Center for Studying Health System Change

Health Insurance Tax Credit Proposals Would Do Little to Increase Coverage

Health Affairs Study: Most Lower-Income Uninsured Would Spend Much More Despite Credits

News Releases
Feb. 25, 2004

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ASHINGTON, D.C.— A comparison of out-of-pocket health care spending by lower-income uninsured people with their expected spending if they bought nongroup, or individual, insurance shows that nearly all would spend more-often much more-even with a tax credit to help offset the cost of coverage, according to a study by Center for Studying Health System Change (HSC) researchers published today as a Web-exclusive article in the journal Health Affairs.

More than 43 million Americans lack health insurance, and roughly half are candidates for tax credits because they lack access to employer coverage and have low or moderate incomes. The study’s results suggest that sizeable reductions in the number of lower-income uninsured Americans would require much more generous tax credits for nongroup coverage than current proposals. For example, under the Bush administration’s tax credit proposal, families buying nongroup coverage would receive $1,000 per adult and $500 per child, up to a maximum of $3,000 for families with incomes up to $25,000, while families earning $60,000 or more would be ineligible.

"Nongroup coverage is costly and provides less generous benefits than most group coverage, so if all eligible people opted to use tax credits to buy nongroup coverage, nearly all would spend much more on health care—premiums plus out-of-pocket costs—than they do now," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded principally by The Robert Wood Johnson Foundation.

The study’s authors—HSC Senior Health Researcher James D. Reschovsky, Ph.D., and HSC Senior Fellow Jack Hadley, Ph.D.—cautioned, however, that increased spending for health care doesn’t necessarily mean people would be worse off because insurance provides greater access to medical care. However, many lower-income families would face tough financial trade-offs in deciding whether to buy nongroup coverage even with the help of a tax credit.

"For most lower-income people, spending for health care and health insurance competes directly with spending for food and shelter," Reschovsky said. "Future health care needs are often uncertain and can be delayed, while food and housing needs are both certain and immediate, leaving families with a stark trade-off. The results of the study strongly suggest that few would take advantage of tax credits unless the credits are much more generous."

The study used data from HSC’s Community Tracking Study Household Survey, a nationally representative sample of approximately 60,000 people. Information from both the 1998-99 and 2000-01 surveys was combined to create a sample of 8,071 lower-income uninsured people—representing 22 million Americans—who lack access to employer-sponsored insurance. Income thresholds were set at $55,000 for individuals and $65,000 for families, and children in families with incomes below 200 percent of poverty were excluded because the State Children’s Health Insurance Program would likely cover them.

Using information from 1,992 sample families covered by nongroup insurance, the researchers predicted the cost of nongroup policies if purchased by uninsured people and how much they would additionally pay for cost sharing and uncovered services with this coverage, accounting for differences in income, health status and other factors. The researchers then compared what the uninsured currently pay out of pocket for health care with their expected costs—out-of-pocket spending and premiums minus the tax credit value—if they bought nongroup coverage under three hypothetical tax credit structures.

The "base" tax credit was modeled on the Bush administration proposal; the "moderate" tax credit would provide $1,500 per adult and $750 per child, up to a maximum of $4,500 for families with incomes up to $55,000; and the "generous" tax credit would provide $2,000 per adult and $1,000 per child, up to a maximum of $6,000 for families with incomes up to $55,000.

In 2001 dollars, the researchers estimated that average annual out-of-pocket spending for uninsured families was $463. If these families all bought nongroup coverage, their premium costs and out-of-pocket spending would average $3,632 a family, far greater than the average tax credit values of $1,121, $1,983 and $2,384 under the base, moderate and generous tax credits, respectively. Under the base tax credit, about six in ten would spend more than 10 percent of their income on health care and health insurance costs. The study assumed that newly insured people would lose access to charity care and other sources of care, but this loss accounted for only a small portion of the increased health care spending—the cost of nongroup premiums was a much more important factor in the increased spending.

The study also examined changes in total health care spending based on income, health status and age for each of the tax credit scenarios. Generally, sicker and older people would all see their average total health care spending rise much more than healthier and younger people under each of the three tax credits.

For example, families of uninsured adults in poor health would have estimated average out-of-pocket spending of $689. With nongroup health insurance, the same family’s average out-of-pocket spending would increase to $1,321, and total health care spending—out-of-pocket spending and premiums minus the value of the tax credit—would increase to $3,475 under the base credit, $2,671 under the moderate credit and $2,103 under the generous credit. Families of adults aged 55 to 64 would face similar costs.

In contrast, families containing uninsured adults in excellent health would have estimated out-of-pocket spending of $318. With nongroup health insurance, the same family’s average out-of-pocket spending would increase to $472, and total health care spending—out-of-pocket spending and premiums minus the value of the tax credit—would increase to $1,632 under the base credit, $830 under the moderate credit and $620 under the generous credit.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded principally by The Robert Wood Johnson Foundation and affiliated with Mathematica Policy Research, Inc.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research. For more information, contact Jon Gardner at Health Affairs at (301) 656-7401, ext. 230, or via e-mail, press@healthaffairs.org.