Statement of Charles N. Kahn III, President
Health Insurance Association of America

Testimony Before the House Committee on Ways and Means

Hearing on Reducing the Tax Burden: I. Enhancing Retirement and Health Security

June 16, 1999

Chairman Archer, members of the Committee, I am Charles N. Kahn III, President of the Health Insurance Association of America (HIAA). HIAA represents 269 member companies providing health, long-term care, disability income, and supplemental insurance coverage to over 115 million Americans. I appreciate this opportunity to speak to you today about the critical role tax initiatives could play in making private health insurance more affordable for all Americans and further expanding access to private long-term care insurance.

Despite Expanding Economy and Success Controlling Costs,
Growing Number of Uninsured

In response to double-digit health care inflation in the 1980s, employers became much more aggressive purchasers of health coverage. As a result, the nation has experienced a dramatic decline in the growth of health insurance premiums over the past ten years. Double-digit inflation in excess of 20 percent in the late 1980s dropped dramatically to low single digit rates in the late 1990s, more in line with general consumer price index trends. This decline in premium growth during the 1990s coincides with dramatic increases in market penetration of managed care. Enrollment in PPOs, HMOs, and other forms of managed care has tripled during the past 10 years from 29 percent in 1988 to 86 percent in 1998.

It is estimated that the impact of lower insurance prices resulting from the growth of managed care and other private sector innovations saved consumers between $24 billion and $37 billion in 1996, and that this savings will grow to over $125 billion by the year 2000. These savings are critically important because the cost of insurance relative to family income is the most important factor in determining whether people will be insured. Without these savings, some employers would not have been able to afford private insurance and would have been forced to discontinue coverage for their workers. In fact, it is estimated that there would be 3 to 5 million additional uninsured Americans right now were it not for these lower premium trends during the past few years.

Despite this progress, however, the number of Americans without health insurance coverage has continued to increase during the last decade.

It is relatively unprecedented for the ranks of the uninsured to be growing at a time when our nation's economy is expanding and health insurance premium trends are moderating.

There are nearly 170 million non-elderly Americans who currently enjoy the security of private health insurance, and the vast majority receives its coverage at the workplace. But for too many Americans, private health insurance is unaffordable, and often, government programs like Medicaid do not cover these adults.

Affordability is the key deciding factor when purchasing health insurance. Almost six of every ten uninsured individuals live in families with incomes less than 200 percent of the federal poverty level. In addition, the number of people with insurance has declined as health care inflation has continued to outstrip the growth in real family income.

There are over 44 million Americans without health insurance, and by the end of the next decade that number will grow to at least 53 million - one in every five non-elderly Americans. If health care costs increase at a faster than projected rate, and the economy experiences a downturn, the number of uninsured could rise to 60 million - or one in four working-age Americans.⁽¹⁾ Clearly, this is a disturbing trend that we, as a nation, cannot afford to let continue.

HIAA's InsureUSA Initiative

Last month, the HIAA Board of Directors approved InsureUSA, a major initiative to help expand health insurance coverage. Building on the success of employer-based health coverage, this plan would increase health coverage through a combination of targeted subsidies, tax incentives, cost-control measures, and education. We already have provided a copy of our plan to all members of Congress, including members of this Committee. In addition, we have developed a special website, www.InsureUSA.org, that provides detailed information about the plan and about the uninsured. And, of course, HIAA staff would be happy to meet with members of Congress at any time to discuss the proposal.

HIAA's member companies developed InsureUSA after nearly one year of deliberations. The plan was shaped considerably by research data prepared on behalf of HIAA by William S. Custer, Ph.D., as well as other research on the uninsured.

There are five basic precepts underlying the InsureUSA initiative.

· The time is ripe for action. Despite expansions of the employment-based health insurance market in recent years, the number of Americans without health insurance coverage will continue to grow by about 1 million people per year. As noted previously, one in every four working age Americans could lack coverage by the end of the next decade if steps are not taken immediately to stem this tide. Having said that, the individual components of InsureUSA could be phased-in over a number of years. In addition, because the proposal attacks the core causes of uninsurance, specific elements of the proposal could be enacted first, without jeopardizing others.

· To increase coverage, health insurance must be more affordable for more Americans. The main reason that Americans are uninsured is because they cannot afford health insurance coverage. Many well-intentioned attempts at insurance market reform have had the effect of increasing the cost of coverage and increasing the net number of individuals without health insurance. Reform, therefore, should both reduce the costs of health insurance and provide financial support for those who otherwise cannot afford coverage.

· Multifaceted problem requires multifaceted approach. While affordability is the primary reason people lack health coverage, there are many reasons people lack coverage. Rather than advocating a singular approach to insuring more Americans, we are advocating a diverse program designed to attack the underlying reasons that people are uninsured.

· A strong, vibrant private health insurance market should remain a cornerstone of our health care system. Expanded coverage must be achieved through means that do not threaten the coverage of other Americans or damage the existing private market. Competitive markets remain the most efficient and responsive mechanisms to provide consumers with coverage. Regulations that stifle innovation, flexibility, and responsiveness to consumers should be strongly discouraged.

· Reforms should make health coverage more affordable within the context of the employment-based private health care system, rather than undermining it. Nine in every 10 Americans with health coverage get their health insurance through their employer. And while coverage has declined overall, the percentage of Americans with employment-based health coverage has increased during the past few years. Therefore, InsureUSA would build upon this base, by providing targeted subsidies and incentives for those who are less likely to benefit from employment-based coverage.

For the purposes of today's hearing, I would like to highlight the tax initiatives proposed in the InsureUSA plan. As I mentioned earlier, affordability is a key factor for many Americans when purchasing health insurance, and tax incentives will help make affordable coverage a reality for those who do not have insurance. In addition, these tax initiatives will help provide greater equity in the purchase of health insurance for small business owners, the self-employed and individuals without access to employer-sponsored health insurance. The cost of these tax incentives is large, but HIAA estimates that they would broadly benefit over 100 million Americans who experience inequity under the current tax code.

Targeted Tax Credits for Small Businesses

First, I would like to discuss the proposal's tax credits for small businesses. Studies show that firm size is one of the major factors affecting the cost of health insurance. Smaller employers face higher costs when providing health benefits than larger firms because their size limits their ability to (1) spread risk, (2) self-insure and avoid expensive state mandates and taxes, and (3) manage high administrative costs incurred because of a lack of staff devoted to health benefits. The smallest firms tend to have low-wage employees who live in low-income families. In fact, 90 percent of the uninsured whose family head works for an employer with fewer than 10 employees also live in families whose income is less than 200 percent of the federal poverty level. ⁽²⁾

Therefore, InsureUSA would like to propose a tax credit for small employers that could be phased-in beginning with the smallest firms:

· 40 percent credit for employers with fewer than 10 employees

· 25 percent credit for employers with 10-25 employees

· 15 percent credit for employers with 26-50 employees

These credits could help the nearly 39 million Americans who belong to families whose head of household works for a company with ten (or fewer) employees. If eligibility for such credits was extended to all companies with 50 or fewer employees, the total would rise to 71 million Americans.

Furthermore, InsureUSA proposes that all employee contributions for health insurance be excluded from taxable income (even if not made through a section 125 cafeteria plan). This would primarily benefit small employers for whom it is often administratively difficult to set up cafeteria plans.

Targeted Tax Credits for Individuals and the Self-Employed

InsureUSA also includes tax incentives that target individual health insurance purchasers and the self-employed. It is a fact that people without access to employer-sponsored plans have a higher likelihood of being uninsured. Nearly a quarter (24 percent) of self-employed Americans are uninsured, and almost three out of ten (28 percent) non-elderly Americans in families headed by an unemployed individual lack health care coverage.

Under current tax law, individuals cannot deduct their out of pocket health insurance premiums until their medical costs exceed 7.5 percent of their income, and the self-employed will not have full deductibility until 2003. HIAA's proposal would extend full tax deductibility of premiums to everyone purchasing individual health insurance policies and would take effect upon the date of enactment rather than 2003. As a result, coverage would become more affordable for over 12 million self-employed workers and for nearly 25 million Americans living in families headed by a non-worker.

Medical Savings Accounts (MSAs)

While there has not been significant enrollment in medical savings accounts (MSAs) under the demonstration authorized by the Health Insurance Portability and Accountability Act of 1996 (HIPAA), statistics compiled by the Department of Treasury show that a large proportion of those with MSAs were previously uninsured. Therefore, InsureUSA proposes that Medical Savings Accounts (MSAs) be made more attractive by:

• simplifying the MSA rules under HIPAA,
• eliminating the "sunset" provision for MSAs available to the self-employed and small employers,
• extending availability to large employers,
• permitting both employees and employers to contribute to MSAs, and
• making it easier for PPOs and other network-based plans to offer MSAs.

Cost of InsureUSA Tax Incentives

Overall, HIAA estimates that changing the current tax system to encourage greater health insurance coverage and make health insurance more affordable for over 100 million Americans, would cost approximately $30 to $36 billion annually. We estimate that 71 million people (20 million of whom are currently uninsured) would be eligible for the tax credit, either through their employer or the employer of their family head. As a result of this credit, between 2.6 and 4.1 million uninsured will gain coverage at a cost in revenue expenditures of between $23.8 and $29.3 billion annually. These figures are broken down by firm size in the table below.

An additional 1.5 and 3.5 million individuals would gain coverage through the individual market. Costs to the Federal government would be between $7.8 and $8.7 billion in annual lost income tax, and the previously uninsured would account for between $670 million and $1.5 billion.

The uninsured have many faces, and tax initiatives will not benefit all of them. These incentives that HIAA is proposing are part of a broader initiative that includes government program expansion to low-income individuals, subsidies for the working poor, and a series of actions that would lower health care costs and educate consumers.

Polling Data

HIAA released a public opinion survey showing that more than 4 out of 5 Americans support the elements of the InsureUSA proposal and that 7 out of 10 believe the large number of uninsured Americans is a significant national problem requiring immediate action. While not all were in support of new taxes, most (43 of the 70 percent) felt that, regardless of new taxes, the government must act.

Of the 83 percent of Americans who favor the proposals in InsureUSA, 60 percent say they would still favor the plan even if they were required to pay an extra $100 annually in new taxes.

Based on these polling results, it is apparent that the majority of Americans believe the time is right for the government to address the growing uninsured problem, but more importantly, they are confident in the InsureUSA proposal, and feel that it meets the challenge.

Long-Term Care

In addition to the critical need to curb the growing number of uninsured Americans, policymakers must address what many people consider to be the most pressing financial problem - long-term care coverage. Long-term care is the largest unfunded liability facing Americans today, and despite the tremendous need for long-term care protection, there is a clear lack of adequate planning for it.

The long-term care insurance market is growing, and the policies that are available today are affordable and of high quality. There is a critical role for private insurance to provide a better means of financing long-term care for the vast majority of Americans who can afford to protect themselves. Continued growth of the market will alleviate reliance on scarce public dollars, enhance choice of long-term care services for those who may need them in the future, and promote quality among providers of long-term care. HIAA estimates reveal that today over 100 companies have sold over 6 million long-term care insurance policies, and the market has experienced an average annual growth of about 20 percent. These insurance policies include individual, group association, employer-sponsored, and riders to life insurance policies that accelerate the death benefit for long-term care.

HIAA would like to applaud the Administration and the 106th Congress' call for programs that would encourage personal responsibility for long-term care, help people currently in need of long-term care, and increase educational efforts on long-term care. Administration and Congressional proposals all have an important common factor, the recognition that private long-term care insurance plays a vital role in helping the elderly and disabled, as well as baby boomers, pay for their future long-term care costs.

The heightened public awareness brought about by these proposals coupled with the passage of incentives for the purchase of long-term care insurance in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) have been essential first steps in solving our nation's long-term care crisis; however, these preliminary tax initiatives are not enough. HIPAA provides little added incentive for individuals to purchase long-term care insurance because the tax breaks are only applicable to employer-sponsored long-term care coverage and fail to address the individual market where 80 percent of all policies are purchased.

Under current law, tax benefits can range from a full exclusion from income if one's employer pays the premiums to no tax benefit if an individual pays and does not have sizeable medical expenses. These disparities lead to inequitable results. For many, current law's tax deduction is illusory. Today, an individual purchasing an LTC policy can deduct premiums only if they itemize deductions and only to the extent medical expenses exceed 7.5 percent of adjusted gross income. Only 4 percent of all tax returns report medical expenses as itemized deductions.

Recent developments have improved the political climate for long-term care insurance, but they are not panaceas and will not, by themselves, achieve the optimum public-private partnership for long-term care financing. HIAA believes that other equally important tax-related changes, at both the federal and state levels, could make long-term care insurance more affordable to a greater number of people. The expansion of this market will restrain future costs to federal and state governments by reducing Medicaid outlays.

Providing additional tax incentives for these products would reduce the out-of-pocket cost of long-term care insurance for many Americans, increase their appeal to employees and employers, and increase public confidence in this relatively new type of private insurance coverage. In addition, it would demonstrate the government's support for and its commitment to the private long-term care insurance industry as a major means of helping Americans fund their future long-term care needs.

As you know, Representatives Nancy Johnson and Karen Thurman recently introduced H.R. 2102, "The Long-Term Care and Retirement Security Act of 1999." This legislation would:

• Provide an above-the-line tax deduction for LTC insurance premiums. The deduction would begin at 50 percent, but rise each year the insured keeps the policy in force until the deduction reaches 100 percent. (Joint Tax Committee cost estimate: $4.0 billion over 5 years and $12.5 billion over 10 years)
• Provide a $1,000 tax credit to individuals with LTC needs, or to their caregivers. The credit would be phased-in over a three-year period. (Joint Tax Committee cost estimate: $5.1 billion over 5 years and $14.0 billion over 10 years)
• Authorize the Social Security Administration to carry out a public education campaign on the costs of LTC, limits of coverage under Medicare and Medicaid, the benefits of private LTC insurance, and the tax benefits accorded LTC insurance
• Encourage more states to establish LTC partnerships between Medicaid and private LTC insurance along the lines of those operating in Connecticut, New York, Indiana, and California.

HIAA believes that the provisions of "The Long-Term Care and Retirement Security Act of 1999" are the critical next steps to begin preparing individuals, families, and our society for the increased LTC needs we know are coming. Congress needs to ensure that any tax legislation passed this year incorporates provisions to help private LTC insurance assume an increasingly prominent role in protecting families from LTC costs and easing the financial burden on public programs. By the year 2020, the Congressional Budget Office has estimated that, at current growth rates in private LTC insurance:

• Medicaid will save $12.4 billion (14% of total program nursing home expenditures);
• private LTC insurance will reduce out-of-pocket costs by 18%; and
• private LTC insurance will also reduce Medicare spending by 4%.
• Savings to individuals and public programs will be much greater in subsequent years, as those presently purchasing private policies approach and pass 85 years of age. If Congress enacts legislation that gives Americans enhanced incentives to protect themselves against the costs of LTC, savings to individuals and public programs will be still greater.

In summary, HIAA supports policy that would:

• Enhance the deduction for long-term care insurance premiums, such that premium dollars are not subject to a percentage of income. The deduction should not be limited to situations where employer-provided coverage is unavailable. If an employer decides to provide premium contributions, employees should be entitled to deductions for the portion that they pay.
• Allow children to deduct premiums paid to purchase a policy for their parents and/or grandparents without regard to whether the child is providing for their support.
• Permit premiums to be paid through cafeteria plans and flexible spending accounts.
• Permit the tax-free use of IRA and 401(k) funds for purchases of long-term care insurance.
• Provide a tax subsidy for the purchase of long-term care insurance.
• Encourage state tax incentives for the purchase of long-term care insurance.

Long-term care tax incentives would largely benefit two groups: those who did not have the opportunity to purchase such coverage when they were younger and the premiums were lower, and as a result, now face the greatest affordability problems because of their age; and those younger adults, our current baby boomers, who need incentives or mechanisms to fit long-term care protection into their current multiple priorities (e.g., mortgage and children's college tuition) and financial and retirement planning.

Educational effects of such tax incentives could far outweigh their monetary value by educating consumers about an important issue and, as a result, would help change attitudes. In an effort to inform all Americans about the value of long-term care insurance, HIAA formed the Americans for Long-Term Care Security (ALTCS), a broad based coalition of organizations sharing a common vision to educate policy makers, the media, and the general public about the importance of preparing for the eventual need of long-term care and viable private sector financing options. When state and federal legislation opportunities to advocate private sector options - such as tax incentives to purchase long-term care insurance - arise, members of ALTCS will encourage swift passage through a variety of advocacy, media, and lobbying means.

Furthermore, ALTCS believes that the government must continue to provide a safety net for the truly needy. At the same time, the government should provide incentives for private sector solutions, such as long-term care insurance, so that individuals and families are encouraged to take personal responsibility for long term care planning.

Conclusion

The health insurance industry, working with employers, has been extremely effective in recent years in slowing premium increases, improving health care quality, and expanding coverage in the employment-based market. Yet, without additional financial support from the government, the number of Americans without health insurance coverage will continue to grow by about one million people each year into the next decade.

Unfortunately, a series of legislative initiatives being considered at both the state and federal level would move us in the opposite direction. These mandates and so-called "patient protection" measures would put affordable private coverage out of reach for even more Americans. Instead, we need to work together to make the uninsured "job one."

Additionally, tax incentives are needed to spur the growth of private long-term care insurance and help the next generation of Americans better protect themselves from costs of long term care. HIAA supports the use of broad-based state and federal funding to subsidize the cost of health insurance for those who cannot otherwise afford it. We have witnessed the success of favorable tax treatment in helping to expand coverage to a large percentage of working Americans. Therefore, we believe that providing greater equity under the tax code for individuals and the self-employed is a reasonable way to make health coverage more affordable for a large number of the 41 million Americans who currently do not have coverage. H.R. 2102 and other similar measures would be a very good start. We also would encourage Congress to consider tax credits, vouchers and other subsidies as a means of making coverage more affordable for even more Americans.

Again, we are encouraged that Congress is addressing the issue of the uninsured and considering ways to make private health coverage more affordable. We look forward to working with you as you consider ways to expand private health coverage and provide equitable treatment under the tax code for individuals who have taken responsibility for their own health care coverage.

We look forward to working with the members of this committee, and other members of congress, to help find ways to expand health insurance coverage in the months and years ahead.

Mr. Chairman, that concludes my testimony. I would be happy to answer any questions you may have.

1. Custer, William S., "Health Insurance Coverage and the Uninsured," December 1998, Center for Risk Management and Insurance Research, Georgia State University, for the Health Insurance Association of America.

2. Custer, William S., "Health Insurance Coverage and the Uninsured," December 1998, Center for Risk Management and Insurance Research, Georgia State University, for the Health Insurance Association of America.