Journal Issue: The Next Generation of Antipoverty Policies Volume 17 Number 2 Fall 2007
Goals of an Antipoverty Health Plan
In this article I set forth a proposal to meet the health care needs of low-income families. In view of the dozens of health care reform proposals already in circulation, some readers may wonder what yet another proposal can contribute. My aim is to place health reforms in the context of broader antipoverty policies, thus raising a somewhat different set of questions and considerations than those typically at the center of health policy discussions.
When putting together a reform proposal, health policy analysts generally begin with the goal of extending health insurance coverage to new populations or making health insurance coverage universal. They then impose a set of values related to issues such as patient choice or the role of government, along with assumptions (drawing on the available data) about such matters as the effects of regulations or financial incentives on individual and organizational behavior. The result is a proposal that meets health care–related objectives while adhering to certain values.
My proposal begins with a purely financial goal: to ensure access to health care services and provide financial protection to lowincome families so they can work and devote their energies to the other tasks necessary for them to improve their financial and overall well-being. My proposal explicitly avoids (to the extent possible) some of the larger philosophical or ideological concerns that dominate health policy debates—taking as a given that Americans are closely divided on matters such as the appropriate role of government. Put differently, my proposal is by design politically incremental. It seeks to build on existing public and private coverage, not replace one with the other or fundamentally alter the nature of either.
What do low-income families need from health policy? At the most basic level they need affordable insurance that provides meaningful access to necessary health care services and financial protection against the burdens of illness and injury. But for health policy to meet a broader range of needs for low-income families, it must meet an additional challenge, one that generally receives less attention in policy discussions. Families need an effective range and ladder of options that meet changes in their circumstances without substantial disruption and without creating perverse financial incentives. For example, a young woman may be covered under her parents’ insurance policy, lose that coverage on her nineteenth birthday, go to work for a small firm that does not offer coverage, become eligible for Medicaid when she becomes pregnant, and then lose coverage after the child is born. An effective health policy would bridge these gaps in coverage, providing continuity for the young woman without creating disincentives to work.
Current Policy Fails Working Families
High cost is the primary reason that health insurance is out of reach for so many working families. Yet many other aspects of the health care system also make getting and keeping coverage difficult.
Most Americans get health insurance through the workplace. Although employersponsored insurance (ESI) is more widely available at higher income levels, it plays a major role throughout the income spectrum. Eighty-six percent of nonelderly people with incomes four times the poverty level or higher have ESI, but even 39 percent of people with incomes between 100 and 200 percent of poverty do also.16
Employers have complete discretion over whether to offer coverage, how much to subsidize the coverage, and the terms of that coverage.17 Under federal law, states may not require employers to provide coverage.18 Employer decisions vary by firm size, sector, average employee wage, and region of the country. Smaller firms are more likely to offer less generous policies that place a heavier financial burden on employees.
One-third of young adults aged eighteen to twenty-four are uninsured.19 Among the next older group, adults aged twenty-five to thirtyfour, 27 percent are uninsured.20 Young families have relatively low incomes, which means they are less likely to have health insurance through their job. In the eighteen to twentyfour age group, only 47 percent have workbased insurance; the figure falls to 42 percent for those with only a high school diploma.21
Employer-sponsored insurance has become less prevalent over time. Employers gain tax advantages, as well as competitive advantages when hiring, if they provide health insurance coverage. But for many employers, especially smaller firms, these advantages are not enough to offset the cost of providing coverage. Data from 2005 show that although 98 percent of firms with 200 or more employees offer health insurance, only 59 percent of firms with 3 to 199 employees offer coverage— down from 68 percent in 2000.22 The share of all workers in small firms who get insurance through their job fell from 57 percent to 50 percent between 2000 and 2005.23 Thus any effort to fill in the gaps in employer- sponsored insurance must fight a strong tide.
Federal tax policy also works against lowincome families. Workplace-based health insurance benefits are tax-exempt for the employer and the employee. The relatively low marginal tax rates for lower-wage workers mean that they receive smaller federal subsidies than higher-wage workers, even when their insurance benefits are identical. One study estimates that the tax benefits associated with employer-sponsored insurance, which totaled more than $188 billion in 2004, were heavily weighted toward the more affluent. Workers with family incomes greater than $100,000—14 percent of the population— received 26.7 percent of the benefit, while those with incomes less than $50,000— 57.5 percent of the population—received only 28.4 percent.24
Although Medicaid and the State Children’s Health Insurance Program (SCHIP) covered 46.5 million people in June of 2005, coverage varies substantially across states and by family structure.25 Eligibility for public insurance is often on an individual basis—and extends much farther up the income scale for children than for adults. Through a combination of Medicaid and SCHIP, most states cover all children in families with income up to 200 percent of the federal poverty level; eight states do not extend eligibility that high and thirteen go higher. Eligibility for parents is quite variable, with many states capping eligibility at a small fraction of the poverty level, although some cover parents with incomes as high as two or three times the poverty level. States cannot cover adults without children (unless they are disabled) through Medicaid at all without a waiver; only a few states have gotten such waivers, and they rarely cover adults with incomes above the poverty line.
By contrast, private employer-sponsored health plans are sold to subscribers—that is, to employees. Subscribers can then choose to cover their dependents (a spouse and children), but the dependents cannot get coverage through the workplace without the subscriber. It is possible for the children in a family to be covered by Medicaid or SCHIP and the working adult to have a substantial employer-provided subsidy for coverage and therefore be able to buy insurance for one, but if family coverage is out of reach, the spouse may be uninsured. Many other combinations of public, private, and uninsured status within a family are possible.
This complex, patchwork system not only leaves many working families without health insurance, it also creates perverse incentives as families are forced to trade off decisions that might improve their earnings against decisions that will allow them to keep their insurance. Medicaid offers the most dramatic example. Every state has a family income eligibility threshold for Medicaid. A person whose income exceeds that standard loses Medicaid coverage but is still likely to be in an income range where employer-sponsored insurance is only occasionally available. With a family insurance policy costing in excess of $10,000, the effective tax on the earnings that exceed the threshold is tremendous. The need to pay such a price for the increased earnings can serve as a strong work disincentive, or at best a severe penalty for advancing in a career.
State and federal policy reduce the size of the penalty in four ways. First, federal law provides for transitional Medicaid, which extends benefits for six or twelve months, depending upon the circumstances, when a person’s income rises above the Medicaid eligibility threshold. But this benefit, which is underutilized, merely delays the penalty and does nothing to smooth the transition to private coverage. Second, federal law gives states the option of developing “medically needy” programs that allow people with incomes above the Medicaid threshold who incur substantial health costs to become eligible for assistance after they have “spent down” their excess resources. As of 2003, thirty-six states had elected this option. But although spend-down programs benefit those with substantial health costs, they do nothing to help low-income workers afford insurance coverage. Third, federal law and state choices have combined to increase the family income threshold for children’s eligibility for public insurance beyond that for their parents. Thus, as a parent’s income increases, the parent may lose coverage while the child retains it. Providing insurance for children reduces the effective marginal tax rate, but also means that families have some uninsured members and does little to facilitate a transition to private coverage.26
Finally, more than a dozen states have adopted “premium assistance” programs in their Medicaid or SCHIP programs, or both, to cover the employee’s share of the cost of an employer-sponsored plan. Despite great effort on the part of many states, most of these programs are quite small, and a variety of barriers impede their success. The most difficult to overcome are the limited availability of employer-sponsored insurance among the lower-income population, the challenges of engaging the small-business community in delivering a public benefit, and the need to ensure that participants in the premium assistance program have adequate coverage through a combination of their employer- sponsored insurance and any available wraparound services the state may need to provide. Although premium assistance programs provide a valuable benefit to participants, families still face a large financial burden once they lose their Medicaid or SCHIP eligibility and must pay their share of premium costs on their own.
The Advantages of Universal Coverage
Health policy analysts gravitate toward universal coverage strategies when describing reforms to the health care system. Leading policy analysts on both the right and the left of the political spectrum have developed coherent, rational universal coverage proposals that essentially scrap the current patchwork of coverage and replace it with something universal that fits with their values and views of the appropriate roles of government and individuals.27
Universal coverage plans can readily meet the various needs of low-income families. They ensure coverage for all, rely on financing systems that are equitable, and eliminate eligibility threshold penalties and perverse incentives. Indeed, many universal coverage proposals achieve their goals at a substantially lower “per person newly covered” cost than incremental expansions can.
Despite the advantages of universal coverage, however, the current political environment is more hospitable to incremental coverage expansions. After all, the corollary to designing a rational system is the need to unravel the many irrational aspects of the current system which, despite its many flaws, meets the needs of many Americans and serves as an engine for economic growth and profits. Doing so would arouse substantial resistance from those who are happy with the current system. Although my proposal is not as ambitious as some would prefer, it is designed to meet the key objective of improving access to health care for low-income Americans.
Requirements for an Incremental Expansion
For an incremental program to meet the needs of low-income families it must address three core problems in the current system: transitions, disincentives to work, and the lack of horizontal equity—that is, similar treatment of all people who are similarly situated.
A reformed system must allow for smooth transitions, particularly from public to private coverage as a person’s earnings and job quality improve. Public programs ensure comprehensive benefits with very limited cost sharing. When they charge premiums, these are the same regardless of the health status of enrollees. Public programs have public oversight and consumer protection to a degree not generally found in private health insurance. Private coverage provides a range of choices and opportunities for innovation. The higher provider payment rates that prevail in private insurance yield a broader range of networks and sites of care. The terms of coverage, however, are quite variable, and individuals or small firms may face high premiums because of age or poor health. The challenge for public policy is to bridge the gaps between these systems.
An effective policy must also minimize disincentives to work. Public subsidies for health insurance coverage, however, necessarily pose a substantial risk of such disincentives. In 2005 a typical health plan for a single employee cost $4,025, and family coverage ran $10,880.28 If, for example, a reform proposal posits that a family should pay no more than 10 percent of its income for health insurance, then even a family earning $100,000 would require a subsidy to purchase family coverage. Subsidies reaching that income level are hard to imagine. A more realistic upper bound for receiving a subsidy is median family income, which was about $56,200 in 2005.29
Meanwhile, most health reform proposals start with the premise that people with income below poverty cannot afford to contribute at all to the cost of their coverage. If a benefit worth $10,000 is provided at no cost to a family with $20,000 annual income and is phased out completely at around $60,000 family income, the effective marginal tax rate associated with the phase-out is quite steep, at 25 percent ($10,000 Ã· [$60,000 – $20,000]). This high effective tax rate is particularly worrisome when viewed in conjunction with the effects of the phasing out of other benefits. In an effort to “make work pay,” policymakers in 1996 combined welfare reform with a series of work supports that supplement wages when parents first go to work, but phase out slightly farther up the income scale.30 If health benefits are phased out in the same range as the work supports—income supplements, child care subsidies, and housing subsidies—are also phasing out, the financial benefit of additional work can become quite limited. Work disincentives cannot be eliminated in a targeted program, but they should be kept as small as possible.
Finally, an effective policy for low-income families must stress horizontal equity over target efficiency.31 Although 33 percent of nonelderly people with family incomes below twice the poverty level are uninsured, 26 percent of people in that category have private coverage through their work.32 A targeted program would deliver subsidies only to those who “need” them—the uninsured— while doing nothing for the 26 percent who are struggling to afford their share of the premium or who have taken lower-paying jobs to obtain a health benefit. Penalizing people who do the “right thing” violates fundamental notions of fairness. Indeed, the imposition of such penalties by the now-defunct Aid to Families with Dependent Children program led to the view that it was flawed and needed to be replaced through welfare reform. One recent analysis concluded that, ironically, steps designed to limit SCHIP coverage to those without access to employer-sponsored coverage block enrollment more among people without access to such coverage than among those with it.33 Ensuring horizontal equity, however, would put a higher price tag on the proposal. Politics might dictate a less expensive program, in which case some horizontal equity may be lost. But although such a program might be easier to enact, it would be harder to sustain.