Heritage Foundation Leadership for America

Despite the fact that America is currently enjoying the longest uninterrupted economic boom in its history, a steadily increasing number of Americans have no health insurance. This trend is universally forecast to continue unless Congress makes the necessary adjustments in health care policy. Many policymakers and lawmakers are now calling for tax credits to enable all Americans to obtain health coverage.

Today's model of employer-based health insurance, with its roots in the economy of the 1950s, no longer serves all American families adequately. When this system was put in place, many Americans worked for large firms and remained with them for life. Today, the combination of increasing job mobility and the proliferation of small businesses that do not offer health benefits has created a market in which employment-based coverage either is not available or involves premiums that are too expensive for many workers. A number of bills now before Congress, including some with bipartisan sponsorship, propose tax credits to make health insurance both more available and more affordable for these Americans.

In 1999, 44.3 million Americans had no health insurance, according to the U.S. Bureau of the Census. Throughout the 1990s, as costs and premiums rose, more and more companies were forced to drop coverage, and the number of uninsured increased steadily. The uninsured are disproportionately lower-income Americans, minorities, and people employed in the service sector--the very people who need access to coverage the most. Regrettably, the numbers of these Americans who are uninsured are projected to continue rising unless changes in health policy are made.

A bipartisan consensus is growing in Washington that current tax policy must be changed to improve the health care system. The current federal tax code gives considerable preference to workers who have employment-based health insurance. Tax credits as an alternative for those who do not have employment-based insurance are gaining in popularity among lawmakers and have even become an election issue. Both Democratic presidential candidates and the presumptive Republican nominee, George W. Bush, for example, have proposed credits that would help more Americans obtain health insurance. Former Senator Bill Bradley, in particular, offered a sweeping proposal that would also replace the outdated and bureaucratic Medicaid system for low-income persons with new private health insurance options. Many Members of Congress also are espousing the value of tax credits, recognizing that the employer-based system no longer serves all Americans effectively.

In June 1999, House Majority Leader Richard Armey (R-TX) and Representative Fortney "Pete" Stark (D-CA) wrote in The Washington Post that the problem of uninsurance is the "biggest health problem facing the country." They also agreed on the root causes of uninsurance: a changing workforce that is "increasingly mobile and part-time" and a perverse tax code that "discriminates against not only insurance purchased outside the workplace but also lower-paid, part-time and small-business workers." Both Members are among those in Congress who propose using tax credits to enable more of these workers to obtain coverage.

There are several distinct advantages to the tax credit approach.

1. It would restore equity to the tax code.
   The current tax code is skewed heavily in favor of the well-to-do and others who have access to an employer-sponsored plan.

2. It would promote consumer choice of health plans.
   Only 17 percent of American employers offer their employees a choice of plans.

3. It would shift control over health plans to consumers and give patients a right to sue.
   Allowing consumers to sign a contract directly with insurers would bypass the employer and allow a consumer to sue an insurer for breach of contract in coverage disputes without placing employers in a legal gray area.

4. It would provide an alternative to the current system, which no longer covers all Americans adequately.
   The current system, based on place of employment, captures fewer and fewer people every year. Those left out need a parallel system.

5. It would stimulate groups other than employment-based pools to sponsor health plans for their own members.
   Employment-based pools need not be the only groups that sponsor plans. Unions, church groups, associations, and other groups also should be allowed to offer plans to their members.

6. Health insurers would be more responsive to the wants and needs of families.
   The actual consumers of health services, rather than employers, would become the insurance company's customers.

7. Consumers would have real portability of health insurance.
   Job status would no longer determine insurance status--a particular advantage for individuals who have pre-existing conditions.

This study not only examines the virtues of tax credits, but also offers a comparison of the provisions of the nine different bills now before Congress that propose tax credits, as well as The Heritage Foundation's tax credit proposal. The strengths, weaknesses, and estimated take-up rates of uninsured of each plan are analyzed using econometric data gathered by the Washington-based Lewin Group. Each bill is premised on the fact that an alternative to the employer-based system is required. To different degrees, each proposal could reverse the trend of ever-increasing numbers of uninsured by offering new tax treatment for Americans who lack employment-based insurance today.

James Frogue is a former Health Care Policy Analyst at The Heritage Foundation.