October 6, 1999
Tax Provisions in "Quality Care for the Uninsured Act"
Largely Benefit High-Income Taxpayers
And Do Not Help Most Uninsured
by Iris J. Lav
When it takes up managed care legislation this week, the House of Representatives is expected to consider a bill that claims to help the nation's uninsured families gain access to health care H.R. 2990, sponsored by Reps. Jim Talent and John Shaddeg. Examination of this bill, however, indicates it would do little to reduce the ranks of the uninsured but would provide a new set of expensive tax breaks that would overwhelmingly benefit higher-income taxpayers who already enjoy adequate health insurance.
Furthermore, the bill's Medical Savings Accounts provisions would risk making insurance more expensive for less healthy individuals. As a consequence, it could result in some individuals who now have insurance becoming uninsured because they could no longer afford health insurance.
The cost of the bill is estimated at approximately $50 billion over the next 10 years. It would reach more than $11 billion a year when all of its provisions were fully in effect. This cost is not paid for; it is simply assumed to be covered by the non-Social Security surplus.
That surplus, however, has yet to materialize; projections of a sizeable non-Social Security surplus rest on the assumption that Congress will make substantial cuts in discretionary spending, an assumption that action on the current appropriations bills belies. Whether a non-Social Security surplus of any magnitude will materialize remains to be seen. Furthermore, this bill would make its inadequately designed and targeted tax cuts the first claim on such a surplus, ahead of needs in Social Security, Medicare, other emerging needs, and paying down more of the debt.
The bill would, among other provisions, create a new "above-the-line" deduction for health insurance premiums paid by individuals who purchase their own insurance. It also would allow a deduction for the full cost of premiums paid for long-term care insurance and provide families taking care of an elderly member an extra personal exemption. In addition, it would prematurely end the demonstration period established in the Health Insurance Portability and Accountability Act of 1996 to test the effects of Medical Savings Accounts; it would allow universal access to MSAs and remove a number of safeguards included in the MSA demonstration project currently underway. None of these provisions would or could do much to broaden coverage among the lower-income and less-healthy segments of the population that constitute the bulk of those who currently cannot afford or obtain coverage.
Health Insurance Deductions
The bill includes a new tax deduction for the purchase of health insurance by taxpayers who pay at least 50 percent of the cost of the premium. At first glance, this deduction may seem an attractive idea. Closer examination indicates, however, that this deduction which would cost upwards of $8 billion a year when fully in effect would provide little help to most of those lacking insurance and would not significantly reduce the ranks of the uninsured.
Census data show that at least 93 percent of uninsured individuals either pay no income tax or are in the 15 percent income tax bracket. For them, this deduction would do little or nothing to make insurance more affordable, since it would reduce the cost of insurance by no more than 15 percent. Those who would benefit most from such a deduction are, by and large, individuals in higher tax brackets who already purchase individual insurance.
- Some 18 million uninsured individuals 43 percent of all of the non-elderly uninsured owe no income tax; their earnings are too low for them to incur an income tax liability.(1) These uninsured individuals would receive no benefit from a tax deduction; a deduction would do nothing to make health insurance more affordable for them.
- Another 20 million uninsured individuals 50 percent of the non-elderly people without health insurance pay income tax at a 15 percent marginal tax rate. A deduction would provide these taxpayers with a subsidy equal to 15 percent of the cost of insurance not covered by an employer. For low- and moderate-income families and individuals without employer-sponsored coverage, a 15 percent subsidy that leaves them with the other 85 percent of the premium cost is much too small a subsidy to make insurance affordable.
For a family earning $35,000 whose employer does not offer insurance, the proposed deduction would reduce the out-of-pocket cost of a typical family health insurance policy that carries a $1,000 deductible from $6,700 to $5,860 or from 19 percent of income to 17 percent of income.(2) An Urban Institute study shows that more than three-quarters of low- and moderate-income uninsured individuals will not purchase insurance that consumes more than five percent of their income.(3) Few families that have forgone health coverage because they cannot afford to spend 19 percent of income on it would find coverage affordable because a deduction had lowered its cost to 17 percent of income. (By contrast, the child health block grant established in 1997 set a limit on the premiums and co-payments that can be charged under programs receiving block grant funds, with the limit being five percent of income for families above 150 percent of the poverty line and smaller amounts for poorer families.)
- This provision might be of modest help to some moderate-income families whose employer pays half or nearly half of the premium costs since the deduction would be in addition to the employer subsidy. But even families whose employers pay 50 percent of the premium would receive only very modest help from the deduction. The deduction would reduce the proportion of the premium these families have to pay only from 50 percent of the premium to 42.5 percent.
While that might help some families afford insurance, the number of such families likely would be small. Moreover, the deduction could induce some employers currently paying more than 50 percent of premium costs to scale back their contribution to 50 percent (or possibly less).
- The group that would appear to benefit most from this deduction would be higher-income taxpayers. A health insurance deduction is worth more than twice as much to affluent individuals in the 31 percent, 36 percent, and 39.6 percent brackets than to moderate- and middle-income families in the 15 percent bracket. Although few higher-income individuals and families are uninsured, a significant number do buy insurance on the individual market. Under this provision, these higher-income taxpayers could deduct the cost of the premiums they pay for health insurance coverage that they already have.
Long-term Care Insurance Deduction
The bill also would allow a new deduction for 100 percent of the premiums paid to purchase long-term care insurance. This provision would cost approximately $2 billion a year when fully in effect.
There are major problems relating to access to long-term care that need to be addressed. This proposal for a deduction for long-term care insurance premiums, however, would not help most middle-income people and could exacerbate the inequities in access and affordability that currently exist.
Three-quarters of all taxpayers most moderate- and middle-income taxpayers pay federal income taxes at no higher than the 15 percent marginal tax rate. For this three-quarters of all taxpayers, a deduction would provide at most a subsidy of 15 percent of the cost of purchasing long-term care insurance. Long-term care insurance premiums are relatively expensive, and a 15 percent subsidy is unlikely to make long-term care insurance fit into the budgets of many middle-income families.(4)
Here, too, the primary beneficiaries of the proposed deduction are likely to be higher-income taxpayers who currently carry long-term care insurance, and taxpayers in higher tax brackets for whom a 36 percent or 39.6 percent subsidy makes purchase of long-term care insurance an attractive option. But these are likely to be the same taxpayers for whom long-term care access is not a major problem.
Additional Personal Exemption for Elderly Care in Home
H.R. 2990 would establish a new, additional personal exemption that could be taken by taxpayers providing long-term care in their homes for qualified elderly relatives. This sounds as though it would help families that undertake this difficult task. But a personal exemption, like a deduction, is worth more to taxpayers in higher tax brackets than in lower. In 1999, for example, an additional personal exemption is worth $413 to a taxpayer in the 15 percent tax bracket ($2,750 times .15 = $413), while being worth $990 to a taxpayer in the 36 percent bracket. Again, the families that would receive the most help from this provision are the families that least need the assistance.
Medical Savings Accounts
The bill includes a number of changes in policies relating to Medical Savings Accounts that risk driving up health insurance premiums for individuals who are less healthy than average. In addition, the changes could create a major new tax shelter that circumvents the income limits that govern tax-advantaged deposits to Individual Retirement Accounts.
The bipartisan Health Insurance Portability and Accountability Act of 1996 established a demonstration to test and evaluate Medical Savings Accounts, which are tax-advantaged personal savings accounts that may be used by persons covered by high-deductible health insurance policies. The demonstration is designed to provide information about the effects of MSAs on workers, employers, and insurers without creating widespread irreparable harm to any of the participants or to the insurance market as a whole. Participation in the demonstration is limited to no more than 750,000 participants who are employees of small businesses (businesses with 50 or fewer employees) and self-employed individuals. The demonstration is scheduled to run through December 31, 2000, after which time Congress will be able to examine the evaluation authorized by the 1996 law and determine future policy.
The Talent-Shadegg bill would end the MSA demonstration. It would open up MSAs to use by all individuals and employees, remove the numerical cap on participation, and eliminate the sunset date for MSAs contained in current law.
- Universal availability for MSAs now before the impact of MSA policy has been studied under more controlled conditions would mean that any negative consequences that MSAs may have for the insurance market could rapidly become pervasive and difficult to reverse. A significant body of evidence suggests that widespread use of MSAs will lead to "adverse selection" in the insurance market because young, healthy people with low medical costs will choose to use high-deductible insurance policies and MSAs and thereby retain their unspent dollars in their own accounts. This could isolate people who are less healthy and have higher medical costs in conventional, low-deductible health insurance plans.
- Such a division of the market would drive up the cost of low-deductible insurance for the less healthy segments of the population who most need it. Research suggests that premiums for conventional insurance could more than double if MSA use becomes widespread.(5) According to the American Academy of Actuaries, a disproportionate share of those left in conventional insurance would be older employees and pregnant women.
H.R. 2990 also would increase the maximum amount allowed to be deposited each year in the tax-advantaged Medical Savings Accounts. The current demonstration project places strict limitation on such deposits to prevent use of MSAs as general purpose tax shelters.
- MSAs are similar to conventional Individual Retirement Accounts; contributions are deductible from income, and tax is deferred on the amounts the accounts earn. While deposits and earnings are never taxed if MSA funds are used to pay medical costs, the tax advantages of MSAs can be substantial even if the funds in the accounts are later withdrawn and used primarily or exclusively for non-medical purposes.
- MSAs differ from IRAs in one key respect there are no income limits on MSAs that prevent wealthy people from using them as tax shelters. As a result, opening up MSAs to all individuals and increasing the amounts that may be deposited in them, as the proposed legislation would do, would enable high-income taxpayers who cannot use IRAs because of the income limits to begin using MSAs as significant tax shelters.
The proposed MSA changes also would circumvent the rules under the current MSA demonstration that prevent employers from setting up MSAs in a manner that primarily benefits highly paid executives and effectively discriminates against lower-paid employees.
- Under the MSA demonstration now underway, deposits can be made to an MSA account by either an employer or an individual, but not by both in the same year. The demonstration also includes nondiscrimination rules requiring employers to make comparable contributions for all participating employees.
- The Talent-Shadegg bill would allow both employees and employers to make deposits to an MSA in the same year. That would make the nondiscrimination rules meaningless. An employer could make small, token deposits to the MSA accounts of all employees. Higher-income employees could add substantial additional funds to their accounts and exclude these additional amounts from their taxable income, but most lower-paid staff would not be able to afford substantial additional contributions.
1. General Accounting Office, Letter to The Honorable Daniel Patrick Moynihan, June 10, 1998, GAO/HEHS-98-190R, Enclosure II. The analysis is based on the 1996 Current Population Survey.
2. A General Accounting Office study found that in 1996, the middle of the range of premium costs was $5,700 for a family-coverage policy that included a $1,000 deductible. The proposed tax deduction would provide a subsidy of $840 for the purchase of a policy with a $5,700 premium ($840 equals 15 percent of $5,700). This means the family would have to pay the remaining $4,860, or 14 percent of its income, to purchase the health insurance policy. Since this premium is for a policy with a $1,000 deductible, another three percent of income would have to be expended before any benefits would be available. The family's net expenditure for health coverage the premium plus the deductible would total $5,860, or 17 percent of the family's income. Without the proposed tax deduction, the full cost of the policy plus the $1,000 deductible is equal to 19 percent of the family's income.
3. Leighton Ku, Teresa Coughlin, The Use of Sliding Scale Premiums in Subsidized Insurance Programs, Urban Institute, March 1997.
4. Long-term care premiums vary by the age at which the policy is purchased and the type and amount of long-term care expenses the policy will reimburse. A 1997 study by Consumers Union found premiums at age 55 ranged from $588 to $1,474 a year, while premiums at age 65 ranged from $1,042 to $3,100 a year. These policies cover individuals, so the costs for a couple would generally be double those amounts. Consumer Reports, October 1997.
5. Emmett B. Keeler, et. al., "Can Medical Savings Accounts for the Nonelderly Reduce Health Care Costs?" JAMA, June 5, 1996, p. 1666-71; Len M. Nichols, et. al., Tax-Preferred Medical Savings Accounts and Catastrophic Health Insurance Plans: A Numerical Analysis of Winners and Losers, The Urban Institute, April 1996; and American Academy of Actuaries, Medical Savings Accounts: Cost Implications and Design Issues, May 1995. The conclusions of these studies are summarized in Iris J. Lav, MSA Demonstration: Research Suggests Controls Needed To Prevent Adverse Affect on Insurance Market, Center on Budget and Policy Priorities, July 10, 1996.