Study criticizes health insurance tax credit plan
■ Others believe the credits would rightly extend the tax benefits of group insurance to individuals.
By Joel B. Finkelstein — Posted April 19, 2004
Washington -- Health insurance tax credits might not be the most cost-effective option to help the more than 40 million Americans without health insurance, says a recent analysis from the American Economic Assn. at Vanderbilt University in Tennessee.
The Bush administration's tax credit proposal would provide less coverage per dollar than an expansion of Medicaid to childless adults, said Jonathan Gruber, PhD, a professor of economics at the Massachusetts Institute of Technology, who conducted the analysis.
Offering a tax incentive for individual health insurance actually could encourage companies to drop coverage, some experts fear.
But the American Medical Association and some lawmakers believe that tax credits are a good way to extend coverage to the uninsured. House lawmakers say provisions in their bill would prevent employers from dropping coverage.
According to Dr. Gruber's analysis, public health coverage for all adults up to 80% of the federal poverty level would cost $1.17 in federal spending for every dollar in health coverage for someone currently without health insurance. By comparison, the government would spend $3.32 for every dollar of new health coverage achieved through tax credits because many of the credits would go to people who already had health insurance.
While both strategies would cost the government the same amount overall and each would reach about 3 million uninsured people, in the case of tax credits, much less of the money would go to covering people who don't already have health insurance.
Because of this, tax credits have the potential to undermine employer-based coverage, said Jack Meyer, PhD, president of New Directions for Policy, a Washington, D.C.-based research firm.
Several surveys have shown that both employers and workers are happy with the predominance of group-health coverage, which accounts for about 80% of the private health insurance market.
A report released last month by the Commonwealth Fund showed that most employers say it is very important to offer their employees health benefits.
According to Dr. Gruber's study, 5.2 million people would take an individual health insurance tax credit, but because of companies dropping health benefits, 2.13 million people would become newly uninsured and could not then afford coverage in the individual market. By comparison, a Medicaid expansion would be more targeted toward those without any coverage. That approach would have almost no effect on the number of businesses dropping coverage or the number of newly uninsured Americans, the analysis predicts.
"We're starting down a spiral I don't like" in trying to move away from an employer-based system that offers a good way to spread risk across a diverse population of individuals, Dr. Meyer said.
Standing up for credits
Authors of tax credit legislation currently pending in the House have taken into account these concerns. The House version of the bill contains a "maintenance of effort" provision, placing strict limitations on when an employer offering health benefits could drop them.
The Senate's version of the measure does not have that provision because some tax credit proponents believe that tax credits are the first step toward wholesale reform of a broken health care market based on inefficient employer-sponsored coverage.
The credits would move the tax system toward more equitable treatment for individuals, who currently get no tax benefit for purchasing health insurance, said Stuart Butler, PhD, vice president of domestic policy studies at the Heritage Foundation, a Washington, D.C., think tank.
People buying individual coverage should get the same subsidies to encourage coverage that people get by working for a firm that offers health benefits, said Merrill Matthews Jr., PhD, director of the Council for Affordable Health Insurance, a research and advocacy association of insurance carriers in Alexandria, Va.
Because tax credits would remove the unique incentives for employer-based coverage, they should be accompanied by reforms to the individual insurance market, where the tax credits would be used, to ensure risk is still spread among young and old, healthy and sick, said Linda J. Blumberg, PhD, a senior fellow with the Urban Institute in Washington, D.C.