Administrative costs of tax credits
Administrative Costs for Advance Payment of Health Coverage Tax Credits: An Initial Analysis
By Stan Dorn
The Commonwealth Fund
March 2007
New federal initiatives to cover the uninsured are under serious discussion by national policymakers and interest groups. Such initiatives include many proposals to use fully refundable federal income tax credits to subsidize uninsured individuals’ purchase of coverage. In considering the merits of his approach, policymakers can learn from the country’s only current use of tax credits to cover the uninsured—namely Health Coverage Tax Credits (HCTCs), which were created under the Trade Act of 2002. HCTCs pay 65 percent of health insurance premiums for certain workers displaced by international trade and early retirees. The credits can either be claimed after the end of the year, when annual income tax forms are filed, or advanced monthly to health insurers to help pay premiums.
This issue brief examines an aspect of the HCTC program that has received little attention in prior research: the extent to which public dollars are spent on administrative costs, rather than on health care services.
During FY 2007, an estimated 13 percent of federal funding related to HCTC advance payment will be spent for health plan administration, 21 percent will pay IRS administrative costs, and 66 percent will purchase health care. This analysis raises serious questions about the efficiency of using federal income tax credits as a strategy to subsidize health coverage for millions of uninsured Americans.
http://www.cmwf.org/usr_doc/1017_Dorn_admin_costs_advance_payment_HCTC.pdf
Comment:
By Don McCanne, MD
One of the more important objections that many of us have had to the concept of using tax credits to help with the purchase of private insurance is that it would add to the administrative burden of a system already sinking from administrative overload. This study confirms that the increased administrative costs are not merely theoretical, but are very real.
After very high start-up costs, this program of advanced payments of tax credits continued to consume 34 percent of health care spending merely for the administrative costs of the health plans and the IRS. This did not include the costs of the administrative burden of the providers of health care, and it did not include the administrative costs of other involved entities such as labor unions, community agencies, State Workforce Agencies, volunteers, and others.
Those who contend that the private sector would be more efficient might have their enthusiasm mollified by the knowledge that 91 percent of start-up costs went to private contractors. Even if it were possible to improve the efficiency of this program, it would still involve very significant administrative expenses added on to the profound administrative waste that already uniquely characterizes our system.
There is a much more efficient mechanism of making health care coverage affordable for each individual than the use of tax credits. Simply establish a universal risk pool and fund it equitably through the tax system. The marginal administrative costs would be very low since we already have a tax system, and the high administrative costs of the complex, private-insurance premium system would disappear (except perhaps for elective supplemental coverage of non-essential services).
Tax credits are only one more scheme to try to protect the private insurance industry from its demise. When it is serving us so poorly, why would we want to do that?