Tuesday, 16 July 2013

A Workable Social Insurance Approach to Expanding Health Insurance Coverage

library C. Eugene Steuerle

This proposal — designed to expand health insurance coverage — was written as a component of a Robert Wood Johnson Foundation-funded project, which was directed by the Economic and Social Research Institute (ESRI). Sixteen other proposals were also written by other authors under the auspices of this project, "Covering America: Real Remedies for the Uninsured." All 17 proposals can be accessed through the ESRI web-site at www.esresearch.org.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

Key Elements

C. Eugene Steuerle has developed an incremental coverage expansion proposal that is designed to mitigate perverse incentives in the present system that discourage cost consciousness and encourage ever-larger private and public spending for health coverage—spending that is often not directed to areas of greatest need or to improving quality of care. The proposal includes the following elements:

THE PROVISION OF THE TAX CODE that allows employees to not pay tax on employer-paid health insurance premiums would be changed: the exclusion would be capped at a fixed-dollar amount, which would not change over time as health insurance premiums increase.

PEOPLE AT ALL INCOME LEVELS could choose to take advantage of a modest tax credit as an alternative to the tax exclusion; the size of tax credit would increase over time.

EMPLOYERS WOULD BE REQUIRED TO OFFER, but not necessarily pay for, at least one state-approved health insurance plan for employees.

AN "INDIRECT" MANDATE WOULD BE ESTABLISHED and enforced through the federal tax system: individuals who failed to get coverage would lose some tax benefit, such as the personal exemption, credits to help pay higher education expenses, etc.

THE INITIAL SOURCES OF FINANCING for the tax credit would be tax revenues from the portion of employer-paid premiums that are newly taxable and the tax penalties imposed on people who fail to arrange coverage.

EMPLOYERS WHO OFFER COVERAGE would be encouraged to adopt the practice of automatically enrolling employees in the employer's health plan unless they specifically chose to opt out.

About the Author

C. EUGENE STEUERLE, PH.D., is a Senior Fellow at The Urban Institute and co-director of the Urban-Brookings Tax Policy Center. He is the author, co-author, editor, or co-editor of ten books, and over 150 reports and articles, 600 columns, and 50 Congressional testimonies or reports. Among many other positions, he has served as Deputy Assistant Secretary of the Treasury for Tax Analysis, President of the National Tax Association (2001 to 2002), chair of the 1999 Technical Panel advising Social Security on its methods and assumptions, President of the National Economists Club Educational Foundation, and Resident Fellow at the American Enterprise Institute. Between 1984 and 1986 he served as Economic Coordinator and original organizer of the Treasury's tax reform effort, for which Treasury and White House officials have written that tax reform "would not have moved forward without your early leadership" and the "Presidential decision to double the personal exemption...[is] due to your insightful analysis." Dr. Steuerle has published articles on such issues as the financing of health care, the use of mandates, and the economic effect of health insurance subsidies. He has provided Congress with testimony and served as faculty at health reform retreats by both the Senate Finance Committee and the House Ways and Means Committee. He has promoted health reform proposals to focus on children and to provide both "carrots and sticks" to encourage the purchase of health insurance.


The federal government's health budget is expanding by leaps and bounds even as the number of uninsured increases and average out-of-pocket costs for Americans rise faster than income. Does this seem incongruous? It shouldn't. Federal policy toward health care operates like a man running with a blindfold on: that he trips, falls over cliffs, and generally fails to reach his objective shouldn't be surprising. What is questionable is the federal government's continual exhortation to run faster under these circumstances. If the blindfold comes off, then policy can be "run" at a more sustainable and efficient pace.

The task here, to identify ways to expand health insurance coverage and reduce the number of uninsured, cannot be achieved without squarely facing the constraints and dilemmas of health policy. Here, the nonhealth side of the wider market and the financing side of government must be given their due. That is, government expenditures on health care are one part of a broader balance sheet; the other parts of that sheet change simultaneously when health policy is reformed. Ignoring them will not make them go away.

The growth in federal expenditures on health care is so large today that it claims a major share of all new revenues to the government and has led, over time, to a decline in the share of almost all non-health functions, other than retirement, relative to both total expenditures and gross domestic product (GDP). Spending more on new health programs on top of the automatic growth in existing programs does mean less to spend on education, homeland security, community development, and everything else—in the aggregate and, often, separately. The high level of current expenditures helps to make reform very difficult, because change can be very expensive and affects a wide range of interest groups.

Even if one wants to argue that tax increases can meet demands for new public interventions (that is, that privately paid-for goods and services, rather than other public goods and services, are what should decrease), this scenario still gives health care priority to use those government revenues and weakens the ability of other functions to maintain their current resource shares, much less capture some higher future share.109

This situation is not as bleak as it might first appear. Although the high, automatic, growth rate in existing health care entitlement programs—a growth requiring no new legislation—greatly constrains achieving legislative reforms, those constraints are more political than economic. Indeed, the political problem is how to move off a path of unsustainable promises, but the economic problem is how to capture some of the sustainable portion of public health expenditure growth and steer it toward more optimal use. Here, much can be achieved.

While some components of the reform package set out here are similar to those in other proposals, this paper approaches the task by recognizing up-front all parts of the health care balance sheet. Thus, many health care proposals start from a health needs assessment that includes inadequate health insurance coverage. Then they blithely ignore all the dilemmas and constraints embedded in current health policy, ranging from large budgetary cost to high implicit and hidden tax rates. The approach here is, first, to identify the constraints and dilemmas and then see how a reform plan might be developed that recognizes and addresses them.

Note: This report is available in its entirety in the Portable Document Format (PDF).

109 Higher tax rates raise the efficiency cost, even for the same level of expenditure on other functions. That is, economic theory suggests that at the margin, the efficiency cost of taxes rises with the tax rate. Hence, if education programs require tax rates to rise from 35 to 36 percent, they are more costly in terms of efficiency than if they require tax rates to rise from 25 to 26 percent. Even if one does not accept the economic logic, it is fairly clear that taxpayers reduce their support for government functions at higher tax rates. Either way, large amounts spent on health care weaken legislators' ability to tap taxpayers yet again for non-health purposes. Trade-offs are real.

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