk pool. The Trade Adjustment Assistance Reform Act of 2002 established the HCTC to help trade-displaced workers and retirees whose pension plans have been assumed by PBGC to purchase health coverage. The establishment of the HCTC within 1 year of enactment, including development of a new mechanism for paying the HCTC directly to hundreds of health plans on behalf of enrollees in advance of the premium due date, resulted from the collaborative efforts of multiple federal and state agencies and private health plans. As implementation issues arose— such as certain health plans’ reluctance to participate, some initial payment problems, and ineligible individuals receiving the end-of-year credit in 2002—the IRS-based HCTC program office worked with other federal, state, and private stakeholders and adapted its policies and processes to address these and other issues. Despite these efforts, the number of individuals receiving the HCTC to date continues to be a smaller portion of those potentially eligible than many stakeholders had expected and some implementation issues remain unresolved. A major factor cited by many state and health plan officials as a reason for lower than expected enrollment was the affordability of coverage, as some eligible individuals may find it difficult to pay the entire premium for 3 to 6 months to maintain coverage until they receive the advance HCTC, and even the 35 percent share of premiums, once the HCTC covers remaining premium costs can represent a high proportion of income, particularly for displaced workers or retirees. Further, while the advance payment option was intended to make the HCTC attractive for eligible individuals by minimizing their out-of-pocket payments, most HCTC recipients in 2003 did not use this option. Instead, the majority of recipients opted to receive the HCTC by claiming the credit on their year- end tax forms. State, health plan, and union officials told us that the complexity of the eligibility determination and enrollment process contributed to the lower than expected usage of the advance payment option. For example, The multitude of tax, labor, and health coverage requirements related to the HCTC are challenging for workers and retirees to navigate. Potentially eligible individuals must often contact multiple federal, state, and private entities to obtain the information they need to enroll. While the HCTC program office offers information to potentially eligible individuals through its call center, this resource begins after individuals have been identified by states or PBGC as potentially eligible and often after individuals have already made decisions about maintaining, changing, or dropping health coverage. Individuals who have more than a 63-day break in continuous health coverage may lose federal consumer protections guaranteed in the TAA Reform Act, such as guaranteed acceptance by a health plan and coverage for their preexisting medical conditions. Given that it takes 3 to 6 months to become eligible for and receive the advance HCTC, during which time the individual is responsible for the full premium amount, some individuals may lose these consumer protections if they do not maintain coverage during this time. To receive the HCTC, the TAA Reform Act requires that an individual must meet certain trade readjustment allowance eligibility requirements, including (1) waiting 60 days or more from the time that a petition to certify that workers were displaced due to trade is submitted to Labor, and (2) complying with the requirement to obtain reemployment training or obtain a waiver from training each month. State workforce agencies contend that granting these waivers to facilitate eligibility for the HCTC is an added administrative burden that further complicates enrollment in the HCTC. Lists from state workforce agencies used to verify individuals’ eligibility were sometimes incomplete, causing individuals to lose access to the advance HCTC if their names were erroneously dropped. Although the HCTC program office began auditing the lists to ensure that they contained all eligible individuals, this time-consuming process had not led to the correction of the underlying problem with the accuracy of the state lists. Enrollees may face delays in having the correct amount of their advance HCTC payment adjusted and paid promptly to their health plans if they fail to notify the HCTC program office when the health plan changes their premiums. PBGC beneficiaries who enroll in Medicare lose eligibility for the HCTC for themselves and their spouse and other dependents, even though their spouse or dependent may not yet be eligible for Medicare and may not have access to other sources of coverage. State and union officials often noted that this was a concern of PBGC beneficiaries when discussing potential eligibility for the HCTC. As the HCTC program begins its second full year and transitions from design and early implementation to more routine operations, it is reducing its contractor staffing and some service levels. As the program evolves, a less complex enrollment process and shorter time period before enrollees begin receiving advance payments could enhance the attractiveness of the HCTC and the advance payment option for eligible individuals. We suggest that Congress consider taking the following three actions: To simplify the advance HCTC eligibility process and enable some trade- displaced workers to qualify for the HCTC sooner after losing employment, Congress may wish to amend existing law to permit TAA recipients to enroll in the HCTC program (1) without waiting 60 days or more to establish eligibility for the trade readjustment allowance and (2) without first meeting trade readjustment allowance requirements pertaining to training. To more promptly reimburse eligible individuals for some of the health coverage premiums they paid during the 3 to 6 months that the advance HCTC eligibility and enrollment process typically takes, Congress may wish to allow the HCTC program to retroactively pay the 65 percent HCTC for the 1 to 3 months between enrollment for and receipt of the advance HCTC, rather than requiring individuals to wait for the end-of-year credit to receive that portion of the benefit. To help eligible individuals maintain their rights to guaranteed coverage and other consumer protections during the time it takes to become eligible and enroll for the HCTC, Congress may wish to specify that for individuals who had health coverage for the 3 months immediately prior to becoming eligible for TAA benefits or PBGC pension payments, the 63-day break in coverage used to determine continuous coverage may begin with the HCTC program office’s notification of potential eligibility. We recommend that the Secretary of Labor, Commissioner of Internal Revenue, Administrator of CMS, and Executive Director of the PBGC take the following five actions. To help individuals understand and comply with the multiple labor, health coverage, and tax eligibility requirements for receipt of the HCTC, the Secretary of Labor, the Commissioner of Internal Revenue, the Administrator of CMS, and the Executive Director of the PBGC should, in coordination with state officials, provide for a centralized resource for individuals to receive information on and assistance with HCTC eligibility criteria, including individualized assistance in completing each step of the eligibility and enrollment process and information about qualified health coverage options available in their local area. This centralized resource should be available at the time individuals must make decisions about purchasing qualifying health coverage and meeting other qualifying criteria, which may occur before the HCTC call center and other existing resources have been notified about an individual’s potential eligibility. To ensure that HCTC-eligible individuals and recipients receive timely and appropriate information, responses to inquiries, enrollment processing, and advance HCTC payments, the Commissioner of Internal Revenue should evaluate the effect that any reduced service levels will have on eligible individuals and health plans’ ability to receive the HCTC on a timely basis and their satisfaction with the information and services provided. To improve the quality of eligibility information provided by the states, the Secretary of Labor and the Commissioner of Internal Revenue should coordinate to improve the accuracy of data received from state workforce agencies. To simplify payment processing for advance HCTC enrollees and avoid disruptions resulting from premium changes, the Commissioner of Internal Revenue should encourage participating health plans to provide notification of changes in premiums directly to the HCTC program office rather than relying primarily on individuals for providing this information. Given that PBGC beneficiaries who enroll in Medicare lose eligibility for the HCTC even though their spouses or other dependents may not yet be eligible for Medicare or have alternative sources for insurance coverage, the Commissioner of Internal Revenue and the Executive Director of the PBGC should coordinate to report to Congress on how many PBGC beneficiaries previously receiving the HCTC have attained the age of 65 and potentially lost eligibility due to enrolling in Medicare, and how many of these former HCTC recipients have spouses or other dependents who are no longer able to receive coverage subsidized by the HCTC. We provided a draft of this report to Labor, IRS, CMS, and PBGC and officials in the eight states we reviewed, including each state’s workforce agency and the department of insurance or high-risk pool in seven states. We received comments from all four federal agencies, five states’ workforce agencies (California, Maryland, New York, Ohio, and Pennsylvania), five states’ departments of insurance (California, New York, Ohio, Pennsylvania, and Texas), and two states’ high-risk pools (Illinois and Maryland). The four federal agencies either concurred with our recommendations or deferred to IRS as the lead agency in implementing the HCTC. The state agencies that commented on our draft generally concurred with our findings. Comments from the federal agencies are reprinted in appendixes VI through IX. Regarding our recommendation that Labor, IRS, CMS, and PBGC work together to develop a centralized resource to help individuals understand the eligibility requirements for the HCTC, IRS agreed with our recommendation and highlighted efforts it has made to date to provide a centralized resource, including developing informational documents for individuals and states, making information available on its Web site, and establishing a call center. Labor agreed on the importance of providing individuals with information about the HCTC and highlighted certain actions it had taken to provide information and training to state workforce agencies and other interested parties such as businesses and unions. Labor also suggested reviewing and evaluating the quality of the existing information before taking further actions. PBGC commented that it would coordinate with the other agencies to address this recommendation, and CMS deferred to IRS as the lead in HCTC outreach and education. While we recognize that agencies have made efforts to provide individuals with information about the HCTC, we noted in the draft report that individualized assistance is not available until after individuals may have already made decisions that affect their eligibility for the HCTC. Thus, while a review of existing resources may be helpful, we have added to our recommendation the need for a centralized resource that provides individualized information and assistance earlier than it is currently available. Regarding our recommendation for IRS to evaluate whether any reduced service levels will affect individuals’ and health plans’ satisfaction, IRS stated that the agency cannot at this time systematically measure customer satisfaction. In response to our recommendation, however, IRS stated that it would include questions in future surveys or other research to elicit an indication of changes in satisfaction. In response to our recommendation that IRS and Labor improve the quality of eligibility information provided by the states, IRS agreed that the information provided by states continues to present a challenge. IRS noted that, although it does not have authority over states to implement solutions to problems with the eligibility lists, it will work with Labor to develop a plan for improving the accuracy of these data. Labor agreed with our recommendation and highlighted the burden the audits placed on states and agreed to continue to work with IRS to improve the quality of the data. In response to our recommendation that IRS encourage health plans to provide notifications of premium changes directly to the HCTC program office, IRS agreed to develop an action plan to make this change. IRS noted that it would likely phase in this change because of the number of plans and individuals affected. IRS and PBGC agreed with our recommendation that PBGC work with IRS to report to Congress the number of PBGC beneficiaries who turn 65 and lose eligibility for the HCTC even though their spouse or dependent may still need HCTC coverage. Additionally, PBGC suggested that IRS, as the lead agency for the HCTC, submit the recommended information to Congress. IRS noted that some estimates may be necessary because not all data elements are readily available to IRS or PBGC. In addition to its comments on our recommendations, IRS stated that the HCTC presented significant new responsibilities for IRS and that challenges remain. IRS reported it is continuing to identify ways to improve the operation of the HCTC program, decrease administrative costs, and obtain data about those who receive the HCTC in order to make outreach activities more effective. IRS stated that it is working to shorten the period of time required before an individual receives the advance HCTC. It noted, however, that the first 3 months of the 3- to 6-month period we identified for this process relates to TAA certification requirements, and that amending these requirements may have broader implications than just for the HCTC program. Additionally, regarding our statement that the benefits offered by qualified health plans across states differ widely, IRS noted that the coverage available for the HCTC is dependent on decisions made by the states and the plans that volunteer to participate. IRS stated that it hopes to obtain data that will enable a better understanding of the health status and other characteristics of HCTC enrollees to help alleviate health plans’ uncertainty about health care costs of HCTC individuals compared to others and to encourage more health plans to participate in the advance HCTC program. IRS and Labor and officials from Maryland, New York, Ohio, Pennsylvania, and Texas also provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. We will then send copies to the Secretary of Labor, Secretary of the Treasury, Administrator of CMS, Commissioner of Internal Revenue, Executive Director of PBGC, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. Please call me at (202) 512-7118 if you have additional questions. Another contact and key contributors are listed in appendix X. Data for Puerto Rico are also included in this table. As of July 2004, 36 states had designated state-qualified coverage options that could be purchased by individuals receiving either the advance or end-of-year health coverage tax credit (HCTC). Another 3 states—Arizona, Idaho, and Washington—had designated state-qualified plans, but these plans were not yet open to enrollment as of July 2004. Most of the 36 states that made state-qualified coverage available chose to provide this coverage through arrangements with insurers or through state high risk-pools, and 3 states designated both their high-risk pool and an arrangement with an insurer as state-qualified coverage. Thirteen states designated mini- COBRA coverage—state-based continuation coverage pertaining to insurers providing coverage to plans maintained by employers with fewer than 20 employees. Mini-COBRA coverage was the sole state-qualified coverage option available to HCTC recipients in 4 states (see table 10). According to federal officials, only a small percentage of Trade Adjustment Assistance (TAA) recipients and Pension Benefit Guaranty Corporation (PBGC) beneficiaries eligible to receive the HCTC likely had access to mini-COBRA coverage, as few of these individuals formerly worked for an employer with fewer than 20 employees. The benefits offered to HCTC recipients varied across coverage types and from plan to plan. COBRA benefits, which were typically identical to the benefits provided to working individuals covered by the employer’s group market health plan, generally included lower deductibles than high-risk pools and more comprehensive benefits and lower deductibles than state- qualified arrangements with insurers in the seven states we reviewed that had state-qualified plans. The majority of state-qualified plans in the states we reviewed were preferred provider organization (PPO) plans, although health maintenance organization (HMO), exclusive provider organizations (EPO), unrestricted fee for service (FFS), and point of service (POS) plans were available in some states. According to a national employer benefits survey, PPO health plans offered by employers in 2003 generally included an average annual deductible for services provided within the health plan’s preferred provider network of $275. Table 11 shows that most of the state-qualified health plans in the states we reviewed offered a choice among deductible amounts, ranging from $0 to $5,000, and that HCTC recipients generally selected the lowest deductibles available, typically $1,000 or less. We reviewed these state-qualified health plans for the extent of the benefits they offered with regard to maternity care, mental health care, and prescription drugs. The extent to which maternity benefits were covered by state-qualified plans in the states we reviewed is shown in table 12. Employer-sponsored plans typically provided coverage for maternity benefits because the federal Pregnancy Discrimination Act required employers with 15 or more employees to cover expenses for maternity services on the same basis as coverage for other medical conditions. Only one state-qualified plan in the states we reviewed did not provide coverage for maternity benefits, and three state-qualified health plans offered maternity coverage that was available as an optional benefit with an additional premium charge. The mental health benefits offered by state-qualified health plans in the states we reviewed are summarized in table 13. A national survey of health benefits offered by employers in 2003 reported that 99 percent of employer PPO plans provided coverage for both inpatient and outpatient mental health services, and the majority of these plans provided coverage for at least 21 days of inpatient care and 21 outpatient visits per year. In comparison, two state-qualified health plans in a state we reviewed did not provide any coverage for mental health benefits, and one health plan in another state we reviewed limited coverage of mental health benefits to 10 inpatient days and 10 outpatient visits per year. State-qualified plans in three states required enrollees to pay 50 percent of the cost of outpatient mental health visits. Two state-qualified health plans in one state limited coverage to certain mental disorders. Prescription drug benefits offered by state-qualified health plans in the states we reviewed are summarized in table 14. According to a national survey of employer-sponsored health benefits, 99 percent of employer PPO plans provided coverage for prescription drugs in 2003, and 92 percent of all employer-sponsored plans did not require a separate prescription drug deductible. The average copayments for prescription drugs reported in this survey were $9 for generic products, $19 for brand-name products that the plan designated as preferred, and $29 for brand-name products that the plan did not designate as preferred. All but one of the state-qualified plans in the states we reviewed included coverage for prescription drugs, and the one plan that did not include such coverage offered it as an optional benefit available for an additional premium charge. State-qualified plans in three states we reviewed required a separate annual deductible for prescription drugs, ranging from $100 to $250. State-qualified health plans in five states we reviewed had annual benefit maximums for prescription drugs, ranging from $500 to $3,000, and one plan did not provide any coverage for brand-name drugs. The cost of qualified health coverage for advance HCTC enrollees varied considerably across states. Total monthly premiums—representing both the individual and federal shares—were affected by the number of people covered on each enrollee’s health plan and whether the advance HCTC enrollee was a TAA recipient or a PBGC beneficiary (see table 15). According to the HCTC program office, most advance HCTC enrollees purchased coverage for a single individual or for an individual and one other family member. On average, PBGC beneficiaries paid more for qualified coverage than TAA recipients. The following staff made important contributions to this report: N. Rotimi Adebonojo, JoAnne R. Bailey, Elizabeth T. Morrison, and Pamela N. Roberto. 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Summary: Congress enacted the health coverage tax credit (HCTC) in 2002 for certain displaced workers receiving income support through the Trade Adjustment Assistance (TAA) program and for certain retirees receiving pensions from the Pension Benefit Guaranty Corporation (PBGC). The HCTC equals 65 percent of the cost of qualified health coverage, which individuals can receive in advance--the Internal Revenue Service (IRS) pays the credit to the qualifying health plan and the individual pays the remaining 35 percent--or by filing for the credit in their federal tax return. GAO was asked to review the implementation of the HCTC and examined, among other issues, how many individuals received it and factors influencing participation, and the type and cost of coverage they purchased. GAO obtained data from federal and state agencies and private health plans. For 2003, 19,410 individuals received about $37 million in benefits from IRS for the HCTC for themselves and dependents, with 12,594 (65 percent) claiming the credit on their tax returns rather than receiving it in advance. As of July 2004, about 13,200 individuals were enrolled for the advance HCTC, the majority of whom were PBGC beneficiaries. The number receiving the HCTC remains a small portion of the workers and retirees initially identified as potentially eligible. For example, some potentially eligible individuals may have other health coverage that would disqualify them from receiving the HCTC. Several additional factors may have limited participation to date. First, the advance credit only became available beginning in August 2003. Second, the enrollment process is fragmented and complex and requires individuals to meet tax, labor, and health coverage criteria before they can become eligible. Third, eligible individuals must pay the entire premium for about 3 to 6 months while completing eligibility and enrollment requirements and until IRS's first payment is made on behalf of these individuals. Fourth, the health coverage may not be affordable both in terms of an individual's ability to pay the entire premium amount while waiting to receive the advance HCTC and the ability to pay the 35 percent share once payment starts. Individuals can purchase one of several types of qualifying coverage for the HCTC: the coverage they had through their previous employer or insurance coverage options designated by states (primarily high-risk pools or arrangements with insurers). More than half of recipients chose coverage from their previous employer for the advance HCTC and another 40 percent of advance HCTC recipients enrolled in state-designated coverage options, which were available in 35 states and the District of Columbia as of July 2004. The average monthly premiums (representing both the individual and federal shares) for individuals receiving the advance HCTC were $480 for TAA recipients and $661 for PBGC beneficiaries as of April 2004. The tax credit resulted in an average monthly individual share of $168 for TAA recipients and $231 for PBGC beneficiaries. The premiums paid by advance credit recipients varied widely depending on the coverage purchased, including the type of health plan and the number of individuals covered. The cost of HCTC coverage also was affected by the premium-setting practices of qualified health plans.