Decent health insurance is more than just financial protection. In modern America, it is a ticket to mainstream health care. Lacking access to the system, most of the 43 million uninsured Americans are dependent on uncertain or haphazard care at emergency rooms or public clinics if they fall ill or suffer injury.
In this paper, the Progressive Policy Institute (PPI) sketches a plan to give all Americans access to health insurance and medical care. The proposal uses government financing and oversight to ensure affordability and access, but it relies on private markets and competition to spark innovation and restrain costs. The proposal is designed to appeal to both sides of the closely divided political spectrum.
On the surface, a major political deal to expand health coverage seems remote. Pessimists point to the failure of comprehensive health reform in the early 1990s and the fact that the uninsured (who are often young, lower-income, and recent immigrants) have little political clout.
On the positive side, both Vice-President Gore and Governor Bush proposed notable (if relatively modest) steps toward expanded coverage during their campaigns. Bush proposed a tax credit that would apply only to people who couldn't get coverage at work, and Gore proposed a smaller tax credit plus an expansion of government programs for near-poor children and their families. Politically, however, those initiatives were secondary to the candidates' high-profile proposals to provide prescription drugs to the elderly, and neither proposal would greatly shrink the ranks of the uninsured.
Bush's proposal for a $1,000 tax credit ($2,000 for families) is limited because it would only apply to people who don't get coverage through their employers. By shifting the tax advantage to individual coverage outside the workplace, it would cause some employers to drop coverage, which would undermine the purpose. Gore's tax credit is even more limited (25 percent of the premium), and his proposed expansions of the State Children's Health Insurance Program (SCHIP) are unlikely to add more than a few million people to the health insurance rolls.
Just beneath the surface, however, political forces for a more ambitious solution are gathering. Liberal Democrats -- even long-time advocates of single payer (national health insurance) proposals like Representative Jim McDermott and Senator Paul Wellstone -- are looking for feasible new approaches to break decades of gridlock on universal coverage. Conservative Republicans like House Majority Leader Dick Armey and Representative Jim McCrery are looking for politically popular ways to fend off government control of the health industry. Both sides are politically vulnerable: Democrats to the charge of nonaccomplishment, and Republicans to the charge of insensitivity.
After an extraordinary interview with Representatives McDermott and McCrery, journalist Matthew Miller sketched a political agreement that would use public funds to boost private coverage:
Tax credits are the key to enhancing public financing for private coverage. Tax credits allow politicians to contemplate helping the uninsured (a liberal goal) by cutting taxes (a conservative goal). Tax credits for health coverage are a bridge between liberal and conservative agendas. They are the politically feasible solution to the affordability problem.
Tax credits are only one piece of a complete proposal, however. To make health insurance more available and convenient, the infrastructure for purchasing health coverage must be improved. Currently, good choices at reasonable prices can be hard to find in the market for individual coverage, and even when coverage is available at the workplace, most employers do not offer their employees a choice of health plans.
Part of the answer to the availability problem is public or private purchasing groups, modeled after the health program for members of Congress and federal employees. The federal employees' program offers as many as 20 choices to its nine million members throughout the nation.
We also need a more flexible and accountable role for state governments. States already have a huge impact on the availability of health care coverage through insurance regulations and the administration of federal health care programs. But those two state government functions operate in separate silos, with little coordination. The federal government should provide states with the flexibility and incentives to focus their efforts on the bottom line: health care coverage for all and a healthier population.
Finally, at some point all Americans should be required to have coverage. If we succeed in making health insurance affordable and easy to obtain, we should take further steps toward effectively requiring it, first for children, and at some later point for adults as well.
Individual responsibility to acquire coverage. With SCHIP, Medicaid, tax credits, purchasing groups, and the new state grants, coverage for children would be universally affordable and available. Three years after enactment, parents would be denied the personal exemption -- a small tax benefit -- for any of their children who remained uninsured. After that, Congress would have to decide whether to extend tax penalties to uninsured adults.
Our best guess is that those actions would cost as much as $40 billion a year (see attached worksheet). That estimate is based on the assumption that the tax credits and other reforms would reduce the ranks of the uninsured by more than half, from 43 million to 20 million or so. Most of the cost would be for the tax credits, but a significant amount (perhaps $5 billion a year) would go to states to improve purchasing options and also for direct outreach efforts and basic health services for the uninsured.
Not all of that $40 billion should be considered new spending on health care. A significant portion instead amounts to tax relief for low- and moderate-income families who are already struggling to afford health insurance. Furthermore, the $40 billion price tag does not include any potential savings from government health programs or from reductions in health premiums for people who already have coverage.
Although covering the uninsured through tax credits is expensive, it could reduce costs for those who already have insurance. That is because most of the uninsured are relatively young and healthy. Adding them to large insurance pools will reduce the average premium for the group. Furthermore, uninsured people usually get at least some treatments if they are ill or injured. The costs of that care are spread to government programs and to those with insurance, sometimes directly and sometimes in subtle ways. Therefore, reducing the number of uninsured will allow governments and insurers to reduce the portion of their payments that essentially subsidize hospitals and doctors for treating those who cannot pay.
PPI believes that working toward universal coverage is more than a moral or clinical imperative -- it could help the health sector work better. The elaborate cross subsidies to institutions that care for the uninsured (and must deal with the consequences when the uninsured don't get timely care) are inherently confusing and inefficient. With fewer people uninsured, those indirect subsidies would be less necessary. Universal coverage would help turn the focus in health care from the needs of institutions to the needs of patients, which we believe would lead to better and more efficient care.
Some advocates of expanded public programs have called tax credits an "inefficient" way to cover the uninsured. That is because tax credits inevitably go to people who already have coverage. (Many low- and moderate-income families would get tax credits for health insurance even though they have already purchased coverage and are not, therefore, uninsured.) This phenomenon has been pejoratively termed "crowding out" private dollars with public dollars. In contrast, government programs create elaborate barriers to prevent people with private coverage from switching to them.
However, it is inequitable to reward those who do not purchase coverage and ignore those who do. Furthermore, any form of assistance -- whether through a government program or a tax credit -- is subject to crowding-out. Public programs that enroll all eligible people also crowd out private coverage. Programs that exclude families who would otherwise qualify for assistance but have instead purchased private coverage may be less expensive for the government, but they are not more efficient in an economic sense. Furthermore, the bureaucratic and welfare-like nature of government programs is a reason those programs have failed to enroll large portions of people who are eligible. It is wrong to call public programs more efficient because they attempt to exclude families who make sacrifices to get private coverage.
The following sections provide more detail on how PPI proposes to give every American a fair chance to get health insurance.
PPI proposes that the federal government enact fixed-dollar tax credits for health coverage. The credits would be as much as $1,000 for single coverage and $2,500 for a family plan for taxpayers who didn't have an employer-sponsored plan, or $400 for individuals and $1,000 for families that had employer-subsidized coverage. The credits would be refundable -- that is, they would be fully available even to those who otherwise would not have had any income tax.
The higher tax credit for people without employer-sponsored coverage reflects the fact that people with employer-sponsored health coverage already get a substantial tax break under current law. (The employer's contribution is not considered taxable income, which saves employees hundreds or even thousands of dollars a year compared with people who have to pay for health insurance using after-tax dollars.)
The tax credits would be available to people or families whose incomes fell below certain levels. For taxpayers using the tax credit to help purchase family coverage, the top income for the full credit would be $40,000 a year. The tax credit for families would phase down to zero at incomes of $60,000 and above. For people using the tax credit for single coverage, the top income for the full credit would be $20,000 a year; the credit would be available in smaller amounts for single coverage for taxpayers with incomes up to $30,000 a year. (Of course, people whose incomes are too high to qualify for the tax credit could still receive tax breaks for health coverage that are already available under current law, either through their employers or otherwise.)
The phase out ranges for the tax credits begin at levels above the point where the phase out ranges of the Earned Income Tax Credit end. Therefore the tax credits should not create troublesome disincentives for additional work or higher earnings. In fact, we hope that the employment focus of our program will strengthen the connection between working and health benefits.
Extending the tax credits to people who have coverage at work is essential for two reasons: (1) stability, and (2) fairness. The current tax system favors employment-based coverage, especially for high wage workers. Substantial tax credits that are only available for coverage purchased in the individual market, however, would tilt the tax incentive toward individual coverage. That could destabilize the employment-based system by giving some employers -- especially those with low-wage workers -- an incentive to drop coverage.
Tax credits at the levels we propose would create a similarly sized tax benefit for coverage in either the individual or employment-based market, at least for most people. That would reduce the potential for tax policy to distort decisions. We believe our tax credit proposal would expand both employer-based and individual coverage.
The PPI's tax credits are designed to induce those not covered to purchase insurance and to reward those who have purchased coverage for making the sacrifice. Economists know that employer-provided benefits are just a substitute for wages or other forms of employee compensation. To be fair, therefore, we must also grant appropriate tax relief to people who already make sacrifices to get coverage at work. Denying tax credits to those who have "worked hard and played by the rules" would be inappropriate, economically and morally.
Even with the tax credit, however, people without coverage at work would still face a tough choice. Premiums for individual coverage can be much higher than group rates offered to employers, and may not be readily available. Furthermore, lower-income people need financial assistance when they purchase insurance, not after the fact, and tax credits for individual coverage cannot easily be provided in advance. (Advancing tax credits directly to individuals or their insurance companies could prompt some people to purchase meaningless or fraudulent insurance, which would be difficult to regulate and audit on a case-by-case basis. The market for employment-based coverage, by contrast, is more clearly regulated and defined.)
However, there is a way to make health insurance more convenient and accessible. The second part of our proposal would make group coverage available to everyone, even if their employers don't sponsor health insurance. States would be required to create purchasing groups (like the federal employees plan) or arrange other purchasing options that would give everyone and every business in the state an opportunity to sign up for a variety of plans at reasonable rates. States would ensure that all businesses and individuals without employer-sponsored coverage were given a menu of health plan options from at least one such group each year. (If after several years a state failed to ensure that at least one such menu was available to its residents, individuals and small employers would be able to sign up for a modified version of the federal employees' program directly.)
The federal government would establish a grant program to help the states form and subsidize those new purchasing options. Those grants would be flexible. States could use the funds to subsidize local purchasing groups, negotiate with local insurers for options available to all in the state, risk-adjust or reinsure health plans or groups with a high proportion of older or sicker enrollees, or directly subsidize high-risk residents. What matters most is not how states use the money, but the new options they create: widely available choices so that all in the state can choose from reasonably priced health insurance options.
States could also use a portion of the grant funds to provide basic and preventive health services to lower-income people who remain uninsured despite the new tax credits. The grants would include substantial performance incentives -- up to half of the available funds -- based on measured improvements in coverage rates, use of basic health services by lower-income citizens, and, as they become feasible, direct measures of health. Thus, over time, the grants would reward states that use the funds effectively to improve the insurance coverage and health of their population.
The third element of the PPI's proposal asks employers to handle enrollment in health plans and payroll deductions and adjustments for workers with health coverage -- even if the employer doesn't pay a part of the cost.
We propose that all employees, on their first day on the job and each year thereafter, receive an enrollment form for health insurance. At the very least, that enrollment form would contain the menu of options available under a state-arranged menu of options or purchasing group. Employees who didn't select a plan and didn't have coverage from another source would have to sign a form stating that choice, and those forms would be forwarded to the state, which could target the worker for additional outreach efforts.
Employers who sponsor coverage would deduct premiums from employees' paychecks, as they do now. In addition, they would add back to an employee's pay the tax credit for which the employee was eligible, up to the amount of the employee's share of the premium. In effect, companies would give tax credits to their employees as they purchased coverage, right on their paychecks. The government would pay employers back contemporaneously, through bookkeeping adjustments in the amounts withheld and sent to the federal government for employees' tax payments. At the end of the year, the company would show the amount added to workers' pay from the tax credit on their W-2 forms. Then workers would file for the tax credit on their tax returns; that would be the final determination of exactly how much they would receive.
Employers who do not sponsor coverage would nevertheless give their employees enrollment forms for at least one menu of health plans. (Those employers could provide options from other insurance companies or groups, but at the very least would supply a form for a menu of health plans put together by the state.) Like firms that sponsor coverage, they would handle payroll deduction of premiums, forwarding those payments to the purchasing group. They would also add back to employees' paychecks the (potentially larger) tax credits for which the employees were eligible. Again, the company would be reimbursed for the tax credits via its business tax arrangements.
How would employers know whether or not an employee was eligible for a tax credit? The employer wouldn't need to know precisely, because the final tax credit would be determined on each employee's individual tax return. But the employee's hourly wage could be used as a guideline. For wages below $10 a hour, employers would assume employees were eligible for the full credit for either individual or family coverage. For wages up to $15 an hour, employers could adjust employees' pay for the full tax credit for family coverage. The IRS could add a worksheet on the W-4 form so that employees with multiple jobs or a spouse who works could figure an appropriate amount to add to their pay. But in any case, employees taking the credit at work -- as long as their wages were within the guidelines -- would not be subject to interest or tax penalties if it turned out at the end of the year that they didn't qualify for the credit.
Our proposal would make it easier for businesses to join purchasing groups and thereby offer their employees a choice of health plans. By making good choices of coverage easy to arrange, and by boosting the tax advantage to employees, we hope that virtually all employers will decide to sponsor health insurance. Good choices of health insurance, we believe, will be a key to maintaining employee satisfaction in the fast-changing economy.
Fourth, our health coverage proposal would allow and encourage people to bundle funds that might be available from multiple government programs to help them buy one insurance policy.
Families whose children qualify for SCHIP coverage would have a choice. Parents could use SCHIP to cover the kids and then use the tax credits to help purchase employer-based or individual coverage for themselves. Or they could combine the money from the tax credit with additional funds from the SCHIP program to purchase one health policy for the whole family. In the latter case, SCHIP rules would apply to any purchases of private insurance that were supported by SCHIP funds. If necessary, the caps on federal outlays for SCHIP could be raised to accommodate this new option.
Similarly, states should be allowed to give unemployed persons additional funds (above the funds available from tax credits) to help them afford so-called COBRA continuing coverage with their previous employers. (Most employers are required under COBRA rules to allow employees to stay on the company-sponsored health plan for up to 18 months, provided the employee pays the full cost.) The extra funds could be transferred electronically from the state to employers handling their ex-employees' coverage.
Our proposal would launch two federal initiatives to provide information about health care. The first would be a federal information clearinghouse -- patterned after the Securities and Exchange Commission (SEC) -- which would report on health quality and outcomes, not just at health plans, but also among individual health providers, including hospitals and physician groups. Comparative information will help consumers make good choices and will allow consumer advocates to make sound recommendations. It will spur quality improvements in the health industry.
The second initiative would be a new federal commission to study health benefits. That would include studies of current benefit practices, the cost and clinical appropriateness of benefits, the extent of benefit mandates (specific benefits that are required by law or regulation, either nationally or locally) and their cost and clinical effectiveness, and so on. Benefit controversies will continue to drive the health care debate as new technologies and treatments run up against concerns about affordability and access to health care. Solid data on what is happening across the nation and what the tradeoffs are will be more essential than ever.
The new tax credits, combined with the current SCHIP program and other initiatives, should eliminate any excuse for children going without health coverage. To that end, we recommend effectively requiring that all children be covered within three years of enactment of our proposal. We would enforce that requirement by denying parents of uninsured children the personal exemption for those kids on their taxes. That would barely penalize parents in the lowest tax brackets -- for whom the personal exemption matters little to their final tax bill -- but it would have an important symbolic impact (and a real financial impact on wealthier families that chose not to cover their children).
Even with tax credits and convenient group purchasing options, some adults may still choose to remain uninsured. However, that choice places a burden on the rest of society, which must pick up the tab when uninsured people are hospitalized or need extensive medical care. For that reason and to promote the public health, society has an interest in prodding all Americans to protect themselves with health coverage.
Therefore, five years after our proposed tax credits and other reforms went into effect, we would establish a commission to study the impact of the credits, recommend changes if necessary, and, most importantly, recommend whether or not to deny uninsured adults the personal exemption on their taxes.
Ultimately all Americans must take responsibility for health coverage. But before we take that final step, we must make health insurance considerably more affordable and easier to acquire than it is today.
Our proposal attempts to balance government initiative and private innovation. We would expand government financing for and oversight of private markets for health insurance and care. We hope to expand individual choice and responsibility rather than defaulting to one-size-fits all entitlements. We prefer to restrain costs through market competition rather than government price controls. We attempt to create a level playing field for private choices rather than picking winners and losers. Unlike some economists, we would work with the existing infrastructure of employer-based insurance, rather than switching to an uncertain marketplace for individual coverage or relying on new public bureaucracies.
In our view the federal government is best equipped to provide significant funding for the problem of the uninsured. The states are best at creating local markets for health care and reaching out directly to help those who would otherwise slip through the cracks. Employers, who come in contact with their employees every day, are best equipped to be the registrars and transfer agents for expanded health coverage. Finally, all Americans must be asked to take responsibility for health coverage in their families, once their choices have been greatly improved.
This outline is just a start. Many additional details will have to be filled in, such as how to structure the grants to the states, how purchasing groups and the backup federal employees' system would operate, what the minimum requirements for insurance to qualify for the tax credit would be, what special considerations should be made for the smallest businesses, and so on.
The main point of the proposal, however, is clear: Small measures like tax credits only for individual coverage or expansions of public programs like SCHIP are helpful, but the time is right to think bigger than that. By raising our sights, and merging the liberal drive for universal coverage with the conservative desire for tax cuts and private markets, we can build a bipartisan plan to greatly reduce the number of Americans without health insurance.
