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P E R S P E C T I V E : 
N O N G R O U P  M A R K E T 
W E B  E X C L U S I V E  

23 October 2002

Reducing Uninsurance Through The Nongroup Market:
Health Insurance Credits And Purchasing Groups

A combined approach, centered on the individual health insurance market,
that takes advantage of the strengths of the existing system.


by Mark McClellan and Katherine Baicker


ABSTRACT:

The president’s proposal to introduce tax credits for the purchase of health insurance will enable millions of Americans to purchase private health insurance, improving the functioning of private markets, empowering patients to make informed decisions, and increasing the use of high-value health care. Evidence points to the availability of comprehensive individual insurance for the young and the old, the sick and the healthy. There are a number of policies that would increase access to the nongroup market, none of which would adversely affect group markets. These policies together will ensure that all Americans have good, affordable health insurance choices available to them.

Almost forty million Americans are uninsured under current government policies. More than 80 percent of them are in families with at least one worker, and more than 60 percent have incomes above the federal poverty level (in 2002, $18,100 for a family of four in the continental United States).¹ Half are childless adults.² It will take a variety of approaches to ensure that this diverse group has access to affordable, high-quality care. Medicaid and State Children’s Health Insurance Program (SCHIP) expansions alone will not reach most childless adults and are especially impractical in light of state budget shortfalls. Efforts to make employer coverage more affordable will miss those who, like many part-time and seasonal workers, are not offered group insurance. Only by coupling policies to increase access to affordable coverage for those not eligible for Medicaid or employer-sponsored coverage with policies to improve and expand these group insurance options can we provide long-overdue relief to most uninsured Americans.

President George W. Bush’s proposal to introduce tax credits for the purchase of health insurance will enable millions of Americans to purchase private health insurance, increasing participation in and improving the functioning of private markets, empowering patients to make informed decisions, and increasing the use of high-value health care. In fact, the reauthorization of the Trade Adjustment Assistance program, passed by Congress with broad bipartisan support, includes health insurance tax credits that will help thousands of displaced workers and retirees who have lost their employer coverage to purchase comprehensive health insurance coverage starting next year.

Many of the objections to using health insurance tax credits stem from concern that the nongroup health insurance market will not provide good, affordable policies to a wide enough segment of the population. These objections are misguided: Evidence points to the availability of comprehensive individual insurance policies for the young and old, the sick and the healthy. For those who are truly “uninsurable” in the individual market, a number of policy options exist to increase their access to good insurance. Used in conjunction with a broadly available health insurance credit, these policies will ensure that all Americans have good, affordable health insurance choices available to them.

Effects Of A Health Insurance Tax Credit

The president’s proposed health insurance credit for the purchase of nongroup coverage would be available to anyone under age sixty-five without employer-sponsored or public coverage. Individuals would be eligible for a tax credit of up to $1,000, and families purchasing a family policy would be eligible for a credit of up to $3,000. The credit would be “refundable,” meaning that those owing no taxes could take advantage of it, and “advanceable,” meaning that people would have immediate access to the credit when they want to buy insurance, rather than having to wait until they file a tax return. The advance credit is based on income in the previous year, so people will not have to worry about having to return the credit if their incomes change over the course of the year. The maximum subsidy rate of 90 percent of premiums would phase out at higher incomes, beginning at $15,000 for single filers and $25,000 for others.³

One objection to such a credit is that too few people would use it. The first reason suggested is that the credit is too small, but data from several sources show that it would cover a substantial portion of the health insurance premiums that most people would face in the private individual insurance market. This is true both for healthy people and for those in less than perfect health. Based on data from the 1999 and 2000 National Health Interview Survey, the average price of an individual insurance policy for a single individual was $1,827, and the average premium for a family policy was $3,420. The average individual annual premium for a sample of eHealthInsurance policies was less than $1,500, with a typical deductible of $500 or less.⁴ Studies by the National Association of Health Underwriters and the Council for Affordable Health Insurance show that the majority of health insurance applicants, even those with chronic conditions, were able to obtain good, affordable policies.⁵

The second reason suggested is that even if the credit covers a substantial portion of premiums, the remaining portion would be big enough to discourage eligible people from using the credit. Several studies, however, suggest that this would not be the case and that millions of currently uninsured people would take advantage of the tax credit. Most people with limited incomes would receive a subsidy worth at least half of their health insurance costs. According to research by Mark Pauly and others, a subsidy of this size would enable the majority of them to buy insurance.⁶ The professional staff at the U.S. Department of the Treasury estimates that six million otherwise uninsured Americans would gain insurance using this proposed health insurance credit.⁷ Having these additional participants will, if anything, improve the functioning of individual markets by increasing pooling and by expanding the types of policies offered. Because people would have to pay at least some portion of their premiums, they would have an incentive to be well informed; this will lead to greater competition among insurers and the development of new products to attract this segment of the population.

Another objection is that too many people would use the credit in nongroup markets, undermining the functioning of employer coverage markets. Subsidizing the purchase of nongroup policies will level the playing field, as the purchase of insurance through employers is already subsidized through the tax code. Exempting employer contributions from taxation costs more than $100 billion annually in forgone tax revenue, with the biggest tax benefits going to those with high earnings.⁸ People who receive coverage through public programs receive federal or state assistance. Only people who purchase coverage in the individual market must do so with after-tax dollars and can deduct the costs only if their total medical expenses are more than 7.5 percent of their income. Treasury staff estimate that in addition to the six million previously uninsured people assisted by the tax credit proposal, nine million people who are buying individual insurance without any help would be eligible for the tax credit.⁹

Use of the health insurance tax credit would complement, not undermine, employer-sponsored group markets. Because the credit would be capped and would phase out with income, and thus would be less generous than the tax subsidy on a typical employer plan for all but the lowest-income workers, it would not substitute for highly subsidized employer-group coverage. Employers’ decisions about offering health insurance and the generosity of the insurance depend on the value of the tax subsidy to average or typical employees, not just low-income employees. We believe that most employers offering coverage would continue to do so, and low-income workers in these firms would continue to benefit from these generous contributions. According to Treasury staff estimates, only around 1 percent of those with employer coverage would switch out of it as a result of the credit.¹⁰ The proposed credit can be implemented with other steps to strengthen employer coverage, such as improved flexible spending arrangements, medical savings accounts, and association health plans.

Policies To Increase The Options Available For All Populations

The small fraction of potential users of the credit who could not get affordable individual insurance would be able to use the credit in high-risk pools or for policies issued by insurers of last resort. Thirty states have set up high-risk pools, which have greatly improved the functioning of health insurance markets for individuals and small groups, and federal policy can increase their availability.¹¹ These pools provide the opportunity for hard-to-insure people to purchase subsidized coverage in a special purchasing group, and they function best when they are broadly financed.

Other mechanisms available to support the functioning of nongroup markets, by allowing individuals or small groups to join together to purchase insurance, include voluntary purchasing groups, association health plans, and state-sponsored purchasing groups. These purchasing groups have the potential to achieve economies of scale and lower fixed costs in negotiating lower rates with participating insurers; they may be able to set up a competitive choice system that would otherwise be very difficult for individuals and small groups to manage.

Some private companies have set up voluntary programs for small agricultural groups, and many “affinity group” insurance plans (such as through alumni associations or professional groups) are available for individuals.¹² Although some of these groups have been unable to obtain health insurance premiums that were much better than those available from independent insurance brokers, others have attracted large enrollments while offering stable and competitive premiums and contain a representative mix of enrollees.¹³ Providing these groups the same exemptions from complex and variable state coverage mandates that are available to large employers while creating clear mechanisms to ensure solvency and broad membership will encourage their development and widespread availability. States also have considerable experience with competitive purchasing groups for their employees, as well as for their Medicaid and SCHIP plans in many cases. Thus, they may also be effective sponsors of individual purchasing groups. Other regulatory reforms can encourage the use of medical savings accounts and other innovative approaches to individual and small group insurance.

The president’s proposal allows use of the tax credit in some state-sponsored purchasing groups as well as in high-risk pools, and the federal government would pay a portion of the states’ administrative costs for states that choose to establish such pools. By supporting nongroup markets in this way, the proposed health insurance credit package would increase all Americans’ access to the efficient, comprehensive insurance that they need.

The authors thank Marit Rehavi for exceptional research assistance.

NOTES

1. Kaiser Commission on Medicaid and the Uninsured, Uninsured in America: A Chart Book(Washington: Henry J. Kaiser Family Foundation, May 2000).
2. Analysis of March 2000 Current Population Survey as reported in J. Lambrew, “Health Insurance: A Family Affair,” Briefing Note (New York: Commonwealth Fund, May 2001).
3. For details of proposal, see Council of Economic Advisers, “Health Insurance Credits,” 14 February 2002, www.whitehouse.gov/cea/HealthCredit_Feb02wp.pdf (5 August 2002); and Executive Office of the President, Economic Report of the President, February 2002, w3.access.gpo.gov/eop/ index.html (5 August 2002).
4. V. Patel, “Analysis of National Sales Data of Individual and Family Health Insurance,” June 2001, www.ehealthinsurance.com/ehealthinsurance/eHealth2.pdf (5 August 2002).
5. National Association of Health Underwriters, “Cost and Availability of Health Insurance for People with Chronic Health Conditions,” 2002, www.nahu.org/news/Kaiser-NAHU_Analysis.doc (5 August 2002); and Council for Affordable Health Insurance, “Real People, Real Coverage,” Issues and Answers, no. 103, May 2002,
www.cahi.org/Issues&Answers/RealPeopleRealCoverage.pdf (5 August 2002).
6. See, for example, M. Pauly, B. Herring, and D. Song, “Tax Credits, the Distribution of Subsidized Health Insurance Premiums, and the Uninsured,” NBER Working Paper no. 8457 (Cambridge, Mass.: National Bureau of Economic Research, 2001).
7. For details of the Treasury analysis of the tax credit, see the testimony of Mark Weinberger, assistant secretary of the treasury (joint statement with Mark McClellan), before the House Committee on Ways and Means, 13 February 2002, waysandmeans.house.gov/fullcomm/107cong/2-13-02/2-13wein.htm (5 August 2002).
8. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2003, Analytical Perspectives (Washington: US Government Printing Office, 2002), Table 6-1 .
9. See Weinberger testimony; and testimony of Mark McClellan before the Senate Health, Education, Labor, and Pensions Subcommittee on Public Health, 12 March 2002, labor.senate.gov/Hearings-2002/mar2002/031202wit/McClellan.pdf (5 August 2002).
10. Ibid.
11. L. Achman and D. Chollet, Insuring the Uninsurable: An Overview of State High-Risk Health Insurance Pools, Policy Brief no. 472 (New York: Commonwealth Fund, August 2001).
12. Agency for Healthcare Research and Quality, “Choosing and Using a Health Plan,” www.ahcpr.gov/consumer/hlthpln1.htm (25 September 2002).
13. M.A. Hall, E.K. Wicks, and J.S. Lawlor, “Healthmarts, HIPCs, MEWAs, and AHPs: A Guide for the Perplexed,” Health Affairs (Jan/Feb 2001): 142–153; and S.H. Long and M.S. Marquis, “Have Small-Group Health Insurance Purchasing Alliances Increased Coverage?” Health Affairs (Jan/ Feb 2001): 154–163.

Mark McClellan, a physician and economist, is a member of the Council of Economic Advisers in the Executive Office of the President, Washington D.C. His nomination as commissioner of the U.S. Food and Drug Administration was recently confirmed by Congress. Katherine Baicker is an assistant professor of economics at Dartmouth College in Hanover, New Hampshire.

©2002 Project HOPE–The People-to-People Health Foundation, Inc.