Center for Studying Health System Change

Current Health Insurance Tax Credit Proposals Offer Little Help to Older, Sicker Americans

Tax Credits Would Help Many Younger, Healthier Americans Afford Individual Insurance

News Release
July 25, 2002

FURTHER INFORMATION, CONTACT:
Alwyn Cassil: (202) 264-3484

ASHINGTON, D.C.—Only about one in 100 uninsured people aged 55-64 in poor health would receive tax credits covering at least half of the estimated cost of an individual health insurance policy under leading congressional and White House proposals, according to a national study issued today by the Center for Studying Health System Change (HSC).

In contrast, about nine out of 10 uninsured people aged 19-29 in excellent health would receive tax credits covering at least half of the estimated cost of individual coverage, the study found, illustrating how the combined effects of age and health differences can create wide variations in the affordability of individual health insurance.

"While tax credits can clearly help make individual health insurance more affordable for many Americans, the study shows current tax-credit proposals will do little to bring the cost of insurance within the reach of the poorest, oldest or sickest uninsured Americans," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded exclusively by The Robert Wood Johnson Foundation.

"Tax credits can offer an effective public policy to extend coverage to uninsured Americans, but current proposals fall short in several ways," Ginsburg said. "Taking people’s age into account, providing larger tax credits to people in poverty and expanding high-risk pools for people with serious health problems are all ideas worth exploring and could make current tax-credit policies more effective."

The HSC study analyzed two leading tax-credit proposals—one by the Bush administration and the other a bipartisan Senate bill, known as the REACH Act—using data from HSC’s 1996-97 and 1998-99 Community Tracking Study Household Survey, a nationally representative survey involving about 60,000 people in 33,000 families. The study’s findings are detailed in a new HSC Issue Brief—Tax Credits and the Affordability of Individual Health Insurance.

Using sophisticated statistical modeling and premium information from almost 2,500 individual insurance policies, HSC Senior Fellow Jack Hadley, Ph.D., and Senior Researcher James D. Reschovsky, Ph.D., were able to estimate individual insurance premiums people would pay based on their age and health. Because people who buy individual insurance are in significantly better health than those who don’t, the study breaks new ground by predicting the premiums people using tax credits are likely to face in the marketplace.

"Current premiums of people already buying individual insurance are not good indicators of what insurance will cost people entering the market," Hadley said. "By adjusting estimated premiums to account for the differences in age and health between people already in the market and those who aren’t, we get a much better picture of the actual premiums people entering the individual market will face."

Researchers estimated overall individual premiums averaged $214 a month, or $2,568 annually in 2002. But estimated premiums varied dramatically when people’s age and health were taken into account. For example, premiums for 18- to-29-year-olds in excellent health averaged $121 a month, or $1,452 a year, while premiums for 55- to 64-year-olds in poor health averaged $273 a month, or $3,276 a year.

In 2000-01, slightly more than 30 million Americans under age 65 were uninsured and did not have access to employer-sponsored insurance. About 10.3 million Americans, or 5 percent of the nonelderly population, already have individual insurance.

Although many factors influence consumers’ decision to buy health insurance, one of the main reasons consumers don’t buy individual insurance is affordability, or how the cost of insurance compares to family income. But affordability varies a great deal even for people with similar incomes because the cost of individual insurance varies with the person’s age, health and other factors.

HSC researchers defined affordability along a range, with individual insurance costing less than 8 percent of family income considered affordable; premiums between 8 percent and 16 percent of income somewhat affordable; and premiums of more than 16 percent of income least affordable.

The study estimated 25.2 million people without access to employer-sponsored or covered by public insurance would be eligible for a tax credit under the Bush proposal, which provides a $1,000 credit for individuals with incomes under $15,000 and phases down to zero for people with incomes of $30,000. Families would receive $1,000 per adult and $500 per child, up to a maximum of $3,000 for families with incomes up to $25,000, while families earning $60,000 or more would be ineligible.

An estimated 28.6 million people would be eligible for tax credits under the bipartisan Senate proposal, known at the Relief, Equity, Access and Coverage for Health Act of 2001, or REACH. The REACH proposal would give tax credits of up to $1,000 for individuals with incomes below $35,000 and $2,500 for families earning less than $55,000. The tax-credit amount would decline as income increases with an income cap of $45,000 for individuals and $65,000 for families.

About 80 percent of people eligible for a credit under either plan are uninsured, with the remaining 20 percent already having individual coverage.

Under the REACH proposal, 58 percent of uninsured people presumed eligible for the credit would receive credits covering at least half of the cost of individual insurance, compared with 31 percent of uninsured people under the Bush proposal.

But the study found wide variations in affordability under both proposals. For example, even under the more generous REACH proposal:

• Less than a quarter of people with incomes below the federal poverty level, or $8,590 for a single person in 2001, would spend less than 8 percent of family income to buy coverage with a tax credit, compared with about two-thirds of those with family incomes above poverty.
• Sixty percent of people in poor health would have to pay more than 16 percent of their income for coverage, compared with 12 percent of people in excellent health.
• Ninety-one percent of people aged 19-29 in excellent health would receive credits covering at least half of the cost of insurance, and 76 percent would have post-credit premiums of less than 8 percent of income.
• One-third of people aged 55-64 in excellent health would receive a credit covering at least half of the cost of insurance, but only 10 percent in fair health would receive similar assistance.
• Half of people aged 55-64 in fair health and 69 percent in poor health would need to spend more than 16 percent of their income to buy insurance.

Detailed tables analyzing both tax-credit proposals are available here on the HSC Web site.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded exclusively by The Robert Wood Johnson Foundation and affiliated with Mathematica Policy Research, Inc.