March 4, 2002

March 4, 2002 | WebMemo on Trade, Economic Freedom

How Trade Legislation Can Cover Displaced Workers

Unemployed families are getting desperate. The House of Representatives has twice enacted an economic stimulus package that would have delivered immediate and generous assistance to these families for health care coverage, but the Senate blocked these efforts. Months have passed and these families have still not received any help.

Congress can, however, still help unemployed workers and their families secure solid health insurance coverage through the private market. There is no reason why these individuals and families should be forced into Medicaid, a financially troubled welfare program that delivers substandard quality care, or be forced to go without health care coverage altogether.

This time the opportunity to help these families presents itself in the form of trade legislation, a possible vehicle for congressional policy on health care. Senate bill 1209, the Trade Adjustment Assistance for Workers, Farmers, Communities and Firms Act of 2001, includes health care provisions, but they are flawed and restrictive. Congress can do much more to broaden and improve assistance to these families while giving them personal choice and control over their health care dollars.

Ideological Opposition To Assistance.
Ordinary Americans should understand that unemployed workers are not getting help because of congressional ideological opposition, concentrated in the Senate, to reliance on private-sector health insurance. The Bush Administration, was well as conservatives and moderates in Congress, would help families directly with tax credits and premium subsidies through the unemployment compensation system, enabling them to secure the health coverage of their choice. Senate liberals would limit health care assistance for industry-specific displaced workers by (1) requiring workers to maintain their health care coverage controlled by their former employer or (2) enrolling them in the substandard Medicaid program. Either way, this approach would limit the worker's access to affordable or desirable health care coverage for himself and his family.

A Better Policy.
A much better policy, embodied in legislation that has passed the House of Representatives twice and has the support of both the Administration and Senate moderates, provides displaced workers with the financial assistance to help them choose the health care coverage that best fits their personal, medical, and financial situation. This proposal ensures that displaced workers have health care security by putting them personally in control. This is in sharp contrast to the Left's proposal, under which displaced workers must trust their former employers or the government to make the right health care decisions for them and their families.

To understand why the Left's proposal for displaced workers is bad health care policy, Members should take note of the fundamental shortfalls and implications of its approach.

COBRA-ONLY COVERAGE: BAD HEALTH POLICY

COBRA coverage refers to a provision adopted in the Consolidated Reconciliation Act of 1986, which allows workers to retain their employer-sponsored health care coverage after they change or lose their jobs for up to 18 months provided the former employee pays both the employee and employer share of the premium and a 2 percent administrative fee. This law, however, applies only to employers with 20 or more workers. Offering federal assistance exclusively for COBRA is not an effective solution for many displaced workers. Consider:

1.     Even with a subsidy, many workers may find COBRA coverage too expensive.
The average employer-sponsored family coverage costs over $7,000.[1] With families facing a dramatic drop in income and the average unemployment benefit only $925 a month,[2] many families may not have the financial resources to maintain the highest-priced insurance plan during their temporary period of unemployment.

2.     Not all workers qualify for COBRA coverage, especially low-income workers.
Only 57 percent of workers even qualify for COBRA coverage.[3] Many are ineligible because they work for small employers, their employer does not offer coverage, or they chose not to participate in employer-sponsored coverage because of its cost. This is particularly true for low-income workers, 60 percent of whom would not qualify for COBRA.[4] Therefore, COBRA-only assistance would give wealthier families subsidies to maintain private coverage while excluding the most needy families.

3.     It requires displaced workers to stay with coverage controlled by their former employer.
During times of unemployment, it becomes evident that the linkage between employment and health insurance is not the most secure. If employees choose to maintain their coverage through COBRA, the employer who terminated them controls their health care coverage. It is doubtful that former Enron employees would trust the Enron health plan to make health care decisions on behalf of their family as they did for their retirement.

MEDICAID EXPANSION: MORE BAD HEALTH POLICY

For displaced workers that do not qualify for COBRA, the Left proposes dumping them into a flawed government-controlled health care system, plagued with financial problems, that promises more than it delivers.

1.     Financially troubled program.
States are facing financial crisis with their Medicaid programs. With increased utilization of services and increased enrollment, most states are facing annual Medicaid shortfalls. In FY 2000, 30 states exceeded their spending allocation for Medicaid; in FY 2001, 37 states exceeded it.[5] Dumping thousands of displaced workers on Medicaid will only add more stress to the already financially unstable program.

2.     Substandard health care system.
As state Medicaid growth outpaces state revenue, the pressure to reduce Medicaid's costs is increasing. States have already begun to cut costs by limiting benefits and reimbursements.[6] As benefits dwindle and providers lose incentives, these efforts to "manage" costs will only diminish both the quality of care and access to proper care.

REFUNDABLE TAX CREDITS: GOOD HEALTH POLICY

A better structure to provide effective health care assistance to displaced workers is to provide them with a refundable tax credit. A refundable tax credit would give unemployed workers financial assistance up front to help pay for a health care plan of choice. This approach establishes health care security for unemployed, displaced workers by offering:

1.     Affordable choices.
Displaced workers, not the government, would determine the plan that best meets their own families' financial and medical needs. Whether they chose to stay with their employer-sponsored coverage through COBRA or chose to purchase coverage for their entire family on their own, the credit could be applied to the health plan of the worker's choice.

Recent analysis by a prominent health insurance broker shows that the average cost for an individual policy was $159 per month and that 85 percent of those policies purchased were "comprehensive," meaning they included inpatient, outpatient, lab tests and prescription drugs.[7] These types of coverage options may be much more affordable, especially with direct assistance, for an unemployed worker.

2.     Fairness.
A refundable tax credit would cover all displaced workers regardless of whether they qualify for COBRA or whether they were previously insured. Every American worker who involuntarily lost his or her job would have the opportunity to obtain private health care coverage using the health credit.

3.     Efficiency.
States would utilize the current structure for distributing federally financed unemployment benefits to distribute the refundable tax credits for health insurance. State unemployment offices are already tasked with verifying worker eligibility for unemployment benefits and could easily qualify workers for health care assistance. This system would ease administrative hassles for displaced workers to accept the credits and assign them to the insurer of choice.

BUILDING ON SOLID LEGISLATION

Twice, the House of Representatives passed legislation that would provide displaced workers with a refundable health care tax credit, but these provisions have not been debated or even considered by the U.S. Senate.

New efforts to extend an effective refundable health care tax credit to displaced workers can build on the provisions found in H.R. 622, which passed on February 14, 2002.

  • Provides displaced workers with a refundable tax credit to pay for 60 percent of the cost of coverage (no cap).
  • Allows the worker to assign the credit toward a qualified health care plan of choice, including COBRA, state mini-COBRA, state high-risk pools, or any other affordable private coverage option.

Other key House health care policies:

  • House legislation extends basic access provisions. For those workers who maintained employer-sponsored coverage for at least one year prior to their termination, the same guarantee issue and pre-existing condition protections governing COBRA coverage would apply to plans purchased on the individual market. The intent of these provisions is to ensure that individuals are not penalized for purchasing more affordable coverage options on the individual market.
  • House legislation offers federal assistance to states that establish or maintain high-risk pools for individuals who are considered "hard to insure."
  • House legislation gives states additional funds specifically designated to further assist workers with health care coverage.
WHAT CONGRESS CAN DO TO HELP DISPLACED WORKERS

To further improve the House-passed model, Members committed to providing effective assistance to displaced workers should consider the following recommendations.

1.     Establish a permanent refundable health care tax credit for all unemployed workers.
Regardless of how or why individuals lose their jobs, if they qualify for unemployment benefits, they should qualify for a refundable health care credit. Analysis shows that every percentage point rise in the unemployment rate leads to an increase of about 860,000 in the number of people uninsured.[8] A refundable credit would give thousands of Americans who lose their jobs the ability to purchase private health care coverage and regain health care security.

2.     Increase the tax credit amount.
While the cost of affordable health insurance is well-documented, increasing the credit amount will encourage more unemployed workers, whether previously insured or not, to purchase private health care coverage.

3.     Allow non-employer groups to sponsor coverage.
To ensure that unemployed workers have access to affordable and consistent health care coverage, established community institutions, such as unions, churches, alumni associations, and other community organizations, should be able to sponsor health care coverage for their members.

CONCLUSION

Workers designated under the Trade Assistance Act are not the only unemployed, displaced workers who are in desperate need of health care assistance. Many others need help to maintain or secure private health care coverage. Hundreds of thousands of workers have been laid off in the past year, and should another economic slowdown occur, thousands more are just a pink slip away from a loss of income and a loss of health care coverage.

All displaced workers should be able to enjoy private health insurance. Current law allows for unlimited tax breaks for employer-sponsored coverage. But if a worker loses this tax break because of a termination of employment, or, worse, if a worker has no help simply because he or she does not have employer-sponsored coverage, Congress provides no comparable tax break for health care coverage purchased by the worker individually. Congress should start reversing this unfair and inequitable policy. A sound and comprehensive health care policy should extend at least the same tax benefits to all Americans regardless of their employment.

Members of Congress should not allow another opportunity pass. Congress can give displaced workers direct help, in the form of a tax credit or a premium subsidy, that will keep them from falling into the ranks of the uninsured and will offer them health care security through private health care coverage. This would quickly help many unemployed American families who need help right away. There is no rational reason to force thousands of hard-working Americans and their families into a substandard welfare program or face the prospect of going without coverage altogether.

Trade legislation offers yet another opportunity.

Nina Owcharenko is Health Care Policy Analyst at The Heritage Foundation.
 


[1] Michelle M. Doty and Cathy Schoeen, "Maintaining Health Insurance During a Recession: Likely COBRA Eligibility," Commonwealth Fund, p. 4, at http://www.cmwf.org.

[2] Diane Rowland, "Health Insurance for Unemployed Workers," testimony submitted to the Committee on Health, Education, Labor and Pensions, U.S. Senate (cancelled), Kaiser Commission on Medicaid and the Uninsured, October 2001, p. 9, at http://www.kkf.org.

[3] Ibid., p. 8.

[4] Doty and Schoeen, "Maintaining Health Insurance During a Recession," p. 2.

[5] Vernon Smith and Eileen Ellis, "Medicaid Budgets Under Stress: Survey Findings for State Fiscal Year 2000, 2001, and 2002," Kaiser Commission on Medicaid and the Uninsured, p. 12, at http://www.kff.org.

[6] Robert Pear and Robin Toner, "Amid Fiscal Crisis, Medicaid Is Facing Cuts From States," The New York Times, January 14, 2002, p. A1, at http://www.nytimes.com.

[7] Vip Patel, "Health Care Coverage for Uninsured Americans," testimony before the Committee on Ways and Means, U.S. House of Representatives, February 13, 2002.

[8] "Rising Unemployment and the Uninsured," Kaiser Family Foundation, December 2001, at http://www.kff.org.

About the Author

Nina Owcharenko Director, Center for Health Policy Studies and Preston A. Wells, Jr. Fellow
Center for Health Policy Studies