Stand-Alone Health Insurance Tax Credits Aren't Enough
Issue Brief No. 41
July 2001
Leslie A. Jackson, Sally Trude
sing health insurance tax credits to help reduce the ranks of the nearly 43 million
uninsured Americans has attracted broad bipartisan support in Congress. But tax
credits alone will not help many sick or older people obtain affordable coverage,
according to an expert panel at an April 10, 2001, conference sponsored by the
Center for Studying Health System Change (HSC). To make tax credits a viable
option for eligible people, the individual insurance market would need significant
reforms or a better way to spread risk-similar to large employers-over a large
and varied population. This Issue Brief highlights critical issues policy makers should
consider when crafting tax credit proposals, including the use of purchasing pools.
Tax Credits Could Help Millions Get Coverage
ecent tax credit proposals to assist lower-income people obtain
health insurance have strong bipartisan congressional support and could help subsidize
insurance costs for millions of Americans. The proposals, however, vary in key
areas, including tax credit amounts, income thresholds and whether people could
use tax credits to pay for employer-sponsored insurance or buy coverage only in
the individual market.
For example, the bipartisan Relief,
Equity, Access and Coverage for
Health (REACH) Act (S. 590) proposes
income-based tax credits of
$1,000 for individuals and $2,500 for
families without access to employer-sponsored
insurance, and tax credits
of up to $400 for individuals and
$1,000 for families eligible for
employer-sponsored insurance.
REACH sponsors estimate that up
to 10 million currently uninsured
people could gain coverage under
this proposal. In contrast, the Bush
Administration’s plan has slightly less
generous tax credits and would allow
people to purchase coverage in the
individual insurance market but not
through an employer.
Panelists warned that tax credit proposals relying on the individual insurance
market’s current structure would not be as effective as policy makers envision.
"I’ve been challenged in the past to name one state in the country where the individual
market works well," said panelist Richard E. Curtis, president of the not-for-profit
Institute for Health Policy Solutions.
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Risk Selection Plagues the
Individual Market
ccording to panelists, the individual
market’s major flaw is risk selection, or
whether an insurer attracts a disproportionate
number of sick or healthy
individuals. Insurers compete based
on how accurately they set prices and
determine coverage according to what
is known about an individual’s health
status, with the market rewarding
insurers that manage risk selection
well. If an insurer attracts too many
high-risk people, the cost of coverage
will increase and healthy people will
look for a better deal elsewhere.
To avoid high-risk individuals, insurers may offer policies more attractive to
healthier individuals, such as low-premium plans with high deductibles, less comprehensive
packages and restricted choice of providers. More often, however, individuals
with health problems find that insurers will raise premiums, limit benefits for
particular conditions or deny coverage entirely. Indeed, a recent study showed
that even individuals with relatively minor health conditions may be considered
substandard risks and face higher premiums or restricted benefits.1
The behavior of people buying individual
insurance also contributes to risk selection.
Individuals have an advantage over insurers
because people know more about their
health status and what kinds of health
services they may need than insurers do,
according to John M. Bertko, vice president
and chief actuary at Humana, Inc. For
example, a person may choose a generous
benefit package if planning a pregnancy or
elective surgery, and, when health services are
no longer needed, either switch to a less comprehensive
plan or drop coverage altogether.
To combat this, insurers offering individual policies underwrite, or set the terms
of coverage and premiums, based on a variety of individual factors that vary by
state, including a person’s age, sex, health status and geographic location. These
underwriting policies result in higher premiums for people who are older or sicker,
if they are even offered coverage at all. Age alone can be a significant determinant
of an individual’s premium cost in the individual market (see
Figure 1).
Some have suggested the individual market
would stabilize if more people purchased
individual insurance. Tax credits are expected
to provide an incentive for more people to
purchase insurance and, possibly, retain
coverage, rather than dropping it based on
medical need. But policy makers would be
dissatisfied with the likely result of stand-alone
tax credits: while healthy individuals
may take advantage of the tax credit and
purchase insurance, older and sicker people
likely would be cut off from affordable
health insurance because of tough individual
underwriting.
"Tax credits will go a long way to infusing
the individual market with healthy lives, but
you still have this incredibly fragmented
market, with individuals making health
insurance decisions on their own," Curtis
said. "By definition, you do not have good
risk-spreading capacity."
Panelist Stuart M. Butler, Ph.D., vice
president for domestic and economic policy
studies at the Heritage Foundation, agreed,
saying that tax-credit proponents recognize
that an effective policy must combine underwriting
restrictions and a method to deal with
risk selection. Bertko echoed concerns about
sending people with tax credits shopping for
insurance without individual market reforms.
"My actuarial colleagues who do individual
coverage are very good at what they do," he
said. "If you have a continuation of the
current individual, toughly underwritten,
market, the people who do the tough
underwriting win, and they always win."
Summarizing the panelists’ views on the current individual market, HSC President
Paul B. Ginsburg, Ph.D., said, "Everyone on the panel agrees that today’s individual
market does not have the characteristics that you’d want to send 10 million- plus
people into with tax credits. One way or another, you would want to set strong
rules for this market."
Figure 1
Impact of Age and Sex in Individual Market: Phoenix, Ariz., as an Example
Note: Initial quotes for nonsmoking individuals for a preferred provider
organization with a $500 deductible, $20 office visit copayment and 80/20
coinsurance.
Source: www.ehealthinsurance.com on June 2, 2001 |
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The Role of Purchasing Pools
ax credits could provide an opportunity to regulate the individual
market aggressively. Alternatively, experts have proposed making tax credits more
effective through purchasing pools, buying into public programs or extending the
Federal Employee Health Benefits Program.2 HSC’s
conference focused on linking purchasing pools to tax credits, building on HSC’s
research on private markets and small business associations.
Purchasing pools are designed to
mimic large employers, which, as Curtis
noted, are natural groups that bring people
together based on work, not health
status. "Such groups represent a broad
spectrum of risks, and it works for insurance
purposes," he said. Large employers’
premiums typically are based on the
group’s collective risk and claims experience,
allowing employees to pay the
same premium regardless of age or
health status.
Similarly, Curtis said, linking tax credits and purchasing pools would result
in a broader spectrum of risk-compared to the current individual market-because
it would be based on an individual’s income, not health status. Furthermore, purchasing
pools potentially can capture other efficiencies enjoyed by large employers, including
aggregated purchasing power and administrative cost savings, according to Mark
A. Hall, professor of law and public health at Wake Forest University (see
box).
Some panelists were concerned that
mandating the use of purchasing pools
would stifle innovation. "You can’t say,
’We’ve discovered the Holy Grail. It’s called
a purchasing pool, and we want everybody
to be in these,’" Butler said. "It would be
unwise to impose pools everywhere,
because you then will never know if
some alternative is a better arrangement."
Hall suggested the 1996 Health Insurance Portability and Accountability Act
(HIPAA) as a model for setting federal standards while allowing state innovation.
"HIPAA, in its insurance regulation aspect, has set a reasonably workable model,"
he said. "It has fairly broad federal standards and has allowed states some
diversity in certifying or choosing options or having a default if states don’t
respond. Something like this would allow a variety of approaches to emerge across
the states, but all oriented toward achieving a general federal objective."
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Building on Current Systems
anelists stressed the importance of designing
a tax credit policy to complement existing
coverage sources, such as allowing
employees to use tax credits to buy employer-sponsored
coverage. This may offer the benefit
of purchasing health insurance with pretax
dollars, making coverage more affordable.
Other options include allowing people with
tax credits to buy into public programs, such
as Medicaid or the State Children’s Health
Insurance Program (SCHIP), or combining
public subsidies to make coverage in the
individual market more affordable.
Butler saw advantages in linking tax
credits with existing public programs, saying,
"One can envision the SCHIP program being
converted, for certain people, into a voucher
that supplements the federal tax credit, which
is getting you very close to real affordability."
Federal policies should not have the unfortunate
effect of requiring family members to go
to different places to obtain coverage, according
to Curtis. "Medical homes logically start at
home," he said, adding that allowing families
to obtain coverage from just one source avoids
having "the 5-year-old kid one place, the 10-
year-old kid another place, the mom someplace
else, the dad someplace else and, oh, by the
way, all of them are going to have to change
next year because somebody’s status changed."
Curtis cautioned, however, that expanding
access to public programs for individuals
with access to employer-sponsored coverage
might create incentives for employees to
drop coverage because they might end up
paying less to buy into the public program.
If that’s the case, "people aren’t dumb," he
said. "They’ll go to the public program." If
this happens, employers’ insurance coverage
could be jeopardized, according to Curtis,
because if employees decide to use the tax
credit elsewhere, then employers may not
meet the minimum employee participation
thresholds many health plans require.
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Debate Over Ways to Make Tax Credits More Effective
he panelists discussed the wisdom of various
approaches, including a tax-credit policy
linked to purchasing pools versus reforms to
the individual market or even leaving a door
open for market innovations to emerge. "The
individual market needs a variety of new
rules, but it might be a hard case to make
that purchasing pools have an inherent
advantage," Bertko said. He agreed, however,
that the individual market might need
substantial reforms to accept tax credits.
Butler also questioned the logic of purchasing
pools, asking, "Are we going to create
yet another system on top of the traditional
employment-based system and the
individual market, segmenting out another
group of people and creating a completely
different system for them?"
Hall countered, "If you compare purchasing
pools against shopping with the tax credit
in the existing individual market, there’s
no question that something like the pools
is required. You just can’t give people a tax
credit and say, ’Go out to the unregulated,
unstructured individual market and good
luck.’" Curtis agreed, saying, "A purchasing
pool is not identical to a large employer, but
it’s a lot closer than the individual market."
While panelists disagreed about what a policy to bolster tax credits should look
like, all agreed policy makers must grapple with risk selection if they want to
ensure people with health problems can use tax credits to obtain affordable coverage
in the individual market. Congress and the Administration have not decided how
to increase the effectiveness of tax credits and reduce risk selection. "A consensus
has not emerged in Congress on the best approach to this issue," said John McManus,
majority staff director of the House Ways and Means health subcommittee. "We’re
just at the beginning stages."
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Characteristics of a Purchasing Pool Alternative
lthough panelists split on a mandatory policy linking tax
credits to purchasing pools, there was significant agreement about how to design
an effective purchasing pool policy. Based on the assumption that a limited number
of purchasing pools would be authorized by either state or federal governments,
the panelists quickly agreed that an enrollment lock-in would be necessary to
prevent individuals- who will almost always know more about their health status
than insurers- from adding or dropping insurance as needed. Otherwise, insurers
would refuse to participate.
Panelists also agreed that allowing small employers to participate in the pool
made sense. Curtis summarized panelists’ views by saying, "It would be a win-win
to allow workers to use their tax credit in the purchasing pool through their
employer. There would be no crowd-out of existing employer contributions in that
instance."
Curtis encouraged establishing competing purchasing pools to extend as much choice
to people as possible. Panelists agreed that ensuring a choice of plans also was
an important benefit of a purchasing-pool option. "Having the ability to offer
10 different health plans to 20 employees was very much of a bonus," Bertko said,
referring to his previous experience as a small employer participating in a purchasing
pool.
Addressing risk selection and ensuring a level playing field for purchasing pools
compared with the rest of the market would be the primary challenges for an effective
policy linking tax credits to purchasing pools, including standardizing underwriting
rules across the market.
"If individuals with tax credits can move willy-nilly around different pools,
going in and out of the pools, and those pools rate people differently, the pools
just are not going to work," Curtis said. If people without tax credits can participate
in the pool, Curtis also stressed the importance of underwriting these people
like the rest of the market; otherwise, the market won’t work. "I hope federal
policy makers would not expect purchasing pools to wear the white hat by accepting
bad risks on the same basis as good risks, to charge them the same amount, if
the rest of the market didn’t have to do that. Inevitably, that does not work;
it cannot work."
Finally, the panelists’ opinions varied on what type of entities should be allowed
to operate purchasing pools, with the two major options discussed being solely
private or a mix of not-for-profit and for-profit organizations. Start-up capital
could be a key issue when deciding whether to allow for-profit entities to run
purchasing pools. "If you’re not going to provide special funding for startup,
then why would you prohibit other organizations and entities from helping to get
the purchasing pools off the ground?" Bertko asked. Limiting participation to
not-for-profits, however, would help ensure purchasing pools "really are there
to represent the best interests of consumers," Curtis said.
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This Issue Brief is based on
a conference sponsored by
HSC on April 10, 2001, in
Washington, D.C.
Conference Participants
Overview
Sally Trude
Center for Studying Health
System Change
Panelists
John M. Bertko
Humana, Inc.
Stuart M. Butler
Heritage Foundation
Richard E. Curtis
Institute for Health Policy
Solutions
Mark A. Hall
Wake Forest University
John McManus
House Ways and Means Health
Subcommittee
Philip J. Vogel
Connecticut Business &
Industry Association
Moderator
Paul B. Ginsburg
Center for Studying Health System Change
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Notes
| 1. |
Pollitz, Karen, Richard Sorian and Kathy Thomas, How Accessible Is
Individual Health Insurance for Consumers in Less-than-Perfect Health?
Henry J. Kaiser Family Foundation (June 2001). |
| 2. | These proposals are described in The
Commonwealth Fund’s report series, “Strategies
to Expand Insurance for Working Americans.” |
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ISSUE BRIEFS are published by the Center for Studying Health System Change.
President: Paul B. Ginsburg
Director of Public Affairs: Ann C. Greiner
Editor: The Stein Group