How Tax Subsidies Cause Many Americans to be Uninsured

Excerpted From: Briefing Book on Health Care

January 9, 1995
W2

How Tax Subsidies Cause Many Americans to be Uninsured

The federal government currently "spends" about $84 billion subsidizing private health insurance through the tax system. These tax subsidies are very costly to government and very valuable to the people who receive them. Ostensibly, they exist in order to encourage private health insurance coverage. However, they probably do more harm than good for four reasons.

"High-income families get almost six times as much help from government as low-income families."

First, the largest subsidies go to those who need them least - people who probably would purchase health insurance without any tax encouragement. Second, current tax law penalizes people who purchase their own health insurance - encouraging them to postpone becoming insured until they can do so through an employer. Third, tax law encourages an employer-based system under which people who switch jobs can lose their coverage " and become uninsurable " after they get sick. Finally, the current system shelters the largest employers while leaving individuals and small businesses vulnerable to the cost-increasing effects of state regulations.

"People who purchase their own health insurance pay up to twice as much because of federal tax law."

Subsidizing the Rich.

The ability to exclude employer-provided health insurance from taxable wages is more valuable to employees in higher tax brackets. And by restricting this tax subsidy to employer-provided insurance, the law favors people who work for larger firms. The result is a highly regressive tax subsidy. As Figure I shows:

Families in the bottom fifth of the income distribution get an average benefit of $270 a year from federal tax subsidies for health insurance.
Families in the highest fifth get an average annual benefit of $1,560.
Thus the tax law benefits high-income families almost six times more than low-income families.

Penalizing the Nonrich.

Under the current system, well-paid employees in the auto industry have some of the most lavish health insurance plans in the world - with government footing as much as half of the bill. At the same time, the self-employed, the unemployed and employees of small companies that do not provide health insurance must pay taxes first and buy health insurance with what's left over. As Figure II shows, paying with aftertax dollars can make health insurance twice as expensive. Small wonder that almost 90 percent of nonelderly people who have health insurance are insured through an employer - and that 81 percent of uninsured workers are self-employed, unemployed or working for small companies!

Encouraging Employer-Based Insurance.

The kind of health insurance most of us have is determined by what the federal tax law subsidizes. This has led to an employer-based system under which people eventually lose their health insurance when they switch jobs. If they are already sick when they lose their coverage, they may be deemed uninsurable.

Subjecting Marginal Buyers to State Regulations.

Contrary to a widespread impression, most of the uninsured are healthy, not sick. Sixty percent of them are under age 30 - in the healthiest age groups. Since they have below-average incomes and few assets, they tend to be very sensitive to premium prices. Moreover, the primary reason why most of them lack health coverage is that they have judged the price too high relative to the benefits.

One way in which state governments have contributed to the number of uninsured is through mandated health insurance benefit laws. These laws tell insurers what services and providers they must cover if they issue policies within a state. The mandates cover health conditions ranging from mental illness to alcoholism and drug abuse. They cover services ranging from acupuncture to in vitro fertilization. They cover everything from the serious to the trivial: heart transplants in Georgia, liver transplants in Illinois, hairpieces in Minnesota, marriage counseling in California, pastoral counseling in Vermont and sperm bank deposits in Massachusetts.

"As many as one of every four people with no health insurance has been priced out of the market by state-mandated benefits."

Currently, there are 240 health-related occupations. Lobbyists representing these groups descend on state legislatures each year to demand still more special-interest legislation. Their efforts are having an effect. By one estimate:

As many as one out of every four people who lack health insurance has been priced out of the market by the cost-increasing effects of state-mandated benefits.
Thus state regulations are directly responsible for as many as 9 million people being uninsured.

State mandates have forced many workers either to purchase a plan bloated with extra benefits or to remain uninsured. As a result, about 40 percent of all group coverage self-insures, under a provision in the Employee Retirement Income Security Act (ERISA). By self-insuring under federal law, larger companies can escape these costly state regulations.

"State mandates force people to buy a cadillac plan, bloated with extra benefits, or remain uninsured."

State regulations also penalize potential health insurance buyers in other ways. In some states, community rating requirements force insurers to overcharge healthy people in order to artificially lower the price for sick people. In other states, anti-managed care laws prevent third-party payers from holding down costs. Among laws currently on the books, one in Indiana requires that preferred provider organizations (PPOs) accept any physician willing to join. Thus Indiana Bell's PPO includes every physician in the state. Montana and Oklahoma have adopted similar measures. Texas and other states restrict the discount that insurers can give to patients who choose PPO doctors.

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Excerpted From: Briefing Book on Health Care