Health care tax credits can make health insurance coverage affordable for millions of working Americans.

In 2002, 43.6 million Americans went without health insurance at some point.[1] Most were uninsured for a short period: 44.1 percent for less than four months and an additional 19.9 percent for between five and 8 months.[2] The shortness of the coverage gap can be explained by any number of reasons, including the time spent between jobs after having lost work and the probationary period, after which coverage begins, when switching jobs. However, that still leaves a significant number of Americans without health insurance for long periods of time.

Policymakers have been struggling for years to find ways to help those without insurance obtain coverage. President George W. Bush has proposed a tax credit, based on income, of up to $1,000 for an individual and $3,000 for a family. There has been some criticism that this amount would be too little to help low-income individuals and families purchase coverage, but new data from eHealthinsurance.com show the cost of individual plans to be well within reach of those numbers.

Congress and the Administration should aggressively promote health care tax credits, and thus help millions of Americans who do not, or cannot, get health insurance through their places of work.

Current Tax Policy

There is currently a tax advantage for the purchase of health insurance for those who get that insurance through their employer, but this favorable tax treatment is not available for people who purchase health insurance on their own in the individual market. Workers with employer-provided coverage have their contribution toward their premiums taken out of their compensation pre-tax and, therefore, are not taxed on that income; those in the individual market do not have that option. In 2004 there will be an estimated $188.5 billion tax break for individuals and families with employer-provided health insurance, with 26.7 percent of that tax benefit going to families with incomes of $100,000 or more-roughly 14 percent of the population.[3] Families with lower incomes see less of a benefit. (See Chart 1)

While the average family receives a tax break for health benefits of $1,482, lower-income families-those with incomes of less than $30,000-get a break of only $725, with that amount being less the lower their income is.

Favorable tax treatment for health insurance should not be based on whether one has access to employment-based health insurance. Congress can end this inequitable policy. A tax credit would be the most efficient and effective way to accomplish this goal, and Congress could target the credits to individuals and families with the greatest needs including those who work in small businesses. With a change in congressional policy, health insurance in the individual market would be within reach for millions of uninsured citizens.

Premium Costs in the Individual Market

In the April 2004 study by eHealthinsurance.com, researchers analyzed the more than 62,000 plans the company sold to individuals and families in 42 states and the District of Columbia since August 2003. What they found was that the average annual premium for an individual was $1,812, or about $151 per month.[4]

Annual premiums varied widely by state, from a high of $4,044 in New Jersey to a low of $1,188 in Iowa and Wyoming, and the average age of the consumer was 33 (See Table 1).[5]

The study also found the average cost of a family plan (average of 2.9 family members) to be $288 per month, or $3,456 per year.[6]

Type of Coverage Purchased

• Individual Plans
  Seventy-five percent of individuals and 79 percent of families purchased Preferred Provider Organization (PPO) plans, while 14 percent of individuals and 9 percent of families purchased Health Maintenance Organization (HMO) plans.[7]
  Of the plans purchased, "94% of policies purchased by individuals and 89% of policies purchased by families can be considered 'comprehensive' in coverage, where comprehensiveness is defined to include: Inpatient, Outpatient, Lab and Test benefits. 76% of these plans also include Prescription Drug benefits."[8]

• Deductibles
  Ehealthinsurance.com reports that the vast majority of the plans purchased through its service had deductibles of $1,500 or less. For individuals, 71.2 percent of plans purchased had deductibles of $1,500 or less, while that number was 60.8 percent for families.[9]

• Co-Payments
  Fully three-quarters (75 percent) of purchasers bought plans with co-payments of $20 or less.[10] For individuals the number was 74.9 percent, and for families it was 75.5 percent.[11]

Preliminary Data on Health Savings Accounts

Health Savings Accounts (HSA) were signed into law on December 8, 2003, as part of the Medicare Modernization Act of 2003 and became available for purchase on January 1, 2004. Ehealthinsurance.com has offered HSAs since that date and has released preliminary data on who has bought them and how much they cost. The information, while from only a two and a half month period, is very promising.

Given the option of an HSA, individuals and families of all sizes have chosen to enroll in them. Of the enrollees, 38 percent were individuals, 16 percent were individuals and their spouses, and 4 percent were individuals with one child.[12] Families of varying size make up the remaining 42 percent.[13]

The ages of those choosing to enroll in HSA-eligible plans ran the spectrum, with the largest group being 40 to 49 years old (32.89 percent).[14] In fact, 55.7 percent of enrollees were over the age of 40.[15] Enrollees between the ages of 30 to 39 comprised another 30.26 percent of those choosing an HSA.[16]

The cost of HSA-eligible plans varies, but the majority of enrollees (52.83 percent) pay between $51 and $100 a month.[17] Another 23.14 percent of enrollees pay between $101 and $200 per month, 5.65 percent pay between $201 and $300, and 17.67 percent pay $50 or less per month.[18]

Once enrollees meet their deductibles, 54 percent will have to pay 20 percent coinsurance for office visits, surgery, hospitalization, Ob/Gyn, and X-Ray/lab tests, but 44 percent have chosen plans that require no coinsurance.[19]

While this data is very preliminary, it is promising. The option of an HSA is one that appeals, as the preliminary data show, to a wide range of individuals and families. In the future, HSAs should continue to offer an affordable option for the uninsured.

Conclusion

Tax benefits have long favored those who get health insurance through their employers. The policies and premiums of the individual health insurance market are often dismissed as out of reach for millions of those who are uninsured. Based on the data, however, this is not necessarily the case.

Comprehensive and affordable plans are available in the individual market. These health plans would be more prevalent and more effective with tax credits that are refundable and advanceable for low-income individuals, who often work in small businesses.

Congress can help millions of working Americans through a vital change in health care tax policy. The Bush Administration has proposed a solid first step with a tax credit. Through refundable, advanceable tax credits, not only would more Americans be able to afford health insurance, but the playing field would be closer to level between those with employer-provided coverage and those who find themselves in the individual market. Thus, such a policy would be far more equitable than the existing policy, which favors higher-income individuals with employment-based coverage in large companies.

Derek Hunter is Research Assistant in the Center for Health Policy Studies at The Heritage Foundation.