Tax Credits and the Affordability of Individual Health Insurance

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Tax Credits and the Affordability of Individual Health Insurance

Issue Brief No. 53 | July 2002 | Jack Hadley, James D. Reschovsky

As federal lawmakers explored using tax credits to help uninsured Americans purchase individual health insurance, a central question was whether the proposed credits would be large enough to make coverage affordable for people who were older or in less-than-perfect health. An HSC analysis of two leading proposals -- one from President Bush and one from a bipartisan group of senators (the REACH proposal) -- found that while tax credits would make individual coverage more affordable for many people, they were unlikely to offer substantial help to those who were older or had health problems. Nine out of 10 people aged 19-29 in excellent health would receive credits covering at least half of an individual policy's estimated cost, but only one in 100 people aged 55-64 in poor health would receive comparable assistance.

Understanding the Individual Insurance Market

In 2000-01, slightly more than 30 million Americans under age 65 were uninsured and lacked access to employer-sponsored coverage. Both proposals targeted people without employer or public insurance options, offering income-related tax credits to reduce the cost of individual policies. At the time, just 10.3 million Americans -- about 5 percent of the nonelderly insured population -- held individual insurance. Determining the actual cost of individual insurance was complicated by the widespread use of medical underwriting. HSC analyzed premiums reported in the Community Tracking Study Household Survey and found that individual insurance costs rose with both advancing age and declining health. A single person aged 19-29 in excellent health would pay an estimated $121 per month; the same person in poor health would pay $180. For someone aged 55-64, the range was $177 per month in excellent health to $273 in poor health -- a 54 percent difference.

How Far Can Tax Credits Reach?

An estimated 28.6 million people without access to employer or public coverage would qualify for a credit under the REACH proposal. Most -- about 88 percent, or 25.2 million -- would also qualify under the Bush plan. About 80 percent of those eligible under either proposal were uninsured. Looking at the uninsured population, REACH would provide a larger average credit per family ($1,535 versus $1,155 under the Bush plan) and a larger average subsidy of the estimated individual insurance premium (54 percent versus 43 percent). Under REACH, 58 percent of uninsured eligibles would receive credits covering at least half of insurance costs, compared with 31 percent under the Bush plan.

Without any credit, only 18 percent of uninsured eligibles would face insurance costs below 8 percent of family income -- a commonly used affordability benchmark. Both proposals increased this share substantially (53 percent under REACH, 44 percent under Bush), though 22 to 26 percent would still face post-credit premiums exceeding 16 percent of their income.

Less Help for Those Most in Need

Both proposals would provide meaningful assistance to many people but were limited in how much they could help those who were older, sicker, or very poor. Even under the more generous REACH plan, only 22 percent of the poorest individuals would face post-credit premiums in the affordable range, compared with more than two-thirds of those with incomes above poverty. The combined effects of age and health created stark disparities: 91 percent of people aged 19-29 in excellent health would receive credits covering at least half their insurance costs, while just 1 percent of people aged 55-64 in poor health would get similar help.

Policy Implications

The analysis indicated that tax credits based solely on income and family size would fail to reach many of the people who needed coverage most. Structuring credits to also account for recipients' age would help, since health tends to decline with age and insurance premiums increase accordingly. Providing larger credits for those below the poverty line could improve affordability for the very poor. Adjusting for health status presented a far more complex challenge. Roughly 6 million uninsured people were in fair or poor health, and another 7.5 million in good health had potentially chronic conditions. Many might not be able to buy an individual policy at any price, suggesting that complementary approaches -- such as building on state high-risk pool models -- might be needed alongside tax credits.

Sources and Further Reading

Kaiser Family Foundation -- Employer Health Benefits Survey -- Annual data on employer-sponsored health insurance.

Health Affairs -- Peer-reviewed health policy research.

Robert Wood Johnson Foundation -- Health policy research and programs.

Commonwealth Fund -- Research on health care coverage.