There is broad agreement that health care tax credits could
remove the inequities in the current tax treatment of health
insurance. But they are also a good mechanism to improve
affordability of health plans and thus reduce the number of the
uninsured, particularly among lower-income individuals and
families. As Jonathan Gruber of the Massachusetts Institute of
Technology and Leonard Burman of the Urban Institute have noted,
"tax subsidies appear [to be] the only game in town for expanding
the federal role in the provision of health insurance."
The right policy for Congress is to expand access to private
insurance for the uninsured through direct tax relief. Health care
tax credits coupled with other state reforms would go a long way
toward improving affordability and reducing the ranks of the
Critics Are Missing the Point
While there is a growing policy consensus on the value of tax
credits to reduce the number of the uninsured, the approach has
some prominent critics. These critics contend that tax credits: (1)
are not as generous as "free" public programs; (2) do not
sufficiently address the issue of affordability in health care; (3)
would result in individuals and families choosing health plans
different from employer-provided or government-controlled coverage;
and (4) would not reduce the ranks of the uninsured.
However, the critics miss a number of crucial points.
The Myth of "Free" Health Care
Federal policymakers interested in reducing the ranks of the
uninsured, particularly among lower-income individuals and
families, have two options: expand public programs or provide
direct tax relief to individuals and families through a refundable
No responsible public official is suggesting that the Treasury
should cover the entire cost of health care for all individuals and
families through a tax credit. Likewise, the expansion of "free"  public
programs would come at considerable cost to taxpayers and, in many
different ways, to patients.
Public programs do not solve the problem of access to health
care. According to Jonathan Gruber of MIT and Kosali Simon of
Cornell University, public programs might offer "the best insurance
money can't buy" because of the supposed comprehensiveness of the
government coverage yet widely known reality that patients have
"trouble availing themselves of that coverage because physicians do
not want to accept them" as a result of reimbursements being set
significantly lower than in the private sector.
Gruber and Simon highlight one study that found "one-third of
all physicians reported that they serve no Medicaid patients, and
another third reported that they limit access of Medicaid patients
to their practice."
Affordability Issue Is Not Exclusive
to Tax Credits
Although some arguethat tax credits do not make health care
sufficiently affordable, the question of what constitutes
"affordable" in health care is largely subjective and not an issue
exclusive to the use of tax credits. The issue of affordability is
often a matter of how much the government would spend, not whether
the expenditure should be made through public programs or the
It is virtually impossible to define affordability for
individuals and families with different means and varying needs and
preferences. Studies have used many techniques and definitions to
estimate how affordable insurance is. In fact, according to a
recent study by M. Kate Bundorf of Stanford University and Mark V.
Pauly of the University of Pennsylvania's Wharton School,
"...health insurance was affordable to between one-quarter and
three-quartersof the uninsured."
Even if health insurance is already affordable to many of the
uninsured, tax credits would help make it more affordable for many
others. But federal health care tax credits alone, depending on how
they are designed, might not fully address the problem of
affordability for the poorest among the uninsured. In certain
cases, depending on income or health care needs, coverage could be
enhanced through different streams of state funding.
Nonetheless, a large part of the problem can be mitigated by
offsetting the massive tax penalty individuals and families face if
they receive health insurance outside of the place of work. Short
of fully addressing this inequity in the tax code, a tax
credit -- instead of covering the full cost of health
insurance -- could level the playing field by offering a comparable
tax break for those who do not fit into today's system centered on
employers and government.
In any case, affordability is not just an issue for tax credits
but also an issue for public program expansion. The key point is
that tax credits can make coverage more affordable for millions of
Americans. The impact will depend on the design and generosity of
the credit itself, a prudential matter for policymakers.
Choice of Health Plans Will Control
Today, employers and government officials, not individuals, make
the key health care decisions -- particularly what is, or is not,
covered in health plans. Few individuals and families actually
select the health insurance that best meets their personal needs
and preferences. So, health plans respond directly to employers and
government officials, and they do not need to directly compete for
consumers' dollars. Therefore, they often have no compelling
economic incentive to provide value to the patient for the money
the patient spends either through an employer premium or a tax
If the federal tax code were changed to provide direct tax
relief to individuals and families, they would have the ability to
select the health insurance that they want and need -- whether
obtained through their employer or a different organization. More
patients would become price-sensitive, and health plans would be
incentivized to provide value for money. Employers and government
officials are no substitute for individuals when it comes to making
health care decisions. Patients can make decisions that reflect
their true preferences and optimize their utility. Therefore, tax
credits would facilitate the creation of a patient-centered system
of personal choice and value-based competition. This would
introduce a new economic efficiency into the system and thus
control costs in a rational fashion.
Reduce the Number of the Uninsured
Over the years, health care tax credits have gained broader
support from a bipartisan group of policymakers. There is ongoing
debate on legislation to reauthorize the State Children's Health
Insurance Program (SCHIP), which centers on whether to expand
eligibility into the middle class -- from 200 percent to 300 percent
of the federal poverty level (FPL). Meanwhile, two like-minded tax
credit alternatives have been advanced. In May, Rep. Rahm Emanuel
(D-IL) introduced the Healthy Kids Act of 2007 (H.R. 2147). The
bill provides that families with children earning between 200
percent and 300 percent of the FPL receive tax relief to obtain
private insurance, paying for part of its cost. Families would get
a progressive tax credit worth 55 percent to 75 percent of the
insurance premium; families would pay the other 25 percent to 45
In October 2007, Senators Mel Martinez (R-FL) and George
Voinovich (R-OH) and Representatives Marilyn Musgrave (R-CO), Tom
Price (R-GA), Tom Feeney (R-FL), and Tim Walberg (R-MI) introduced
the More Children, More Choices Act of 2007 (S. 2193, H.R. 3888).
The bill would provide a tax credit worth up to $1,400 per child
for the families in the income range of 200 percent to 300 percent
of the FPL.
As a matter of policy, this type of approach could significantly
reduce the number of the uninsured. Preliminary estimates by the
Lewin Group show that a child health care tax credit, similar to
that envisioned in the Martinez-Musgrave bill, can insure nearly
all children between 200 percent and 300 percent of the FPL.
However, much depends on the design of the credit, which is a
matter of detailed legislative negotiation. Congress would have to
choose between a flat credit, a progressive credit, or some
combination of both to maximize coverage.
Additional Measures to Boost the Tax
While health care tax credits would make health care more
affordable, give patients more choices, and reduce the number of
uninsured, alone they cannot solve the problem of health care
coverage in its entirety. Any approach to helping the uninsured
needs to be coupled with other state reforms to address local
concerns. For instance, a child health care tax
credit, as envisioned in the More Children, More Choices Act of
2007, could be coupled with innovative state reform initiatives to
optimize functioning of the credit. State officials would have both
the incentive and the ability to supplement the credit to improve
affordability or implement statewide private risk-transfer
mechanisms to cope with adverse selection and high-cost enrollees.
States could also establish new pooling arrangements, such as
statewide health insurance exchanges, to expand affordability and
portability of coverage.
Affordability remains an issue whether expanding coverage
through government programs or through a health care tax
Congressional provision of health care tax credits would go a
long way toward making health insurance more affordable and
reducing the number of the uninsured. But, as with any approach,
health care tax credits are not a complete solution to the complex
problem of the uninsured. While credits can reduce cost and expand
access to care, they can and should be combined with other
measures -- most importantly, reforms of health insurance markets at
the state level.
Greg D'Angelo is Research Assistant
in the Center for Health Policy Studies at The Heritage
Centers for Medicare and Medicaid Services, State Children's Health
Insurance Program Summary, at www.cms.hhs.gov/MedicaidGenInfo/05_SCHIP%20Information.asp.
For instance, current law allows states to require cost sharing for
up to 5 percent of a family's income for SCHIP beneficiaries.
However, few states require meaningful cost sharing. States that do
require cost sharing often require families to pay far less than 5
percent of their income. For example, in New Jersey, a family of
four earning 200 percent of the FPL could receive coverage for 1.8
percent of the family's income with minimal copayment requirements.
For an explanation, see NJ FamilyCare, "What it Costs," at www.njfamilycare.org/pages/whatItCosts.html.
Jonathan Gruber and Kosali Simon, "Crowd-Out
Ten Years Later: Have Recent Public Insurance Expansions Crowded
Out Private Health Insurance?" National Bureau of Economic
Research, Working Paper No. 12858, p. 5, at www.nber.org/papers/w12858.
Edwin Park , et al., "Martinez Bill
Would Weaken Children's Health Coverage: Bill Would Lead to Cuts in
SCHIP While Creating Poorly Designed Tax Credit," November 5, 2007,
atwww.cbpp.org/11-5-07health.htm; Linda J.
Blumberg and Genevieve M. Kenney, "Can a Child Health Insurance Tax
Credit Serve as an Effective Substitute for SCHIP Expansion?"
Healthy Policy Online, No. 17, October 2007, at www.urban.org/publications/411560.html.
Kate Bundorf, et al., "Is health insurance affordable for
the uninsured?"Journal of Health Economics, 25 (2006)
Estimates for coverage levels in 2009 by Lewin
Group were based on a Heritage proposal for a health care tax
credit to be applied to families with children in the income range
of 200 percent to 300 percent of the FPL.
Sherry Glied and Douglas Gould, "Variations
In the Impact of Health Coverage Expansion Proposals Across
States," Health Affairs, June 7, 2005 W5-259.