Reforming the U.S. Health Care System

Policy Backgrounders | Health

No. 149
Monday, April 26, 1999
by John C. Goodman & Merrill Matthews

VIII. Solution To The Special Problems Of The Uninsured

"Because the tax credit is refundable, it would be available even to families that do not pay income taxes."

A. Solving The Cash Flow Problem For People Who Purchase Their Own Insurance

  1. A refundable tax credit for the purchase of health insurance previously in the tax code failed because it did not address the cash flow problems of low-income families; it forced these families to rely on their own resources to meet premium payments for the year and wait for reimbursement until the following April 15.
  2. As a result, the program did not make funds available for the purchase of insurance at the time the funds were needed.
  3. This plan solves the problem for individually purchased insurance by allowing people to assign their rights to the credit to an insurance company month-by-month.
  4. The procedure will be similar to the one currently used under which low-income families assign their right to collect the Earned Income Tax Credit (EITC) to a firm such as H&R Block in return for an immediate cash payment.
  5. In this way, individuals will be able to buy health insurance without reducing in their monthly income.
  6. This plan also will allow the health insurance tax credit to be combined with the Earned Income Tax Credit (EITC), so that families can afford a more generous package of benefits without lowering their monthly income.

"The temporarily uninsured could use their tax credit to obtain insurance for part of a year."

B. Solving The Cash Flow Problem For People Who Obtain Insurance Through An Employer

  1. Most people who are uninsured are working, and many have the opportunity to join an employer plan but decline to do so.
  2. One reason they decline is that they are required to pay a substantial part of the premium; some join themselves but do not insure their dependents.
  3. This plan solves the problem, using a procedure similar to the one described above.
  4. Currently, low-income employees who qualify for the EITC can file a form with their employer and receive their EITC "refunds" month by month.
  5. In a similar way, the health insurance tax credit can be accessed month by month and used to pay the employee's share of the premium.
  6. Thus low-income employees can insure themselves and their families with no reduction in take-home pay; where options exist, the employees can also combine the health insurance tax credit with their EITC refund to obtain more generous coverage -- again, with no reduction in take-home pay.
  7. Employers will not be required to opt into the tax credit system, but those who do will be able to offer their employees a more attractive compensation package and gain a competitive edge in the labor market.

C. Solving The Problems Of The Temporarily Uninsured

  1. Most people who are uninsured are temporarily uninsured -- usually for a period of less than one year.
  2. To meet the needs of these people, health reform must make a refundable health insurance tax credit flexible enough to fund health insurance coverage for part of a year.
  3. The techniques described above will allow low-income employees to pay premiums month by month, or even pay period by pay period.

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