Tax credits no quick fix for the uninsured

Capitol Hill proposals are inadequate to address the complexities of the private insurance marketplace, some analysts say.

By Joel B. Finkelstein, amednews staff. Jan. 13, 2003.

Washington -- The new Republican majority in Congress favors health insurance tax credits to address the problem of the uninsured, but fashioning a workable subsidy could prove difficult, several health system experts say.

Individual tax credits of up to $1,000, proposed last year by the Bush administration, are not enough to encourage lower-middle-income Americans to purchase insurance if they have not already done so, said Mark V. Pauly, PhD, professor of health care systems, insurance and risk management at the Wharton School of the University of Pennsylvania, Philadelphia.

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Many of these "betweeners," as Dr. Pauly calls them, very likely could afford some form of health insurance if they wanted, but seem to mistakenly think that it is too expensive or that they don't need it.

Tax credits would need to reduce premiums to 5% to 7% of an individual's income before the person would buy insurance, said Joseph M. Heyman, MD, member of the AMA Board of Trustees.

The Association "would support any move toward tax credits," said Dr. Heyman, but is seeking a broader approach that would create more vehicles for making insurance available and affordable to individuals. These include local purchasing marts, health pools and defined-contribution plans.

Designing tax credits is tricky business

There are several pitfalls to offering tax credits as a stand-alone policy, said Linda J. Blumberg, PhD, senior research associate at the Urban Institute in Washington, D.C. Tax credits might help young, healthy people afford health insurance, but older people and those with preexisting conditions may still be left out in the cold.

A report released last year by the Kaiser Family Foundation found that people with risk factors ranging from HIV infection to hay fever were often offered increased-rate policies or outright rejected by health plans.

Administrative costs account for 40% of the price of an individually purchased health plan.

Another report, recently released by the Commonwealth Fund, found that women would also have difficulty getting health insurance because of added obstacles related to the cost of maternal care benefits.

"To be effective, we need to take the risk issue out of the equation," said Dr. Blumberg.

This means offering subsidies not only for low- and moderate-income individuals, but for people with above-average health risk.

There are other concerns for low-income and poor individuals.

For example, they may not have the money upfront to pay for health insurance, no matter how generous a tax credit is.

Due to this concern, the AMA has proposed tax credits that are not only inversely related to income, but also refundable and advanceable, said Dr. Heyman.

However, having such a complexly structured tax credit, while not wholly without precedent, may still pose an obstacle to quickly enrolling uninsured Americans into health plans, warned an issue paper from the Kaiser Family Foundation.

"If it is done properly, everyone who needs [the credit] will get it," Dr. Heyman countered.

Risks to employer plans

However, offering too large a tax credit to individuals could act as a perverse incentive, encouraging people to drop out of their employer-sponsored plans, said Dr. Blumberg.

"There are potential dangers in creating incentives to leave the employer-sponsored market," she said, including higher costs and greater segmentation of the health risk pool.

Employers face double-digit increases for employee health premiums in 2003.

The individual insurance marketplace has evolved as a place mainly for temporary coverage, said Blumberg. The administrative costs of individually purchased health insurance can be as high as 40% of the benefit's price.

On the other hand, the group insurance market "works fairly well," said Michael A. Morrisey, PhD, professor of health care organization and policy at the University of Alabama at Birmingham. He echoed the sentiment of other experts, who seem wary of the potential to undermine the success of the employer-based system by offering incentives to purchase individual insurance.

Virtually all American companies with more than 200 employees offer health insurance, in large part due to the ability to pay for the coverage with pretax dollars, said Roger Feldman, MD, professor of health services research/policy at the University of Minnesota, Minneapolis. This is good evidence that large subsidies encourage high rates of enrollment in health plans.

But the employer market is under stress. Premium increases are again in the double digits.

Surveys of employers that provide health insurance suggest that they will increasingly pass on the rising cost of insurance premiums to their employees. This could signal trouble as more middle-income Americans choose to forgo coverage in favor of bigger paychecks, Dr. Pauly said.

Despite these concerns, many employers are likely to continue offering health plans to their employees, said Dr. Morrisey. It is much easier for employers than for individuals to research insurers and negotiate a fair price for benefits.

Employers need to take stock of what they get, besides tax benefits, by offering their workers health insurance, said Dr. Pauly. While rising premiums may be a harbinger of runaway medical costs, they may also simply be a sign of increased quality.

There are also the inherent benefits of access to health care, such as fewer sick days and higher worker productivity.