reducing the uninsured through tax reform robert e. moffit, ph.d. director, center for health policy...

Reducing the UninsuredReducing the UninsuredThrough Tax Reform Through Tax Reform

Robert E. Moffit, Ph.D.Robert E. Moffit, Ph.D.

Director, Center for Health Policy StudiesDirector, Center for Health Policy Studies

The Heritage FoundationThe Heritage Foundation

20072007

Moffit Slide # Moffit Slide # 22

THE UNINSURED ARE A DIVERSE

AND DYNAMIC POPULATION

Roughly 85 percent of Americans have public or private insurance coverage. The minority of the uninsured are a heterogeneous population, and their coverage options are affected by a variety of social, economic, geographical and political factors.

8 out of 10 uninsured Americans are members of working families. Health insurance coverage—and the lack thereof—is predominantly a function of employment. CBO reports that more than 3 out of 4 uninsured Americans do not get coverage through their place of work.

The uninsured are heavily concentrated in small businesses, and the service and retail trade industries. They also work on a contract basis and are part-time employees.


The uninsured, as a group, are relatively young, between 19 and 39; and they are adults with children, who work in small businesses.

The uninsured population is mainly composed of low-income working people; six out of ten of the uninsured families have family incomes below 200 percent of poverty. But you also find the uninsured in middle and even upper income categories.

The uninsured are disproportionately found among minority workers and their families. The highest incidence of un-insurance is found among Hispanics, followed by African Americans. Over one third of Hispanic workers and their families are uninsured.

The uninsured are in and out of insurance coverage. CBO estimates that 45 percent of the uninsured are in a spell of un-insurance that lasts 4 months or less; 26 percent are uninsured 5 to 12 months; 16 percent are uninsured more than 24 months; 13 percent are uninsured 13 to 24 months.


Total Uncompensated Care in 2004(in billions)

$26.3

$8.8

$1.8

$3.6 Uncompensated Care

Adults - $35.1 bChildren - $5.4 b

Full-Year Uninsured - $29.9 bPart-Year Uninsured - $10.6 b Total = $40.7 billion

Data may not total due to rounding.SOURCE: Hadley and Holahan analysis of 1998 - 200 MEPS data, 2004; prepared for the Kaiser Commission on Medicaid and the Uninsured ; May 10, 2004.

Adults, Full-Year Uninsured

Adults, Part-Year Uninsured

Children, Part-Year Uninsured

Children, Full-Year Uninsured


Total Government Spending Available for the Uninsured, 2004

(In Billions of Dollars)

SOURCE: Hadley and Holahan analysis of 1998 - 200 MEPS data, 2004; prepared for the Kaiser Commission on Medicaid and the Uninsured; May 10, 2004.

Total = $34.6 Billion

State MedicaidDSH/Supplemental Payments

$1.8 (5.2%)

State & Local TaxAppropriations/

Payments to Hospitals$7.9 (22.8%)

State Director ServicePrograms$1.4 (4.0%)

Federal Director ServicePrograms

$6.1 (17.6%)

Federal MedicaidDSH/Supplemental

Payments$6.9 (19.9%)

Federal MedicareDSH/IME

$10.5 (30.3%)


Estimates of Per Capita Spending, 2004 dollars

(includes uncompensated care)

$1,629

$2,466

$2,975

Full-Year Part-Year Full-Year Insured

Uninsured

SOURCE: Hadley and Holahan analysis of 1998 - 200 MEPS data, 2004; prepared for the Kaiser Commission on Medicaid and the Uninsured; May 10, 2004.


Federal Tax Expenditures For Health Insurance

$52.20

$14.20

$101

$7.50

$4.60

$1.60

$7.40Social Security OASDI tax: 27.7%

Medicare HI: 7.5%

Income tax health benefit exclusion: 53.6%

Retiree exclusion: 4%

Self-employed deduction: 2.4%

Health reimbursement accounts: 0.8%

Out-of-pocket deduction: 3.9%

Total: $188.5 Billion


State and Federal Tax Expenditures for Employer Health Benefit Contributions, 2004

State: $ 21.4 Billion10%

Federal: $188.5 Billion90%

State: $ 21.4 Billion

Federal: $188.5 Billion

Total State and Federal: $209.9 Billion


ECONOMIC REALITY:TAX POLICY ECONOMIC REALITY:TAX POLICY SHAPES THE HEALTH INSURANCE SHAPES THE HEALTH INSURANCE

MARKETMARKETThe Congressional Budget Office (CBO) studied the The Congressional Budget Office (CBO) studied the tax treatment of health care in 1994 and found four tax treatment of health care in 1994 and found four fundamental problems with today’s tax policy: fundamental problems with today’s tax policy:

1.1. It undermines the portabilityIt undermines the portability of health insurance and of health insurance and restricts consumer choice because the insured individual’s restricts consumer choice because the insured individual’s employer owns the policy; employer owns the policy;

2.2. It hides the true cost of health careIt hides the true cost of health care as well as the as well as the identity of the person paying for the care by creating an identity of the person paying for the care by creating an impression that health care is a free fringe benefit, not a impression that health care is a free fringe benefit, not a service purchased with money that otherwise would be service purchased with money that otherwise would be spent on wages or other benefits. (Other studies indicate spent on wages or other benefits. (Other studies indicate that up to 88 percent of the cost of health benefits actually that up to 88 percent of the cost of health benefits actually is paid for by lower employee compensation); is paid for by lower employee compensation);


Tax Policy Distorts Health InsuranceTax Policy Distorts Health Insurance

and,and,

3.3. It fuels higher health costsIt fuels higher health costs, because it encourages , because it encourages employees to seek more comprehensive and expensive employees to seek more comprehensive and expensive benefits—the more expensive the benefits, the greater the tax benefits—the more expensive the benefits, the greater the tax exclusion; exclusion;

4.4. It favors those who have higher incomesIt favors those who have higher incomes, while low-, while low-income workers who are least able to afford coverage on their income workers who are least able to afford coverage on their own enjoy very few benefits, and is thus very regressive.own enjoy very few benefits, and is thus very regressive.


Average Federal Health Benefits Tax Average Federal Health Benefits Tax Expenditure by Income Level in 2004Expenditure by Income Level in 2004

$102

$292

$726

$1,231

$1,448

$2,134

$2,640$2,780

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Less than $15,000

$40,000 -$49,000

$30,000 -$39,999

$20,000 -$29,999

$15,000 -$19,999

$100,000 or More

$75,000 -$99,999

$50,000 -$74,999

a/ Estimates for families with a family head under age 65. Source: Lewin Group estimates using the Health Benefits Simulation Model (HBSM)

Average Per Family $1,482


THE PRESIDENT’S TAX THE PRESIDENT’S TAX REFORMREFORM

Universal Standard Deduction would Universal Standard Deduction would replace the existing tax treatment of replace the existing tax treatment of health insurance.health insurance.

Families would pay no income or payroll Families would pay no income or payroll taxes on all health plans up to $15,000 taxes on all health plans up to $15,000 annually. (The average employer group annually. (The average employer group family plan cost is $11,500).family plan cost is $11,500).

Individuals would pay no income or payroll Individuals would pay no income or payroll taxes on all health plans up to $7,500.taxes on all health plans up to $7,500.


IMPACT OF THE PRESIDENT’S IMPACT OF THE PRESIDENT’S TAX REFORMTAX REFORM

The standard deduction will lower taxes for about 80 The standard deduction will lower taxes for about 80 percent of those with employer provided health percent of those with employer provided health policies ( estimated 100 million Americans).policies ( estimated 100 million Americans).

A Family of Four with group coverage and an annual A Family of Four with group coverage and an annual income of $60,000 would get a tax break of $424. income of $60,000 would get a tax break of $424.

A Family of Four without coverage and an annual A Family of Four without coverage and an annual income of $60,000 would get a tax break worth income of $60,000 would get a tax break worth $4,545.$4,545.

For all Americans without coverage who would buy For all Americans without coverage who would buy health insurance on their own, the average tax health insurance on their own, the average tax reduction would reach $3,350 in 2009reduction would reach $3,350 in 2009

The Policy would result in a tax increase for about 20 The Policy would result in a tax increase for about 20 percent of those with employer provided health percent of those with employer provided health policies. policies.


Impact of The President’s Plan Impact of The President’s Plan Con’t.Con’t.

It would increase the demand for health insurance It would increase the demand for health insurance and reduce un-insurance. Lewin estimates a and reduce un-insurance. Lewin estimates a reduction in the uninsured of 9.2 million in 2009.reduction in the uninsured of 9.2 million in 2009.

It would be a middle class tax cut; about 70 It would be a middle class tax cut; about 70 percent of the tax reductions would go to families percent of the tax reductions would go to families with incomes of more than $50,000 annually. with incomes of more than $50,000 annually. ( Lewin Group, 2007).( Lewin Group, 2007).

It would level the playing field between employer It would level the playing field between employer based and non-employer based insurance based and non-employer based insurance ( association, unions, ethnic and fraternal ( association, unions, ethnic and fraternal organizations, faith-based plans etc.) organizations, faith-based plans etc.)

Problem: It would have little or no impact on low-Problem: It would have little or no impact on low-income families who do not file tax returns.income families who do not file tax returns.


A Possible Grand A Possible Grand Compromise?Compromise?

Combine the Tax Deduction with a refundable Combine the Tax Deduction with a refundable health care Tax Credit for low income persons.health care Tax Credit for low income persons.

Agree to use existing Government Subsidies to Agree to use existing Government Subsidies to Hospitals and Other Health Care Facilities for the Hospitals and Other Health Care Facilities for the Uninsured ( $36 billion) as a pool for refundable Uninsured ( $36 billion) as a pool for refundable credits or health care vouchers ( Eg. credits or health care vouchers ( Eg. Massachusetts).Massachusetts).

Create Statewide Health Insurance Exchange as an Create Statewide Health Insurance Exchange as an administrative platform for vouchers( Medicaid and administrative platform for vouchers( Medicaid and SCHIP) for private health insurance.SCHIP) for private health insurance.

Allow Interstate Commerce in Health InsuranceAllow Interstate Commerce in Health Insurance


A UNIVERSAL TAX CREDIT A UNIVERSAL TAX CREDIT PROPOSAL PROPOSAL

The Key ElementsThe Key Elements::

Universal Coverage Through a Universal Tax Universal Coverage Through a Universal Tax Credit System.Credit System. Every American would have access to Every American would have access to affordable health care coverage. Every American would get affordable health care coverage. Every American would get direct assistance either in the form of a tax credit for those direct assistance either in the form of a tax credit for those who pay taxes, or a voucher for low-income persons. That who pay taxes, or a voucher for low-income persons. That tax relief could be used in a way that best meets their tax relief could be used in a way that best meets their personal needs – to offset the costs of insurance, out-of-personal needs – to offset the costs of insurance, out-of-pocket medical costs, or medical savings accounts. Tax pocket medical costs, or medical savings accounts. Tax relief would be conditioned on the purchase of a basic, relief would be conditioned on the purchase of a basic, catastrophic plan.catastrophic plan.


A Universal Tax Credit A Universal Tax Credit ProposalProposal

Continued. . .Continued. . .

Tax Relief or Subsidies Would be Based on Tax Relief or Subsidies Would be Based on Need. All Individuals and Families Would Need. All Individuals and Families Would Qualify for a Basic Tax Credit.Qualify for a Basic Tax Credit. Beyond that the Beyond that the generosity of tax relief or government assistance would be generosity of tax relief or government assistance would be based on need. More help would go to lower income based on need. More help would go to lower income families or families with higher health care costs. The families or families with higher health care costs. The formula for a sliding scale of credits or subsidies: the formula for a sliding scale of credits or subsidies: the higher the health costs compared to income, the greater higher the health costs compared to income, the greater the tax relief or subsidy.the tax relief or subsidy.

Tie State Insurance Reform to Tax Reform.Tie State Insurance Reform to Tax Reform. Rules governing the tax treatment of health insurance Rules governing the tax treatment of health insurance could be accompanied by state insurance reform: reform of could be accompanied by state insurance reform: reform of state markets; state risk pooling, reform of underwriting to state markets; state risk pooling, reform of underwriting to expand access, including the elimination of exclusions for expand access, including the elimination of exclusions for pre-existing medical conditions. pre-existing medical conditions.


Average Tax Subsidy under Current Law Average Tax Subsidy under Current Law and The Heritage Tax Credit Proposal in and The Heritage Tax Credit Proposal in 2000: Families with Family Head Age 65 2000: Families with Family Head Age 65

and Underand Under

$79

$2,207

$2,638

$2,064 $2,005

$1,775$1,691

$1,985$1,926$1,886

$331

$599

$949

$1,338$1,155

$1,871$1,926

$2,170

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Less Than$15,000

$15,000 -$19,999

$20,000 -$29,999

$30,000 -$39,999

$40,000 -$49,999

$50,000 -$74,999

$75,000 -$99,999

$100,000 orMore

All Families

Current Subsidy for Income Tax and FICA Tax Exemption

Tax Credit under Heritage Foundation Plan

a/ Estimates for families with a family head under age 65. b/ Includes the value of the tax credit provided under The Heritage Foundation proposal.Source: Lewin Group estimates.


Diversity of Health Options. It would result in a variety Diversity of Health Options. It would result in a variety of insurance options, including plans sponsored by of insurance options, including plans sponsored by various associations, professional and fraternal various associations, professional and fraternal organizations, trade organizations and unions, and organizations, trade organizations and unions, and ethnic, religious or faith based organizations.ethnic, religious or faith based organizations.

The Creation of Large National Pools. Employment-The Creation of Large National Pools. Employment-based pools are good to excellent for large based pools are good to excellent for large corporations; not so good for small businesses. A corporations; not so good for small businesses. A national tax credit creates the groundwork for national tax credit creates the groundwork for national pooling.national pooling.

Impact of a Universal Tax Credit on Impact of a Universal Tax Credit on the Health Insurance Marketthe Health Insurance Market


Impact of a Universal Tax Credit on the Impact of a Universal Tax Credit on the Health Insurance MarketHealth Insurance Market

Continued . . .Continued . . .

Inclusion of the Uninsured would introduce a Inclusion of the Uninsured would introduce a Downward Pressure on Claims Costs.Downward Pressure on Claims Costs.

The expansion of coverage to a largely younger and The expansion of coverage to a largely younger and healthier population would lower average claims costs.healthier population would lower average claims costs.

More reliable financing and premium collection lowers More reliable financing and premium collection lowers administrative costs.administrative costs.

More stable enrollment and the likelihood of long-term More stable enrollment and the likelihood of long-term contracts which add to price stability and reduce churning contracts which add to price stability and reduce churning in the market.in the market.

A Revolution in Insurance Consumer Relations. A Revolution in Insurance Consumer Relations. Since the consumer is henceforth a customer, Since the consumer is henceforth a customer, carriers have a powerful incentive to retain this carriers have a powerful incentive to retain this business. (Internet expansion is expected to business. (Internet expansion is expected to intensify competition). intensify competition).

reducing the uninsured through tax reform robert e. moffit, ph.d. director, center for health policy...

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