Reducing the Uninsured

Through Tax Reform

Robert E. Moffit, Ph.D.

Director, Center for Health Policy Studies
The Heritage Foundation
2007
 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.

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        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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 Total Uncompensated Care in 2004
(in billions)

Adults, Full-Year Adults, Part-Year

Uninsured Uninsured
$8.8

$26.3

$1.8 Children, Part-Year

Uninsured

Uncompensated Care
$3.6

Adults - $35.1 b Children, Full-Year

Children - $5.4 b Uninsured

Full-Year Uninsured - $29.9 b

Part-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.

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 Total Government Spending
Available for the Uninsured, 2004
(In Billions of Dollars)

State Medicaid
DSH/Supplemental Payments
$1.8 (5.2%)

Federal Medicaid State & Local Tax

DSH/Supplemental Appropriations/
Payments Payments to Hospitals
$6.9 (19.9%) $7.9 (22.8%)

State Director Service

Programs
$1.4 (4.0%)

Federal Medicare Federal Director Service

DSH/IME Programs
$10.5 (30.3%) $6.1 (17.6%)

Total = $34.6 Billion

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

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 Estimates of Per Capita Spending,
2004 dollars
(includes uncompensated care)

$2,975

$2,466

$1,629

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.

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Federal Tax Expenditures For Health Insurance

$7.40
Social Security OASDI tax: 27.7%
$1.60
$4.60
$7.50 Medicare HI: 7.5%

$52.20
Income tax health benefit exclusion: 53.6%

Retiree exclusion: 4%

Self-employed deduction: 2.4%

Health reimbursement accounts: 0.8%

$14.20
Out-of-pocket deduction: 3.9%

$101

Total: $188.5 Billion

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

State: $ 21.4 Billion

10%

State: $ 21.4 Billion

Federal: $188.5 Billion

Federal: $188.5 Billion

90% Total State and Federal: $209.9 Billion

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 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);

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 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.

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 Average Federal Health Benefits Tax
Expenditure by Income Level in 2004
$3,000 $2,780
$2,640

$2,500
$2,134

$2,000
Average Per Family $1,482 $1,448
$1,500 $1,231

$1,000
$726

$500 $292
$102
$0
Less than $15,000 - $20,000 - $30,000 - $40,000 - $50,000 - $75,000 - $100,000
$15,000 $19,999 $29,999 $39,999 $49,000 $74,999 $99,999 or More

a/ Estimates for families with a family head under age 65.

Source: Lewin Group estimates using the Health Benefits Simulation Model (HBSM)

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THE PRESIDENT’S TAX REFORM
 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).
 Individuals would pay no income or payroll taxes
on all health plans up to $7,500.

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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).
 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.
 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.

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 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 2009.
 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.)
 Problem: It would have little or no impact on low-
income families who do not file tax returns.

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 A Possible Grand Compromise?
 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).
 Create Statewide Health Insurance Exchange as an
administrative platform for vouchers( Medicaid and
SCHIP) for private health insurance.
 Allow Interstate Commerce in Health Insurance

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 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.

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 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.
 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.

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Average Tax Subsidy under Current Law and
The Heritage Tax Credit Proposal in 2000:
Families with Family Head Age 65 and Under
$3,000
Current Subsidy for Income Tax and FICA Tax Exemption $2,638
Tax Credit under Heritage Foundation Plan
$2,500
$2,207
$2,170
$2,064 $2,005 $1,985
$1,926 $1,926
$2,000 $1,886 $1,871
$1,775
$1,691

$1,500 $1,338
$1,155
$949
$1,000
$599

$500 $331

$79
$-
Less Than $15,000 - $20,000 - $30,000 - $40,000 - $50,000 - $75,000 - $100,000 or All Families
$15,000 $19,999 $29,999 $39,999 $49,999 $74,999 $99,999 More
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.

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 Impact of a Universal Tax Credit on the
Health Insurance Market

 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.

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 Impact of a Universal Tax Credit on the
Health Insurance Market
Continued . . .

 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.
 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.

 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).
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