Families lacking health insurance is a
persistent problem in the United States. According to projections
based on a sampling for the Kaiser Family Foundation, approximately
43 million non-elderly Americans were uninsured at any point during
2002. According to
the Congressional Budget Office, based on survey figures for 1998,
between 21 million and 31 million people lacked insurance for the
entire year, while nearly 60 million were uninsured at some point
during the year.
For
some of these people, a short spell without insurance poses no real
hardship. Some are "voluntarily" uninsured, in that they
consciously decide to forgo insurance that they can afford and take
the financial risk. Many of these individuals pay directly for
routine care and/or use the emergency room. But millions of others
desire insurance, yet cannot afford it or otherwise obtain adequate
coverage. For these Americans, a major illness or accident could
mean financial ruin or going without necessary care.
According to the Kaiser survey, about
two-thirds of the non-elderly uninsured are from low-income
families (less than 200 percent of the poverty level, or
approximately $29,000 for a family of three). Moreover, about 80
percent (including children) come from working families, and 70
percent have a family member working full-time.
Small-Business Insurance Is
Dysfunctional
While most uninsured people are in working
families, they are not spread evenly across the workplace. Instead,
they are heavily concentrated in the small-business sector. The
Kaiser survey
indicates that:
- Almost half (48.7 percent) of all
uninsured workers are either self-employed or work for firms with
fewer than 25 workers.
- The highest rates of uninsurance are also
among these workers. Some 26.3 percent of self-employed workers are
uninsured, as are nearly one-third (31.2 percent) of all workers in
firms with fewer than 25 employees. Analysis by the Employee
Benefit Research Institute underscores this general pattern: the
smaller the firm, the higher the probability that workers will be
uninsured.
- Meanwhile, just 12.6 percent of workers in
firms with 1,000 or more employees lack insurance--typically
low-paid individuals who decline offered coverage.
The concentration of uninsurance in small-business
and lower-income households helps to explain the high level of
uninsurance among non-managers in such occupations as agriculture
(42.7 percent of non-managers uninsured), construction (37.8
percent), and services (34.6 percent), where small firms and
lower-income households are disproportionately represented.
- The preponderance of minorities in small
firms also helps to explain the high levels of uninsurance among
Hispanic workers (38.7 percent) and black Americans (23.7 percent),
compared with relatively low rates among whites (13.2 percent).
Thus, while uninsurance occurs in every
stratum of American society, even among highly paid households, it
is heavily concentrated in households in the small-business
sector.
- Less than 30 percent of low-income,
full-time workers in firms with fewer than 25 employees have
insurance.
There are certainly weaknesses in using
the large-business sector to provide insurance, but it does
function as a workable system; however, for close to a majority of
workers in small firms, the system of health insurance in the
small-business sector is practically dysfunctional.
To address the inherent weakness of
employer-sponsored coverage in the small-business sector,
policymakers should not try to force or induce small employers to
act like large-firm sponsors of insurance. That will never be
effective. Instead, they should empower employees of small firms to
make the same choices as employees of large firms while enabling
small employers to facilitate those choices. Specifically, Congress
should:
- Create
a refundable tax credit for workers in small firms in order to
eliminate the bias against employees choosing their own coverage
and to subsidize those who need the most help.
- Create
alternative pools for employees of small firms--including plans
offered through churches, unions, and other intermediaries--so that
these workers and their families can access a wide range of
affordable plans.
- Make it
easier for employees of small firms to sign up for
insurance at the workplace--even when the employer does not sponsor
insurance--by removing tax and regulatory obstacles.
Why Small-Business-Based Insurance Is in
Deep Trouble
Surveys indicate that working Americans
generally prefer employer-based health coverage to other ways of
acquiring health insurance, and many experts maintain that
employment-based coverage has many advantages. However, most of the generic advantages
of employment-based insurance apply far less, or not at all, to the
self-employed and to workers in small firms.
There are several reasons for the general
popularity of employer-sponsored coverage and several reasons why
small firms are the exception.
- Employment-based
coverage is the only way for most families to obtain a very large
tax benefit for insurance costs. This tax benefit is
smaller and less available for workers in small firms. When part of
a worker's compensation is provided in the form of health
insurance, the value of that compensation is exempt from all income
taxes (state as well as federal) and all payroll taxes (i.e.,
Social Security and Medicare taxes). The total value of this "tax
exclusion" in 2004 is projected by analysts at the Lewin Group to
be about $188.5 billion in federal and state income and payroll
taxes.
But there are two snags with this form of tax
subsidy:
It favors high-income households over
low-income households. For an insured family with an annual
income over $100,000, the average value of the tax benefit in 2004
is estimated by Lewin Group analysts at $2,780. For lower-income
but insured families, the tax benefit is a small fraction of that
amount because their marginal tax rate is lower. Families with
household incomes of from $20,000-$30,000 receive a tax benefit
averaging just $725.
If the employer does not offer insurance
(or affordable insurance) for a particular worker, the family
typically does not receive a tax break or other subsidy to help
purchase insurance. If the employer does not offer insurance,
or if the worker cannot afford to enroll in the available plan,
there is of course no tax subsidy. But if such an uninsured person
considers buying coverage for himself and his family, he normally
receives no tax benefits at all. The whole cost is in after-tax
income.
A small firm is far less likely to offer
insurance, which means employees of such a firm would receive no
tax break, and lower-income workers are more commonly employed in
smaller firms. According to a recent survey by the Kaiser Family
Foundation, while 98 percent of firms with at least 200 employees
offered insurance in 2003, only 65 percent of firms with fewer than
200 offered insurance. Not surprisingly, in 2001, some 64 percent
of uninsured workers were not even offered insurance through their
own job. According
to a survey of firms in 1999, only 55 percent of firms with fewer
than 10 employees offered insurance.
-
Employment-based
insurance is very convenient--if it is available. The
workplace is a convenient location for many transactions. For
instance, most Americans pay their income tax through withholding
available at their workplace. Many employees also contribute to
their own IRA-type pension savings plan--typically a 401(k)
plan--by having their employer make a deduction from their
paychecks.
Similarly, when an employer provides health
coverage, an employee can easily participate in the plan, assuming
the worker can afford it. Premiums are paid directly by the
employer, and the worker does not even have to apply for a tax
exclusion. The W-2 form, which indicates the worker's income for
tax purposes, simply makes no mention of the employer's
contribution to the worker's health insurance. Moreover, if the
worker has to pay something toward the cost of the plan, this is
usually done through a convenient payroll deduction during each pay
period.
This "automatic" way of obtaining health
insurance works well for larger firms; but because smaller
employers are far less likely to offer insurance, they are also far
less likely to set up a payroll deduction system for employees who
wish to arrange their own coverage.
- Large firms
provide a large and stable insurance pooling. Small firms do
not. A company with a large work force obviously also has
a large pool for insurance purposes. This means that the insurance
risk for healthier and sicker employees can be spread across the
large group and that the insurer (sometimes the firm itself,
functioning as a "self-insurer") can predict average usage more
accurately. Thus, an insurer can estimate the expected total claims
cost for the group fairly accurately.
Moreover, if a new employee poses particularly
high--or low--insurance risk (and therefore incurs particularly
higher or lower medical expenses), this will not significantly
change the group's expected total cost, and an insurer can offer a
group premium that will not change drastically over time (other
than tracking the general growth rate for medical expenditures),
despite possibly wide variations in medical risks among employees.
Large companies also have the economies of scale and sophistication
to provide insurance at a low administrative cost per employee.
Small firms, however, are by definition small
insurance pools. A retail store with a handful of employees is a
dismal pool for insurance purposes. Hiring a new employee with a
disability, or the diagnosis of a chronic heart problem in an older
worker, can dramatically change insurance costs for the employer
from one year to the next. States and the federal government
recognize this and are exploring various ways to group small firms
together to form larger insurance pools. But the need for these
efforts only underscores the fact that small firms are a poor basis
for pooling employees' insurance risks.
Three criteria for risk pools. It is
also important to recognize that the size of a risk pool is only
one of three important criteria for a good insurance risk pool. The
other two are randomness and stability, which also present problems
for small employers and even groups of small employers. In other
words, the group must be in line with the health risk associated
with a random cross section of the population from which the
employees are typically drawn, and the group's composition must not
change frequently. Unfortunately, the employee turnover rate in
small business is relatively high, as is the tendency of
firm-owners to withdraw from multi-employer groups if they can
obtain less expensive coverage somewhere else.
- Advantages in
bargaining and administration depend on firm size. Larger
firms can bargain quite effectively with insurers and providers and
thus are able to deliver cost-effective coverage that is often
tailored specifically for their work force. Moreover, because they
have a large group available to the insurer (or the plan
administrator if they are self-insured), administrative costs per
worker tend to be relatively low.
Again, this advantage does not exist with small
firms. Small firms face relatively high administrative costs, and
many small-business owners consequently do not see it as efficient
to organize insurance. Precisely because they lack the economies of
scale and the management resources of larger firms, small
businesses tend to face high costs when administering plans.
According to data collected by the Congressional Budget Office,
overhead costs for providing insurance can be over 30 percent of
premium costs for firms with fewer than 10 employees, compared with
about 12 percent for firms with more than 500 employees.
In addition to simple economies of scale, other
things such as higher staff turnover contribute to this difference.
Moreover, many small-business owners have little desire to engage
in the demanding task of organizing health insurance to meet the
often-varied needs of their employees.
- The degree of
choice is related to the size of the employer. Because of
the size of their insurance pools and their sophistication, large
companies can more easily provide a choice of health plans, making
it more likely that their workers will be reasonably satisfied with
their coverage. Small firms, however, can rarely offer a choice of
plans. If a small employer provides coverage, it tends to be a
single "one-size-fits-all" plan. While 61 percent of workers with
insurance in firms of 5,000 or more employees had a choice of at
least three plans in 2003, only 20 percent of covered workers in
companies with fewer than 100 employees had a similar choice of at
least three plans.
-
Small firms cannot
provide the same quality of benefits. Even if a small
employer decides to offer a plan, that employer typically cannot
offer the same quality of benefits as a larger employer. High
administrative costs, low bargaining clout, small and unstable
pools, and the other obstacles combine to reduce the quality of
benefits that can be offered.
A recent study by Jon Gabel and Jeremy
Pickreign for the Commonwealth Fund underscores this disadvantage.
The study used 2002-2003 survey data from the Kaiser Family
Foundation and other sources and found that, although premiums
charged to firms were comparable between firms of different sizes,
the premiums bought fewer benefits for the workers and their
families in small firms.
For example, only 38 percent of workers in
firms with fewer than 25 employees were offered dental benefits,
compared with 87 percent in firms of 200 or more. Meanwhile, 100
percent of employees in the large firms had access to prenatal care
benefits, compared with 93 percent in the smaller firms. Moreover,
employees of the small firms faced far higher deductibles for
single or family coverage.
Goals for Addressing Uninsurance in the
Small-Business Sector
With
such a heavy concentration of the uninsured employed and their
dependents in the small-business sector, it makes sense to focus
efforts on addressing the obstacles facing families in that
sector.
A
good way to approach the task is first to consider the overarching
goals that one would want to achieve, not just for these families,
but also in the long term for all Americans.
Goal #1:
Financial assistance to families for health insurance coverage
should be based on need.
As
noted earlier, many lower-paid employees in small firms face a
subsidy double-whammy. Those who are offered insurance are paid
less and thus get a much smaller tax benefit than upper-income
employees through the exclusion from taxable income of
employer-sponsored health benefits. Many have no employer-sponsored
insurance at all, and if they purchase their own insurance, they
typically receive no tax break.
A
sensible reform would be to provide similar tax breaks or other
assistance to families whether or not they obtained their insurance
through the workplace. Rather than a tax exclusion or a tax
decision, which gives the most help to those with the highest
income, a more efficient and fairer approach would concentrate more
help on lower-paid Americans, perhaps through a tax credit.
Goal #2: The
available choices of health insurance should not depend on the
place of employment.
Unlike the employees of large firms,
workers in small business currently have little or no choice of
coverage, even if they are offered tax-advantaged insurance.
A
sensible reform would be to permit workers in small firms to use
any tax break or other subsidy available to them to purchase a plan
of their own choice, not just the one (if any) selected by their
employer. This reform would allow workers in small firms to obtain
insurance through large pools or organizations equivalent in size
and sophistication to large employers. It would also mean that
employees could retain their chosen coverage if they changed
employers.
Goal #3: While
workers would continue to sign up for coverage in the workplace and
obtain tax subsidies through the workplace, employers should not
have to sponsor health insurance for workers in order to be
eligible for tax subsidies.
Changing the nature of today's tax subsidy
and widening the choice of insurance plans for workers in small
firms means rethinking the role of small employers in the provision
of health insurance. Large firms typically both sponsor insurance
(i.e., select the plans or self-insure) and facilitate insurance
(i.e., arrange for employees to sign up and pay for insurance).
Given the obstacles that make it very
uneconomic for small firms to offer coverage, divorcing the sponsor
and facilitator roles--and leaving smaller firms with only the
facilitator role--would reduce the burden and risk for many small
employers and make it more likely that they would help their
employees to select and sign up for coverage.
Three Steps to Increase Coverage for the
Employees of Small Firms
The
inherent weaknesses of small firms as sponsors of health insurance
require policymakers to think differently about the role of small
employers. Thinking of them as just small versions of large firms
overlooks the different nature of the small-business workplace.
Instead, policymakers need to construct a
health insurance infrastructure for workers in the small-business
sector that achieves--or exceeds--the insurance advantages of large
firms by altering the role of the small employer and changing how
benefits are subsidized. (For an overview of the proposed changes,
see Figure 1 and Figure 2 in the Appendix.) Congress needs to take
three steps to do this:
Step #1: Create
a refundable tax credit for workers in small firms in order to
eliminate the bias against employees choosing their own coverage
and to subsidize those who need the most help.
Unlike a tax deduction or tax exclusion,
which favors upper-income workers, a tax credit provides either the
same level of assistance to each recipient or even more help for
lower-paid individuals. It can be designed in various ways. A
credit can be in the form of a fixed dollar credit; a percentage of
the premium and/or out-of-pocket, perhaps with a maximum credit
amount; or a combination--a base fixed amount plus a percentage of
the premium. Each has different effects and financial
consequences.
Making a credit refundable means that if
the available credit exceeds the tax liability of an individual or
family, the government would remit the difference. Hence, a
refundable credit is in effect a health insurance voucher available
through the tax system.
A
refundable credit could be limited to workers who are not offered a
plan by their employer. A criticism of this approach is that it
might induce some small employers now offering insurance to end
their plans in favor of allowing their employees to qualify for a
credit. While, in most cases, this would actually make the employee
better off, it remains a widely held criticism. On the other hand,
giving the same tax credit to all workers in small firms--whether
or not they are offered employer-sponsored coverage--means that
workers with employer-sponsored coverage would enjoy "double-dip"
tax relief in the form of the tax credit and the exclusion for
their employer-directed compensation.
To
avoid either situation, a "full" tax credit could be given to
workers who are without sponsored insurance and a smaller tax
credit to those who have a sponsored plan; the amount of the latter
credit, when combined with the tax value of the exclusion, would be
designed to be approximately equal to the full credit. In this way,
the tax credit would not be biased either for or against an
employer-sponsored plan.
Delivering the
Credit Through the Withholding System
The simplest way to deliver the subsidy to workers would
be through an adjustment in tax withholdings, much as deductions
(such as mortgage interest) or credits (such as the child care
credit) are typically handled today with the employer remitting tax
payments to the government that are net of the credits. This means
that workers would receive the tax benefit in increments throughout
the year when they receive their paychecks.
Employers could also institute a system of
payroll deductions for health premiums, perhaps through the
existing rules for flexible benefit plans, so that the money would
be available when premiums were due. Employers could pay premiums
directly from these accounts on behalf of employees. In this way,
the credit-premium transaction would be relatively simple for both
employer and employee.
An Alternative:
Assigning the Credit to a Health Plan
Another option would be to permit families to assign the
value of their credit to their insurance plan in return for a lower
premium. With the assignment, the employee signs a document
allowing the insurer to claim the credit on his behalf and the
insurer agrees to reduce premiums by the same amount. Insurers
would normally obtain the credit through an adjustment in their tax
payments to the government. Thus, rather than deal with the
withholding system, a family would only have to establish its
eligibility for a fixed or simple percentage credit.
This
alternative would be particularly attractive to those lower-income
families that do not even file tax returns and would address the
concern that the tax subsidy might not be available when premiums
are due. The process would mirror the premium payment system in the
Federal Employees Health Benefits Program (FEHBP), under which
Members of Congress and other federal employees are quoted premiums
net of the government contribution.
Boosting
Coverage Through Automatic Enrollment
Whether or not they sponsored insurance, employers could
institute an automatic enrollment and payment system to make health
insurance premium payments and obtain health-related tax benefits.
This means that employees would automatically be enrolled in a
health plan unless they explicitly declined to enroll, perhaps by
signing a document indicating that they understood the possible
consequences of not enrolling in a plan. Alternatively, a state
could establish a default bare-bones health plan in conjunction
with a private insurer, to which anyone not otherwise choosing a
plan would be assigned.
Evidence from pension plans indicates that
an automatic enrollment system for health insurance could sharply
increase sign-up rates.
Tax Credit
Proposals in Congress
Several recently introduced legislative proposals are
based on the health care tax credit concept. With some variation,
the proposals focus primarily on providing tax credits to
lower-income individuals and families without coverage.
These proposals have also garnered
bipartisan and even tripartisan support. For example, Senator Rick
Santorum (R-PA) and Representatives Mark Kennedy (R-WI) and William
Lipinski (D-IL) introduced similar legislation in the Fair Care for
the Uninsured Act (S. 1570 and H.R. 583). Representatives Kay
Granger (R-TX) and Albert Wynn (D-MD) introduced the Securing
Access, Value, and Equality (SAVE) in Health Care Act (H.R. 1236).
In 2001, Senator James Jeffords (I-VT) introduced S. 590, the
Relief, Equity, Access, and Coverage for Health (REACH) Act, with
the support of both Democrats and Republicans--including Senators
Bill Frist (R-TN) and John Breaux (D-LA).
Some
proposals have integrated tax credits with other health care
initiatives. Both President George W. Bush and Democratic
presidential candidate Senator John Kerry (D-MA) have integrated
tax credits into their overall health care proposals.
Representative John Shadegg (R-AZ) has introduced the Small
Business Access and Choice for Entrepreneurs Act (H.R. 3423), and
Senator Jeff Bingaman (D-NM) and Representative Marcy Kaptur (D-OH)
have introduced the Health Coverage, Affordability, Responsibility,
and Equity Act (S. 1030 and H.R. 2402). All three combine the tax
credit approach with an overall health reform proposal.
Step #2: Create
alternative pools for the employees of small firms--including plans
offered through churches, unions, and other intermediaries, as well
as through the FEHBP--so that these workers and their families can
access a wide range of affordable plans.
Providing a health insurance subsidy to
employees who lack adequate help today is only one part of the
solution to a lack of coverage. Affordable coverage that can be
purchased with the help of a credit is the other part. For younger
and healthier individuals and families, the individual insurance
market offers affordable policies; but for many with poor health,
obtaining affordable private coverage is difficult or
impossible.
A
solution to this problem is to construct forms of group insurance,
in essence mimicking the large pools of employees available to the
biggest employers. This would spread high risks across the pool so
that sicker individuals and families would not face unaffordable
premiums.
Enhancing the
Stability of Groups
Creating such pools, however, poses a number of challenges
that require careful design decisions. (Bringing several small
employers together as a group poses similar challenges.) A major
worry is the stability of voluntary insurance groups. The danger in
bringing individuals together and establishing a group insurance
premium--in effect, an average premium--is that healthier
individuals would have the incentive to leave the group to get
cheaper individual coverage reflecting their low risk. Meanwhile,
sicker individuals would wish to join the group to get relatively
inexpensive coverage. The group could then face a "death spiral" of
ever-higher group rates.
Certain steps can reduce this problem to a
degree. For example, some combination of higher rates, waiting
periods, and pre-existing condition exclusions could be imposed on
those seeking to join such a group who did not have prior coverage.
Thus, individuals would be rewarded for buying and maintaining
coverage when they are healthy and would be penalized if they
sought coverage only when they needed medical care. Long-term
contacts with penalties for dropping coverage could also make the
group more stable.
A Reinsurance
Pool with a Risk Adjuster
Although steps can be taken to improve the stability of
pools, for long-term success and for equity reasons, an effective
risk adjustment mechanism needs to be incorporated into group
coverage for families in the small-business sector. A risk adjuster
can take different forms, but the basic idea is to ensure that
there are appropriate cross-subsidies between high-risk and
low-risk enrollees within the pool, regardless of which insurance
plan individuals choose.
An
example would be a mandatory reinsurance pool in a state or other
area, in which all insurers would pay a percentage of their
premiums into a reinsurance pool and the member insurers would
receive payments from the pool according to whether they had an
above-average or below-average share of high-cost enrollees
relative to the other carriers in that market. In this way, an
insurer attracting a disproportionate share of high risks (perhaps
because of good coverage for cancer) would be subsidized through
the reinsurance pool by an insurer that attracted a
disproportionate share of low risks (perhaps by offering a leaner
policy with a lower premium).
Of
course, if all carriers in the market were attracting about the
same share of high-risk enrollees, then little--if
any--cross-subsidy would occur through the reinsurance pool, since
no single carrier or group of carriers was being disadvantaged in
the market.
New
Intermediaries in the Insurance System
Large firms are more effective than small firms in
offering insurance not only because they can assemble large pools,
but also because they are sophisticated negotiators and buyers of
insurance. Insurance groups based on large organizations could
achieve many of the marketing and administrative economies of scale
that are normally available only to the employees of large firms.
Typically, such organizations would not get into the business of
insurance themselves, but would act much as a buyers club does by
negotiating an arrangement with existing insurance companies.
Organizations that might function in this way include groups of
churches, trade unions, the American Association of Retired Persons
(AARP), professional and trade associations, farm bureaus, and
credit unions.
Some
organizations (e.g., many farm bureaus) already offer plans, but
working families who join these plans typically are not eligible
for tax relief. Tax credits for health insurance would change that
by making it more economical to offer insurance because far more
potential enrollees would be able to afford premiums. For years,
many African-American church congregations have organized various
forms of insurance and other services for their members. Moreover,
in many inner-city communities, these churches are typically
larger, more stable, and more sophisticated--as well as more
trusted--than the typical employer, making them a natural avenue
through which many families armed with tax credits could obtain
their health insurance.
The FEHBP System
as a Possible Model
The Federal Employees Health Benefits Program could be
another model of an alternative intermediary for workers in small
firms. The FEHBP is an example of an insurance arrangement that
offers group rates for individuals and also incorporates plans
offered through voluntary associations, primarily employee
organizations and unions. An FEHBP "look-alike"--organized by
states and that has a separate risk pool--could be one way to
provide an insurance infrastructure.
The
FEHBP provides federal workers and their dependents (nearly 10
million covered individuals) with a wide choice of plans. There have been many
proposals in recent years to open it up to non-federal workers
under various conditions, typically using a separate insurance
pool. To make the FEHBP available to non-federal workers using tax
credits, Congress would need to amend federal law governing the
FEHBP to permit a separate insurance pool for non-federal employees
(so that premiums for federal employees would not be affected),
with the exact structure in each state negotiated between the state
and the federal government. Plans currently available in the FEHBP
might be allowed to market to the new state pool if they wished,
and other plans could market exclusively to the new pool provided
they met the general requirements of the state-based version of the
FEHBP.
Unions organize several of the leading
FEHBP plans. For example, the Mail Handlers even offers associate
membership to non-union members who wish to gain access to the
health plan. These unions do not carry the insurance risk
themselves; instead, they organize a group and negotiate an
insurance package from an insurer for a fee. CNA Insurance
organizes the Mail Handlers Benefit Plan, which has roughly 10
times as many enrollees as the union has regular union members.
This "friendly society" role of unions has a long history in this
and other countries.
Many
union-sponsored plans also operate under the Taft-Hartley Act,
where union-sponsored plans are a rational way to provide coverage
when there is only a weak relationship between employer and worker.
They flourish in markets that have fewer tax and regulatory
obstacles to union-sponsored plans and where enrollees can receive
tax or other subsidies--such as the FEHBP.
State governments could also charter
FEHBP-style purchasing groups to act as intermediaries in their
states, and a number of states are already experimenting along
those lines with various purchasing group designs.
Step #3: Make it
easier for employees to sign up for insurance in the
workplace--even when the employer does not sponsor insurance--by
removing tax and regulatory obstacles.
Most
Americans pay their taxes through the workplace. This is a
convenient system under which employers withhold income and Social
Security taxes and send the money to the government. In addition,
employees typically adjust their withholdings to take advantage of
any tax breaks for which they may be eligible (e.g., the mortgage
interest deduction). In a sense, the employers are actually
operating the basic income tax system, but they do not in any sense
design the tax code for their employees or "sponsor" the tax
system. They could more appropriately be considered a clearinghouse
for tax payments.
The
place of employment is likewise particularly convenient and
efficient for handling health insurance payments. Workers with
employer-sponsored health insurance benefits typically sign up for
the firm's plan when they take a job and arrange for a payroll
deduction to cover premium costs for them and their families.
With
individual tax credits for employees available, a small employer
who is reluctant to sponsor coverage could instead carry out the
critical clearinghouse role for the plan choices of his or her
employees, making tax adjustments and premium payments. The
employer might also decide to make a cash payment toward the plan
chosen by the employee, as a fringe benefit.
Commonly, the payroll firm handling wages
and benefits for the small firm would conduct these transactions.
In this way, smaller employers could either directly or indirectly
take responsibility for the mechanical aspects of arranging for
payroll deductions and premium payments (similar to their role in
the tax collection system) without having to sponsor a plan.
With
tax credits, in principle, eligible employees could join any plan
available in their area, not just one sponsored by their employer,
and still obtain tax benefits. Thus, a small employer could play an
important role in facilitating coverage without having to organize
coverage by such things as providing information and making sign-up
simple, instituting a payroll deduction and payment system (as many
small firms do today for employee-directed savings plans), and
making withholding adjustments to reflect available credits.
The
government could spur the "facilitator" role of small firms that
are disinclined to sponsor coverage themselves by clarifying the
status of employer contributions to plans that are chosen by the
employee and not sponsored by the employer. An employer wishing to
set up such an arrangement today faces a dilemma. If the employer
helps to pay for coverage chosen by the worker, that coverage is
deemed to be an employer-sponsored plan under federal employee
benefit law, and both the employer and the coverage issued to the
worker by the insurer become subject to federal employer-sponsored
plan regulations. To avoid such regulation, the employer must pay
the worker taxable cash, which the worker can then use to purchase
coverage. But that means the worker must forgo the tax benefit
derived from his employer's making pre-tax contributions toward the
cost of his coverage.
If
the plan is interpreted as an employer-sponsored plan, the employer
could face a regulatory nightmare under state insurance rules or
the Employee Retirement Income Security Act (the federal law
affecting certain employers) since any plan chosen by the employee
would embroil the employer in complex insurance rules. However, if
the arrangement is not considered an employer-sponsored plan, both
employer and employee lose favorable tax benefits.
Thus, to encourage smaller employers to
play the role of insurance facilitator--with or without a tax
credit available to employees--federal and/or state employee
benefit law needs to make clear that favorable tax benefits are
available at least to the employee for an employer's contribution
toward coverage whether or not the insurance is deemed an
employer-sponsored plan.
Conclusion
High
rates of uninsurance among working families in small firms are a
testament to the limitations of the employment-based health system
in the small-business sector. Yet both the tax system and
government insurance rules discourage other insurance arrangements
for these uninsured working families.
Proposals for individual tax credits for
health coverage would help to remove this barrier to alternative
insurance arrangements. In addition, taking steps to build an
insurance infrastructure with affordable choices would enable these
families to have coverage that is similar to--or even better
than--the insurance available to employees of large firms.
With
these reforms in place, new forms of coverage--including plans
offered through churches, large corporations, and the FEHBP--would
become available to working Americans in the small-business sector.
For this to occur, however, Congress must recognize that an
important distinction exists between using the workplace as a
convenient location to obtain insurance and making tax relief to
families contingent upon employer sponsorship of their health
insurance.
Stuart M. Butler, Ph.D. , is Vice President for Domestic and Economic
Policy Studies at The Heritage Foundation.
Appendix
Kaiser Commission on Medicaid and the
Uninsured, Health Insurance Coverage in America: 2002 Data Update
(Washington, D.C.: Kaiser Family Foundation, 2003), p. 6.