Health insurance coverage for adults: Tax credits or public program expansion?

With public policy in place to expand the numbers of children who have health insurance coverage through Medicaid or the state Children’s Health Insurance Program (CHIP), policy-makers have been turning their attention to the problem of uninsured adults.

Two recent studies have looked at two approaches to providing health insurance coverage for more adults: tax credits to individuals or expansion of public programs such as enrolling parents through CHIP.

A report from the Washington, DC, Urban Institute — "Workers Without Health Insurance: Who Are They and How Can Policy Reach Them?" — gives more details about the demographic profile of the uninsured than earlier studies, and makes the case for individual tax credits. And a paper from Washington, DC-based Kaiser Commission on Medicaid and the Uninsured looks at "Covering Parents Through Medicaid and CHIP: Potential Benefits to Low-Income Parents and Children."

The Urban Institute research on uninsured adults found that some 26% work in retail, 10% work in construction, and 10% work in business and repair services. These industries have lower-than-average coverage rates. (See pie chart, below.) A substantial share of uninsured workers — 16% — is in the professional services industry. While the rate of uninsurance is relatively low for such workers, they are a large fraction of the work force.

In terms of company size, 25% of the uninsured work in firms with fewer than 10 employees, but 43% are in companies with 100 or more employees. (See pie graph, below.) Seventy-one percent of uninsured workers are employed full-time.

The researchers say that workers may lack employer-sponsored insurance for one of three main reasons:

  1. The employer does not sponsor a plan.
  2. The employee is not eligible for the employer’s plan.
  3. The employee is offered coverage but turns it down.

They found that 59% of uninsured workers have employers that do not sponsor a health insurance plan. Many have tried unsuccessfully to find employment with a company that does offer a coverage plan. Some 21% of uninsured workers were not eligible for their company’s plan, and 20% declined the coverage that was available to them.

The Urban Institute report says the key findings on the working uninsured are that firm size is more important than industry in explaining sponsorship, eligibility, and take-up rates; income is more important than family type; high income and high wages are associated with higher rates of sponsorship, eligibility, and coverage; income and wages are correlated, but not perfectly, since many low-wage workers are married to someone with higher income; lower coverage rates for Hispanics are mostly due to working in jobs with much lower offer rates than whites obtain; lower coverage rates for blacks are mostly due to lower spousal coverage rates than those for whites; and given an offer, all races are equally likely to accept employer-sponsored insurance.

Bowen Garrett, a researcher with the Urban Institute, says that if targeting of efforts to increase health insurance coverage is to be effective, it must hit a meaningful share of uninsured workers. And for targeting to be efficient, eligibility must extend to a large number of the uninsured relative to the already insured. On the whole, Garrett says, both effectiveness and efficiency are accomplished by targeting workers who are disproportionately likely to be uninsured such as low-wage workers, low-income workers, and workers in small firms.

Len Nichols, another Urban Institute researcher who worked on the report, says that firms offer health insurance if their workers demand it, but the evidence makes clear that many low-income workers can’t afford to demand health insurance today.

"Increasing their purchasing power through targeted subsidies is the surest way to expand coverage. If such subsidies are structured properly, the share of firms that offer health insurance and the share of workers who enroll would both increase," he explains.

Policies designed to expand health insurance coverage tend to focus on workers in low-income households, low-wage workers, and small firms. But many low-wage workers are secondary earners in higher-income households and are already insured.

"Targeting subsidy dollars to low-income workers would extend eligibility to a large share of uninsured workers, and would be less likely than targeting low-wage workers to subsidize workers who already have coverage," Mr. Garrett says. Targeting workers in small firms is the least likely way to reach a high share of uninsured workers.

Mr. Garrett and Mr. Nichols say that public program expansion would work better than individual tax credits to reduce the rate of worker uninsurance for low-income workers, unless a tax-credit subsidy were nearly equal to the price of an insurance policy. But public program expansions would require a more elaborate eligibility determination system.

One possible approach to changes in public programs would be for states to cover parents under Medicaid and CHIP. In a study for the Kaiser Commission on Medicaid and the Uninsured, Lisa Dubay and Genevieve Kenney, also researchers for the Urban Institute, say that if states were to cover parents to the same extent as they currently cover children, 7.4 million parents (70% of all uninsured parents) would gain coverage. A side benefit would be that coverage of children also could be expected to increase.

Focus going beyond children

Ms. Kenney tells State Health Watch that until the 1980s, public policy focused on increasing coverage for children and pregnant women. In the early 1990s, there were some small-scale 1115 waivers to expand coverage to parents with state funds. Additional federal money came into the picture through welfare reform and some changes in eligibility.

Today, she says, most states can cover parents up to 100% of poverty without a waiver and get federal matching funds.

Ms. Dubay says this approach can be easier to implement because states know where children are and thus can find their parents and offer them coverage. While such an effort has the potential to significantly increase coverage, there are challenges in trying to make it happen.

For the roughly 3 million parents who have children enrolled in Medicaid or CHIP, the policy problem is the relatively straightforward one of expanding coverage to include the parents of children already covered. But more than half of uninsured parents who meet Medicaid or CHIP income thresholds have children who are uninsured despite meeting the thresholds.

Increasing Medicaid/CHIP participation by eligible children, Ms. Dubay and Ms. Kenney say, hinges on raising awareness and understanding of the programs and their benefits, improving enrollment systems, and addressing barriers related to other program dimensions.

Another concern is that expanding coverage will draw some parents who were not in fact uninsured but were paying for private coverage.

"Policy-makers need to come to terms with the inevitable fact that covering whole families may lead to some substitution of public for what was previously privately financed coverage," the authors say.

"Results from Massachusetts suggest that the extent of substitution will be small, about the magnitude observed under the Medicaid expansions for children, with most of the increased coverage coming from real reductions in the number of uninsured children. Coverage expansions to parents with higher incomes can be expected to increase the amount of substitution, while coverage expansion directed at lower-income parents should result in lower levels of substitution," they explain.

An overriding potential problem will be the availability of funds for coverage expansion, especially during an economic downturn.

"States that have the political will will find the resources to cover parents," Ms. Dubay says, "but it may be harder when there are shrinking budgets. We can’t underestimate the importance of political will in being able to cover more children in the last few years."

Some states may cut benefits 

Because of the economy, some states are talking about cutting benefits to avoid having to tighten eligibility. One way to address the concern may be to drop coverage of children from 300% of the poverty level to 200% and use the money saved to add some parents.

While earlier this year there were some signals that policy-makers were ready to consider sending more federal money to the states to be used to help cover parents, that all changed after the Sept. 11 terrorist attacks. Congressional hearings that had been planned were dropped, and Ms. Dubay and Ms. Kenney don’t expect to see any additional federal money available this year.

That means, however, that states have more flexibility and guidance from the Centers for Medicare & Medicaid Services, which indicates a willingness to accept more trade-offs between benefit levels and eligibility.

[Contact Mr. Garrett, Mr. Nichols, Ms. Dubay, and Ms. Kenney at the Urban Institute at (202) 833-7200.]