February 25, 2003 | Backgrounder on Health Care
The Trade Adjustment and Assistance (TAA) Act1 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.
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.2 In addition to these options, states may elect to offer other coverage options that would qualify for the tax credit.
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.4 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.
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.
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.
2. The term "COBRA coverage" refers to a provision in the Consolidated Omnibus Budget and Reconciliation Act of 1986 which allows a worker to maintain coverage through his or her former employer, provided the employer has more than 20 employees and the employee is willing to pay the full cost of the policy (the former employer's portion and the employee's share, plus a small administrative fee). Applying the credit to a spouse's coverage is permitted, provided that the spouse's employer does not contribute more than 50 percent of the cost of the policy. Applying the credit to an individual policy is permitted only if the recipient of the tax credit had an individual policy 30 days prior to leaving his or her place of employment.
3. In a recent analysis on the uninsured, health policy analysts examined tax credits and the FEHBP model as a possible approach to the uninsured. See Stan Dorn and Jack A. Meyer, "Nine Billion Dollars a Year to Cover the Uninsured: Possible Common Ground for Significant, Incremental Progress," in Covering America: Real Remedies for the Uninsured, Economic and Social Research Institute, Current Policy Series, No. 4, October 2002, pp. 5-11.
5. State Children's Health Insurance Program. For further information, see Centers for Medicare and Medicaid Services Web site at http://cms.hhs.gov/schip/.