PPI: Two Promising Approaches to Expanding Health Coverage by Jeff Lemieux

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PPI | Backgrounder | July 24, 2003
Two Promising Approaches to Expanding Health Coverage
By Jeff Lemieux

Politicians never fail to express concern for the uninsured. Yet when it's time to legislate, other issues tend to dominate the discussion: drug benefits for seniors, patients' rights in health plans, malpractice insurance premiums, and so on.

This year, however, Congress has an excellent chance to act on health coverage. The Budget Resolution set aside $50 billion over 10 years specifically for that purpose. Moreover, there are two plausible, bipartisan approaches to expanding health coverage that could be enacted quickly if legislative leaders put them on the agenda.

A "transitional coverage" proposal for unemployed workers is percolating in the Senate, and a proposal to create health insurance subsidy "certificates" for low-income workers has been introduced in the House. Both the House and Senate proposals are modeled on past suggestions from the Progressive Policy Institute (PPI). (There is little functional distinction between House's new certificates and the sorts of tax credits PPI has proposed.) Either the House or Senate proposal would be a reasonable, affordable step toward universal health coverage.

In recent years, Congress has done very little to expand health coverage. Yet the need is growing rapidly. After several years of political and marketplace backlash against managed care plans, health insurance premiums are again rising at double-digit rates. And the number of jobs has fallen by 2.6 million since the beginning of the recession in March 2001, adding to the number of uninsured. Under current conditions, even employed workers and small business owners may find if difficult to afford health insurance, especially if their incomes are low.

There are two approaches to expanding health coverage that stand a decent chance of enactment this year. The first approach concentrates on transitional coverage for unemployed workers. The second approach concentrates on people with low incomes, regardless of whether or not they are unemployed. Both of the approaches make good analytic sense and either (or both) would represent a wise social deployment of limited federal resources.

Transitional Coverage. The most important coverage bill enacted in 2002 was the Trade Adjustment Assistance (TAA) Act, which created a 65 percent subsidy for health insurance purchased by two highly targeted groups of people: unemployed workers displaced from their jobs by a trade action, and certain retirees under age 65 whose pension plans were taken over by the government.

The TAA bill was a difficult, but ultimately successful political compromise. Congress spelled out specific forms of eligible coverage, including COBRA continuing coverage from ex-employers, certain state-based purchasing pools, state high-risk pools, and other state-endorsed forms of group insurance. The 65 percent subsidy could also be used to help purchase individual coverage, but only if the unemployed worker had such coverage prior to losing his or her job.

However, the number of unemployed workers eligible for the 65 percent subsidy is very small: only 240,000 by government estimates. That does not approach the need. In mid-July 2003, there were over 3.7 million workers on the unemployment rolls, based on the four week moving average of continuing claims for unemployment compensation reported by the Bureau of Labor Statistics.

Now, several Senators, including Chuck Grassley (R-IA) and Max Baucus (D-MT), chairman and ranking member in the Finance Committee, are discussing a proposal to expand the TAA bill's 65 percent health credits to all unemployed workers. The bill under discussion would not tinker with the structure of the TAA compromise -- it would be simply expand the number of people eligible for the credits to all 3.7 million unemployed workers.

According to a preliminary estimate from the Joint Committee on Taxation, the Senate proposal would cost $34 billion over ten years, well within the $50 billion limit for such proposals set by the Budget Resolution.

The TAA expansion bill would allow unemployed workers to keep their 65 percent credits for an extra month after they took a new job. One improvement to the bill would be to allow the credits to continue for 6 months or more for all unemployed workers who were not offered health coverage at their new jobs. Alternatively, state employment offices could allow newly re-employed workers to apply for "hardship" certification if their incomes at the new jobs were low and they needed extra time to build up funds in order to afford health insurance.

Allowing workers without on-the-job health insurance at their new jobs to keep the credits for a period of time would create the proper incentives for re-employment: workers would not have to worry that by taking a new job, they would lose their 65 percent credits before their finances were sufficient to afford health coverage on their own.

Extending the TAA credits for several months for certain newly reemployed workers would cost more, but the overall budget for the health credits could be kept within the $50 billion limit.

At this time, it is unclear when the bill will be introduced in the Senate or worked on in committee, or whether the primary sponsors will be Senators Grassley and Baucus or other Senators interested in this approach. Nevertheless, since both parties agreed on the TAA set-up last year, this sort of bill could move quickly through the legislative process.

Low-Income Workers and Families. The other approach to health coverage that stands a good chance of passage in Congress involves health tax credits or subsidies for people with low incomes.

For several years, the Bush Administration's budget has included tax credit proposals to help low-income people purchase health insurance. However, the Bush proposals had a significant flaw: workers -- even those with very low incomes -- would not be allowed to use their credits to pay their share of the premium when coverage was offered at work. Therefore, they had an incentive to drop work-based coverage and instead purchase individual coverage in order to receive the subsidy. Of course, their employers would have a corresponding incentive to drop coverage -- why go to the trouble of offering it if employees got no tax break from the government? Whether employees dropped coverage or employers quit offering it on their behalf, the final result would be destabilized insurance pools and great difficulties for workers with illnesses that make if difficult (if not impossible) to acquire or afford individual coverage.

Moreover, the President never pushed for the inclusion of his (or any) health insurance proposal as part of the various tax bills that have moved through Congress.

Now, a new proposal has been introduced by Reps. Michael Bilirakis (R-FL) and Edolphus Towns (D-NY) that would provide subsidy "certificates" to people whose incomes were too high to qualify for public health insurance programs like Medicaid, but too low to afford health insurance without considerable sacrifice. (The bill uses certificates instead of tax credits for arcane jurisdictional reasons -- the terms are essentially interchangeable for analytic purposes.)

For individually purchased health coverage, the subsidy level would be as high as $2,750 for families with two or more children and an annual income under $25,000. The subsidy level would phase down for families with incomes above $25,000 but below $35,000.

In a crucial improvement over the Administration's proposal, the Bilirakis-Towns subsidies could also be used for work-based coverage. For families with two or more children, up to $1,100 could be applied annually toward the enrollee's share the premium for family coverage obtained at work.

For singles, the subsidy level would top out at $1,000 for individual coverage or $400 for employer-based insurance. The maximum subsidy would be available for workers with incomes of $13,000, and the subsidy would phase out as income approached $20,000 (see table below).

The subsidy could not exceed 70 percent of the premium or employee share of the premium (for work-based coverage) in any case.

To be sure, most of the Bilirakis-Towns subsidies would accrue to families that have already purchased health insurance. However, that is a very good thing. We should reward families with low incomes, few assets, and a negligible tax incentive to purchase health insurance under current law. Those families must make considerable sacrifices to purchase health coverage. Low-income families who choose to do the right thing and protect themselves with health insurance deserve the same breaks as families that do not. With health insurance, they are more likely to receive proper health care, which is good not only for the family but also for the public health. People with health insurance are not dependent on public charity and they do not thereby place an extra burden on the rest of society.

Under current tax law, families in income ranges targeted for new subsidies in the Bilirakis-Towns bill generally do not get a significant tax subsidy for health coverage. That is because their marginal income tax rate (computed as the extra income tax they pay per additional dollar of income) is often very low. By contrast, high income taxpayers receive a much larger tax subsidy for health coverage under current law, because employer and self-employment premiums are excluded from taxable income. (The tax break equals the excluded amount times the marginal tax rate.)

The Bilirakis-Towns proposal would level the playing field, providing a significant tax break for health insurance to families who would otherwise get none. It would help solidify health coverage for families that currently struggle with the cost, and who are most at risk for losing their health coverage as costs increase.