As air leaks out of the economic balloon, the number of Americans withouthealth insurance will rise. For two decades, the number--now more than 45million--has been steadily growing, as it has during all but the last of oureight years of unprecedented prosperity. There are only two large payers forhealth insurance: government and private employers. Both have large gaps in whomthey cover. The federal government, through Medicare, does insure nearly everyoneover age 65; but the state-run Medicaid system, along with the four-year-oldState Children's Health Insurance Program (SCHIP), covers only a fraction of thepoor--children and some parents--using very stringent criteria.
Employer-sponsored insurance is spotty in the best of times. Companies may ormay not offer it, and workers may or may not accept it. During full employment,employers must compete for workers, so they have an incentive to offer healthbenefits, at least to skilled employees. In the year 2000, which will probablyturn out to be the high watermark of our current employer-based system, nearlyall large companies and those with highly paid workers offered health insurance.But about a third of small companies (those with fewer than 200 employees) didnot; nor did many companies--large as well as small--with temporary orhourly-wage earners.
In firms that did offer insurance, one in five workers (mainly new employees andpart-time and temporary workers) were considered "ineligible." And of thoseconsidered eligible, another one in five turned down insurance because they couldnot afford to pay their share of the premiums (usually about 10 percent to 30percent of the total cost). Thus, only about half of American workers receivedemployer-sponsored health coverage.
Still, until this year most employers offered health benefits and evenabsorbed the rapid increases in premiums that began in 1998 after a few years ofslowed inflation. But premiums charged by insurers are now rising at double-digitrates. So far, most employers have not passed these increases directly to theirworkers. Instead, they have avoided higher premiums by increasing the workers'out-of-pocket costs through higher deductibles and co-payments.
But with the slowdown in the economy and rising unemployment, the balance ofpower between employers and workers will shift. Since the employer-sponsoredsystem is voluntary, some employers will drop health benefits altogether. A tough patients' rights bill would add to this erosion, because it would drive uppremiums.
Employers who continue to offer benefits will take steps to reduce theiroutlays. One way is to pass along higher health-insurance costs to employees byraising out-of-pocket charges. Another is to reduce the services covered. Another is to shift to stringently "managed" plans. Still another is to contribute onlya fixed amount toward the premium--known as a "defined contribution"--and requireworkers to pay the rest. Often billed as a method to increase workers' options,this is really inflation protection for employers. Obviously, the more workershave to pay, the more likely they will be to refuse coverage when it is offered.Employers are resorting to all of these devices. Thus, the combination of risingunemployment and rising premiums will swell the ranks of both the underinsuredand the uninsured, as employers drop coverage or more workers find they can'tafford it.
Faced with the likelihood of a large increase in the number of Americanswithout health insurance, many policy makers and interest groups are coalescingaround the same solution: refundable tax credits to enable the uninsured topurchase private insurance. (A refundable tax credit is like a cash subsidy.) Ininsurance terms, this is essentially a defined contribution, and there are anumber of variations on the theme. In his election campaign, Bush called for taxcredits of up to $1,000 for individuals earning below $45,000 a year and $2,000for families earning below $60,000 a year. Others have called for larger creditsthat would phase out at higher incomes. Most proposals would require recipientsto purchase insurance in the private market, without any regulation of premiumsor benefits. Most also contain no provision to adjust the tax credit for inflationin health care premiums. Some would limit the program to those not eligible forother government programs or employer-subsidized coverage, but others would offercredits to all low-income workers who turn down employer coverage or need help topay their share of the premiums.
Tax credits for the uninsured are a bad idea for several reasons. First, eventhe most generous of the proposed tax credits would not buy an adequate policy.According to the General Accounting Office, the average cost of a nongrouphealth-insurance plan for a family of four is $7,352 per year. Even with a $3,600tax credit (the most generous proposed), $3,752 would be left for the family to pay out of pocket--or 12.5 percent of a $30,000 income. With Bush's $2,000credit, the out-of-pocket expense would be $5,352, or nearly 18 percent of a$30,000 income. Such outlays would be impossible for the very people who mostneed coverage. So right from the start, the idea is empty. And withoutadjustments for inflation in health costs, the shortfall would grow larger overtime.
Second, the influx of federal money would probably cause premiums to rise evenfaster than current projections. Unless premiums are regulated (which nobodyproposes), tax credits for the uninsured would be a windfall for the insuranceindustry.
Third, tax credits would tend to drive out other types of coverage. Employerscould use them as an excuse to drop health benefits altogether or shrink themfurther. That would be particularly likely if premiums rose steeply as a resultof the tax credits. Similarly, parents of children eligible for Medicaid or SCHIPmight opt instead for tax credits to cover the entire family. Prohibitions onsuch shifting would be difficult to enforce.
Fourth, most of the tax-credit proposals require individuals to fend forthemselves in the notoriously treacherous market for individual coverage. Somecompanies would likely offer cut-rate plans for the amount of the tax credits,but those plans would have very large out-of-pocket payments and very narrowbenefits. Even with regulation, policing this market would be a nightmare.
Finally, complex administrative requirements, including the need to monitorthe insurance market and ensure that criteria for eligibility are met, wouldprobably generate a huge and expensive new government bureaucracy. That wouldsiphon off still more of the U.S. health dollar for overhead, which is already anexorbitantly high fraction of the total.
Yet despite its fatal flaws, the tax-credit idea enjoys surprising support fromthe political right, the center, and even the near left. For example, Senator JimJeffords (while he was still a Republican) introduced a bill along the lines ofthe Bush plan that was co-sponsored by Democrats John Breaux of Louisiana andBlanche Lincoln of Arkansas, together with Republicans Lincoln Chafee of RhodeIsland, Bill Frist of Tennessee, and Olympia Snowe of Maine. In the House,versions of tax-credit bills have been sponsored by liberal Democrats Pete Starkof California (whose plan did provide for regulation of benefits) and JimMcDermott of Washington (the only plan to peg credits to premiums), as well as byconservative Republicans Dick Armey of Texas (the House version of the Jeffordsbill) and Charlie Norwood of Georgia (a plan permitting reduced credits for individuals eligible for employment-based coverage). And outside the halls ofCongress, the idea has created even stranger bedfellows. Organizations more oftenat odds than in accord, like the American Medical Association, the HealthInsurance Association of America (HIAA), Families USA, and the American HospitalAssociation, have signed on to tax credits as at least a partial solution to theproblem of the uninsured.
It's easy to see why conservatives would like the tax-credit solution. It's apart of their creed that nearly any problem can be solved by an adjustment intaxes. And they are committed to market solutions, however unworkable they mightbe. As for the political center, providing tax credits sounds like a good"centrist" thing to do: set up a "partnership" in which government policy createsincentives for market solutions. But why does the idea appeal to people whoshould know better--good liberals like Ron Pollack, executive director ofFamilies USA, and Congressman Jim McDermott, a longtime champion of asingle-payer health care system?
One answer is that they see it as a harmless bargaining chip to be offered inreturn for an expansion of government programs such as Medicaid and SCHIP.Another is that after the defeat of the Clinton health care plan in 1994 and thegeneral ascendance of market ideology, they no longer believe that it isrealistic to push for comprehensive reform. The only way to expand coverage, theynow believe, is by incrementalism--nibbling at the edges--which necessarilyrequires a lot of political horse-trading. Pollack joined with Chip Kahn, thenpresident of the HIAA, to publish an article in the January/February issue ofHealth Affairs arguing for such incremental quid pro quos. In welcoming the federal budget resolution's inclusion of $28 billion to extend health coverage for the uninsured, Pollack later said: "Expanding Medicaid and [S]CHIP programs in conjunction with tax credits to assist working families will significantly reduce the number of uninsured Americans."
McDermott joined with conservative Republican Congressman Jim McCrery ofLouisiana to stage a conversation on the subject at the request of journalistMatthew Miller, who reported on it in the October 2000 issue of TheAtlantic Monthly. Both McDermott and McCrery are members of the House Ways and Means Subcommittee on Health. A passionate crusader for middle-ground solutions, Miller got the unlikely pair to agree that the tax-credit idea is a feasible second choice (to a single-payer system, for McDermott; to the market, for McCrery) and a good compromise. McCrery candidly stated that his purpose was to stave off a move toward a single-payer system, a move he thought would be inevitable as the current system deteriorates. As for McDermott, he recently told me that he just wanted to show "that the emperor has no clothes"--in other words, that nothing short of a single-payer system would cover anywhere near the entire population.
But tax credits are not harmless, and it's not just a matter of watching themfail and then starting over from the same point. Paradoxically, tax credits wouldactually increase the number of uninsured. That is because they would drive upprices and undermine the employment-based system without putting anythingworkable in its place. In short, the damage done in demonstrating that the"emperor has no clothes" would be great, and small expansions in public programswould not compensate for the harms.
Tax credits are just an extreme example of the problem with incrementalimprovements to our fragmented, market-driven system. There is simply no way to fixa piece of the system without creating unintended ripple effects. Push in hereand it pops out there. We should have learned that lesson from our disastrousexperiment with market-driven managed care. Both employers and the managed-carecompanies competing for employers' business have every incentive to keep premiumsas low as possible. But the surest way to do that is by limiting services.
Managed-care companies, for example, often refuse insurance to employers withworkers at unusually high risk of getting sick--say, because they are older thanaverage or many of them have chronic conditions of one sort or another. Instead,they direct their marketing efforts toward young, well-educated workforces,because they are healthier. And when they do agree to provide insurance, they mayrefuse to cover certain expensive conditions or services. These practices--knownas "cherry-picking"--have become the hallmarks of managed care. Employers andmanaged-care companies also discourage the use of medical care through highdeductibles and co-payments and by erecting so many bureaucratic roadblocks toobtaining care that workers often prefer to pay out of pocket or do without. Forhealth plans to avoid actually delivering medical care requires a degree ofingenuity and a lot of overhead expense. But the expense is apparently worth it.Managed-care companies boast to investors about their low "medical lossratios"--the amount they spend on medical care. The lower the ratio--and it maybe as low as 70 percent--the more the companies keep in profits and administrativesalaries.
Incremental attempts to deal with these abuses have failed or backfired forthe simple reason that employer-sponsored coverage is purely voluntary and thereis no regulation of premiums and benefits. Thus, recent legislative initiatives toprovide remedies--such as requiring at least 48 hours' hospitalization forchildbirth and enacting other patient-protection measures--can lead to the unintended consequences of managed-care companies raising premiums and employersshrinking benefits or dropping them altogether. The same will be true for taxcredits. Premiums will rise, the benefit package will shrink, and more employerswill drop coverage.
The fact is, our private-employer-based health care system is a failure. Itpits the economic interests of managed-care companies and employers against thehealth needs of patients, and it is woefully inefficient because of its hugeoverhead expenses, many of which are aimed toward limiting services. Dealingwith the effects rather than the underlying causes of the system's failures isnot only futile, it is harmful.
Compare the tax-credit idea with Medicare (which is a public, single-payersystem embedded in the private, market-based system). Medicare offers definedbenefits, not defined contributions; that is, all beneficiaries are entitled tocertain services. The program provides a uniform set of benefits to nearlyeveryone who qualifies, and it does so far more efficiently than the privatesector's employment-based system. Furthermore, by regulating prices as well asbenefits, Medicare limits what providers charge. Certainly, Medicare has plenty ofroom to improve. It could make the benefit package more appropriate for seniorsand it could control inflation better (although it does better on this score thanthe private sector). But the essential mechanisms for doing both are in place.
No system can work if it doesn't cover virtually everyone automatically and regulate prices as well as benefits. No matter how many ways we try to shift costsand plug holes, we will sooner or later have to face that fact. Otherwise, wecontinue to chase a rapidly receding quarry: health care that is both adequateand affordable. Precisely what makes the tax-credit idea attractive toconservatives-- the preservation of the private market--is what will doom it inpractice. We had better come up with another solution, because the problem isabout to get a lot bigger. Universal Medicare, anyone?
