Hearing on Health Insurance Credits
House Ways and Means Subcommittee on Health
February 13, 2002
Excerpts from the written testimony of Jonathan Gruber, Ph.D., Professor of Economics at Massachusetts Institute of Technology:
"The results that I discuss below come from a very detailed microsimulation model of health insurance decisions... analyzing the President's proposal for a health insurance tax credit in his FY 2003 budget."
"... the tax credit does have its intended effect of significantly increasing the purchase of nongroup insurance by the uninsured. But it also has an unintended effect of slightly eroding the group insurance market, so that the net reduction in the uninsured is fewer than 2 million..."
"One of the key debating points about those modeling tax credits for health insurance is the extent to which individuals will find low cost nongroup plans on which they can use their tax credit. This is an important issue because the costs of nongroup insurance plans are so high. For a 40 year old male in excellent health, the average cost of nongroup insurance is roughly $2000 per year. But these costs rise dramatically with age and poor health status. Indeed, in my data, for the typical uninsured family the cost of a nongroup policy is estimated to be roughly $10,000."
"The main disadvantage (of the President's tax credit proposal) is that this policy has a very modest impact on the number of uninsured in the U.S. My central estimates suggest that the number of uninsured will be reduced by fewer than 2 million, or 5% of the existing number of uninsured. This amount equals roughly the rise in the uninsured estimated to be caused by the recent rise in unemployment, according to a recent analysis by myself and the Kaiser Family Foundation."
"The other disadvantage of this approach is that it displaces, rather than supplementing, the group insurance market. The group insurance market remains the most effective way to deliver insurance benefits, through its use of large pools to minimize the variation in health risk to insurers. My estimates suggest that for every one person gaining insurance coverage, two persons will be leaving the group insurance market."
"... I am quite skeptical of claims that low cost policies can raise the effectiveness of this tax credit for two reasons. First, if such low cost policies exist today, why are there still 40 million uninsured Americans? The answer is that most Americans do not want catastrophic-type coverage; they apparently would rather be uninsured than buy low-premium, high out-of-pocket-cost policies. The enormous out-of-pocket costs that are typically associated with these low cost policies make them unattractive to the uninsured. Second, the very reason that such policies can be low cost is that they are only purchased by the very healthiest individuals for whom they are affordable; in other words, there is 'virtuous selection,' as opposed to 'adverse selection.' If a credit allows less healthy persons to purchase these policies, they will have to raise their prices to adjust for this higher cost risk pool. In other words low prices on these policies today do not guarantee low prices in the world of a health insurance tax credit; it seems likely that those low price policies will increase in price once more 'typical' persons are buying them."
"... raising the income limits (to increase eligibility for the tax credits) actually had pernicious effects on the insurance market on net: the reduction in the uninsured was unchanged, but there was a much larger net movement from group to nongroup insurance. As a result, the total cost of the policy rose by over one-third with no gain in insurance coverage. This finding highlights how important it is to keep tax policies tightly targeted."
(The full written testimony of Professor Gruber will be posted on the House Ways and Means webpage in about two months. These results are part of an ongoing project with the Kaiser Foundation to estimate the effects of tax credits and public program expansions designed to expand coverage for the uninsured; the full results from that project will be publicly released soon.)
Comment: This tightly targeted tax policy proposal would reduce the numbers of uninsured by 5%. What about the other 95%?
By supporting tax credits for the uninsured, the administration is conceding that government intervention is warranted. Then why not adopt policies targeting 100% of the uninsured? And a single risk pool would eliminate the problem of high cost plans in the non-group market.
How much longer are we going to play with the numbers? Let's adopt policies that, by their very design, will automatically solve our health care problems: global budgeting, single risk pool, universal coverage, and comprehensive benefits. We've repeatedly cranked the numbers for single payer reform, and they work. Let's do it.