The
Trade Adjustment and Assistance (TAA) Act that was signed into law
last year provides health care tax credits for the purchase of
insurance for two specific groups of Americans without health
coverage: trade-affected workers who lost their jobs and Pension
Benefit Guaranty Corporation (PBGC) beneficiaries. The federal
health care tax credit will be equal to 65 percent of the health
insurance premiums of these individuals and can be applied only to
specific types of coverage that states can play a key role in
offering.
States that elect to provide health care
coverage to these tax credit recipients can choose among a range of
approaches and access National Emergency Grants to design and
administer the coverage options. The federal grant money provides
states with a unique opportunity to explore creative approaches
that incorporate greater choice and competition and that build an
infrastructure that could accommodate a wider range of residents
seeking coverage. All states, regardless of the number of residents
who qualify for the health care tax credits, should take advantage
of this opportunity.
COVERAGE OPTIONS FOR THE STATES
The
TAA Act authorizes the use of the credits for a select group of
coverage options. Certain tax credit recipients will have access to
COBRA coverage, through which workers can continue their
participation in the plan provided by their former employers; the
health plan of a spouse's employer; or coverage through an
individual policy that was purchased previously. In addition to these
options, states may elect to offer other coverage options that
would qualify for the tax credit.
Under the Act, states may choose to offer
one or several of the following options:
- State-based
continuation coverage
Several states have established COBRA-like provisions for
employees of firms that have fewer than 20 employees. Under this
approach, recipients of the tax credits could apply their credit to
this "mini-COBRA" coverage option.
- State high-risk
pool
Many states have established high-risk pools for
individuals who are difficult to insure. States could choose to
allow qualified tax credit recipients to enroll in such a pool and
to use their tax credits toward their premium payments. (States
that establish and maintain high-risk pools are eligible to receive
additional federal funds.)
- State employee
health plans
States could elect to open the health plan established for
state employees to the TAA tax credit recipients. Since there would
be no employer (state) contribution, tax credit recipients would
apply their tax credit to the full cost of the policy.
- A plan similar
to the state employees' plan
States could elect to design a separate pool for tax
credit recipients, providing them with a benefits package that
would be similar to that offered to state employees but would be
administered separately. The tax credit would then be applied to
the cost of the benefits package.
- Other state
group-plan arrangements
States could elect to contract with a group health plan,
an insurer, an administrator, or an employer to provide coverage
for the tax credit recipients. If such an approach included
insurers of individual policies, tax credit recipients could have
the ability to obtain a plan that is better tailored for their
individual needs.
- Purchasing
pool
States could design an arrangement through which tax
credit recipients could choose from an assortment of competing
health plans. This approach could be modeled after the highly
successful Federal Employees Health Benefits Program (FEHBP) and
could easily be expanded to accommodate residents other than the
tax credit recipients.
- State-operated
health plan
States that administer a health plan with no federal
assistance could elect to offer such state-based coverage to tax
credit recipients. As with the other approaches, the tax credit
recipients would apply their credits to the premium for this
insurance and would be responsible for paying any remaining
costs.
A MODEL FOR STATES
It
is likely that many recipients of the health care tax credit will
apply their credits to conventional coverage options such as COBRA
coverage or to participating in their spouse's coverage. In
addition, states with a qualified high-risk pool could be an
attractive option for tax credit recipients with serious, high-cost
medical conditions.
Although recipients of the tax credits
have the potential to use their credits for a range of options, the
TAA Act prohibits recipients from using their credits for the most
direct and sensible option: purchasing an individual plan in the
private market. Nevertheless, the fact that
federal grant money is available to set up the infrastructure to
accommodate these recipients gives states an opportunity to think
creatively about how to improve existing private health insurance
markets and to enhance choice, competition, and portability.
The
FEHBP, through which federal employees and Members of Congress can
choose from a menu of competing private health care plans, could
serve as an ideal model for states. Through such a system, states
could allow tax credit recipients to select the health plan that
best suits their financial and medical needs, offering them a
choice of plans while developing an infrastructure that could be
extended to and benefit other populations.
In
developing such a system, states should:
- Create a health
insurance "service center"
This center, which could be either a state or a private
entity, would serve as a clearinghouse for a variety of qualified,
competing plans from which participating individuals could choose.
The service center would enroll individuals in the various plans
and would administer an annual open enrollment through which
participants could switch coverage. In addition, the center would
function as a financial aggregator. It would put in place a system
for collecting premiums from multiple sources, matching them with
the coverage that had been selected, and transmitting them to
carriers.
- Determine a core
group of participants
Due to the small population receiving the TAA tax credits,
states should consider expanding the participating population
beyond tax credit recipients. A beginning point could be to
incorporate state employees and their dependents within the system.
Participation in the system could also be opened to one or more
additional groups such as county and municipal employees, employees
of small businesses, the self-employed, families eligible for
SCHIP, or
some Medicaid recipients.
- Establish rating
rules that ensure portability of coverage offered through the
service center
The TAA Act already establishes certain requirements
regarding the coverage that is provided to tax credit recipients.
To promote portability, the model approach should allow anyone with
sufficient previous coverage (e.g., 18 months or more) to switch
his or her plan once a year during the open season, with payments
being adjusted only with regard to the age and geography rate
scales of the new plan and without medical underwriting or the
exclusion of coverage for preexisting condition. Furthermore, to
encourage eligible individuals to keep continuous coverage and
prevent adverse selection, plans participating in the program
should be allowed to impose limited rating surcharges and
preexisting condition exclusions on individuals who lack continuous
coverage.
- Set in place a
reinsurance pool mechanism to cope with adverse selection
To address the concerns of possible adverse selection
(whereby healthier persons gravitate disproportionately to less
expensive plans), the state could establish a nonprofit,
self-governing corporation that would be administered and financed
by the participating health insurers and would create a pool to
which insurers could cede the financial risk of higher-cost
individuals without disrupting their continuity in coverage.
States can design an FEHBP-style approach
in a variety of ways. For example, a state could create an
independent purchasing pool, redesign a state employee health plan,
or choose a combination of options. As long as the tax credit
recipients were included in the pool, the state could apply for
federal grant money to help set up a system that offers coverage
options to a variety of participants.
CONCLUSION
States should seize the opportunity to
offer coverage options for their tax credit recipients. While such
efforts are intended initially to serve a small and select group,
states can take advantage of the opportunity to use federal grants
to build an infrastructure that has longer-lasting benefits.
During this legislative session, Congress
and the Administration are expected to consider a variety of health
care initiatives that will affect the states, including health care
tax credits for the uninsured and Medicaid reform. States that
capitalize on present opportunities and develop adaptable models,
such as the FEHBP model discussed above, will also be better
prepared for forthcoming policy initiatives.
Nina
Owcharenko is a Health Care Policy Analyst, and Edmund Haislmaier is a
Visiting Research Fellow in Health Care, at The Heritage
Foundation.