Senate Committee on Health, Education, Labor,


Senate Committee on Health, Education, Labor,
and Pensions

Hearing on Health Care Coverage: 45 Million Uninsured and Counting

October 4, 2000

Written responses for the record from Grace-Marie Arnett

  1. Question: In your book and testimony, you talk about the ?Galen gap? people as those who earn too much to quality for public assistance but often too little to afford coverage on their own. However, in some States, single persons without children earning well below the poverty level may still not qualify for Medicaid. Will a tax credit of $1,000 or $2,000 really do anything to help these people, or does it make more sense to let them qualify for Medicaid coverage?

    This is an important question because you address one of the most vulnerable of the uninsured population – those whose incomes are at minimum wage levels or slightly above but who do not qualify for public assistance programs. Under most of the proposals to provide tax credits for the uninsured, the tax credit would be refundable. That means those eligible would actually get a refund from the federal government for the difference between the value of the credit for which they are eligible and the amount of income taxes they owe.

    In some states, like California, this may be enough to obtain a basic health insurance policy. But in other states, it would not. Supplementary payments may be necessary to assist very low-income persons in obtaining coverage. States could provide refundable state tax credits or other supplementary payments allocated through existing safety-net programs.

    States could also relax health insurance regulations and mandates for those eligible for tax credits. Numerous studies have shown that these regulations and mandates drive up the costs of health insurance and put it out of the reach of those who can least afford to pay higher prices. More affordable policies would become available if insurers were free to write policies that were not so encumbered by mandates.

    You asked whether low-income uninsured should instead be added to Medicaid instead of being offered tax credits. I believe they deserve a better option than Medicaid. In theory, Medicaid is a comprehensive benefit program, but the theory crumbles as Medicaid-eligible people try to access coverage. Too often, Medicaid pays so little that doctors cannot afford to see patients in their offices, and Medicaid recipients wind up instead waiting in long lines in hospital emergency rooms. Medicaid is an overly bureaucratic, excessively regulated program that desperately needs modernization. Most of the uninsured are working or are dependents of those who are working, and they do not want to be on public assistance programs. They deserve access to the dignity of private health insurance. Refundable tax credits would give them this option.

  2. Of the following options, which do you think is the best approach for targeting a tax credit and why?
    Targeting the credit to small businesses; or
    Targeting the credit to workers whose employer offers coverage, but the worker declines it because the premium contribution is unaffordable; or
    Targeting the credit to individuals who do not have access to employer-sponsored or subsidized coverage at all.

    Mr. Chairman, there is a great deal of debate in the policy community over how to target tax credits to the uninsured. While some believe that it should be targeted to small business, this increasingly is seen as the least attractive option. It perpetuates many of the problems of job-based insurance: Workers will still lose their health insurance if they lose their jobs, and the uninsured are the most mobile of a very mobile American workforce. Tying tax credits to the jobs only exacerbates the problems of portability of health insurance.

    In addition, giving the tax credit to businesses perpetuates another of the problems with the current employment-based health insurance system – the invisibility of cost. When employers purchase health insurance, the full cost of the policy is invisible to the workers for whom it is purchased. As a result, workers demand more coverage and get angry at limitations and restrictions. Giving the tax credit directly to individuals would make both the subsidy and the cost of the policy visible to the person using the insurance, giving them an incentive to shop more wisely and understand the trade-offs between cost and services.

    Certainly, the credit should first be targeted to those who do not have access to employer-sponsored or subsidized coverage. But I also believe that consideration should be given to allowing those who have access to job-based coverage to use the credit to obtain health insurance as well.

    Take the example of two mechanics working at an automotive garage, doing exactly the same job at the same wage. Let?s say one of the garage owners does not offer health insurance. The other does, but the mechanic can?t afford his share of the premiums. It would be highly inequitable and unfair to give the credit to one of these workers and not to the other simply on the basis of which garage they work for. In addition, Congress would set up an incentive for the garage owners who DOES offer health insurance to drop it so his employees could qualify for the tax credit. Any incentive structure that encourages anyone to drop health insurance moves in the wrong direction.

    While there are policy issues that must be addressed in implementing a tax credit, I believe that fairness requires that the credit be available to people in certain situations and income categories, which Congress would determine, regardless of whether their employer currently offers coverage.

  3. The cost and availability of non-group health coverage varies widely between States. What can we do to empower the individual consumer and ensure that all people are well-informed about their coverage options? And, how can we increase the consumer?s power to negotiate with the insurance companies and HMO?s?

    I would like to answer the second part of the question first. Mr. Chairman, I believe that if Congress were to provide tax credits to the uninsured for the purchase of private health insurance, that changes also are necessary in the marketplace to provide viable options.

    Job-based insurance is not an option for most of the uninsured, and they need other vehicles through which they could purchase coverage. Many organizations would like to provide coverage for members, such as churches, professional and trade associations, and labor unions. Enactment of legislation to provide for Association Health Plans or HealthMarts would dramatically improve their ability to offer this coverage. These groups would then negotiate on behalf of their members with insurance companies and HMOs.

    And to answer the second part of your question, these groups would then have an incentive to inform their members about the availability of the tax credit and market the insurance products they are offering. Catholic and Baptist churches, labor unions, the National Federation of Independent Business and the Chamber of Commerce would be among those who would likely offer health insurance if tax credits were enacted and coupled with the market reforms I described above.

  4. How does the cost of insurance versus the current tax policy affect small business owners and their ability to provide health coverage? Don?t small employers and their employees get the same tax benefits as large firms? If so, do you think most smaller employers are aware of these tax benefits?

    Small business owners confront a number of challenges in offering health insurance. First, they are often too small to self-insure and thereby use the ERISA clause to escape the mandates and regulations that many states have too zealously enacted. This means businesses must either pay for the higher-cost insurance or not provide insurance at all for their workers. Second, small businesses seldom have large human resource departments that can explore options for health insurance coverage and manage the contracts. To use my earlier example, they are in the business of fixing cars, not searching for health insurance. And finally, tax law makes it more financially attractive for larger, more affluent companies to provide health insurance than smaller, more marginal firms.

    In addition, the panoply of regulations, mandates, and cumbersome bureaucracy frustrates small business and falls hardest on them. Every year, the National Federation of Independent Business asks its members their number one concern. Year after year after year, health insurance tops the list. This problem will not be solved until policies that discriminate against and frustrate small businesses are changed.

    By providing tax credits to the uninsured, you would help lift this burden by giving both small employers and individual employees more options of where to obtain health insurance other than through the workplace. This would provide health insurance to millions more Americans, provide incentives for the marketplace to respond with more affordable products, and give people the option of health insurance that they can keep as they change jobs, start new businesses of their own, or leave the workforce to return to school.

    Thank you for the opportunity to respond to these inquiries. Please let me know if there is further information I can provide.

For more information, contact Grace-Marie Arnett, Galen Institute, Alexandria, VA, (703) 299-8900. Fax (703) 299-0721. E-mail

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