Impact of policies favoring tax credits and catastrophic coverage
The Henry J. Kaiser Family Foundation
March 2004
Coverage and Cost Impacts of the President’s Health Insurance Tax
Credit and
Tax Deduction Proposals
This issue brief looks at the coverage impacts and costs of the two largest components of the President’s proposal: a new tax credit for people purchasing non-group health insurance and a new tax deduction for premiums for high-deductible, non-group health insurance policies.
The estimates presented below were prepared by Jonathan Gruber, Ph.D., Professor of Economics at the Massachusetts Institute of Technology, using a
microsimulation model developed in conjunction with the Kaiser Family foundation.
Overall, this analysis finds that the President’s tax credit and tax deduction proposals for non-group health insurance, when fully implemented, would increase the number of people with health insurance by almost 1.3 million, at a cost of more than $4,700 per newly insured person. As discussed in more detail below, while the net change in the number of people with insurance is relatively small, these policies would result in a substantial movement of individuals away from employer-based coverage and into the non-group market, or in some cases, into being uninsured. Also of significance, the tax credit and tax deduction policies together result in a lower number of newly insured people, and a higher cost for each person newly insured, than the tax credit policy would achieve standing alone.
Two findings in particular raise important questions for policymakers considering these proposals. The first is the impact of both the tax credit and tax deduction proposals on people with employer-based coverage. By offering tax subsidies for non-group health insurance, the policies would reduce the preference under current tax law for employer-based coverage over non-group insurance, with the likely result that fewer employers would offer health benefits to their employees. In some cases, these employees would not find other insurance, either because they would not want to pay the premiums for non-group insurance or because health problems could make it difficult for them to find affordable coverage in some states. This is not to say that any new problems encountered by people who would lose insurance under these proposed policies are necessarily greater or more important than the financial access problems faced by the people who would benefit from the tax credit and deduction policies, but policymakers need to be aware of the potential for disruption in the group insurance market. In particular, people with health problems who lose employer-based coverage would likely face higher premiums and more coverage restrictions in the non-group health insurance market than they currently face when receiving health benefits through work. These same problems-relatively high premiums and coverage restrictions-already exist for people with health problems purchasing non-group health insurance in most states today. Policymakers may want to consider whether current market responses for people with health problems, such as state high risk pools, are sufficient to assure the availability and affordability of coverage for this population.
A second question raised by these findings relates to who benefits from the proposed policies. …the newly insured under the tax credit policy (and the results for the combined policies are almost identical) tend to be younger and healthier than the uninsured overall, and tend to be younger than the under 65 population as a whole. This raises the question of whether these policies could be modified to provide more assistance to older or less healthy uninsured people, or whether an additional policy response, such as a public coverage expansion, would be needed to increase insurance access for these more costly groups of uninsured people.
http://www.kff.org/insurance/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=32681
Comment: This report updates Professor Gruber’s prior microsimulations demonstrating that providing tax credits for individual (non-group) health plans has very little impact in reducing the numbers of uninsured, but has a more significant impact in shifting coverage from employer-sponsored group plans to individual plans. This shift moves individuals into plans than usually have fewer benefits and much less value. In fact, the amount of the tax credit is offset by the funds wasted by purchasing private plans with their inherent lower value. And individuals with significant health problems are particularly vulnerable in the non-group market. Until we have in place a health insurance system that does provide adequate protection for everyone we cannot afford to adopt policies, such as this tax credit proposal, that threatens the future of group health care coverage.
Now that health savings accounts (HSAs) are a reality, President Bush is proposing that we move on to the next step and make catastrophic (high deductible) plans tax deductible. What difference does it make if we allow individuals with higher incomes to benefit from this proposal? Well, first of all, it is unfair. The tax advantage means that taxpayers would be paying more of the health care expenses of higher income individuals and less for those with moderate or low incomes. A health care welfare program for the rich is not really sound health policy nor sound tax policy.
Of much greater importance is the fact that Professor Gruber’s new microsimulation demonstrates that combining tax credits with tax deductibility of catastrophic plans would greatly accelerate the trend to move out of employer-sponsored group plans, and it would have even less impact on reducing the total numbers of uninsured than would the relatively ineffective tax credit alone. In fact, 2.6 million individuals who currently have employer-sponsored coverage would end up with no insurance at all.
To the casual observer, it would seem that tax credits and deductibility of catastrophic coverage would be a move forward. But since these policies have
only a negligible impact on the total numbers of the uninsured, and since they shift individuals from the security of employer-sponsored group plans into the highly flawed marketplace of individual plans, the net impact is decidedly negative.
We do need to move away from employer-sponsored group plans. But that shift
must be into an equitable system of social insurance. Tax policies that benefit the rich and healthy and benefit the private health plan industry should be emphatically rejected.