Journal Issue: The Next Generation of Antipoverty Policies Volume 17 Number 2 Fall 2007
A Proposal for Improving Access to Health Care
Low-income families would benefit from a higher, federally defined floor of public coverage through Medicaid and SCHIP and a new federal earned income health credit that could be applied to the cost of coverage provided either by their state or by their employer. This combination of policies would help low-income families afford coverage while meeting the three goals of facilitating transitions across types of coverage, minimizing work disincentives, and providing equitable benefits to people who are similarly situated.
The proposal would first expand Medicaid eligibility to all people with family income below the federal poverty level and, through a combination of Medicaid and SCHIP, to all children with family income below twice the poverty level. The expansion for children would be modest—all but eight states already cover children up to or exceeding this level. The expansion for adults would be substantial. Only fourteen states and the District of Columbia cover parents living in poverty, and adults without children living with them are rarely eligible for Medicaid.34 As is now the case with Medicaid, states would have the option of extending coverage farther up the income scale. The goal is not to make the Medicaid and SCHIP programs uniform across the country, but to create a clearly defined floor on which other sources of coverage can build.
The proposal would also create a new earned income health credit (EIHC) modeled on the well-regarded earned income tax credit (EITC).35 The EIHC would be a refundable tax credit claimed each year on the federal tax return but, like the EITC, would be made available during the year in advance. The credit would be based on taxpayer earnings and family structure and would phase in as earnings increase, reach a plateau, and then phase out farther up the income scale. The credit would be larger for families with dependents, reflecting the higher cost of family coverage.
The EIHC could be used in either of two distinct ways. When applied to a state-sponsored plan, it would reduce the premium that the state would otherwise bill the participant for providing coverage. When applied to an employer- sponsored plan, it would reduce the contribution the employee would otherwise have to make to participate in the employer’s plan. The amount of the credit and the mechanism for obtaining it would differ, depending on the source of the coverage. The EIHC would not be available to people who purchase insurance in the individual or nongroup market.
How the EIHC Would Work with the State Plan
All states would be required to design and implement a mechanism that enables anyone who receives the EIHC to purchase health insurance. States could meet this requirement in a variety of ways. They could open up their existing Medicaid or SCHIP programs, or both, to this new population. They could anchor the program to other groups, such as state employees. Or they could develop new entities, like the Massachusetts Connector, which was created as part of that state’s recent health reforms to make subsidized insurance available to the low- and moderate-income population.36 Whatever approach they choose, based on current practices, states are likely to contract with one or more private health insurance plans to provide the insurance. That is, the “state” insurance would generally be delivered through one or more private health plans.
Some states might develop an insurance product and make it available only to the target population of EIHC recipients. Other states might incorporate this effort into a larger initiative that markets products to small businesses or individuals whose incomes exceed the EIHC eligibility threshold. States could even consider supplementing the value of the federal EIHC with state funds to help targeted populations afford better coverage than they might otherwise be able to get.
The state insurance product would have to be community rated and guaranteed issue. That is, the price the enrollee is charged could vary by family size but not by age or health status, and no eligible applicant could be denied coverage. These requirements are essential to ensure that EIHC recipients get coverage, because the EIHC would not be any larger for older or sicker people than for those who are younger and healthy. Absent this requirement, people could find themselves with a subsidy that was too small to allow them to afford a suitable plan. In the extreme, some people with health conditions might not be able to find an insurance company that would sell them a plan at all.
The community-rating requirement adds a layer of complexity to the proposal. There is a significant risk that this new program would suffer from adverse selection—that is, it would attract those who could not get coverage elsewhere or who could get it elsewhere only at a high cost. Meanwhile, healthier, lower-cost populations would stay in the private market, where they could find lower prices. This risk has been discussed elsewhere in greater detail than is possible here.37 In brief, the state plan is at greater risk if its rating rules differ from those in the market as a whole, if the subsidies are small, and if the program is less attractive in other respects than the broader market. These circumstances will vary from state to state. A few states already have tight rating rules similar to those that would exist for the new state product; most do not.
Ultimately, states would likely have five options to address concerns about adverse selection. First, they could examine their existing rules in the private market and bring them closer to community rating. Second, they could establish (or expand existing) high-risk pools or reinsurance mechanisms to try to segregate higher-risk populations from all markets into a separate, subsidized pool, thereby reducing the risk and burden in the state plan. Third, they could expand subsidies using state funds to reduce the potential for adverse selection. Fourth, they could open the state plan to a much larger share of the market, thereby diluting the effect of highrisk enrollees. Fifth, they could accept a certain amount of adverse selection and fund the excess risk from other resources.
How the EIHC Would Work with Employer Coverage
The EIHC would be designed to function seamlessly with the employee payroll withholding system. Employees would determine their expected credit by completing the appropriate forms. Employers would subtract the amount of the credit from the amount they withhold from each employee’s paycheck and remit to the federal government as taxes. The employer would bundle the credit with employer and employee contributions in a single payment to the health plan that provides insurance to the firm’s employees. This process is described more fully in two reports that have examined the implementation of a tax credit that supports employer-sponsored insurance.38
Beneficiaries of the federal earned income tax credit can receive the credit in advance during the year through a similar payroll credit, though less than 1 percent of those eligible take advantage of this option.39 Ensuring that EIHC beneficiaries use the advance option will require full integration of the EIHC with not only the employer’s withholding system but also the employer’s open enrollment and plan selection processes. The idea is to make applying for the EIHC, calculating the credit, and participating in an employer- sponsored plan a single event.
As with the EITC, the ultimate value of the EIHC will have to be calculated on the yearend tax return. If applicants claim a larger credit during the year than they are actually owed, they will have to pay the excess back to the Internal Revenue Service when they file their tax returns. Some proponents of health insurance tax credits have suggested dropping the reconciliation aspect entirely, so as not to discourage participation. Such a step, however, might undermine the integrity of the overall approach. It would be preferable to make it very unlikely that people who accurately report their income will owe money. One option would be to calculate the credit based on monthly income and health insurance participation. If employees were able easily and quickly to report status changes, such as family size or composition, the value of the credit could be adjusted automatically and immediately to reflect the change.
How the Value of the EIHC Would Be Established
Each tax filing unit would have two EIHC values: the maximum credit available and the credit it actually receives.40 The maximum available credit would be calculated individually for each member of the tax filing unit and then summed to create a total value for the family. The EIHC would be available only to taxpayers who paid out of their own resources for a health insurance policy. All members of the tax filing unit would have to have coverage before the unit could claim the credit for anyone. A family whose children were eligible for and covered by Medicaid or SCHIP could claim the credit for the parents, but parents who did not secure coverage for their children would not be eligible for the credit at all. The EIHC value would be prorated on a monthly basis for those who had health insurance for a portion of the year.
The design and computation of the credit would be different for state-sponsored and employer-sponsored coverage. For state plans, the maximum and actual credits would be the same. The credit would be based on family income, with a design similar to that of the EITC. That is, the credit would phase in at 50 cents for each dollar of earned income, hit a plateau that would be sustained through the poverty level for adults and twice the poverty level for children, and then phase out to zero at three times the poverty level. The plateau would be set at 90 percent of the cost of a typical health plan, or roughly $3,600 for an adult.
The EIHC would reduce the price an enrollee pays for the public plan from its market value to a lower, subsidized level. The plan would have a very low net price for those who receive the maximum EIHC, gradually rising to the unsubsidized amount as family income increased.
For employer-sponsored coverage, the maximum credit should be lower because most employees already receive a subsidy from their employer. Subsidies of less than 50 percent for employee-only coverage are extremely rare (only 4 percent of workers in small firms have subsidy rates this low).41 Only 12 percent of all workers have family coverage subsidy rates lower than 50 percent, although the rate is 24 percent among workers in small firms.42 It seems reasonable to use 50 percent as the starting point for the public subsidy as it will capture the large majority of people, whether they need individual or family coverage. Thus the maximum credit for the EIHC in employer-provided coverage would plateau at 45 percent of the cost of coverage, to reflect a 90 percent public subsidy when the employee contribution is 50 percent.
The maximum EIHC value is shown in figure 1. Many employees receive subsidies from their employer of more than 50 percent, and almost one-quarter of workers contribute nothing toward the cost of employee-only insurance coverage.43 The maximum credit would thus exceed what these workers have to pay out of their own pocket for coverage. For reasons I discuss in more detail below, their EIHC would be calculated as follows. First, workers would receive the amount they contribute toward their coverage. In addition, one-sixth of the difference between their contribution and their maximum EIHC would be deposited on their behalf into a flexible spending account that could be applied toward the out-of-pocket costs the employee incurred during the year. The same amount would go to the employer as a credit against the cost of providing health insurance. Thus, the government would pay out a total of one-third of the amount by which the maximum credit exceeds the amount the worker has to pay.