Reducing the Uninsured Through Tax Reform Robert E. Moffit, Ph.D. Director, Center for Health Policy Studies The Heritage Foundation 2007

Moffit Slide # 1 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.

Moffit Slide # 2  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.

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Moffit Slide # 8 ECONOMIC REALITY:TAX POLICY SHAPES THE HEALTH INSURANCE MARKET The Congressional Budget Office (CBO) studied the tax treatment of health care in 1994 and found four fundamental problems with today’s tax policy: 1.It undermines the portability of health insurance and restricts consumer choice because the insured individual’s employer owns the policy; 2. It hides the true cost of health care as well as the identity of the person paying for the care by creating an impression that health care is a free fringe benefit, not a service purchased with money that otherwise would be spent on wages or other benefits. (Other studies indicate that up to 88 percent of the cost of health benefits actually is paid for by lower employee compensation);

Moffit Slide # 9 Tax Policy Distorts Health Insurance and, 3.It fuels higher health costs, because it encourages employees to seek more comprehensive and expensive benefits—the more expensive the benefits, the greater the tax exclusion; 4. It favors those who have higher incomes, while low-income workers who are least able to afford coverage on their own enjoy very few benefits, and is thus very regressive.

Moffit Slide # 10 Average Federal Health Benefits Tax Expenditure by Income Level in 2004 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

Moffit Slide # 11 THE PRESIDENT’S TAX REFORM Universal Standard Deduction would replace the existing tax treatment of health insurance. Universal Standard Deduction would replace the existing tax treatment of health insurance. Families would pay no income or payroll taxes on all health plans up to $15,000 annually. (The average employer group family plan cost is $11,500). Families would pay no income or payroll taxes on all health plans up to $15,000 annually. (The average employer group family plan cost is $11,500). Individuals would pay no income or payroll taxes on all health plans up to $7,500. Individuals would pay no income or payroll taxes on all health plans up to $7,500.

Moffit Slide # 12 IMPACT OF THE PRESIDENT’S TAX REFORM The standard deduction will lower taxes for about 80 percent of those with employer provided health policies ( estimated 100 million Americans). The standard deduction will lower taxes for about 80 percent of those with employer provided health policies ( estimated 100 million Americans). A Family of Four with group coverage and an annual income of $60,000 would get a tax break of $424. A Family of Four with group coverage and an annual income of $60,000 would get a tax break of $424. A Family of Four without coverage and an annual income of $60,000 would get a tax break worth $4,545. A Family of Four without coverage and an annual income of $60,000 would get a tax break worth $4,545. For all Americans without coverage who would buy health insurance on their own, the average tax reduction would reach $3,350 in 2009 For all Americans without coverage who would buy health insurance on their own, the average tax reduction would reach $3,350 in 2009 The Policy would result in a tax increase for about 20 percent of those with employer provided health policies. The Policy would result in a tax increase for about 20 percent of those with employer provided health policies.

Moffit Slide # 13 Impact of The President’s Plan Con’t. It would increase the demand for health insurance and reduce un-insurance. Lewin estimates a reduction in the uninsured of 9.2 million in It would increase the demand for health insurance and reduce un-insurance. Lewin estimates a reduction in the uninsured of 9.2 million in It would be a middle class tax cut; about 70 percent of the tax reductions would go to families with incomes of more than $50,000 annually. ( Lewin Group, 2007). It would be a middle class tax cut; about 70 percent of the tax reductions would go to families with incomes of more than $50,000 annually. ( Lewin Group, 2007). It would level the playing field between employer based and non-employer based insurance ( association, unions, ethnic and fraternal organizations, faith-based plans etc.) It would level the playing field between employer based and non-employer based insurance ( association, unions, ethnic and fraternal organizations, faith-based plans etc.) Problem: It would have little or no impact on low- income families who do not file tax returns. Problem: It would have little or no impact on low- income families who do not file tax returns.

Moffit Slide # 14 A Possible Grand Compromise? Combine the Tax Deduction with a refundable health care Tax Credit for low income persons. Combine the Tax Deduction with a refundable health care Tax Credit for low income persons. Agree to use existing Government Subsidies to Hospitals and Other Health Care Facilities for the Uninsured ( $36 billion) as a pool for refundable credits or health care vouchers ( Eg. Massachusetts). Agree to use existing Government Subsidies to Hospitals and Other Health Care Facilities for the Uninsured ( $36 billion) as a pool for refundable credits or health care vouchers ( Eg. Massachusetts). Create Statewide Health Insurance Exchange as an administrative platform for vouchers( Medicaid and SCHIP) for private health insurance. Create Statewide Health Insurance Exchange as an administrative platform for vouchers( Medicaid and SCHIP) for private health insurance. Allow Interstate Commerce in Health Insurance Allow Interstate Commerce in Health Insurance

Moffit Slide # 15 A UNIVERSAL TAX CREDIT PROPOSAL The Key Elements: Universal Coverage Through a Universal Tax Credit System. Every American would have access to affordable health care coverage. Every American would get direct assistance either in the form of a tax credit for those who pay taxes, or a voucher for low-income persons. That tax relief could be used in a way that best meets their personal needs – to offset the costs of insurance, out-of-pocket medical costs, or medical savings accounts. Tax relief would be conditioned on the purchase of a basic, catastrophic plan.

Moffit Slide # 16 A Universal Tax Credit Proposal Continued... Tax Relief or Subsidies Would be Based on Need. All Individuals and Families Would Qualify for a Basic Tax Credit. Beyond that the generosity of tax relief or government assistance would be based on need. More help would go to lower income families or families with higher health care costs. The formula for a sliding scale of credits or subsidies: the higher the health costs compared to income, the greater the tax relief or subsidy. Tax Relief or Subsidies Would be Based on Need. All Individuals and Families Would Qualify for a Basic Tax Credit. Beyond that the generosity of tax relief or government assistance would be based on need. More help would go to lower income families or families with higher health care costs. The formula for a sliding scale of credits or subsidies: the higher the health costs compared to income, the greater the tax relief or subsidy. Tie State Insurance Reform to Tax Reform. Rules governing the tax treatment of health insurance could be accompanied by state insurance reform: reform of state markets; state risk pooling, reform of underwriting to expand access, including the elimination of exclusions for pre-existing medical conditions. Tie State Insurance Reform to Tax Reform. Rules governing the tax treatment of health insurance could be accompanied by state insurance reform: reform of state markets; state risk pooling, reform of underwriting to expand access, including the elimination of exclusions for pre-existing medical conditions.

Moffit Slide # 17 Average Tax Subsidy under Current Law and The Heritage Tax Credit Proposal in 2000: Families with Family Head Age 65 and Under

Moffit Slide # 18 Diversity of Health Options. It would result in a variety of insurance options, including plans sponsored by various associations, professional and fraternal organizations, trade organizations and unions, and ethnic, religious or faith based organizations. Diversity of Health Options. It would result in a variety of insurance options, including plans sponsored by various associations, professional and fraternal organizations, trade organizations and unions, and ethnic, religious or faith based organizations. The Creation of Large National Pools. Employment-based pools are good to excellent for large corporations; not so good for small businesses. A national tax credit creates the groundwork for national pooling. The Creation of Large National Pools. Employment-based pools are good to excellent for large corporations; not so good for small businesses. A national tax credit creates the groundwork for national pooling. Impact of a Universal Tax Credit on the Health Insurance Market

Moffit Slide # 19 Impact of a Universal Tax Credit on the Health Insurance Market Continued... Inclusion of the Uninsured would introduce a Downward Pressure on Claims Costs. Inclusion of the Uninsured would introduce a Downward Pressure on Claims Costs. The expansion of coverage to a largely younger and healthier population would lower average claims costs. The expansion of coverage to a largely younger and healthier population would lower average claims costs. More reliable financing and premium collection lowers administrative costs. More reliable financing and premium collection lowers administrative costs. More stable enrollment and the likelihood of long-term contracts which add to price stability and reduce churning in the market. More stable enrollment and the likelihood of long-term contracts which add to price stability and reduce churning in the market. A Revolution in Insurance Consumer Relations. Since the consumer is henceforth a customer, carriers have a powerful incentive to retain this business. (Internet expansion is expected to intensify competition). A Revolution in Insurance Consumer Relations. Since the consumer is henceforth a customer, carriers have a powerful incentive to retain this business. (Internet expansion is expected to intensify competition).