Galen President Testifies on Expanding Access to Health Insurance

Grace-Marie Arnett, president of the Galen Institute, presented testimony on “A Fresh Approach to Health Care Reform” in Montpelier, Vermont, on Wednesday, May 31, 2000.

The field hearing on “Ensuring Access to Affordable Health Coverage” was held by the Senate Committee on Health, Education, Labor, and Pensions and was chaired by Senator James M. Jeffords. The text of Grace-Marie’s testimony follows:

Thank you, Mr. Chairman, and members of the committee for the invitation to present testimony this morning on the important issue of “Ensuring Access to Affordable Health Coverage.”

While the nation today enjoys exceptionally low unemployment, low inflation, and strong economic growth, the one key statistic that persistently moves in the wrong direction is the number of Americans without health insurance. While the nation has focused intensely on the problems of access to health insurance over the last eight years, the number of uninsured Americans has actually risen by nine million.

Despite significant efforts of federal and state officials to address this problem by creating and expanding new programs, even supporters of these programs have been disappointed in the success of their efforts. I would like to talk with you about why I believe this is so.

Many of the initiatives that have been debated and enacted revolved around ways to create or expand government programs or government’s authority over private insurance in order to increase coverage.

Clearly, a fresh approach is needed for our changing economy and workforce. I believe that the answer lies in an energized private health insurance market that is responsive to newly empowered consumers. And I believe that the key to achieving this is targeted tax credits to assist the uninsured in purchasing private health insurance. Tax credits are the best way to reach the millions of Americans who are being left behind in the current system.

Who we are

The Galen Institute is a not-for-profit public policy organization devoted to research and education on free-market health reform. One of our primary projects is coordinating the work of the Health Policy Consensus Group, composed of more than 20 health policy experts, including researchers from the major market-oriented think tanks. Our group meets regularly and produces advice and statements with ideas to guide policy-makers and to educate the general public on health reform.

For more than six years, the Consensus Group has been working to bring attention to fundamental flaws in the financing structure of health care in the United States. To quote from our joint Vision Statement:

The United States does not have a properly functioning market for health care, and the financing system needs to be reformed.

The market is distorted by a tax policy that provides generous benefits to those who have higher incomes and receive health insurance through the workplace.

Yet it offers little or no assistance to those at the lower end of the income scale. Particularly at a disadvantage in the current system are those who fall through the cracks between this tax subsidy and Medicaid.1

What this means is that the deck is stacked against 44 million uninsured Americans by unfair federal tax policy.

Flawed tax policy

The United States offers a generous but invisible subsidy for health insurance that favors those with high incomes and good jobs.2 John Sheils of the Lewin Group in Fairfax, Virginia, estimates that U.S. taxpayers subsidize job-based health insurance at the rate of $125 billion a year. But it is a very regressive subsidy, favoring the rich over the poor. A taxpayer earning $100,000 a year or more gets an annual subsidy worth $2,638 while one earning $15,000 gets only $79 a year in assistance toward the purchase of health insurance.

What that means is that the executive with a high-paying job gets a generous tax subsidy for health insurance from the taxpayer while the waitress serving him lunch gets little or no help in purchasing health insurance.

Clearly, this is not a system we would have designed if we were starting from scratch. Instead, it has evolved as a relic of World War II wage and price controls. I refer you to the Vision Statement of the Health Policy Consensus Group for a more detailed explanation of the evolution of this regressive tax subsidy system.

Certainly, it would not be wise or feasible to uproot the current system – flawed though it may be – that provides access to health insurance for 160 million Americans. But it is clear that something must be done for the growing number of Americans who are left out of the current system.

Legislative solution

The bill you have offered, Mr. Chairman, the Health CARE Act (S. 2320, The Health Coverage, Access, Relief, and Equity Act) is the first national, bipartisan, bicameral initiative to provide meaningful help to the uninsured to obtain private health insurance.

This bill would put in place a solid foundation to expand access to private health insurance for those who are falling through the cracks of the current system. And it targets those who are least likely to have the resources to purchase their own insurance and who do not have access to health insurance at work.

The bill would provide a tax credit of $1,000 to individuals earning up to $35,000 and $2,000 for families with incomes of up to $55,000, with phase-outs at $10,000 above these levels. The median household income for Vermont in 1996 was $32,350, according to the most recent figures available from the U.S. Census Bureau, which means that the income limits on the tax credit in the Health CARE legislation will be accessible to a large proportion of uninsured residents in your state.

The uninsured are typically lower-income workers or dependents of workers in small business. Sixty-four percent of the uninsured say the main reason they don’t have insurance is because they can’t afford it.

Tax credits, particularly refundable tax credits, are a fair way to give the uninsured help in obtaining coverage. Will it be enough? Professor Mark Pauly of the Wharton School at the University of Pennsylvania has done research that shows that the number of uninsured would drop by at least 50% if a tax credit worth half the value of a decent health policy were to be available to all of the uninsured.

Responding to changes in the economy

In addition, the approach you have taken addresses the need for public policy to respond to the changing workforce in an information-age economy. The current system for subsidizing health insurance in the United States fit an industrial-age economy where people worked for one company for most of their careers. But there is a growing consensus that the 1940s model of employer-based health insurance is no longer adequate. In the last generation, workers were employed by large firms and remained with them for years, if not decades.

But today’s economy is characterized by increased job mobility. According to the U.S. Bureau of Labor Statistics, 13 million workers change their employment status in a typical month. On average, that means 13 million Americans leave home or school to enter the labor force, exit the labor force without looking for new work, find new work after a spell of unemployment or search for work after they quit or are dismissed or laid off — every month.

With subsidies for private health insurance so closely tied to the workplace, it is no wonder that so many workers are falling through the cracks of the current system. Clearly, if health insurance continues to be tied only to the workplace, the number of people without insurance is going to continue to rise.

Tax credits would give these mobile workers much the same kind of help that employees with higher incomes in larger firms receive.

Help for small business

Vermont is proud of its cultivation of small, home-grown businesses. But the deck is stacked against these entrepreneurs regarding health benefits. Many small employers want very much to provide health insurance for their employees, but the cost of health insurance, driven up by excessive mandates and regulations, forces many to forgo or to drop coverage. New, struggling small businesses often find they lose good workers to larger companies because they cannot compete on benefits.

Small companies are also especially vulnerable to the rising cost of health insurance: Nationwide, an estimated 300,000 Americans lose their coverage every time the cost of health insurance rises by 1 percent. It is almost always small businesses operating closest to the margin that are forced out of the market. Further, if one employee in a small firm gets sick, it can cause premiums to rise so much that everyone in the company is at risk of losing insurance.

Small businesses employ 60 percent America’s workforce, yet they also lack the advantages of large companies in designing and purchasing health care packages. Not surprisingly, in 1996, less than 50 percent of businesses with fewer than 50 employees offered health insurance.

If workers had the option of obtaining health insurance outside the work place – an option that tax credits would give them – then it would ease pressures on small businesses that are trying to grow and create new jobs. This would be good for workers and it would be good for Vermont’s economy.

The Galen Gap

My colleagues in the Consensus Group and economists throughout the country believe that tax credits are a crucial step in providing greater access to private health insurance for the uninsured. In fact, tax credits not only may be the best way to reach them; they may be the viable only way.

I would like to use a chart to explain why I think this is so important.

This chart, which also is the logo of the Galen Institute, tells the story of the dilemma our country faces regarding health insurance for those under age 65.

The horizontal axis represents personal income.

The vertical axis represents not only subsidies for health insurance but also the likelihood that a person will be insured, since the two numbers are directly correlated.

The poorer someone is, the more likely that person is to qualify for federal programs, especially Medicaid or the State Children’s Health Insurance Program (S-CHIP).

But as a person moves up the income scale, they fall out of these programs into a trough that we call the “Galen Gap.” They make too much to qualify for public programs and do not yet have the good, higher-paying jobs that are more likely to provide health insurance, represented on the right side of the chart.

The political pressures for the last decade have been coming from the left side of the chart, trying to fill the gap and increase the number of insured by creating and expanding more and more government programs.

Some states, including Vermont, have expanded access to government plans so that even many middle-class citizens are eligible for public programs. But your state, like many others, is finding that costs are extremely hard to control, that access to physicians and hospitals becomes ever more difficult, and that private insurers are fleeing the state, forcing more people to look to government as their only resort.

Tax credits would instead look to the right side of the chart for solutions. This would give the uninsured a benefit much like that which those with job-based health insurance have: A tax subsidy for the purchase of private health insurance. We believe that this subsidy would energize the private market for health insurance, expanding coverage and options.

Solving other problems as well

In addition to expanding access to health insurance, offering tax credits to the uninsured is an important solution for many reasons.

First, by giving people tax credits, they can choose the health plan that best suits their needs and the needs of their families. They inject much needed individual control into the market for health insurance so that people, not public sector or private sector bureaucrats, are deciding what health insurance is best for them.

Second, because the subsidies for health insurance are not tied to the workplace, people don’t lose their health insurance if they lose or change jobs or start their own businesses.

Third, this army of newly empowered consumers will inject renewed energy into the withering market for privately purchased health insurance. This market has been suffocated by state insurance regulations and mandates that have made individual and small group health insurance policies prohibitively expensive and have driven many insurers out of the market. Tax credits would improve Vermont’s market for private health insurance by giving consumers and insurers an incentive to strengthen the market for private health insurance.

Fourth, the cost of the insurance would be visible, and consumers would be more motivated to shop for the best coverage for the money, reversing the current trend for workers to demand more and more insurance coverage because the full cost of the policy and the services they consume is hidden from them.

But most importantly, we tell these hardworking Americans who are left out of the current system that they count, too. Tax credits would provide help to those who make too much to qualify or don’t want to be in public programs and who don’t have jobs that provide health insurance for them and their families.

By providing new federal subsidies for health insurance, these workers would have the option to get health insurance on their own rather than going bare or risking that a major illness or accident could cause them to lose their homes or send them into bankruptcy.

Complementary legislation

There are initiatives working their way through Congress, such as HealthMarts and Association Health Plans, that would give these fragile markets for individual health insurance a boost. People would be able to form groups in order to get the benefit of group health insurance through professional associations, labor unions, churches, or civic groups. We believe that these would provide new vehicles for those who qualify for the tax credits to purchase affordable health insurance.

Renewed efforts

Vermont has tried as hard as any state to make sure that every one of its citizens has health coverage. But federal tax policy is stacked against you.

While Vermont’s uninsured rate is significantly lower than the national average, we estimate that nearly 50,000 Vermont residents under age 65 were without insurance coverage in 1998, with some estimates putting the number as high as 79,000. This is more people than live in Franklin County and or here in Washington County.

The choices are to further burden taxpayers by drawing more and more of them into public programs, or to strengthen the private market for health insurance.

Other legislative proposals involve 1) expanding Medicaid so that more and more middle-class Americans are drawn into this program designed to provide health care to the poor, 2) expanding Medicare to cover Americans down to age 55, 3) or expanding the State Children’s Health Insurance Program to the parents of uninsured children, as President Clinton and Vice President Gore have proposed.

But not only do these approaches put more and more pressure on fewer and fewer taxpayers to pay for these benefits, it also takes away the diversity, competition, and choice that are vital in a free economy.

A revived marketplace

In every other sector of the economy, competition forces prices down and quality up, and health insurance is no different. If the federal government were to provide tax credits for the uninsured, my colleagues in the Consensus Group and I believe that the marketplace would respond by making more affordable, more diverse, more appropriate health insurance available. That would strengthen the health insurance market in the states and would provide citizens with more choices for coverage. If the state government were to provide complementary tax incentives, they could expand coverage to even more of the uninsured.

There are many questions about how the tax credits would work, and I recommend a book I have edited and which was published by the University of Michigan Press, Empowering Health Care Consumers through Tax Reform. It is available in its entirety on our website at My colleagues in the Consensus Group go into detail about how a system based upon individual-based subsidies for health insurance would work.

I also refer you to an excellent new paper by Health Policy Analyst James Frogue, published by The Heritage Foundation, “A Guide to Tax Credits for the Uninsured” which provides further analysis of different tax credit approaches and makes a strong case for this approach to solving the problem of the uninsured.

Bi-partisan support for the idea

The idea of providing tax credits to help the uninsured purchase coverage has broad bipartisan support, as evidenced by the original co-sponsors on your bill, Democratic Senators Breaux and Lincoln and Congressman Dooley, as well as Republican Senator Frist and House Majority Leader Armey. This impressive list shows the breadth of appeal of this idea.

In the House of Representatives, Mr. Armey and Democrat Pete Stark both have tax credit bills they are supporting. While their numbers and approaches are somewhat different, the concept is the same. These two call themselves “the congressional odd couple” because on virtually every other issue, they are miles apart. But on the idea of providing tax credits to help the uninsured obtain health insurance, they agree. Finally, tax credits for the uninsured are part of the health policy initiatives of both presidential candidates, Republican George W. Bush and Democrat Al Gore. I believe this shows what a revolutionary idea this is.

While all of these bills take different forms and have slightly different features and subsidy amounts, they all are built on the same solid foundation. Importantly, virtually all of the bills offer refundable tax credits, so if those who are eligible for the credit owe little or no income tax, they still can receive the subsidy, much like taxpayers who overpay their taxes get a refund check.

In this election year, health care is an especially polarizing issue. But because you and others have worked to hard to build bi-partisan support for the idea of tax credits for the uninsured, I believe this has the best chance of passing and therefore offers the greatest hope to the uninsured that meaningful help is on the way.

Millions of Americans are being left out of the current system. It is time to rectify this imbalance and, in the process, energize the market for privately-owned health insurance that people can choose for themselves, own, and control so they don’t lose their coverage if their job changes.

Thank you for the opportunity to present this testimony. I would be happy to provide additional information.

1 “A Vision for Consumer-Driven Health Care Reform,” Health Policy Consensus Group. For more information, contact the Galen Institute, coordinator, at

The tax code offers an exclusion from taxable income to those who get their health insurance at work. Employment-based health insurance is part of the compensation package that many employers, especially large, established companies, provide to their employees — a form of non-cash wage.

Section 106 of the Internal Revenue Code provides that the value of health benefits is not counted as part of the taxable income of employees — in tax terminology, it is excluded from their taxable income. However, workers may receive this tax-favored benefit only if health coverage is provided through an employer. The value of the health coverage, the tax benefit employees receive, and the cost in forgone wages are largely invisible to workers.

This tax exclusion is worth an estimated $125 billion in tax savings to those with job-based health insurance, significantly more than the value of the mortgage interest deduction.

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