Committee on Ways and Means, Full Committee, 2-13-02, 107-58, Health Tax Credits to Decrease the Number of Uninsured

COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois E. CLAY SHAW, Jr., Florida NANCY L. JOHNSON, Connecticut AMO HOUGHTON, New York WALLY HERGER, California JIM MCCRERY, Louisiana DAVE CAMP, Michigan JIM RAMSTAD, Minnesota JIM NUSSLE, Iowa SAM JOHNSON, Texas JENNIFER DUNN, Washington MAC COLLINS, Georgia ROB PORTMAN, Ohio PHIL ENGLISH, Pennsylvania WES WATKINS, Oklahoma J. D. HAYWORTH, Arizona JERRY WELLER, Illinois KENNY C. HULSHOF, Missouri SCOTT MCINNIS, Colorado RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin	CHARLES B. RANGEL, New York FORTNEY PETE STARK, California ROBERT T. MATSUI, California WILLIAM J. COYNE, Pennsylvania SANDER M. LEVIN, Michigan BENJAMIN L. CARDIN, Maryland JIM MCDERMOTT, Washington GERALD D. KLECZKA, Wisconsin JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts MICHAEL R. MCNULTY, New York WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee XAVIER BECERRA, California KAREN L. THURMAN, Florida LLOYD DOGGETT, Texas EARL POMEROY, North Dakota
Allison Giles, Chief of Staff Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined.

The Committee met, pursuant to notice, at 11:25 a.m., in room 1100 Longworth House Office Building, Hon. Bill Thomas (Chairman of the Committee) presiding.

Chairman THOMAS. Good morning. I would like to welcome our witnesses and guests to today's hearing. I apologize for the lateness of the beginning of the hearing. There was necessary administrative business that had to take place.

Today's hearing is an important one on how to make health insurance more affordable, specifically for displaced workers but also for those who do not have health insurance. As we know, a million Americans have lost their jobs since September 11, and when people lose their jobs, if they had it, they lose their health insurance coverage.

Some 40 million Americans are uninsured. When the uninsured receive their medical care but can't pay for it, pretty obviously they get the care but the costs are shifted to others. Exacerbating the problem is that same uninsured individual's tendency to deal less in preventive care and often resort to the most expensive kind of medicine, emergency room use of a doctor of last resort.

Six weeks ago now the House passed legislation providing unemployed workers access to the health insurance of their choice. If the Senate had acted, millions of unemployed, uninsured workers and their families would already be receiving a 60 percent refundable and advanceable tax credit to assist them in purchasing the health insurance that best fits their family's needs. Unfortunately, the response that we got from the Senate was for the last century's response of unemployment insurance.

I think three fundamental principles should govern our solution to this problem: One, obviously availability; two, affordability; and, as much as possible, allowing consumer choice. The Displaced Worker Tax Credit I believe meets all of these principles.

The tax credit is refundable. That means even people with little or no tax liability receive assistance to purchase private health insurance. The tax credit is also advanceable. That means assistance is provided when it is needed, and individuals don't have to wait until the end of the year to get a refund check from the Internal Revenue Service. And, most importantly, it allows individual to choose the health care that best fits their family's needs, whether they choose to stay with their former employer's plan or opt for a new, perhaps more affordable one.

The President's budget reserves over $100 billion for two new health insurance tax credits, credits for all lower- and moderate-income uninsured individuals, and the Displaced Worker Tax Credits which passed this House in December.

The Displaced Worker tax credit is a large umbrella. If you have lost your job, you are eligible. It will cover all those who find themselves unemployed through no fault of their own, not just people who were lucky enough to have insurance while they had a job. It helps everyone, but particularly those at the lowest income level.

The broader uninsured tax credit is specifically targeted at lower- and moderate-wage earners without insurance, because on their jobs they don't have that insurance. It recognizes the diversity of the uninsured and allows them to purchase the health plan that is best for them.

Passing the problem off to the States, already struggling with skyrocketing Medicaid costs, is probably not the answer. Forty States are running budget deficits and six are not even in session this year. The prospect that these States would magically expand Medicaid, fundamentally a welfare program for the poor, to middle-class individuals is I think a long shot at best.

Health insurance for the unemployed should be just one component of a modern health care system that offers choice, independence, and the ability to tailor to your particular and specific needs. But the real answer is to restore our economy to full health, creating the jobs and paychecks that will get displaced workers back on their feet. They still may, however, have a job but no health insurance.

Now, prior to calling on our witnesses today, the Chair would recognize the Ranking Member, the gentleman from New York.

It seems like it was only yesterday that the leadership of this august Committee was contemplating pulling up the tax code by its roots. One of the reasons was the tax credits and the things that made the code so complicated. Of course, when you think of the political priorities as to whether or not we would want to simplify the tax code or whether we would want to destroy employer-based health plans, then we have to decide which is the priority and which way that we are going to go.

It just seems to me that even when we talked about the stimulus package, that we could have found an uncomplicated way to do it on a temporary basis, and we can move on with these hearings to see whether or not the system that you are recommending or the Administration has recommended is employee-friendly, whether it gives older folks an equal opportunity, as well as people who are not that healthy. In any event, Mr. Stark has developed an expertise in this area as the Ranking Member of the Health Subcommittee, and with your kind permission I would like to yield to him, and I might add for the Chairman's comfort, just to him.

The issue today of the health insurance tax credit is important to all of us, and most important I suppose to the 40 million Americans who go today without health insurance, which means basically in this country they don't get health care. It need not be a partisan issue. Obviously there are some great philosophic differences here.

And I am concerned that this hearing should focus not on the goal, is going to focus not on the goal of helping the uninsured get insurance, this hearing is going to focus on tax credits, whether they solve the problem or they don't. And we have much research to show that health care tax credits create more problems than they solve, unless in fact they are universal and come with strict controls on the health insurance industry, which is not suggested.

The choice of--well, we will see some research that Professor Gruber will give us, that shows that under the health tax credits we would reduce the number of uninsured by less than 2 million, and we could better spend the money to put those people who are uninsured into existing government programs. The tax credit proposal purports to give choice to people, but the choice of an inadequate, expensive plan isn't a choice. Americans who are deemed bad risk--heart condition, history of cancer, high blood pressure, arthritis, asthma, allergies--have very little real choice in the private individual market, and the tax credits aren't going to do them any good.

I know that the Chairman has been critical of the employer-based system. I would like to put into the record the Joint Economic Committee Democratic staff report on the health insurance tax credits. I think my colleagues will find it interesting, and we have copies to pass out. We also have done some research on what health plans are available for a family of four without pre-underwriting in the various communities around the country, which would show that these tax credits aren't going to go very far toward covering people.

It is interesting to note that a famous American politician, a Republican, I might add, has said repeatedly that we should jettison the employer-based health insurance, it is fatally flawed, and replace it, and I think it is interesting. Sixty years ago under a Democratic Administration we went to war, perhaps the greatest war this country ever fought, and we created at that time the employer-based health insurance to protect all the Americans who were coming in off the farms to pitch in, to help in that war effort, and now under a Republican Administration 60 years later you want to destroy that system as we enter into another war. I think that is a sad commentary. Thank you.

JOINT ECONOMIC COMMITTEE
DEMOCRATIC STAFF
SENATOR JACK REED (D-RI) - VICE CHAIRMAN
Joint Economic Committee • Hart Senate Office Building • Washington, D.C. 20510 • 202-224-0372

HEALTH INSURANCE TAX CREDITS:
THE WRONG PRESCRIPTION FOR THE UNINSURED
February 13, 2002

Despite a strong economy over the last decade, there are still millions of working adults who lack health insurance. High costs and difficulty in gaining access to care are the primary barriers to insurance coverage both for workers and for the unemployed. Many low-income workers are not offered insurance benefits through their employers. For them, the cost of private, non-group insurance plans can be prohibitively expensive. High costs also force some workers to decline employer-sponsored coverage because they cannot afford the employee share of the premiums. The unemployed face similar problems, and for them finding affordable health insurance coverage can be even more difficult.

Providing tax credits for health insurance is one approach that has been proposed as a means of reducing the ranks of the uninsured. The Bush Administration, for example, has proposed a refundable tax credit for uninsured individuals and families. But tax credits cannot fully address the problems of access and affordability for the vast majority of the uninsured in the United States.

The purpose of a tax credit is to lower the cost of health insurance premiums sufficiently to allow more people to buy coverage. Proponents argue that a health insurance tax credit would expand coverage by giving people money - either a fixed percentage of premium costs or a flat dollar amount - to use toward purchasing a plan in the private, non-group market.

To be effective, the credit must be large enough to allow the low-income uninsured to afford coverage and to give private insurers an incentive to provide that coverage. Under current tax credit proposals, however, health insurance would still be out of reach for most low-income Americans. Many very poor families would have to spend more than half of their annual income on health insurance to receive coverage under these plans. Tax credits alone would also do little to improve access to coverage, because providing coverage to people with health risks will not be profitable for insurers unless premiums are very high or better methods of pooling risks are developed. As a result, insurance providers may still turn away some uninsured because of age or health status, even if the applicants can afford to pay somewhat higher-than-normal premiums.

A more effective way to guarantee health coverage for the poor would be to extend coverage through existing public programs such as Medicaid and SCHIP. Most proposals would grant free coverage to the very poor and allow the near poor to buy into public programs at reduced rates. The advantage of these proposals is that they would virtually eliminate the problem of health insurance coverage for the poor, without spending public resources to subsidize those who can already afford and gain access to health insurance. In the longer run, offering tax advantages for health insurance for higher-income employees who are not covered by employer plans may even induce some employers to drop their plans, raising public costs for health insurance even further.

In 2000, more than 38 million Americans did not have health insurance at any point during the entire year, and many more lacked insurance for at least part of the year. Further, many of those who did have some insurance did not have enough coverage to allow them to pay for all their health care needs. These problems occurred in spite of record levels of employment, the most common source of health insurance. As the economy slows and unemployment increases, the number of uninsured will continue to rise.

Most of those without insurance are working adults under the age of 65. More than 75 percent of the uninsured - some 30 million Americans - are between the ages of 18 and 64. Most of them are working poor. The overwhelming majority (75.9 percent) worked either full or part-time during the year, yet more than half of the nonelderly uninsured have household incomes that are less than 200 percent of the federal poverty level (FPL), which in 2000 was about $17,500 for a family of four.

There are two primary barriers to coverage for the low-income uninsured - access and affordability. The cost of a comprehensive health insurance plan can be a significant share of a low-income family's monthly budget. After paying rent and buying food, many simply cannot afford to pay insurance premiums.

Access to coverage is also a serious problem. Many people are uninsured because they do not meet the eligibility requirements for group plans or for public programs such as Medicaid. Those who have past or present health problems may be unable to find an insurer willing to cover them in a private, non-group plan, and these plans often exclude existing medical problems and are very expensive when they do exist.

The problems of affordability and access plague all three markets for health insurance - employer-sponsored group insurance, public programs, and private non-group plans.

Most Americans with health insurance are covered by a plan offered by their employer. However, many of the uninsured do not have access to an employer-based plan. The majority (80 percent) of those who are working but uninsured are not offered or are not eligible for an insurance plan at work.¹ Smaller firms, which tend to employ more low-wage workers, are much less likely than large firms or those with a higher proportion of high-wage employees to offer health insurance benefits. Even if an employer offers health benefits, many part-time and temporary employees are not eligible to participate. While employer contributions and tax advantages make employer-sponsored plans generally more affordable than non-group plans, the cost of the employee share of the premiums may still put insurance out of reach for low-income workers. In 2001, workers paid an average monthly premium of $150 for a family health insurance plan.² A worker making minimum wage would earn $717 a month before taxes; therefore, such health insurance premiums would cost about 20 percent of the worker's gross monthly earnings.³

Medicaid offers an insurance safety net for some very low-income families, but not all. Federal law established a stringent set of eligibility guidelines for the program. Very few adults without children can qualify, regardless of how poor they may be. More than 80 percent of uninsured adults with incomes below 200 percent of poverty do not qualify for Medicaid coverage.⁴ Many of these adults are disabled, but even their poor health does not necessarily qualify them for coverage. In most states, non-working individuals with a chronic disability are not eligible for Medicaid unless their incomes are below 74 percent of the poverty line (about $6,8000 for a single adult). A disabled adult being supported by a spouse or parent making the minimum wage, for example, would not qualify for Medicaid. The disabled cannot get Medicare coverage until they have been receiving Social Security disability benefits for two years. So while public insurance programs have been very effective in expanding coverage to the elderly and poor children, a large portion of the low-income population remains uninsured.

The only avenue left for people without access to employer-sponsored coverage and who do not qualify for public programs is private, non-group insurance. But securing coverage in the private market is very difficult. Insurers in most states have the right to refuse coverage based on health risk and age. This means that people who have had a heart attack or who suffer from chronic health problems may not be able to find an insurer willing to cover them. One-third of insurance applications from people with mild to severe health problems are rejected.5 Even those who are accepted may not be able to get insurance that covers their pre-existing health problems.

Even if someone is able to get coverage, the cost of a plan with adequate benefits can be prohibitive. Insurers in most states can charge higher premiums based on a person's age or health status. The high costs put this type of insurance out of reach for many people. In the group market, on the other hand, insurers can pool their risk and keep premiums lower. Low-cost insurance plans do exist, but the benefits are very limited - some do not even cover basic maternity care - and the deductibles can be as high as $5,000 per year.

As unemployment continues to rise and health care costs increase, the number of uninsured people is expected to grow in 2002. More than 60 percent of Americans get their coverage through an employer-sponsored plan.⁶ When people lose their jobs, they are at greater risk of becoming uninsured. One estimate suggests that the number of people without health insurance could increase by 2.4 million this year.⁷

The Consolidated Budget Reconciliation Act of 1985 (COBRA) (see box) allows many people who have insurance coverage through their jobs to continue it after they are laid off. The vast majority of laid-off workers either cannot or choose not to take advantage of this opportunity, however. Over 40 percent of workers and their adult dependents, often those in the lower-income brackets, fail to meet COBRA's eligibility standards. Small firms, for example, are not obligated to offer COBRA coverage to workers. High costs prohibit many of the remaining 50 to 60 percent of unemployed workers from participating. Under COBRA, employees must shoulder the entire burden of the premium costs plus an additional 2 percent administrative fee.

The increase in the cost of health insurance for the individual losing a job can be substantial because, on average, employers pay almost three-quarters of the cost of the health insurance they provide as a fringe benefit for their employees.⁸ Few continue to pay a share of health insurance premiums when workers become unemployed, however. In 2001, the average monthly premium (including both employee and employer shares) for an employer-sponsored plan was $221 for an individual and $588 for a family.⁹ This means that average workers with family coverage would see their share of premiums rise from $150 a month when they were employed to $588 a month when they were unemployed and using COBRA. Even those workers who are employed may find health insurance more difficult to get in tough economic times. As the job market gets tighter, employers have less incentive to offer health insurance benefits to lure new employees. They may stop offering insurance or shift a greater share of the premium cost to employees.

Tax credits have been proposed as one option to help reduce the ranks of the uninsured. A health insurance tax credit would give people money - either a fixed percentage of premium costs or a flat dollar amount - to use toward the purchase of a health insurance plan in the private, non-group market. (Some proposals would also allow the credit to be used toward COBRA coverage or the employee share of premiums in an employer-sponsored plan.) Refundable credits would allow any eligible individual to get the credit, even if he or she does not have any income tax liability.

Proponents argue that health insurance tax credits can help expand coverage by giving people the resources to purchase coverage and allowing them the freedom to choose among the options in the private market. However, tax credits are an inefficient and relatively high cost tool to expand health insurance coverage, particularly for low-income people. Tax credits do not address some of the fundamental problems with access and affordability of coverage in the private, non-group market.

The tax credits proposed to date are too small - relative to the cost of premiums in the private, non-group market - to allow many of the low-income uninsured to buy adequate coverage. Even with the additional funds, insurance premiums can be a significant share of income for poor individuals and families. For some young and healthy individuals who can find inexpensive coverage fairly easily, a tax credit could make coverage more affordable. But premiums for nongroup coverage can be significantly more expensive for older and less healthy people.

Timing of payments is also a crucial part of making insurance affordable. People need the money on a monthly basis to pay their premiums. Tax credits are typically paid out as annual, lump-sum payments.

A tax credit would do little toward making insurance affordable for these individuals and families. An alternative approach that would do more to make insurance affordable would be to cap the cost of premiums paid by poor people. For example, federal law caps the cost of premiums for low-income families enrolled in the State Children's Health Insurance Program (SCHIP) to 5 percent of family income. This approach would help to target federal subsidies for health insurance toward those who need them most.

Money is not the only barrier to coverage for the uninsured. There is no guarantee of coverage in the private, non-group insurance market. Insurers in most states have the right to deny or limit coverage based on age and health condition.¹² Even with funds from a tax credit, some of the uninsured may simply not be able to find a private insurance firm willing to offer them adequate coverage. A tax credit does nothing to address this problem.

The problem of access also extends to the tax credit itself. If eligibility for the credit is based on prior-year earnings, as has been suggested, people in need of health insurance assistance this year may not qualify for the credit.

There are inherent problems in using the tax system to get money to the people who need it the most, when they need it the most. The tax system is based on an annual accounting of income and annual payments of refunds and credits. But an individual's income and expenses, particularly for low-income households, can vary greatly on a monthly basis. In order for a health insurance tax credit to be effective, people need to get the money every month to pay their premiums. Making a health insurance tax credit "advanceable" - delivering subsidies on a monthly basis - poses serious hurdles to effective implementation.

Current tax credit proposals do not fully address all aspects of the process they would use to advance money on a monthly basis. Most tax credit proposals acknowledge the need to make the credit advanceable so that people will have the money on a monthly basis. However, there is not an existing process by which to do this and most proposals offer only a limited description of how they will implement their idea. For example, the Bush Administration proposes that the credit would be paid directly to health insurance providers. Individuals would pay their monthly share of the premium and, using a tax credit identification number, providers would be directly reimbursed by the Treasury Department.

Another option for getting the money into people's hands on a monthly basis is to lower the withholding in their paychecks. This would require the cooperation of employers. Almost all of the people who would be claiming this credit would be working in firms that did not offer health insurance. It is unlikely that these employers would want to take on the added burden of paperwork and adjusting withholding. Of course, individuals who do not work would not be able to claim the credit with this method.

The Earned Income Tax Credit (EITC) offers an example. Data show that almost all recipients opt to take the credit as a lump-sum payment as part of their tax return. As few as one percent of recipients opt to submit the necessary paperwork to their employer in order to receive the credit throughout the year in their paycheck. Economic theory would suggest that low income individuals on tight budgets would prefer to receive the money over the course of the year to help meet basic expenses. While there is no evidence about why most EITC recipients opt for the lump sum, it raises the possibility that the added paperwork burden and the involvement of employers may discourage some people.

As noted earlier, the Administration has recommended state-sponsored purchasing and high-risk pools as one avenue for the uninsured to get access to coverage. This raises some implementation questions:

Despite dramatic increases in wealth and prosperity during the 1990's, the lack of health insurance - particularly among low-income individuals - remains a persistent problem. While health insurance tax credits may help some healthy people with good incomes to buy coverage, millions of Americans will not be helped by this approach.

Tax credits do little to address the fundamental reasons why so many low-income people are not able to get adequate health insurance in this country. The size of proposed tax credits would not make health insurance more affordable for many of the uninsured. Premiums for adequate health insurance would consume a significant share of income for poor households - even with the boost from a tax credit. Low-cost insurance plans are not widely available and their benefits are quite limited. And tax credits do nothing to address the serious problem of access to insurance coverage. Even with the necessary funds, many of the uninsured could be turned away from insurance providers because of their age or health status.

Expanding public insurance programs avoids some of the inherent problems with tax credits. Most current proposals would grant coverage free to the very poor and allow the near poor to buy into public programs at reduced rates. Expanding a public program to everyone below a certain income level, regardless of age and health status, would have a dramatic effect on the ability of the low-income uninsured to access coverage. The clear advantage of these proposals is that they would virtually eliminate the problem of health insurance coverage for the very poor.

In order to solve the persistent problem of the uninsured, the nation will need to make a significant investment. Over the long-term, the cost of having millions of people without health insurance and thus without access to basic care will put pressure on public health services and reduce earnings among people who can least afford it.

For additional information, please contact JEC economist Kathleen FitzGerald at 202-226-4065 or Kathleen_FitzGerlad@jec1.house.gov.

Achman, Lori and Deborah Chollet. Insuring the Uninsurable: An Overview of State High-Risk Health Insurance Pools. The Commonwealth Fund, http://www.cmwf.org, August 2001.

Blumberg, Linda J. "Health Insurance Tax Credits: Potential for Expanding Coverage." The Urban Institute, Health Policy Briefs No. 1, http://www.urban.org, August 2001.

Duchon, Lisa, Cathy Schoen, Michelle M. Doty, Karen Davis, Erin Strumpf and Stephanie Bruegman. Security Matters: How Instability in Health Insurance Puts U.S. Workers at Risk. The Commonwealth Fund, December 2001.

Feder, Judith, Larry Levitt, Ellen O'Brien and Diane Rowland. "Covering the Low-Income Uninsured: The Case for Expanding Public Programs." Health Affairs (20) 1, January/February 2001.
Families USA. "The Health Care Safety Net: Millions of Low-Income People Left Uninsured," http://familiesusa.org, July 2001.

Families USA Foundation. A 10-Foot Rope for a 40-Foot Hole: Tax Credits for the Uninsured, http://familiesusa.org, September 2001.

Garrett, Bowen, Len M. Nichols and Emily K. Greenman. Workers Without Health Insurance: Who Are They and How Can Policy Reach Them? The Urban Institute for the W.K. Kellogg Foundation, http://www.communityvoices.org.
Greenstein, Robert and Richard Kogan. "New House Stimulus Proposal Dominated by Multi- Year or Permanent Tax Cuts," Center on Budget and Policy Priorities, http://www.cbpp.org, December 26, 2001.

Gruber, Jonathan. "Tax Subsidies for Health Insurance: Evaluating the Costs and Benefits," National Bureau of Economic Research Working Paper #7553, http://www.nber.org/papers/w7553, February 2000.

Guenther, Gary. RL30762: Tax Subsidies for Health Insurance for the Uninsured: An Economic Analysis of Selected Policy Issues for Congress, Congressional Research Service, Long Report for Congress, January 2001.

Hoffman, Catherine and Alan Schlobohm. Uninsured in America: A Chart Book, Second Edition, The Kaiser Commission on Medicaid and the Uninsured, http://www.kff.org., May 2000.

Kaiser Commission on Medicaid and the Uninsured. Health Insurance Coverage In America: 1999 Update, http://www.kff.org, December 2000.

Kaiser Commission on Medicaid and the Uninsured. Medicaid's Role for the Disabled Population Under Age 65, Fact Sheet, http://www.kff.org, April 2001.

Kaiser Commission on Medicaid and the Uninsured. The Uninsured and their Access to Health Care, Fact Sheet, http://www.kff.org, January 2001.

Kaiser Family Foundation. "Medicare At a Glance," Fact Sheet, http://www.kff.org, June 2001.

Kaiser Family Foundation. "Rising Unemployment and the Uninsured," http://www.kff.org, December 2001.

Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits 2001 Annual Survey, http://www.kff.org, September 2001.

Lambrew, Jeanne M. How the Slowing U.S. Economy Threatens Employer-Based Health Insurance. The Commonwealth Fund: Task Force on the Future of Health Insurance, November 2001.

Lyke, Bob. Tax Benefits for Health Insurance: Current Legislation, Congressional Research Service, CRS Issue Brief, December 2001.

Meyer, Jack A. and Elliot K. Wicks, eds. Covering America: Real Remedies for the Uninsured. Economic and Social Research Institute, June 2001.

Mills, Robert J. "Current Population Reports: Health Insurance Coverage: 2000," U.S. Department of Commerce, Economics and Statistics Adminisration, U.S. Census Bureau, http://census.gov, September 2001.
Peterson, Chris L.. Health Insurance Coverage: Characteristics of the Insured and Uninsured Populations in 2000, Congressional Research Service, November 14, 2001.

Pollitz, Karen, Richard Sorian and Kathy Thomas. How Accessible is Individual Health Insurance for Consumers in Less-Than-Perfect Health?, The Henry J. Kaiser Family Foundation, June 2001.

The Lewin Group: John Sheils, Paul Hogan and Randall Haught. "Health Insurance and Taxes: The Impact of Proposed Changes in Current Federal Policy," The National Coalition on Health Care Final Report, http://www.nchc.org/1999PolicyStudies/healthandtaxes.html, October 1999.

The Urban Institute. "First Tuesdays Transcript - Tax Credits or Medicaid for the Uninsured? The President's and Governors' Plans, May 2001", http://www.urban.org/news/Tuesdays/ 5-01/mcclellan.html, May 2001.

1 Workers Without Health Insurance: Who Are They and How Can Policy Reach Them? Bowen Garrett, Len M. Nichols and Emily K. Greenman. The Urban Institute for the W.K. Kellogg Foundation

2 Employer Health Benefits 2001 Annual Survey. The Kasier Family Foundation and Health Research and Educational Trust, September 2001.

3 Calculations by the Joint Economic Committee Democratic Staff. Assumptions: minimum wage of $5.15 per hour, 35 hour work week, 4.3 work weeks per month and 7.5% social security tax.

4 "The Health Care Safety Net: Millions of Low-Income People Left Uninsured." Families USA, July 2001.

5 How Accessible is Individual Health Insurance for Consumers in Less-Than-Perfect Health? Karen Pollitz, Richard Sorian and Kathy Thomas. The Henry J. Kaiser Family Foundation, June 2001.

6 "Current Population Reports: Health Insurance Coverage: 2000," Robert J. Mills, U.S. Census Bureau, September 2001.

7 "Rising Unemployment and the Uninsured," December 2001, Kaiser Family Foundation. Analysis by Jonathan Gruber suggests that for every percentage point increase in the unemployment rate the number of uninsured people increases by 860,000. This estimate assumes unemployment rises to 6.8%.

8 Employer Health Benefits Annual Survey 2001. In 2001, employers paid 73% on average for a family health insurance plan.

11 A 10-Foot Rope for a 40-Foot Hole: Tax Credits for the Uninsured. Families USA Foundation, September 2001.

12 Fifteen states require insurers to guarantee coverage for all participants in non-group plans. However, half of these states only require insurers to offer a basic plan. Even with a guarantee of coverage, insurers in almost all states can charge higher premiums based on health status and age.

Mrs. JOHNSON OF CONNECTICUT. I would just like the record to note that Members of both parties for many, many years in this body have looked to subsidizing premiums for people who had to pay for their own health insurance as the way to close the gap and create a system that provided affordable insurance to all Americans. It is not a new idea.

What has changed is that we have figured out how to deliver it promptly, how to deliver it to everyone, and how to provide a subsidy that really is powerful in the market. And to all those Democrats that have cosponsored legislation, introduced tax credit legislation, I just want to say, Mr. Stark, that I don't think that you speak for all in your party when you say that tax credits are not an effective means to reach the uninsured.

So it is a long-standing issue with a lot of Democrat support, and I am pleased that we are moving forward in this hearing on a very powerful approach to providing health security to the unemployed, as well as some level of financial security which our unemployment compensation system is structured to provide. Thank you, Mr. Chairman.

Without objection, the Chair would place in the record an article from The Washington Post, June 18, 1999, the co-authors are Dick Armey and Pete Stark, about the positive aspects of a tax credit for the uninsured.

Medical Coverage for All
The ultimate congressional odd couple weighs in on tax credits for the uninsured.

We may be the ultimate congressional odd couple. We seldom agree on anything. But on this we do agree: Congress should act now to help the 43 million Americans who have no health insurance.

The ranks of the uninsured are growing by 100,000 a month. And this is happening during a time of strong economic growth, despite continuing congressional attempts to expand coverage. Imagine what will happen come the next economic downturn.

For individuals, being uninsured is a problem because too often it means health care forgone, small warning signs ignored and minor illnesses allowed to become costly crises. It's a problem for families because unpaid medical bills are a leading cause of personal bankruptcy. And it's a problem for the nation because uncompensated care is an unfair burden on doctors, hospitals and taxpayers.

Why is the problem growing? Because Americans are increasingly unable to get coverage through their jobs. With health premiums going up, employers are bearing a smaller share of those premiums, and the work force is becoming increasingly mobile and part-time. More and more people find themselves working in places where coverage is either unavailable, unaffordable or undesirable ("one crummy HMO"). And when these workers try to buy insurance outside their jobs, they lose a generous tax break, making coverage that much less affordable.

Indeed, today's tax code discriminates against not only insurance purchased outside the workplace but also lower-paid, part-time and small-business workers. The highly paid CEO gets a more lavish health-care tax break than the waitress earning the minimum wage.

These problems cry out for remedy. And happily, a bipartisan remedy is available. We think Congress should create a new refundable tax credit to enable all Americans to buy decent health coverage.

Properly designed, such a credit could bring about near-universal coverage without new mandates or bureaucracy. It would eliminate barriers the uninsured face in today's system, enabling them to shop for basic coverage that suits their individual needs and is portable from job to job.

To be successful, the credit would need to be sufficiently generous to buy a decent policy; available to those who owe no tax liability; and, to prevent fraud, paid directly to insurers or other entities, not to individuals.

Would the existence of such a credit prompt some employers and employees to drop workplace coverage? Unavoidably. But job-based coverage is already eroding. And the erosion can be minimized by making the credit less attractive than most company plans.

To be sure, we don't want to end workplace coverage. We do want to permit a gradual transition to a world in which individuals are free to obtain the kind of insurance they want, regardless of where it's purchased.

What amount is "sufficiently generous"? That's open to debate. But we note that $3,600 per family is roughly the amount the federal government spends on its own employees' families.

Obviously this proposal would produce a revenue loss of tens of billions a year, risking a return to deficits. So how do we "pay" for it? Well, a portion of the surplus could be used. And we note that reducing the numbers of the uninsured would free billions in current federal cross-subsidy programs.

Admittedly, a tax credit can't help people who are too sick to insure at any price. Although we differ, fairly strongly, about the best way to help such people, we agree a reasonable way can be found to do so, and we'll keep looking for it. (Rep. Stark would prefer to get insurers to take all customers at a common price, regardless of health status. Rep. Armey would set up "high-risk pools" to subsidize sick people's coverage in the 22 states that haven't already done so.)

Too often, when Congress turns to health issues, it ends up applying legislative Band-Aids. It's time to address underlying causes. The biggest health problem facing the country is the uninsured. The tax code can be used to help them. We urge a bipartisan consensus to do so.

Rep. Dick Armey (R-Tex.) is the House majority leader. Rep. Pete Stark (D-Calif.) is the senior Democrat on the House Ways and Means health subcommittee.
©Copyright 1999 The Washington Post Company

Mr. STARK. Because he is quite correct, I worked for a long time with Majority Leader Armey to see if we could do it, and we came to the conclusion that while a minimum of a $3,600 tax credit was necessary, first of all it had to be universal, it had to replace the entire health care system, and it had to have regulation over the insurance industry. Mr. Armey felt that he couldn't get the Republicans to agree to that, we would have to have community rating and no underwriting, that it wouldn't work without regulating the insurance companies, and we agreed at that point that it was a good idea but politically impractical without the second half, which would have been our controlling the insurance industry.

Chairman THOMAS. I will tell the gentleman that in his opening remarks he did indicate that there were individuals who thought the employer-based system was flawed. Apparently he is among them, and if he wishes to work with the Chair on those additions which would make an adequate tax credit insurance structure, the Chair is more than willing to work with the gentleman. Although I certainly couldn't replace Dick Armey in the team of Dick Armey and Pete Stark, I would be willing to work on that.

And with that, it is a pleasure to have in front of us again the Honorable Mark B. McClellan, Member of the Council of Economic Advisers (CEA) in the Bush Administration, and the Honorable Mark Weinberger, who is the Assistant Secretary for Tax Policy at the U.S. Department of the Treasury. Your written statements will be made a part of the record, and if you could summarize briefly, we would appreciate that, so that we could move to the questions focused in part upon the President's proposal in his budget. I assume, Mr. Weinberger, you will begin?

STATEMENT OF THE HON. MARK WEINBERGER, ASSISTANT SECRETARY FOR TAX POLICY, U.S. DEPARTMENT OF THE TREASURY

Mr. Chairman, Mr. Rangel, distinguished Members of the Committee, I appreciate the opportunity to discuss with you today the President's proposal for tax credits for the purchase of health insurance. The Administration looks forward to working together with Congress to address the pressing need to expand access to health insurance for uninsured Americans.

Almost 40 million Americans are reported to go without health insurance coverage for an entire year, and as many as 20 million more are without health insurance coverage during some part of the year. The scope and persistence of this issue highlights the importance of our making progress this year.

Tax credits to expand access to health insurance are a common element of proposals from both Republicans and Democrats. Many of the Members of this Committee have supported such proposals and sponsored such legislation in prior sessions of Congress. We just seek to bridge partisan divides and seek common ground on this key issue which enjoys such bipartisan support and is important to uninsured Americans.

As we move forward together on the issue, I hope we can make some commitments to each other. When we see a weakness in a particular element of a proposal, let's make a resolution to try and identify a fix. When we question the motives of alternative approaches, let's have the resolution to focus on our shared objectives of better and affordable health insurance for all. When there are heartfelt differences of opinion, let's have the resolution to listen and not just hear. And when we recognize good ideas in each other's perspective, let's have the courage to learn from them, adopt and innovate.

Finally, there are many tradeoffs in developing a comprehensive solution. A policy that excels along one dimension may do poorly along others, and we have to balance these competing dimensions. There is a need for flexible and innovative solutions to this problem. The reality is that there is no single approach that will resolve the entire issue.

The uninsured population is not made up of just the poor or the unemployed. In 1999, 81 percent of the uninsured population were in families with at least one full-time worker. While more than one-third of the uninsured had incomes below the poverty line, approximately 29 percent had incomes between 100 and 200 percent of poverty. Nearly three-quarters of the uninsured below 200 percent of poverty are adults, many who do not live in households with children.

Given the need for a broad approach to this problem, the President supports both an immediate temporary health insurance credit for displaced workers, as contained in the economic security package passed by this body, and a permanent new health insurance tax credit to expand health insurance coverage that is not dependent upon employment status. For brevity, I will describe the displaced worker credit and my colleague, Mr. McClellan, will discuss the permanent health insurance credit.

The health credit for displaced workers is a refundable, advanceable tax credit that can be claimed by unemployed workers for up to 12 months. The credit can be used to offset 60 percent of the cost of health insurance premium for unemployed workers and their families. The credit can be applied to the purchase of the Consolidated Budget Reconciliation Act of 1985 (COBRA) and other types of qualified non-employer health insurance. Eligible unemployed workers include those who receive unemployment insurance benefits and those who would be eligible for those benefits, except that the rights to benefits were exhausted or the period in which the benefits were payable ended.

The design of the health credit reflects the President's goal of providing targeted, quick assistance to Americans who have lost their jobs during this recession. Because it builds on existing infrastructure to assist displaced workers, it can be fully implemented in a matter of months.

In particular, State work force agencies will certify eligibility for the credit when they certify the displaced worker is eligible for unemployment insurance benefits. That certification will be presented to the insurance company along with the remainder of the premium. The insurer will be reimbursed by the U.S. Department of the Treasury for the amount of advance credit it provides.

We believe that the displaced worker credit offers a number of advantages over competing proposals that have been advanced that would have been COBRA-only policies or expansion of Medicaid assistance. A COBRA-only credit would provide no benefit to 40 to 50 percent of displaced workers.

A COBRA credit would impose a costly new mandate that employers would be required to implement immediately. Further, a COBRA credit is poorly targeted to workers who lose their jobs because of the economic downturn. About 60 percent of those eligible for a COBRA credit are workers who voluntarily leave their job, not displaced workers.

Some have advocated forcing workers not eligible for the COBRA credit into a State Medicaid plan. There are many troubling aspects of that temporary relief. This would require these workers to drop their current insurance coverage and possibly change health insurance providers if they do not participate in Medicaid.

Extending Medicaid to cover these displaced workers would require State legislation, and would necessitate delays before State legislatures were even in session to be able to provide this so-called immediate relief. The cost to States of such expansions could be ill afforded by many States at the present time, and would take away resources from their ability to fund expansions for low-income children and families who also need assistance.

So, in short, that is the description of the displaced worker credit, and I turn to Mr. McClellan to talk about the permanent health insurance credit.

Mr. MCCLELLAN. Mr. Chairman, Mr. Rangel, and distinguished Members of the Committee, I also want to thank you for the opportunity to discuss with you today the President's proposals for health credits as one element of an effective policy response to address the urgent problem of the uninsured in the United States. The second credit we will highlight is the permanent health insurance credit contained in the President's budget proposal.

This proposal would create a refundable, advanceable tax credit for the cost of health insurance purchased by individuals under age 65. Individuals participating in employer-provided health plans or generally in a public plan would not be eligible for the credit. Eligible health insurance plans would be required to meet some minimum coverage standards, including coverage for high medical expenses.

This credit is designed with a number of attractive features in mind, reflecting our efforts to learn from and incorporate the best ideas of previous proposals as well as critiques of those proposals. Our goal is to maximize the impact of the credit on the uninsured, while minimizing any undesirable effects on currently covered workers. This includes significant modifications of the credit that the President proposed in his budget last year.

First, the credit amount varies with family size, mirroring the relationship of actual health insurance premiums. The maximum credit would be $1,000 per adult and $500 per child up to two children in a family. For example, a policy covering two adults and two or more children would be eligible for the maximum credit of $3,000.

Second, the credit is targeted to lower- and middle-income individuals and families who are least likely to have employer-based health insurance, resulting in an efficient use of the subsidy to expand coverage. The credit phases out with incomes. It is further limited by a cap on the amount of the premium eligible for the subsidy. The maximum subsidy percentage of 90 percent would apply for low-income taxpayers and would be phased down at higher incomes.

Third, the credit is refundable, so even those without any income tax liability can receive the subsidy.

Fourth, the credit is available in advance at the time that the individual purchases health insurance, before they file their tax return. Eligibility for the advance credit would be based on the person's prior year's tax return. Individuals would reduce their premium payment by the amount of the credit, and the health insurer would be reimbursed by the U.S. Department of the Treasury for the amount of the advance credit. Alternatively, instead of an advance credit, individuals could claim a credit as part of the normal tax filing process based on their current year income. The availability of the advance credit will make the credit much more attractive for persons who want to use the assistance when they are actually purchasing their insurance, not later, making it even more effective in expanding health insurance coverage.

Fifth, while the credit could be used for the purchase of health insurance in the nongroup market, qualifying health insurance could also be purchased through private purchasing groups, State-sponsored insurance purchasing pools, and State high risk pools. These groups can promote risk pooling and provide economies of scale, resulting in additional opportunities for individuals to get affordable coverage. States can also provide additional subsidies for lower-income participants.

There is considerable new evidence that this proposal could have a rapid and substantial impact on the uninsured. The Council of Economic Advisers has just released a new analysis of the credit, which I would request to be read into the record.

The President’s proposal to introduce tax credits for the purchase of health insurance will enable millions of Americans to purchase private health insurance, improving the functioning of private markets, empowering patients to make informed decisions, and increasing utilization of high quality health care.

This proposal is part of a broader vision for promoting access to innovative, high-quality patient-centered health care for all Americans, by encouraging effective patient choice among competing health care coverage options. This vision is discussed in more detail in the 2002 Economic Report of the President.

The goal of the health insurance credit is to increase participation in and improve the functioning of health insurance markets. To see the value of this improvement, it is important to understand the composition of the uninsured population and how those markets function.

In 2000, approximately 39 million Americans, or 14 percent of the population, reported that they were uninsured for the entire year.[1] They may go without effective health care, or may rely on inefficient care at emergency rooms and clinics.[2] Expensive expansions of government run health care programs such as Medicaid and the State Children’s Health Insurance Program (SCHIP) in the 1980s and 1990s did little to change the number of uninsured.

The uninsured population is not made up of just the poor or the unemployed. Over 80 percent of the uninsured population in 1999 were in families with at least one worker. Furthermore, while 36.4 percent of the uninsured had incomes below the poverty line, a large fraction, 28.7 percent, had incomes between 100 and 200 percent of poverty.[3] As shown in Figure 1, nearly three-quarters of the uninsured below 200 percent of poverty are adults, most of whom do not live in households with children. These childless adults would benefit from the health insurance credit, but would not be assisted by proposals to expand the SCHIP program to include parents. That said, many of the children who are currently uninsured are also eligible for Medicaid or SCHIP. Coupled with continuing outreach efforts to increase Medicaid and SCHIP enrollment, the availability of the credit provides another opportunity for low-income families to get coverage.

Insurance coverage differs significantly by race and ethnicity. In 2000, 32 percent of Hispanics were uninsured, compared to 20 percent of blacks and 19 percent of Asians. In contrast, just 10 percent of whites are uninsured.[4] Insurance coverage also differs across types of employment, with employer-sponsored insurance less likely to be available to part-time, seasonal, and short-term workers.

The benefits of increasing participation in health insurance markets extend beyond those realized by the individuals themselves. First, even those without insurance receive publicly subsidized basic health care through emergency rooms – a very expensive way to provide care. Second, access to health care is important to control the spread of disease through immunizations or through early diagnosis and treatment. Third, greater participation in insurance markets allows broader pooling of health risks – the markets themselves work better.

One important goal of health insurance is to reduce the risk to individuals of high medical expenses, trading the certainty of a known premium for the uncertainty of very unpredictable health care costs. An important element of insurance is thus the “pooling” of risk – people sign up for insurance before they know how much they will spend on health care, and then the premiums of those who have low expenses help subsidize spending on those with high expenses.

Several things can interfere with the smooth functioning of this important insurance market. One is lack of choice and competition. Health insurance plans have little incentive to adapt to changes in medical care in order to compete for enrollees if the enrollees have no other options. Insurance markets with little or no competition are thus unlikely to keep up with innovations in health care, and without market discipline plans may encourage excessive care and inappropriate treatments. A second problem is “adverse selection”: If individuals know their likely health insurance expenditures ahead of time, they can sign up for more generous insurance when they know their expenditures will be high, undermining the pooling of risk that is the key to insurance. Given a choice among plans, the healthiest people (with the lowest expected costs) can save money by pooling together in the least generous plan, or dropping insurance altogether, making the cost of the more generous plans rise as the expected costs increase.[5] Just as individuals with higher expenses want more insurance, insurance companies want customers with lower expenses, and may cater their plans to appeal to those with low risk.

Both of these incentive problems can lead to premiums that are higher than they need to be, lower value care because efficient services are not offered, and increases in uninsurance because people conclude that the coverage is simply not worth the cost. The result of non-optimal coverage is inefficient health care use, with worse health outcomes and avoidable costs due to disease complications that could have been prevented with better coverage. The health insurance credit can improve the functioning of health insurance markets by addressing these problems.

The vast majority of private health insurance in the U.S. is purchased through employers. An important reason is that these purchases are subsidized through the tax code: Employer contributions are not taxed, which provided an estimated $126 billion subsidy in 2000 (including $85 billion through the exclusion of employer contributions from income taxation and another $32 billion through their exclusion from Social Security and Medicare HI taxes). This tax benefit is larger for those with higher incomes, since they face a higher marginal tax rate (see Figure 2).[6]

The current tax subsidy encourages provision of health insurance through employers. In addition, provision through employment forms a basis for risk pooling that is largely independent of health status, at least in most large firms.

This is one of the main reasons that the health insurance available through individual (non-group) markets is often more expensive than comparable coverage through an employer: the people who choose to obtain such coverage are those who think they are likely to have higher health expenditures, raising premiums and making the insurance even less appealing to those with lower expected costs. Furthermore, the administrative costs associated with these non-group plans are often much higher. (These problems also afflict the market for small employers.) State measures to reduce the cost or increase the availability of insurance in the non-group market are discussed in more detail below. Unfortunately, some of the regulatory approaches intended to improve the availability of affordable coverage have often done more harm than good, in effect discouraging participation in insurance markets.

In contrast, the health insurance credit will increase participation in these individual markets, increasing risk pooling and improving market functioning overall. An important question is the degree to which it would interfere with the functioning of employer-sponsored group markets by inducing some employers to stop offering insurance and some employees to stop taking the employer-sponsored insurance (ESI) they are offered. In practice, the health insurance credit has been structured to complement employer-sponsored insurance markets.

The Administration’s health insurance credit would be available to people under 65 purchasing private health insurance coverage outside of plans offered by their employer or a spouse’s employer. That is, both working and unemployed people who do not already have tax-subsidized, employer-provided insurance (or insurance through public programs such as Medicare or Medicaid) would be eligible.[7] Workers who are laid off and lose their insurance would be able to take advantage of the credit regardless of whether or not COBRA continuation coverage was available to them.

Evidence suggests that the decision to purchase health insurance is quite sensitive to its cost. The President’s proposal provides a refundable tax-credit of up to $1,000 for a single person and up to $3,000 for a family with two or more children, with the credit phasing out between $15,000 and $30,000 for single filers and between $25,000 and $60,000 for other filers purchasing policies for more than one person (or $25,000 to $40,000 if purchasing a policy for one person only). The effect of the credits on participation in individual insurance markets depends critically on the cost of the available insurance.

Some reports have placed the “mid-range” cost of family health insurance at approximately $7,000 per year, large relative to a $3,000 tax credit.[8] This estimate is likely overstated: it reflects the average cost of plans offered, not the best offer available. In addition, many of these plans often provide near first-dollar coverage — that is, all expenses, even predictable periodic and routine expenses, are covered, and there are almost no copayments, coinsurance, or deductibles.

Expensive “first dollar” coverage may not make good economic sense. First, minimal copayments lead to a disconnect between cost and value in health care decisions, contributing to rising health care costs (and patient frustration with managed care plans meant to control costs). As health care costs rise rapidly, such policies will be even less sustainable. Second, reliance on minimal copayments in both private managed care and government health insurance plans has led to significant regulatory intrusions and price controls, all of which adversely affect doctor-patient decision-making. However well-intentioned as an approach to limiting cost increases, such intrusions may make it more difficult for patients to get both appropriate treatment and protection from very high medical expenses. Third, patients will be much more likely to take an active interest in the value of the care they receive when they face at least a portion of the cost.

Analysis by the Council of Economic Advisers finds that Preferred Provider Organization (PPO) policies with significantly lower premiums are almost always available. These plans, which are not “first-dollar” plans but which provide effective health insurance assistance, are described in more detail in the Appendix. They typically cover all major types of medical services and treatment, have per person deductibles of $1,000 ($2,000 per family) while also covering preventive and emergency care, they generally provide significant discounts on all prescriptions and in-network services, and they support a full range of provider choices. The average premium for a plan of this type was less than $3,000, and was less than $1,000 for young individuals. For lower-income Americans, the proposed health insurance credit thus generally covers more than half of the premium the purchaser would face, and almost always covers more than a third.[9] Moreover, these prices are representative of actual coverage in the population, not the premiums available to just a few very healthy people. A recent study by the health insurance distributor eHealthInsurance found that three-quarters of premiums for individual health insurance plans that it sold were less than $2,000 and three-quarters of family premiums were less than $5,000.[10] Similarly, another study found that people with all but the most serious chronic illnesses were able to get affordable individual market insurance offers in every market examined.[11]

The type of plans that those using the health insurance credit are likely to purchase have distinct economic advantages. The growth of PPO and similar plans in the private sector reflects patients’ desires for more choice, and the health insurance credit would allow individual purchasers to have the same choices. These policies function well as true insurance, providing excellent protection against large unanticipated expenses caused by a severe illness or needed surgery, and assistance with access to the full range of modern health care treatments. Patients who prefer lower copayments could choose a Health Maintenance Organization-style plan that used more restrictive networks and tighter control of care to keep the premium down. The presence of the credit may encourage insurers to offer even more plans catering to new insurance market purchasers, such as plans with good catastrophic coverage but deductibles high enough to keep premiums in line with the size of the credit. These plans would not only encourage the use of the credits, but would encourage responsible and informed use of health resources.

The analysis also documented substantial differences across geographic areas in the price of similar policies. This variation indicates that national averages can hide substantial heterogeneity in cost and may provide a poor representation of the market facing most families. One cause of this variation may be differences in the cost of care at the local level. (Another important source of variation is different state regulatory environments discussed below.) Having more involved and informed consumers of health care and greater individual participation may help reduce geographic disparities.

In order to infer the effect of health insurance credits on the purchase of individual insurance policies, we need to know not only what insurance policies are available, but how sensitive individuals’ decisions are to the price of the insurance that they face. Estimates of this price sensitivity are difficult to obtain, but some studies suggest that individuals are quite sensitive to large subsidies, and are thus much more likely to buy insurance when they receive a 50 to 90 percent subsidy.[12]

Several different studies have examined the likely effects of the health insurance credit on insurance purchases. Pauly, et al. (2001) find that a $1000 refundable tax credit would likely increase the participation rate among the uninsured by 21 to 85 percent.[13] Gruber (2000) finds smaller effects, closer to 10 percent, but analyzes plans with premiums that are much more expensive than those described above. Other studies focus on average premiums, not the best offers available. Even with the most conservative assumptions, the health insurance credit would substantially increase participation in health insurance markets. If even 15 percent of those uninsured for a full year (or 10 percent of those uninsured for part of a year or more) take advantage of the health insurance credit, 6 million people would be newly covered. In addition, the credits would encourage those already purchasing non-employer coverage to purchase more comprehensive policies.

The health insurance credit would likely significantly increase participation in non-employer health insurance markets and increase the generosity of coverage selected. This increased, more generous participation would both increase the pooling of risk and reduce administrative costs.

The health insurance credit could increase the participation in individual markets of a wide cross-section of Americans. As shown in the Appendix, it would cover a substantial portion of premiums for younger, healthier people, heavily subsidizing their purchase of insurance. The credit would cover a lower percentage of the premium for individuals over 50 and those with chronic illnesses, for whom rates in the individual market are higher. While there is little evidence on this point, older and sicker people are likely less sensitive to the price of insurance and would value the credit more highly, so even though their premiums might exceed the maximum credit by more, they may increase participation in individual markets just as much as their younger, healthier counterparts. This broad increase in participation, especially of younger and healthier people, would improve the pooling of risk in the individual market (since insurers cannot perfectly underwrite individuals' health risks).

There are several other regulatory reforms that affect the efficiency and availability of insurance through individual markets. In an effort to subsidize the insurance purchase of those with high expected medical expenses, some states have implemented regulations that limit or prohibit the extent to which insurers can vary prices based on expected expenses. Some of these regulations have the perverse effect of driving people out of individual insurance markets.

States have several regulatory devices at their disposal, including restrictions on the variation in premiums (rating bands), requirements on the fraction of premium receipts that must be paid out in benefits (loss ratio restrictions), mandated benefits, restrictions against the exclusion of preexisting conditions, community rating and guaranteed issue. In community rated states, insurers must offer all purchasers in the same “community” the same rate.[14] By prohibiting insurers from charging higher premiums to those in high-risk categories and in effect averaging costs of the high risk people with the lower risk people, this regulation is intended to hold down the premiums for those who are expensive to insure. States with guaranteed issue regulations require that insurers write policies for all comers. When coupled with community rating (such as in Maine, New Jersey, New York, and Vermont), this policy means that even those with very high expected health care costs will face the same price as healthy people. The drawback of these policies and many other forms of regulation is that the premiums facing most purchasers may be higher than they would be in the absence of regulation, since the premium collected must be sufficient to cover the expected expenses of the group. Given higher premiums, the healthiest individuals (those with low expected costs) may chose not to buy policies. Regulation thus provides another cause for adverse selection, and a spiraling upward of premiums.

As an alternative to policies such as community rating, states can establish high-risk pools.[15] These pools are often subsidized with general revenues or through taxes on insurance companies. Broadly funded high-risk pools can subsidize the insurance purchase of people with consistently high medical expenses, without making health insurance unappealing for others. Today, 29 states have adopted high-risk pools (including some states, such as Kentucky and Washington, that used to have guaranteed issue but found that it severely undermined their individual insurance markets).[16] States with adequate, broad-based funding for their risk pools are providing good insurance at affordable rates for people who would otherwise face high premiums in the individual market, and are doing so without driving up rates and reducing coverage.[17]

Finally, lower-income people can also use Administration’s health insurance credit in non-employer purchasing groups, including private affinity groups and state-sponsored purchasing pools. Many states have already established purchasing pools that allow individuals enrolled in their Medicaid or SCHIP programs to choose from competing private plans. All states have competitive purchasing pools for their state enrollees. Thus, states generally have an infrastructure in place to provide a group coverage option, giving people using the credit another option for obtaining affordable health insurance choices.

The generosity of the credit would also influence the cost of the expansion of coverage. A very generous credit would induce more people to obtain coverage but, depending on its design, might also draw more workers away from current employer coverage, either by leading them to opt out of taking up coverage that their employers offer or by inducing employers to stop offering coverage. The result would be a relatively expensive incentive with relatively less net effect on coverage.

Employees who are eligible for ESI may forgo employer insurance and voluntarily enter the non-group market if doing so allows them to select a policy that better meets their specific needs. Single, healthy individuals may wish to use their credit to purchase less generous coverage than the coverage offered by their employer. Employers may choose not to offer health insurance at all if many of their employees can take advantage of the credit and purchase insurance individually, and receive taxable wages in lieu of employer health insurance contributions. Insurance in the non-group market carries higher administrative costs, which implies that such an outcome would not be efficient in the short run. In the long run, as discussed above, increased participation in individual insurance markets may improve their functioning such that they have similar risk pooling and administrative costs as group markets.

Such arguments suggest that a tax credit that is too large may disrupt the ESI market. In this case, the phase-out of the proposed health insurance credit and the cap on the maximum amount are important features to ensure that there are minimal disruptions to the ESI market. Those low-income Americans who are eligible for the largest credit are less likely to have employer-sponsored health insurance. About 80 percent of uninsured workers are not offered health insurance by their employers.[18] Only 36 percent of people under age 65 with income below 200 percent of the federal poverty line have ESI, while 77 percent of those above do.[19] Furthermore, employers make the decision to offer health insurance based on all of their employees, so they are unlikely to stop offering insurance simply because a minority of their employees become eligible for the health insurance credit. Most employees would be significantly better off with the uncapped, untaxed payments for their health insurance, and with the administrative savings of group plans, than with the capped credit and some additional taxable wages. Moreover, even if this minority of employees dropped employer coverage because they could get more affordable non-employer insurance, there would not be a large effect on overall employer health insurance costs. Consequently, the impact of the proposed credit on employer health insurance coverage would be minimal, and the majority of individuals taking up the proposed health credit would be those who were either previously uninsured or previously covered in the non-employer insurance market.

By comparison, research indicates that 50 percent or more of those who became eligible for Medicaid in the expansions of the late 1980s and early 1990s lost private coverage, suggesting that providing near first-dollar coverage (even in a government insurance plan) requires much more substantial government funding to achieve comparable reductions in uninsured rates.[20]

Some health policy experts and members of Congress have proposed a broader-based refundable tax credit—one that would also provide significant new subsidies to all workers with employer-provided coverage. Because so many workers have employer coverage already, however, a tax credit for employer coverage would have a far greater budgetary impact, and a much larger share of its costs would go toward existing rather than new health insurance coverage. To limit the additional budgetary costs, many experts have proposed a gradual transition from the current tax exemption to a system of tax subsidies for employer coverage that relies more on credits. Although such a transition would probably encourage lower cost employer coverage and increase the takeup of employer coverage by lower income workers, it could have a significant impact on current employer plans, union negotiations, and other issues affecting worker compensation. Thus, it seems less likely to be effective as an incremental, immediate step to improve insurance coverage significantly.

Because this credit is available to all low-income uninsured Americans, it will provide both increased options for workers and an improved safety net for the unemployed. It can help ease transitions between employment, dislocation, and reemployment without distorting labor markets. Unlike employment-based insurance, part-time and seasonal workers will be able to keep the coverage they purchase with the health insurance credit even if their jobs change.

The Administration’s health insurance credit will allow millions of Americans to purchase good insurance through private markets. It will improve the functioning of individual insurance markets, and will encourage high-value, high-quality care.

The Council of Economic Advisers performed quantitative analysis to document the likely effects of the health insurance credit on the purchase of health insurance. A key component of this is the cost of the insurance plans available through non-group markets.

To analyze the purchasing power of the proposed health insurance tax cut, we compiled a data set of sample premiums. Using the web site www.ehealthinsurance.com we collected data on premiums for low-cost traditional indemnity (i.e., Fee-for-Service or FFS) plans and low cost Preferred Provider Organization (PPO) policies, in which patients can see physicians outside their network, but with higher copayments. We obtained observations for one large and one small city in each state. In each case we priced policies for six hypothetical purchasers.[21] Our total number of observations is 1020 (2 plans x 6 families x 50 states x 2 cities, less missing values for cases in which we were unable to find policies that satisfied our criteria).[22] Although the sample is small, it provides a starting point for an investigation of the affordability of insurance in the individual market. The purchaser and plan types included in the sample were:

Purchasers:	Plan Characteristics:
55-year-old single male	$1000 per person deductible
25-year-old single male	$2000-$3000 family deductible
25-year-old couple	covers office visits
55-year-old couple	covers emergency room care
25-year-old mother and daughter	20% coinsurance or $30 copayment
25-year-old couple with two children

We attempted to obtain quotes for plans with characteristics as close as possible to those listed above. While all the plans we sampled cover emergency room care and all but 12 (those in New York City) cover office visits, the deductibles and coinsurance/copayments are occasionally higher or lower than our specifications. Overall, 92 percent of our single policies have deductibles of $1,000; 5 percent have higher and 3 percent have lower deductibles. Eighty-one percent of our family policies have deductibles of $2,000 or $3,000, with 8 percent lower and 11 percent higher. All of the plans have coinsurance of 20 percent, except for the plans in New York City, which have no coinsurance, and the plans in Boston and Brockton, Massachusetts, which have 10 percent coinsurance. We also assumed that the individuals were in good health, with no preexisting conditions, and were not smokers.

This section provides summary information on the types of policies available.[23] The discussion highlights not only national averages, but also the distribution of premiums relative to the proposed health insurance credit.

Premiums vary substantially across states and across types of purchasers. Table 1 has summary statistics for PPO premiums by family type and appendix table A1 shows PPO premiums for the two cities in each state by type of purchaser.[24] For a family of four, annual premiums vary from $1,272 for Bloomington, Illinois to $9,675 in Boston, Massachusetts (the Boston policy has relatively generous benefits).[25] The average price for a family of four is $3,287.[26] Premiums for young single males are substantially lower, averaging just $975, or $25 below the proposed health insurance credit.[27] Premiums for individuals in their 50s are much higher. The average premium for a 55-year-old male is $2,749.

Characteristic	Average	Median	Minimum	Maximum
Younger Male	$975	$772	$504	$4094
Older Male	$2749	$2464	$1524	$6722
Younger Couple	$2142	$1729	$1032	$7370
Older Couple	$5145	$4613	$2904	$12099
Mother and Child	$1931	$1518	$852	$7224
Family of four	$3287	$2683	$1272	$9675

The differences in the prices faced by older and younger Americans are substantial: the average premium for an older couple is over $5,000 compared to $2142 for a younger couple. These premiums are for a couple aged 55; older couples (not yet eligible for Medicare) would face higher prices.[28] However, there is also evidence suggesting that older Americans may value health insurance more than younger Americans and may therefore be more willing to devote a larger fraction of their income to health insurance premiums, so that a $1,000-$2,000 tax credit would be sufficient to stimulate purchases.

Prices vary substantially across cities and states. We examine the distribution of premiums with respect to the credit to which the purchaser would be entitled. Nearly three quarters of the PPO plans for young single men had premiums less than the proposed $1000 health insurance credit and over 90 percent cost less than $2000. Thus the health insurance credit would provide young men substantial assistance in purchasing a policy. In contrast, the subsidy covers much less of the policy premium for older single men: only 1 percent of plans have premiums below $1000 and just 17 percent of plans were less than $2000. Younger families fare much better than older Americans. A $3000 subsidy would cover half the PPO premium for a family of four in more than 90 percent of the plans. If children in a low-income family are eligible for SCHIP or Medicaid, then a $2000 credit would cover all of the cost for the mother and father in more than 70 percent of the plans.

These premiums are for plans that do not provide first-dollar coverage, yet as noted earlier, provide comprehensive coverage for large expenses. Plans with lower annual deductibles will be more expensive. To investigate the difference, we priced health insurance policies with a $500 deductible but coverage similar to our sample in other dimensions.[29] We collected this information for families in 10 states, and premiums were approximately 20 percent higher. The premium data presented assume that the individuals are in good health and are non-smokers. Just as premiums increase with age because expected medical expenses increase, plan availability and premiums also change with the underlying health of the beneficiary. There is also substantial variation in price across insurers as well as variation in the quality of service provided. For example, in Kansas City, Kansas, premiums for family policies that fit our criteria range from $182.50 to $434. Consumers need to shop carefully for plans, comparing prices and coverage to find the plan that best suits their needs.

[1] Estimates of the number of uninsured vary depending on the survey question and the length of time uninsured. This estimate is based on the March 2001 Current Population Survey. Data from other surveys such as the Survey of Income and Program Participation suggest that 55 to 60 million were uninsured for part of a year or more.

[2] Kaiser Family Foundation, Uninsured in America: A Chartbook (2000); Urban Institute, Health Insurance Access and Use: United States, (July 2000).

[3] Kaiser Family Foundation, Uninsured in America: A Chartbook (2000). Note that the Census Bureau does not report coverage for families with income between 100 and 200 percent of the federal poverty line.

[5] This can again induce the healthiest remaining in the more generous plan to leave that plan. In extreme cases, this drives the most generous plans or those with the sickest members out of the market altogether.

[6] Estimates include the likelihood of receiving employer-provided health benefits and the value of the tax benefit of employer-provided health insurance. Source: John Sheils, Paul Hogan, and Randall Haught, “Health Insurance and Taxes: The Impact of Proposed Changes in Current Federal Policy,” October 1999, The Lewin Group, Inc.

[7] There are other restrictions: The credit cannot be applied to the purchase of ESI, and people may not contribute to Archer MSAs in the same year that they claim the credit. Plans must meet minimum benefit standards. Those participating in ESI or public programs may not use the tax credits, although in some circumstances states may provide an additional contribution to individuals who purchase private insurance through Medicaid or SCHIP purchasing groups. Those over 65 (and thus eligible for Medicare) or anyone eligible for public insurance cannot claim the credit.

[8] See, for example, Center on Budget and Policy Priorities, “Unemployed Workers Need Help with Health Insurance,” October 2001; General Accounting Office Report HEHS-00-104R.

[9] Low cost policies are substantially less common in states with community rating than in states without such regulation.

[11] Pollitz, Sorian, and Thomas, How Accessible is Individual Health Insurance for Consuers in Less-than-perfect Health, Kaiser Family Foundation, June 2001; and eHealthInsurance Services, Inc. The original Kaiser study investigated whether the mock applicants with different preexisting health conditions were rejected by any insurer, not whether they actually received offers, and reported average offers, not the best offer, which is more indicative of the cost that they would actually incur. All of the mock applicants received offers in every market tested, with the exception of an HIV positive applicant. The best offer was often not much more expensive than the offer for healthy mock applicants.

[12] Marquis and Long, Worker demand for health insurance in the non-group market, Journal of Health Economics, v. 14 (1995).

[14] A community can be defined broadly, such as all individuals in the state, or more narrowly, with some differences permitted by age and/or geographical location, for example. Premiums in community rated states cannot vary with factors such as occupation or health status. Some states have modified community rating, allowing some, but only limited variation based on health factors.

[15] The National Association of Health Underwriters found premiums for a 53 year old male in 14 states with high risk pools. The average premium in these 14 states was $5086. The average premium in our data for the 55 year old single male was $2597. The high risk policies sought had $500 deductibles and generally had more comprehensive coverage.

[17] Communicating for Agriculture, op cit; Communicating for Agriculture/National Association of State Comprehensive Health Insurance Plans, Comprehensive Health Insurance for High-Risk Individuals, 1999.

[18] Garrett and Nichols, Workers without health insurance: who are they and how can policy reach them, Urban Institute, 2001, cited in Blumberg, Health insurance tax credits: potential for expanding coverage, Urban Institute, August 2001.

[19] Department of Health and Human Services tabulation of the March 2001 CPS, which includes data from 2000.

[20] Cutler and Gruber, Does Public Insurance Crowd Out Private Insurance?, Quarterly Journal of Economics, 111(2), May 1996, 391-430.

[21] Plan premiums typically vary by age. We choose one “young age” and one “old age.” Premiums for family policies vary by the age of the adults.

[22] We were unable to obtain information on regulations in the District of Columbia. We found no individual policies available in Hawaii and no PPO plans in Maine, New Hampshire, or New Jersey.

[23] In the following, we focus on PPO premiums because they are lower and thus more likely to be selected by those helped by the tax credit. Also, PPOs are the most commonly offered type of plan by employers. In 2000, 75 percent of large employers offering health insurance coverage offered a PPO plan, compared to 25 percent for a traditional indemnity plan and 51 percent for an HMO (Mercer/ Foster Higgins Mercer/ Foster Higgins, National Survey of Employer-Sponsored Plans, 2000). Premiums for FFS plans follow the same pattern, but are higher.

[24] These premiums are similar to premiums that were actually purchased. In the 1996 Medical Expenditure Panel Survey, the average premium paid by single policy holders for plans purchased in the non-group market was $1573; half of the individual premiums were between $600 and $1,992. The average family policy was $2,651; half of the premiums were between $600 and $3650. (Accounting for the potential accidental reporting of supplemental plans by eliminating the lowest 5 percent of premiums raises the average single plan cost for 18 to 39 year olds by only $150.) There was substantial variation both by age and by specific plan. The average individual premium in the MEPS ranged from $1230 for those less than 40 years old to $1976 for those 55-64 years old. (Statistics provided by Jessica Banthin at the Agency for Healthcare Research and Quality.)

[25] The average premium in 2001 for employer-provided health insurance was $2,652 for single plans and $7,056 for family plans (Kaiser Family Foundation, 2001Kaiser/Health Research and Educational Trust Survey). The average yearly contributions for employees for whom some contribution was required was $840 for a single coverage and $2868 for a family plan. Fifty percent of employees paid no contribution for single coverage but only 18 percent for family coverage (Mercer/Foster Higgins, National Survey of Employer-Sponsored Plans, 2000).

[26] Because deductibles are measured on a per person basis with annual family caps of $2000-$3000 it is possible for a family with these policies to have substantial out of pocket expenses. They are, however, protected against large expenses that might be incurred with a hospitalization, chronic condition, or serious illness.

[27] Although we did not conduct as thorough an analysis, premiums for young women appear to be only slightly higher on average (approximately $50 to $100 higher) and identical in some states (these policies typically do not include maternity coverage).

[28] The fraction of employers providing retiree coverage has fallen sharply in recent years (Employee Benefits Research Institute, Health Benefits Data Book, Washington, DC, 1999).

[29] The median deductible for in-network individual coverage for employer sponsored policies was $250 in 2000 (Mercer/ Foster Higgins, National Survey of Employer-Sponsored Plans, 2000).

Mr. MCCLELLAN. That study indicates that the credit would provide good, affordable coverage options for almost all persons who are eligible, particularly in conjunction with its use in high-risk pools and other purchasing group arrangements. Altogether, 6 million or more people who otherwise would be uninsured for some or all of the year would get coverage under this proposal.

Moreover, the analysis by CEA, as well as the analysis of the credit by Treasury professional staff, indicate that the vast majority of persons who use the credits would be those who were either previously uninsured or those who are currently struggling to purchase nongroup health insurance on their own. About 16 million people in this country buy nongroup coverage today, and receive little or no assistance from the government to do so.

Only a very small fraction of those with current employer coverage would use the credit. So while very attractive to those without good employer coverage today, the credit is generally not a better deal than the current uncapped tax subsidy of $120 billion per year for employer-sponsored coverage.

This proposal is one key element in a broad set of Administration proposals to help us create a more patient-centered health care system. The President believes that our private health system is the best in the world because it encourages and rewards innovation to get the best treatments to the patients who need them. He also believes that our health system faces serious problems today, problems of rising costs, problems of frustrations of doctors and patients that they are losing control to health maintenance organization (HMO) and government bureaucrats.

He believes that the best way to preserve the best features of our private, innovative health system while addressing these challenges is to find solutions that are based on trust in patients working with health care professionals. By giving all Americans access to affordable health care coverage options, we will not only enable Americans to get up-to-date coverage that meets their needs, we will also encourage high-quality, high-value care that is continuously getting better, and that has been the hallmark of our health care system.

The Administration wants to work closely with Congress in a bipartisan fashion to make this vision a reality . At yesterday's event sponsored by the Robert Wood Johnson Foundation, there were many stories presented of what a difference good coverage options can make. Before coming to the Administration, while I was a Professor at Stanford, I also practiced in our internal medicine clinic there, and I saw many stories myself of patients with chronic illnesses and other health problems who had difficulty getting ongoing care because of lack of health insurance.

We are pleased by the broad support in the community by groups on the right and left, and in this Committee, for proposals to move forward and to find common ground on addressing the problem of the uninsured now. I think the Nation's uninsured have good reason to be optimistic that help is coming soon. Thank you.

Chairman THOMAS. Thank both of you very much, and I do compliment the Administration in moving the dollar amount on the credit from $2,000 to $3,000. I do find it ironic, though, that that dollar amount is in competition with an unlimited amount which requires no prioritizing whatsoever under the more traditional fringe benefit structure, but you are moving in the right direction.

Secondly, I also want to compliment you on the flexibility that you have begun to add. The idea that we would limit the way in which the credit would be used is, I think, a valid criticism, and once again you have at least moved in responding to that concern.

Statements were made in opening remarks, and others will make the statement that this is modest, it certainly doesn't cover that many folk. It seems as though if you don't have a solution for 40 million uninsured, you don't have a solution at all. Does the Administration have some numbers which indicate the number of uninsured that would be covered under this particular proposal, and if so, would you wish to present them to us?

Mr. WEINBERGER. Yes. The numbers for the health insurance tax credit, our estimates are that 15.5 million would receive the credit. Six million of these individuals would have been uninsured for at least part of the year, and about 10 percent of the individuals taking the credit would otherwise have received employer-provided health insurance.

Mr. MCCLELLAN. So just to be clear, the vast majority of people who are covered under this credit now are either uninsured, that is 6 million, or not getting any assistance at all for purchasing nongroup health insurance, and so they will be able to afford better coverage. And the impact on the 160 million employer market is negligible.

Mr. RANGEL. Thank you. I want to thank both of you for your testimony. Mr. Weinberger, your opening statement was laced with remarks about bipartisanship and working together, and I wondered whether you know what Committee you were testifying in front of, because you have had a very limited experience of bipartisanship with this Committee.

And it would seem to me that if these are the hopes and aspirations that you would like to see, that you in the Administration will have to dramatically do something in order to achieve these goals. It would seem to me that for openers you might consider having meetings with Democrats, people in the minority, and sharing these views, rather than having us come to hearings and finding out that the majority and the Administration have made up their minds as to what the health care should be.

This is especially so when I know that you know that many people, including our leader, some that are very close to me physically if not politically, have claimed that one of their targets is the employer-based health care system, as opposed to expanding health care generally. Well, I am not opposed to people having political goals, but sometimes they interfere with bipartisanship, which I assume you can understand. And if indeed some of us are paranoid in believing that you are against employer plans and unions more than you would be for health coverage, that is something that should be discussed with honest people who have honest disagreements.

But I would suggest to you if you are serious about this goal of bipartisanship, especially in an election year, we need outside help, and I hope you would consider deciding how you intend to bring about this goal, because I think that both parties can benefit in working together. There is enough to fight about in November, but health care should not be the subject of a partisan debate.

So I thank you for coming here, and you, Mr. McClellan, and let me see where we go from here.

Chairman THOMAS. I thank the gentleman. The gentlewoman from Connecticut wish to inquire?

First of all, I think it is very important that you have developed a better mechanism of delivering a tax credit, and I think that I don't want that to be missed in this debate. For those of us who have long been interested in a tax credit as a means of reaching those who couldn't afford the premiums for health insurance, that issue of being able to deliver the credit in a way that doesn't require people to carry the cost until the end of the year and then deduct it, and to be able to deliver it to people who don't pay enough taxes to ever get the credit back, is very important.

And could you describe for the Committee a little bit as to how that mechanism works, and as importantly, whether it would work as well if we used that mechanism for all the uninsured as opposed to just the unemployed uninsured?

Mr. WEINBERGER. A clarification. Is your question with regard to the displaced worker credit or the health insurance credit, or both?

Mrs. JOHNSON OF CONNECTICUT. Well, are you using the same mechanism Mr. McClellan mentioned, that the uninsured credit is also advanceable and refundable?

Mrs. JOHNSON OF CONNECTICUT. So if you are using the same mechanism in both instances, you need to talk a little bit more about the mechanism and why it would work with the larger group of the uninsured as well as with the smaller group. Because with the smaller group, when you are unemployed you go for unemployment benefits, so at that time you can also get the credit power.

Mr. MCCLELLAN. Right. Just to respond to the question about mechanisms, I want to talk about both the displaced worker credit mechanism and the health insurance credit mechanism, because they are not the same.

From the standpoint of the user of the credit, though, they both have a similar effect. You can write your premium check for the portion of the health insurance cost that is not covered by the credit only, so when you are signing up for insurance, it is much cheaper. It is cheaper by the amount of the credit. You get it in advance.

The actual mechanics for doing it are a little bit different for the two credits. For the displaced worker credit, the quickest way to identify the people who need help and to get help to them is to build on the strong existing infrastructure of unemployment benefits. That credit would be available through State and local work force offices, which is the first stop that people usually make when they lose their jobs, to find out about the income benefits available to them, the training opportunities, the job search opportunities and so forth.

Under our credit proposal, people would qualify for the health insurance credit as soon as they qualify for unemployment insurance benefits. It is that simple. They would receive a number that they could write on their check, and they would send in the check for their portion of the premium, and the insurance company would get reimbursed directly from the government for the remainder, for the amount of the credit.

For the health insurance credit, that is a credit that's value depends on income, so what is key there is a person's or a family's income in the prior year. At the end of the year when you file your taxes, you know how much money you had in that year. You let the Internal Revenue Service (IRS) know that, and the IRS will notify you or get you the information on how much of a credit you qualify for. And then once again you just write a check for the portion of the premium that you owe. The credit is paid directly to the insurer, so that you don't have to pay as much out of pocket for health insurance.

Both of these mechanisms can be implemented very quickly. The displaced worker credit we think we can have operational within a few months of passage, and people in the meantime would have the confidence of knowing that they are going to get 60 percent of their health care costs covered. The health insurance credit would be up and running next year.

Mrs. JOHNSON OF CONNECTICUT. One of the reasons I think it is so important to move forward in the stimulus bill on this issue is that we can then pilot that mechanism. But I would hope that Members on both sides of the aisle would not allow the issue of who talks to who to interfere with all of us talking together to take advantage of this opportunity to have in the budget money for the uninsured, and work on a mechanism and try it.

It is not going to be the sole solution, but we have all known, both sides of the aisle, it was a critical component. And we have a chance to move forward on that this year, and I hope anyone who is really interested will let us know and be part of the solution.

Chairman THOMAS. I thank the gentlewoman. The gentleman from California, Mr. Stark, wish to inquire?

Mr. STARK. Thank you, Mr. Chairman. Mr. McClellan, have you read Professor Gruber's testimony?

Mr. MCCLELLAN. No, sir, I have not had a chance to read his testimony in full for today, but I have seen it and I am familiar with the main points in it.

Mr. STARK. If you could, if you wouldn't mind answering this just with a note if you have, but he is suggesting that about 4 million people would leave employer-based coverage and that--I mean, he doesn't agree with your numbers. He says that health tax credits would reduce the number of uninsured by about 2 million. And economists can differ, and I would just like to know where your research differs from his.

Ken Thorpe at Emory suggests that under this plan, the Federal cost for a newly insured person would be around $4,100, expanding the State Children's Health Insurance Program (SCHIP) would run to $2,300. So there is some difference here as to how many people would be in and how many would be out, and my guess is that a little more empirical work would get there.

The line that I would like to follow with you guys is this: that there is no guarantee that there wouldn't be medical underwriting, right? And that is in the interest of the insurance company. There is nothing in this proposal to get the insurance companies to take people with any kind of preexisting condition, and they are pretty fussy about that. Bad back, a whole host of things, and those things are eliminated.

The chart that we got from eHealthInsurance.com, from whom we will hear later, in trying to get the lowest policy available in each community for Members of the Committee, in round figures only Seattle got below $2,900 approximately for a premium. So what is out there today, lowest, now, for a family of four is about $3,000. For us in the Federal Employees Benefit system it is about $7,000 for the generous Blue Cross high option, which is in my opinion a pretty good policy.

So there is no way that a $3,000 tax credit, which really drops to $1,700 for a family of four in the $40,000 income bracket, so we are not talking about $3,000 tax credit for a lot of people. And then all of these policies that I have on my list have between $1,000 and $2,000, most of them have $2,000, in Minnetonka it is a $6,000 deductible. What is in the water up there? But what I am--and many of them, 10 of them have no maternity benefits, five of them don't have a prescription drug benefit, two of them don't even cover emergency room.

So I guess what I am getting at is that if we are going to cover people, the credit isn't adequate. Now, you can argue all over the place, but I would challenge you, either of you, and then I would stand corrected, shop for me in the market, in the individual market. You can get the rates. You can probably get them faster than I can.

And show me in various communities what these people can get, because you really are talking about tax credits of $1,700, with two adults and one child, $1,400, one adult is $600. You aren't going to find much in the market that really covers people if they are not going to have to come up with $2,000 or $3,000 more, and if they lose their employer-based insurance, if that is correct, we haven't done much to help people.

I have no quarrel with giving a tax credit, but there is another side to this. You have got to make the product available. And my question is, would the administration support controls on the private insurance market to make sure that these policies are available? What do you suspect, Mr. McClellan?

Mr. MCCLELLAN. The Administration certainly supports additional steps to help private insurance markets make this available--

Mr. STARK. But I said controls on the insurance industry, which would mean community rating or universal coverage non-underwriter. Would you support those sorts of controls to make these products available at a reasonable cost?

Mr. MCCLELLAN. Our preference is to support the additional steps that will actually make more affordable insurance available to a wider number of people. I think the experience of States that have tried community rating coupled with guaranteed issue requirements has been that the resulting price of premiums available in the nongroup market is significantly higher, significantly higher not only than policies for relatively healthy people in other States, but significantly higher than policies in high-risk pools or other options that are available in other States.

But I certainly would like to work with you and your staff on finding ways to reach the goal of making affordable health care coverage options available to everyone. We just think that there are probably some better ways to do it than restricting access to coverage.

Mr. STARK. In Texas, for instance, a 55-year-old male smoker would pay $13,000 in the State's high-risk pool. You know, what good is this tax credit going to do that person? You could tell him to quit smoking. I would join with you in that.

But my point is that high-risk for different insurance companies means a lot of different things, and there is no way that I can see that we can really say to the public we are giving them access to decent medical care at a price they can afford. Because when you add the deductibles and the other things that they will be out of pocket in the current market, without some controls on that market, you don't have a plan. And I would like to be proven wrong.

Mr. MCCLELLAN. Sure, sure. Well, to help address your concern, the Council of Economic Advisers did a study of policy availability in all 50 States, looking at multiple communities within each State, and that is included in the CEA document that you have available to you.

These policies were not first dollar policies. They were typically preferred provider organization (PPO) plans that had preventive care coverage, maybe emergency care coverage, and they did have significant deductibles, but they gave people the option of going outside of network, getting rid of the managed care red tape, getting whatever treatments they thought were best for them, while still providing good catastrophic protection.

In addition, there are also some reasonably priced network plans available that have much lower out-of-pocket payments--

Mr. STARK. That is good, Mr. McClellan--if I could just finish, Mr. Chairman--for you and me. You are making more than $100,000. So am I. But I am talking about the family with two adults and two kids making $40,000. They don't have anything left for this high out-of-pocket. They get $1,700. And those are the people that we are not helping.

Mr. MCCLELLAN. Under our proposal, low-income families would generally get access to coverage that was, for the plans that we looked at, the average premium for a plan of this type was less than $3,000, less than $1,000 for young individuals. Family coverage similarly had more than 50 percent subsidies available.

Mr. MCCLELLAN. Well, at most $1,000, if you buy an open PPO plan. If you prefer a network plan with lower co-pays and smaller deductibles, you can have more coordinated care at a lower out-of-pocket cost.

Mr. STARK. You make my point. One more time. You make my point. $3,000 to buy the policy. You give them $1,700, so they are out $1,300 and another $1,000 to $2,000 deductible, and still--

Mr. MCCLELLAN. I think the bottom line here is that we end up getting 6 million more people covered who wouldn't have been covered otherwise. So go back to Dr. Gruber's analysis, and I have worked closely with Jon on many issues. His study, it looks like it is an analysis like one he did a year ago of a previous proposal that was even a little bit different from ours then. It had different income limits. It examined a very rich first dollar plan, which is not what we are aiming to provide affordable coverage.

Mr. MCCLELLAN. It did not address advanceability and other issues to a significant degree. I am just saying his estimate, that he says is of this proposal, is very similar to his estimate of the previous proposal last year, which does not address issues such as the availability of lower-cost plans which are widely available; the income limits in our proposal; the effective advanceability mechanism in our proposal; the fact that some people want to get coverage for part of the year, not just the entire year. None of these things are covered in his model.

And I put a lot of faith in the Treasury staff estimates of this kind of analysis. They have done very accurate and effective and comprehensive work on a very detailed model that has been in existence for many years and picks up a lot of subtleties in markets that are very hard. You know, I come from an academic perspective, too, and we try to do our best, but often we are working alone, without a dedicated professional staff.

So I put a lot of faith in those estimates, and beyond that, in terms of crowd-out estimates, I just would point out that Dr. Gruber's research also shows that whatever you do for the uninsured, you need to be very careful about affecting employer coverage. For example, his research on Medicaid expansions indicates that over 50 percent of the new coverage is people who would have been covered elsewhere.

Chairman THOMAS. I would make a request both of Members and of the witnesses that the gentleman's 5 minutes became 9 minutes and 40 seconds. However--

Mr. MCDERMOTT. Mr. Chairman, could we have the numbers that he has? I don't know if they are available. He said he has a set of numbers there that some of us haven't gotten copies of.

Mr. MCCLELLAN. There is a CEA analysis that should be on the table with the other documents for the hearing, and the--

Chairman THOMAS. If the gentleman's staff would distribute the numbers. Last week it was charts, this week it is numbers. I do believe it is important that everyone have the material that we are discussing.

And the Chair wants to make a point that one of the reasons the Chair allowed the gentleman from California the additional 4 minutes was because the questions he was asking were important, and there was a line of questioning that he wished to pursue.

However, the Chair wants to make it clear that if in fact the tax credit has some impact on the employer-based system, any other modifications would also have impact on the employer-based system, and I believe Professor Gruber shows that modifications in a significant fashion on Medicaid would have a negative impact on the employer-based system. So if we are going to make a point, we need to make it on a broad basis, that any enhancement of any other program would obviously result in a modest negative impact.

Also, we have to remember that we are not dealing with health insurance in a vacuum and that the Federal level is the one to make all of the changes, because frankly it is primarily a State-based question, and there are a number of States--this has guaranteed issue--there are a number of regulations at the State level that require adjustment.

But the final point that the gentleman made I think is an excellent one. I talked about the fact that we moved from $2,000 to $3,000. That is a move in the right direction. I also underscored the fact that the employer-based system is open-ended. One of the problems in this system, the Chair believes, is not that we are not spending enough money on health insurance, it is that it is maldistributed under the current structure.

And if the gentleman wishes to enter into a discussion of capping the employer-based system at a reasonable amount and redistributing that to require this one to be slightly larger, a redistribution of the current tax benefits for health insurance, I think you will find we can move rapidly to a much more handsome program for those who now get nothing under the system. The gentleman from New York wish to inquire?

You know, purchasing insurance--I would like to address this to Mr. McClellan if I could--purchasing insurance in the open market, as you know, is not easy. You know, many are denied coverage, restricted benefits, things like that. So I guess the question I have is, will adding a large tax subsidy and increasing the size of the individual market change any of this? In other words, will the cost go down?

Mr. MCCLELLAN. Yes, sir, it should help significantly with the costs of coverage available in the insurance markets generally. We have some analysis of this in the CEA study that I mentioned. The simple idea is that if you give people subsidies, those who are healthier and not participating in the insurance markets now would begin to do so. That improves the risk pool available for everyone and reduces the costs of coverage available.

In addition, all of the people who are already purchasing in the individual market, as I mentioned, there are 16 million of them today, would generally have access to more affordable coverage as well. They would be willing to buy more generous plans than they have now in the case when they receive no subsidy at all.

We provide big subsidies for employer coverage. We are starting to provide subsidies for the self-employed. But this group gets none of those subsidies, and that is one reason their benefit packages tend to be less. By providing a new subsidy, we move this entire market in the direction of more generous, affordable coverage.

I sure hope that we can have a discussion about this tax credit business and not get the volume up too high. Mr. McCrery and I, like Mr. Stark and Mr. Armey, spent a lot of time talking about this. And certainly if you believe that private sector answers are the way to go, tax credits, you have got to look at them, one way or another. I happen to be somebody who believes that ultimately the government will provide the whole thing, but that is--we are getting to that.

But when we were looking at this, and we couldn't figure out any way to do it without using community rating, now I don't think there is anybody in this room--there might be somebody so out of touch that they would think the insurance industry is going to let us or encourage us or be supportive of us going to community rating and demanding that, so that the individual market is anywhere reasonably available. I just want to take an example that I know.

Boeing is in the middle of laying off about 30,000 people at the moment. These are aerospace mechanics who make somewhere between $40,000 and $60,000, depending on unemployment. They have a policy that is worth $7,000 under their COBRA, so if they want to go out and buy a COBRA policy, they have $7,000 to come up with. Unemployment benefits in Washington State, as in Massachusetts, are the best in the country, $450 a week. That means you get $1,800 a month to live on, and you are looking at a premium of about $600 to pay for your insurance.

Now, that is the maximum. If you are from Mississippi, the average unemployment benefit is $190 a week. That means $800 a month to live on. And it is--I cannot see how you--I mean, that is what I said once in this Committee. I don't know if anybody has ever been unemployed.

When you have rent--we had a hearing in Seattle about 2 weeks ago, and a woman who was laid off, working for the Westin Hotel, is living on--she is living on the minimum benefit, which is around $800 or $900 a month in Washington. Her rent is $510 a month. Now, she is raising two daughters on $800 a month, or trying to, on that unemployment. And interestingly enough, if she works three shifts at the hotel, she gets insurance. If she works two shifts, she doesn't get insurance. So everybody is now working two shifts a week, if they are working at all.

And when you take a benefit of $1,000 a month or whatever you might say, and then talk about a reasonable place to live, no subsidized housing, so you are now spending, in her case more than half her unemployment check goes for her rent. And I said to her, "Well, how much do you spend on food?" And she said, "Well, I spend $100." I said,"$100 a month?" And she laughed and said, "No, no, no. $100 a week for the three of us."

So now you have got $400 of food. Well, maybe you can cut that back. Maybe $50 a week, right? But there is no economic way you can make this possible for people, even if you give them all the money up front, if you are talking about $3,000. Now, Jim and I never could quite figure out what the figure was, or what percentage you had to subsidize, but this in my view does not work for unemployed people.

And most of the uninsured people are not making more than $6 or $7 an hour. Most of them are somewhere around $25,000. They are not, they are also not in much of a position to go out and buy in the individual market. They don't even have the--well, COBRA is really no advantage, because you get jumped up in how much you get.

How did you pick $3,000? That is my question. Was that a number backed in to how many people you think are going to use it?

Chairman THOMAS. The gentleman's time has expired. If the gentleman will respond briefly to the question.

Mr. MCCLELLAN. Yes. The $3,000 maximum figure for the health insurance credit was done to balance the need to give access to affordable policies for lower-income families with a desire not to have too generous of a subsidy and disrupt employer coverage. That did it. That led to a very large number of people getting coverage.

And I just would also add that we also support, as part of the economic stimulus legislation, assistance for workers who have lost their jobs to cover 60 percent of their health care costs, along with other benefits like emergency grants to provide additional assistance, and no cap on those benefits.

Chairman THOMAS. The gentleman's time has expired. The gentleman from California, Mr. Herger, wish to inquire?

Mr. McClellan, I have several. I want to continue on this same line of questioning, but I want to allow you plenty of time to respond, if I could. As we are hearing, there are some that are concerned that the tax credits would not work because they believe it is so difficult to get insurance on an individual basis. A series of questions, if you could.

Are those criticisms valid? And how does the President's proposal address these issues? And, finally, are the policies in the individual market affordable?

The President's proposal includes a number of elements to make sure that virtually everyone has access to affordable policies. As I mentioned, we did a comprehensive analysis of all 50 States to examine the actual premiums available to people who are purchasing in the nongroup, the individual market. And, again, for the vast majority of people, the vast majority of low-income families would get 50 percent or more subsidy for the cost of their health insurance. And according to many academic studies, that level of subsidies is substantial enough to induce and allow most of them, to buy coverage.

Beyond that, we also include a number of other elements to help workers or individuals who may need additional help with the costs of their health insurance. We allow the credits to be used in high-risk pools which, as Chairman Stark mentioned, in some States have very high premiums, but in many States where they are well-funded, broadly based, Minnesota and others, there is good coverage available for not much more than the cost of a general premium, certainly for much less than the cost of a community rating requirement State's policy.

In addition, we also support the use of these credits in purchasing groups that States could set up. States often have the infrastructure in place through competitive approaches that they are taking in their Medicaid and SCHIP programs to do this, or through the employer plans that they have available to their own employees, another option for getting affordable coverage to people who may not have the best options available in the individual market.

Altogether, we think this is a robust approach to making affordable coverage available to everyone who is now purchasing or has no other option besides purchasing in the individual insurance market. We need to make those options for those Americans much better, since people who are not offered employer coverage and since low-income people who are not eligible for public insurance have the highest uninsurance rates in the country.

Mr. HERGER. Thank you very much, and I think that is the crux of what we are trying to do. We are attempting to help those who are currently unable to have health insurance be able to acquire health insurance. And I want to thank you and the Administration for, I believe, making a major step forward in attempting to do this.

And I believe at the same time when we have--the more individuals we have out shopping around, I think that helps bring the prices down. It brings about more competition. So I think there is a number of side pluses that we have, as well as what you are doing. I commend you and I commend the Administration.

Chairman THOMAS. I thank the gentleman. The Chair wishes to note that there obviously are a number of Members engaged in the debate going on on the floor, and they may not be able to be here for a presentation of questions. They do, however, have questions, and Members can always submit those questions in writing. We will make sure they are available to you, and we would appreciate a prompt response to those questions that are submitted in writing.

A quick question of Mr. McClellan. Mr. McClellan, in your estimation, will the Administration proposal serve to strengthen or to diminish employer-sponsored health plans?

Mr. MCCLELLAN. The Administration's package of health care proposals will strengthen the employer market. As I mentioned, this particular proposal--

Mr. MCCLELLAN. The particular proposal we are discussing now is going to provide good options to people who do not have employer coverage. In addition, the Administration's budget also supports a number of proposals to strengthen employer coverage.

For large employers, that are already offering a range of choices, we want to make it easier for people who are choosing plans that require significant out-of-pocket payments to meet those payments. We want to give them tax-free options for paying out-of-pocket costs, through rollovers of flexible spending accounts and through broader availability of--

Mr. KLECZKA. Now, that is a totally inadequate answer. Let me address, Mr. Chairman, the audience, the people watching us on FAT NET, and that is the second camera over there. This is not an issue that we usually talk in this Committee, like alternative minimum tax (AMT) for businesses, right? And you can sit there and listen to that, and you folks over here can sit and write that, but that is for the next guy.

This is an issue which directly affects everyone in this room and viewing this hearing who has employer-sponsored health insurance. And that is the plan where we are in a group, there are sick people, there are healthy people, there are young people, there are old people, and the employer says, "Okay, you pay 20 percent of the premium, I'll pay the balance."

And that is the plan that about 177 million Americans have. It is a system that works. But we are being told today that we are going to replace that system, and you are going to hear comments, "No, we're not. We're just taking care of the uninsured." That is baloney. That is nonsense.

And I refer you to the comments of our esteemed Chairman, who indicated on December 14th that the current employer-based health care system is fatally flawed. Okay? He thinks it is broke. I have got employer-sponsored health care insurance. Works fine. Okay?

The other comment that you should write about, folks, is that Mr. Thomas will offer a bill this year to jettison the entire employer-sponsored health care system. That is what this is all about today. And do you realize what a boon it would be to the employers if they didn't have to pay your 80 percent health insurance premium?

If you thought the AMT, repealing the alternative minimum tax for companies was bad, and making that retroactive, having the effect of giving IBM a check for $1.4 billion, if you thought that was bad, take a real close look at this one, because this is better for the employers than that measly check. And what is going to happen to you folks? You are going to go on an individual basis to an insurance company and try to get coverage, versus the group plan where, again, you have sick, healthy, young, old.

Now it is you alone. And just like in the National Basketball Association during halftime, they have this game called "one-on-one," that is what we are doing. It is one-on-one, the insurance company and you and your family. And who do you think is going to win that battle?

Let's look at the premiums being offered by eHealthInsurance.com, and they will be testifying later, for the city that I hail from, Milwaukee, Wisconsin. All right. On average, the annual premium is going to be $3,000. The deductible is $1,000, so now that is $4,000.

And what is covered? Maternity, optional. Prescription drugs, many of you have it in this room, not covered. Health insurance is for when you get sick, when you have an emergency. This policy being sold in Milwaukee, Wisconsin, does not cover the emergency room, one of the reasons you have it in the first place. And office visits, you have got a sick kid, you want to take them to see the doc, or yourself, you are not feeling well, office visits aren't covered.

So know full well what we are doing today is not trying to cover some folks in this country who are uninsured, because the reason they are uninsured is, their employer don't offer it, if they are working, or they can't afford it. Based on the e-plans that we are sharing with you today, they are still not going to be able to afford it.

And if you are unemployed and you are not able to have the government help you with some COBRA coverage, after your rent or your mortgage payment, your car and your bills and your food and your clothes for your kids, there ain't no money left in that unemployment check for health care coverage.

So what we are doing today, my friends, is sounding the death knell for employer-sponsored health insurance, and make no mistake about it.

Chairman THOMAS. The gentleman indicated that the Chair held certain positions, and then represented what those positions were. I think those that he appealed to, both visually and in the written media, need to understand what it was that he was saying.

He said the Chair believes that the employer-based health system form of insurance is fatally flawed. The fatal flaw is that it doesn't cover everyone. The only people it covers are those that are employed. And if you were going to build a system, which we are now looking at, the "uninsured," we are trying to deal with those who now do not have an employer-based system. If we got everyone health insurance through their employer, it still would be flawed because there are some folks who don't work.

Chairman THOMAS. No. The flaw is that the system is not a basis that can provide universal coverage.

Secondly, the gentleman said that you have a group plan with an employer and an individual market if you don't. Who today, in trying to build a plan for all Americans, would say that we will allow those who are able to get up and go to work every day, carry out functions at the work place, the healthiest Americans get the cheapest price for their insurance? But those who are not able to get up every day and work have to pay the highest price for their insurance. No one would build a plan like that.

If we were to propose that the group plan, the lowest rate would go to the healthiest Americans today, we would be absolutely opposed to that concept. Any economist will tell you that when you look at wages and fringe benefits, they are totally related. The more fringe benefits, the less in wages; the more in wages, the less in fringe benefits.

Chairman THOMAS. It all comes out of the employee's pocket, and that at some point--

Mr. KLECZKA. Will the Chairman respond to the quote that he is going to jettison the entire--

Chairman THOMAS. At some point employees need to realize that the benefits they are getting come out of their pocket, and that at some point an educated consumer perhaps would like to make slightly different judgments for themselves on health insurance, if it were available, than the employer makes for them.

Those are the points I would like you also to include as you examine the system. What we are talking about here is a modest attempt to augment a flawed system. It immediately gets escalated to blowing up the employer-based system. I find it ironic that when we try to reach out, the response is not a different or better idea, it is once again fearmongering in terms of hanging onto a system--

Chairman THOMAS. The gentleman's time has expired. The gentleman from Louisiana wish to inquire?

Mr. KLECZKA. There is no fearmongering here. I am basing my comments, Mr. Chairman, on your statements. And you didn't respond in your last set of remarks to your comment about jettisoning the entire employer-based system,

Mr. KLECZKA. That is what I am talking about. If that is fearmongering, then you were misquoted or you misstated your point.

Chairman THOMAS. The gentleman is out of order. His time has expired. The gentleman from Louisiana wish to inquire?

Mr. MCCRERY. Yes, Mr. Chairman. I am going to begin my remarks, and I may have a question, I may not, but I am going to begin my remarks on a positive note and end my remarks on a positive note. I can't guarantee the substance in between.

But I commend the Administration for your efforts to address the problem of the uninsured in this country. I do think that the problem of the uninsured is regrettable because of the lives of people who are damaged by their lack of health insurance. I think it is also regrettable because I think it is one of the things driving us toward a single-payer system. It is one of the things driving us toward a movement for the government to take care of everybody in terms of their health care.

And Mr. Kleczka, I guess he has left, but he tries to set this up as a battle between the employer-provided health insurance advocates and those who want an individual market. I believe it is a much bigger and more important battle than that. I believe it is a battle between those who want a single-payer system, they want the government to provide health insurance basically for everybody, and those of us who believe in a private market for the delivery of health care in this country.

Both views are legitimate, and those who hold the views are good Americans and they want to do what is best, I believe. Jim McDermott is one of those, Pete Stark is another, who believes in the single-payer system, and most countries in the world have some sort of single-payer system, so who is to say that they are wrong and I am right. I believe we in the United States can find a better way to do it, to provide a better quality of health care for everybody than Great Britain or any number, Canada, other countries that have a single-payer system.

But I believe that is the battle, and the thing that I find troublesome about the Administration's proposal is that it is a toe in the water. You are just going a little ways to solve the problem of the uninsured, and you are using tax credits to do it, and I believe it will fail. Yes, it will provide coverage for a few more people, but the whole concept of tax credits and the individual market will fail, and that will add fuel to the fire for a single-payer system.

So I would like a much more ambitious program. Yes, I am one who thinks that the employer system is flawed and we ought to go, big time, from employer-provided health insurance to individually owned and provided health insurance. I think that is probably the only way we are going to avoid a single-payer system. But if we go just a little ways and we don't do insurance market reforms to make sure that the individuals have access to insurance, if we don't do reforms in terms of either government-mandated or government-provided information to the consumer so that they can make educated, informed choices for their health insurance, then we will fail, and the only outcome will be for the government to take over the program.

So I am unabashed in my support of going toward an individual-based system and away from an employer-based system, and make no apologies about it. I am afraid, though, that what the Administration has proposed is too little. However, I commend you for trying.

Mr. MCDERMOTT. I have some analysis by M.I.T., the Massachusetts Institute of Technology, and the Kaiser Foundation that says that under the tax credit proposal, more than two-thirds of those using the tax credit would be people who are already insured. Is that--

Mr. MCCRERY. I have no idea, but reclaiming my time, the biggest threat, I would say to Mr. Kleczka, to the employer system, employer-provided health insurance system, is cost. Cost.

As cost continues to go up, and we are getting double-digit increases this year in employer-provided health insurance, as those costs continue to spiral upwards, you are going to have fewer and fewer employers choose to provide health insurance to their employees. And it is a choice. There is no government mandate. They don't have to do it, and as costs continue to go up, fewer employers will provide it and the employees will have to pay more and more of the costs for that health insurance. That is the threat to the employer-provided health insurance system.

So what are we doing about cost? In this proposal, not much. Mr. McClellan has talked about, well, it should bring down premiums because you are going to give them these good risks in the system. I think that is a bunch of baloney. You are not going to get enough of them in the system to do much good overall on premiums.

And my time has expired, and I could say a lot more. I need about another 20 minutes or so. But, Mr. Chairman, with that I will--and I wanted to end on a positive note. I do commend the President for--

Chairman THOMAS. The Chair thanks the gentleman. Others don't feel constrained in that way. I appreciate the gentleman, but others haven't felt constrained in that way. The Chair hates to disrupt someone on a roll.

Mr. MCCRERY. I thank the Chairman for his consideration, but in view of the few number of people who are here, I will wait perhaps for a second round. Thank you.

Mr. RAMSTAD. Thank you, Mr. Chairman, and thank you both for your appearance here today and the work you are doing on this important problem.

We all know the statistics: 39 million Americans, or more, who don't have health insurance, 8 million of the uninsured being children. As Mr. McCrery just stated, an 11 percent increase in health insurance premiums. This really comes home to me when I go back to Minnesota every weekend.

I know too many people in Minnesota who are unemployed because of the Bin Laden recession. I know too many families who are hurting. I know too many adults and children without health insurance in Minnesota, and they live in fear, true fear; fear of getting sick, serious illness; fear of getting injured and not having health insurance. These people live in real fear, and they express these feelings to me only too often.

So I applaud the Administration, the President, those of you who are working with him in the Administration to address this problem. We have let it linger too long, the problem of displaced workers and the uninsured.

The proposal that we are talking about today, one of the positive, very positive aspects I believe is the fact that it is a large umbrella. If you lose your job, you are still unemployed, you are covered. You don't lose your health insurance. Certainly Medicaid is not the answer. Forcing millions onto welfare would only discourage the unemployed from working and threaten welfare reform.

I want to ask you--and again picking up where the gentleman from Louisiana left off, because I share his concerns--I certainly understand and agree with the concept of refundable tax credits in the way you are proposing it, the way we have tried to advance it here on the Committee. What about, to answer some of the criticisms affecting those people who are indigent, what about doing what the first Bush Administration did, not only including refundable tax credits but also vouchers for the uninsured who are indigent?

Mr. MCCLELLAN. Good question, Congressman. Just to highlight that many people who are low income or have limited means would be helped by our health credit proposals. The proposal for displaced workers would give immediate assistance to the families that you mention that you are seeing back in your district, who have lost their jobs and are struggling to continue their health insurance or having to go without it.

All of them, all of them who have lost their jobs involuntarily would be eligible for our displaced worker credit. In addition, people who have low incomes would be eligible for up to $1,000 for each individual and $3,000 per family under our health credit proposal.

Beyond these proposals, the President also has supported strengthening every other aspect of our health care system. It is not a one-size-fits-all health care system.

Mr. RAMSTAD. Pardon me. Just to interject, just to digress, so that means people with no tax liability whatsoever--

Mr. MCCLELLAN. Absolutely, would get the full amount of the assistance, so people--

Mr. MCCLELLAN. I don't know if I would call it that, because we are planning on having them, you know, just send in a check for their portion of the premium, but it amounts to a direct payment for a large part of their health insurance costs.

Mr. WEINBERGER. Can I just add, Congressman Ramstad, the way that it is structured with the advanceability gives real-time money so that these individuals when they go pay their premiums will get a subsidy amount that they will include with the premium payment, so they will pay a lower cost for those premiums. So that is advanceable. If they don't want to take it that way or for some reason they would also like to take it on their tax return, they are also allowed to do it that way.

Mr. RAMSTAD. Well, I think this makes eminently good sense. The other element of the plan that is very appealing, the flexible spending accounts, the FSAs, I think again a very, very useful way to approach this problem. Could you just briefly elaborate on the FSAs? I think it is important to explain.

Mr. MCCLELLAN. Sure. The flexible spending accounts basically allow individuals to roll over $500 or to take that $500 out. The purpose of doing that, of course, is currently a "use it or lose it" plan. So at the end of the year you find individuals making some expenditures they might not otherwise want to make or need to make, in order to use up that money in the account.

And so we give them the ability to roll this de minimis amount over into a future year. It also, we hope, will increase the take-up rate, because then people don't have to try and target the amount that they want to put in these flexible spending accounts to the exact dollar that they otherwise would expect to spend.

Mr. RAMSTAD. Well, thank you very much. Just a final brief comment. You know, some of the hyperventilating notwithstanding here today, I truly hope we can work in a bipartisan, pragmatic way and do something about this other than simply verbal exchange this year. There are a lot of people hurting and we need to address the problem. You are addressing it. Thank you. I yield back.

Chairman THOMAS. I thank the gentleman. The gentlewoman from Florida wish to inquire?

Welcome, and we are glad you are here. I am going to go through a scenario, and I will tell you it came from the Center on Budget and Policy Priorities, but I think it sets it out in a kind of a way that Members might understand a little bit of what is going on and some of the concerns that we might have.

And prefacing that and saying that I probably, like has already been mentioned, was one of those that thought we ought to give tax credits to farmers, tax credits to the self-employed and those. I mean, I think we all have looked for ways to try to bring in the uninsured into a system that works for them. But I am very concerned that we are disrupting something that is already taking place in the marketplace, and really just looking at one system of where we just give it to people outside of the system or move outside of the system, instead of closing some gaps that we have in the system that is already there.

So the story is, if you assume a company provides a comprehensive health insurance play to its two employees, John is 28 with a healthy family of three. The cost of the family coverage plan for John through the employer-based system would be $3,000. Mary is a 45-year-old woman with a family of three that has a history of chronic, serious medical problems. The cost of a plan for Mary is $12,000.

However, because both workers are in the same health insurance pool, the health insurance cost through the company averages to $7,500 a year. Since the company subsidizes 80 percent of the cost of health insurance, it would contribute $6,000 per year for the cost of health insurance and the workers would pay $1,500 a year.

If John instead buys health insurance for his family in the individual market, he might be able to purchase a policy that costs about $3,600. It is a little bit more than the cost of a plan in the employer-based system, since individual insurance is usually more expensive than the employer-based coverage for the same level of coverage. Because he and his family are in excellent health, they can obtain a policy in the individual market.

Under the Administration's proposal, with a tax credit of $3,000, John can save $900 a year by dropping his employer-sponsored plan and buying a plan in the individual market. His net cost is $3,600 minus $3,000 or $600, while he currently pays $1,500 for his employer-based.

But if John drops out of his employer's plan, then only Mary is left in her company's health insurance pool, and the average cost of insurance for the firm rises from $7,500 to $12,000. If the company continues to subsidize at 80 percent of the cost of health insurance, the employer contribution towards her insurance would rise to $9,600 because John is no longer there and available to bring the average cost of insurance down.

Accordingly, Mary's premium would rise from $1,500 to $2,400. It is likely that Mary would be unable to afford the higher premium and continue to participate in her employer's health insurance plan. She and her family would be eligible for a $3,000 tax credit to buy health insurance in the individual market, but because of the medical problems obviously that would not work.

And just in a note, there in Florida you might know they closed their high-risk pool. They were $100 million in deficit. Mary may live in Florida. She has no place to go at that point.

But on the other hand, if Mary's company may be unable to increase its contribution to the cost of health insurance, it might just balk at increasing the company contribution by $3,600 per year, making it more likely that Mary would be unable to afford the employee contribution, or decide against offering health insurance altogether, which the company could do, knowing that Mary has a tax credit available to purchase coverage in that individual market.

In this very simple example, John has used his tax credit to buy insurance in the individual market, but since he already had insurance, there is no net reduction in the number of uninsured people. On the other hand, it may become harder for Mary.

I know that is a long thing, and I am sure that at some point--so the question is, you know, I understand why you are trying to do what you are doing, but why would you not open this up, instead of being disruptive to the total market, to the businessman? Why would you not put the incentive with the businessman as well to offer that insurance and to give that tax credit? Why would we just do it on an individual basis? I am very concerned about these kinds of stories that we are going to come back and hear because we have disrupted a market that is working.

Mr. MCCLELLAN. We totally agree with you about the importance of closing gaps in the system and strengthening all parts of the system. Just one factual point on that example you gave. John, the employee who would go outside of the pool and would take this additional income, would have to pay taxes on that income, so it is going to be worth substantially less. And, unless he was a very low-income worker, he is not going to get the full value of this tax credit.

So the result of that is that there isn't very much crowding out of employer coverage. Around 1 percent of employees who have health care coverage now through their employers would take this option instead. It is a very small part of the pool, and that is because there are such big tax subsidies through the tax deduction for this unlimited into employer coverage, and there also are the benefits of employer contributions and the pooling that employers can provide.

In addition to implementing this proposal, however, we agree with you that we ought to strengthen employer coverage. We have proposals like the flexible spending account proposal, so that people like Mary would have to pay less after tax in their out-of-pocket health care cost. We have other proposals--

Mrs. THURMAN. But we already have a cafeteria plan. I mean, we can do that today.

Chairman THOMAS. I thank the gentlewoman for showing some of the flaws in the current system. The gentlewoman from Washington wish to inquire?

Ms. DUNN. Thank you very much, Mr. Chairman. And gentlemen, thank you for coming today. I have appreciated very much the work that we have all done together over the last year, the 2-hour meetings that we have done through many, many weeks, and I think the consistency of your being available to answer our questions and work with us on a bipartisan basis needs to be noted for the record.

I wanted to go back to something Mr. Kleczka was talking about. The President and other folks who are supporting tax credits to reduce the uninsured I think are on the right track, but I really would like your opinion on whether you believe that these tax credits might cause some employers to drop their health care coverage. And if you believe that that is where the incentives are headed, what can we do right now to prevent that sort of erosion?

Mr. WEINBERGER. Congresswoman, as I think was discussed, the purpose and aim of this credit was to have minimal disruption of any insurance offered in the employer-provided market. When you expand any incentive to individuals, there is a risk that some might leave an incentive that they have somewhere else, like through the employer-provided system. The same would be true if you expanded Medicaid or any other type of proposal to cover people who currently don't have benefits or try to aim at that market.

As we suggested, out of the 170 million people who are in the employer coverage--that was the number, I think, that Mr. Kleczka used--our estimate is that less than 1.5 million or less than, 1 percent, would actually leave the employer market. The vast majority of people that would take the benefit of this incentive, again which is aimed at those people who don't have the benefit of employer coverage in these cases, are individuals outside that market.

And so, obviously this is an issue we have got to watch. It is important to look at how the effect of these individual incentives will affect the employer market. But we designed this in a way that it is targeted to those individuals who would least likely be in a position to leave the employer-provided plan.

I wanted to ask you a question having to do with my part of the country. I am from the Seattle area, and as you know, many folks out there are currently losing jobs, work for Boeing, Northrop, other companies, and so we are not in a great position right now. In fact, we are number two on the list of the highest unemployment numbers in States around the Nation, after Oregon.

As we talk about the uninsured, I would like for you to reiterate in a way that is easy to understand, the difference between your policies and how you would approach the problems of the uninsured when it comes to coverage, and the unemployed.

Mr. MCCLELLAN. Can I highlight proposals that I think would be of great assistance in the immediate future for people in your district who have lost their jobs? And you are right, there are a huge number of them. The President spent some time out on the West Coast lately, and has seen firsthand how important it is that we do something right away to help them.

Our displaced worker credit could be implemented within a few months, and as soon as it is implemented, those workers would know that they have got help on the way. They will know that premiums that they have to pay now are going to get reimbursed at the end of the year, 60 percent of the premiums will, and they will know that within just a few months they will able to pay much lower costs for continuing their health insurance because they can use the advanceable credit.

Sixty percent of their costs of health insurance, while they are buying it, would be paid directly by the credit. And this would enable the vast majority of people, not only in your district but around the country, who have lost their jobs to continue health insurance coverage, whether it is COBRA coverage if that is what they prefer, or mini-COBRA coverage if they are in a State that has similar laws to COBRA, that are not the same as COBRA but that allow people in small firms to continue their coverage, like Washington does.

And it would also allow people who are purchasing coverage outside of their employer. Many displaced workers do not have employer coverage to begin with. That is 10 percent of the non-elderly with health insurance today don't have employer coverage to begin with. They would get help.

So all of these displaced workers would get help quickly, without the need for further State legislation to come up with matching funds and set in place some new kind of unprecedented Medicaid expansion, and without the need for mandates on employers like Boeing that are facing enough problems right now without the government telling them yet more things that they have to do in a difficult economic time.

Mr. WEINBERGER. Congresswoman, could I just underscore one thing that Mr. McClellan said, I think is important? Because the proposal we have for the displaced worker would help those at Boeing, but it would also help all the small businesses in your State as well. And that is one of the concerns we had about the COBRA credit. Where small businesses generally don't provide COBRA, they would not qualify for this immediate benefit.

Ms. DUNN. I think that is very important, Mr. Chairman, and I think that needs to be reiterated, this business of being willing to cover COBRA payments that folks get when they work for big businesses, but the fact is, the small businesses can't provide that sort of coverage. For example, if you work for a company that has fewer than 20 employees and you try to get COBRA, as I once did, you can't get covered for anything. How do you suggest that we incentivize small businesses to provide affordable health insurance coverage?

Mr. MCCLELLAN. We have a number of proposals in our budget to help small businesses provide affordable coverage. One of them is our association health plan proposal, which would make it possible for small businesses to pool together just like large corporations do to offer a lower-cost range of health insurance options to their employees. This is a proposal that is strongly supported by the small business lobby, would enable groups like the Chamber of Commerce, other organizations, to serve as a conduit for health insurance for those.

Chairman THOMAS. The gentlewoman's time has expired. The gentleman from Georgia wish to inquire?

You know, I very well understand the intent of what you are trying to do with your proposal on the tax credit. However, I have a real problem with the tax credit provisions, because as you issue a credit on one side, someone has to make it up on the other side if you are going to have a balance in your Treasury. And, two, to me you are creating an entitlement within the tax code, one that is means-tested, based on income.

So you have a situation where you are creating an entitlement for certain incomes to be able to get a credit, a refundable credit. Then you have others who will be paying the tax that covers that credit, based on a means test. I don't like that at all.

It has been talked about the employer-based insurance, where the employer provides insurance, versus privately purchased insurance. There is a real difference in employer-provided, whether it be all of the premium or part of the premium for the employee, because the employer gets to deduct that from the cost of operation. But if it is privately purchased insurance, the employee does not get to deduct from their taxable income.

I will give you an example of a small business in a little town in Georgia. It is a sub S corporation, three employees. Two of those employees actually have other jobs also, and those two are covered under group insurance or insurance from the other employers. One employee is covered with a private policy paid for by that sub S, but at the end of the year the premium for that policy has to be added to the income of that employee, no deduction anywhere.

And based on your means testing, your entitlement program that you are setting up through the tax credits, his income of he and his wife would just exceed what you are trying to do, so he has no assistance at all, but he will be paying additional income tax to help support what you are doing. I think you are totally wrong in your approach with the tax credit. I think what you need to look at is how you can assist an individual for their income, as far as a deduction for the cost of premiums.

You know, there are all types of programs out there when it comes to health care. Some we are embarrassed to participate in because it may make us appear to be indigent or it may make us appear to be poor. But I am also concerned that we put in place programs that disincentivize a person's will to work because of increased, increased, increased government programs that offset that will.

I would be very careful as to how I took an approach to this situation with tax credits. I am afraid the tax credits will come back to haunt you in the end. Thank you.

Mr. MCCLELLAN. Representative, we certainly appreciate your caution. I think a number of the comments here at the session today have indicated how difficult and careful we must be in approaching the problem of uninsurance, and also how there is not just a one-size-fits-all solution that is going to address every gap and problem with our health care system.

We do think that health credits can provide important assistance for some individuals who are having trouble purchasing individual coverage today, but we don't pretend that this is our whole solution to the problem of uninsurance. We have a range of other proposals that will strengthen employer coverage and that will also help people like the individual you describe get more affordable coverage.

For example, he could potentially be eligible for our health account proposal. This would allow him to deduct his out-of-pocket payments for health care and to get better protection at a lower cost for seeing the doctors that he wants and getting the treatments that he prefers. This is another part of our entire agenda on health care coverage. So we would very much like to take steps to help that kind of individual at the same time as we are helping lower-income families.

A final point on this, on the refundable credit, is that it is not based on your current income. The advanceability is based on prior year's income, so that we are encouraging people to get help when they need it most and then to get back into a good job that can provide them coverage as well.

Mr. COLLINS. Young man, take your blinders off and the plugs out of your ears and listen to what people are trying to tell you. Government can't do everything for everyone. It won't work. You are digging a hole that we can't get out of. We can't financially cover everything that you want to do.

We are debating campaign finance reform today. The biggest problem in this town is, we use the Treasury to develop programs for voter base, and we are digging the hole deeper and deeper, and what you are doing with this is, you are using two shovels instead of one.

I was at church Sunday. The pastor says, "Man who doesn't work, doesn't eat." Don't put in place disincentives for man to work, that the government is going to take care of everyone from the womb to the tomb. It won't work, fella. Take your blinders off and the plugs out of your ears and listen to what people are trying to tell you, people who are paying the bill. That happens to be my business. That one person happens to be my brother-in-law. Thank you.

Several Members have indicated they would like a brief second round if possible, and if we can be brief in our questions and brief in our responses, we might be able to accommodate the Members.

I have been sitting here thinking about my aerospace mechanic, so I am back to him. He is now unemployed, and he goes down to the unemployment office, and I heard you say that he fills out his application for his unemployment and while he is there, he fills out an application for some kind of a tax credit for his health insurance.

Now, if he exercises his COBRA option and wants that money applied to what he already has with Aetna or whoever it is, you would send the money from the government directly to Aetna?

Mr. MCDERMOTT. And would you wait until his--where would he send his part of it? Would he have to send it to Aetna?

Mr. MCCLELLAN. He would send, just like he would do otherwise, he would send his check to the insurance company for his part of the premium, and the credit would make up the difference.

Mr. MCDERMOTT. So if he missed a payment and it ended his insurance, how would you know when you should stop sending your checks to Aetna because he isn't covered anymore?

Mr. MCCLELLAN. Well, there would be a reconciliation mechanism in place to make sure that the employee is still eligible for unemployment insurance and also is still making the actual payments on his health insurance. The insurance company couldn't get reimbursed by the government for a policy that they are not providing.

Mr. MCDERMOTT. So that would be one way you would get it back. Now, let's suppose he gets down the road and something happens and he says, "Wait a minute, I can't afford $7,000 a year, so I've got to reduce my costs here, and the jobs don't seem to be coming back, so I want to go out and get one of these programs on eHealth or whatever I can find somewhere for $3,000." Now, can he come back and change it with you?

Mr. MCDERMOTT. And so you are perfectly willing to allow him to take a lesser coverage?

Mr. MCCLELLAN. Well, our goal is to help the people get the coverage that they most prefer, the coverage that best fits their needs. So if individuals are not eligible or are not offered good COBRA options, then they would be able to use the credit for other coverage choices, as well.

Mr. MCDERMOTT. So if this, you are essentially saying that if this chart from eHealthInsurance is anywhere close to correct, you would be willing to pay for a policy where there was no guaranteed set of benefits, just you are going to send a premium out for $3,000 for something that might not cover the emergency room or doctor's visits or anything else.

Mr. MCCLELLAN. There are some coverage requirements in the proposal and in the bill that passed the House, and they are consistent with a broad health insurance plan. Again, we think it is in the best interest, especially these workers, as you mention, they are on limited income, they are between jobs, and they need coverage that fits their unusual current circumstances. So we would prefer to put our faith in them to choose the coverage that is best for them, subject to the health insurance standards in the bill.

Mr. MCDERMOTT. One thing I didn't understand, though. You said the bill that passed the House had some coverage requirements. Which bill was that?

Mr. WEINBERGER. Yes, you are referring, Congressman, to the Displaced Worker Credit which was part of the stimulus bill, so that was the one.

Mr. MCCLELLAN. Yes, there were HIPAA, Health Insurance Portability and Accountability Act of 1996, standards of coverage.

Mr. MCCLELLAN. Accepted benefits that are currently in the law, in HIPAA. It's the same as current law, correct.

Mr. MCCLELLAN. They are the standards in law for private health insurance premiums, for private health insurance plans.

Mr. MCDERMOTT. But that was only a guaranteed issue question, wasn't it? Were there actual standards beyond that in terms of what had to be covered?

Mr. MCCLELLAN. The HIPAA legislation describes what constitutes a health insurance plan for purposes of the legislation. It excludes, you know, disease-only plans, narrow cap benefit plans, things like that.

Mrs. JOHNSON OF CONNECTICUT. Just briefly, I want to put on the record very clearly because I think we forget, this Committee, this Nation provides $118 billion in subsidies to employer-provided health plans. There is no one listening to this hearing that has an employer-provided insurance program that isn't federally subsidized, and a lot of us only want that same subsidy to go to Mac Collins' brother-in-law and people who don't have health insurance.

Under my bill if you are at certain incomes it is a credit, at higher incomes it is a deduction. Everyone ought to have the same access to the subsidy of health insurance that we currently provide to people who work, have employer-provided plans.

Now, I do not agree that we should get away from the employer-provided program. I like that. Employers do a lot of good bargaining, a lot of protection. You know, there are some good aspects to that. And I like the Administration's emphasis on allowing new groupings, so individuals can use their tax credits or deductible status to move into new groupings.

But I want to--I am going to assume you are going to answer this question in the affirmative, because I want to really get to the other question. I want you to take a look at my bill that does provide tax credits and then deductions. I know we can't afford it now, but it is the direction we need to go.

And then I want to just point out, in terms of the uninsured, and actually in terms of the uninsured as a general problem, Mr. McDermott proposed a bill with a 30 percent credit with a lot of Democrat cosponsors from this Committee.

What we are talking about for the unemployed, and this is what I want, really want to get to, on the floor we have an opportunity to provide a 60 percent premium subsidy, double the subsidy that has ever been proposed and more generous than my tax credit, I believe, for unemployed people without health insurance. This is a 60 percent premium subsidy, so this is a powerful assist to the uninsured and unemployed. And I just hope that we won't lose track of what we are doing here.

And what I want to ask you is, what is the comparison between our 60 percent subsidy for essentially all the people that are unemployed, versus their subsidy for just those who have COBRA or have Medicaid coverage? Now, a lot of people who are working don't want to go on a welfare program, and Medicaid is a welfare program. And a lot of States can't afford to increase their welfare spending right now anyway.

So this is a big difference, and we are going to be out there on the floor this week or next week. We are going to have the chance to vote to give people who are struggling with unemployment the opportunity to have a 60 percent premium subsidy, whether they work for a company who offers COBRA or whether they don't. And I think you need to give us a little better insight into the power of the proposal you are recommending we work on, that we have developed, versus the alternative that is going to be on the floor, that is going to help many fewer people with a much less powerful subsidy. Now, that is my question.

Mr. MCCLELLAN. Congresswoman, we couldn't agree more about the need for bold action right now, and we think the proposal that the House has developed, has already passed once, ought to become law to provide this kind of assistance to people who have lost their jobs. We think it is a far more effective proposal than others that have been put forth.

The President really laid out two goals for us on what our objectives should be in providing assistance with health care costs for workers. We need a proposal that can be implemented quickly, we need a proposal that can be targeted to all people who have lost their jobs involuntarily, and this proposal wins on both counts.

COBRA subsidies are not only difficult to implement because they impose new mandates on businesses, they are also poorly targeted to people who have lost their jobs involuntarily. Most of the people who would be eligible and most of the subsidies under the COBRA proposal would go to people who did not lose their jobs involuntarily.

The Medicaid proposals are not the right medicine for people who want to continue their coverage, their private insurance coverage, but don't happen to be eligible for COBRA. It cannot be implemented quickly. As Chairman Thomas pointed out, most States are not in a position to expand coverage to populations that are not their core Medicaid populations, the low-income families and low-income seniors that really do need help now, and that we really want to help the Medicaid and SCHIP programs focus on.

So this is a far more effective way to get help to people who need it quickly, and we appreciate your support for seeing it become law.

Chairman THOMAS. The Chair notes that we are under second bells on a vote on the floor. Any other Member wish to inquire briefly? The gentleman from Louisiana?

Mr. MCCRERY. Yes, Mr. Chairman, just to continue on my concern about the cost of health care, and I know that you all have thought about that because I have had discussions with you about health care costs and where they are going, and what we can do to try to stem the upward spiral of health care costs. And I notice that in your tax credit proposal, not for the unemployed but in general, you do cap that by income, so you limit that subsidy to low-income folks, or really not low-income folks, but at least you cut it off at $60,000 for a family, and that is a start.

The fact is that the tax subsidy that Mrs. Johnson spoke about for employer-provided insurance is not the only subsidy that those employees get. They also get a subsidy from their employer. So not only do they get a tax break, and depending on your tax bracket, I mean, it could average say 25 percent that you are going to get, a cut on the cost of the premiums from the tax subsidy, but you are also getting 50 percent, 75 percent subsidy from your employer.

So the employee that is getting that tremendous subsidy for his health insurance has no idea generally what it costs, really, so he has no price sensitivity in the marketplace. He doesn't care generally how much health care costs. He knows it is covered, so he gets it.

When you subsidize something, you get more of it, and you are going to subsidize more health insurance so we are going to get more health insurance. But you are also subsidizing health care, and you are going to get more health care when you subsidize it more.

I am just wondering, since the Administration put in your proposal some cap here for your general tax credit, did you consider and would you consider some cap on the tax subsidy that we provide, so that we can start to bring some price sensitivity back into the marketplace for health care?

Mr. WEINBERGER. Well, we have not, as you know, designed this proposal to look at the employer system. We have designed this proposal to reach out to those people who are generally not covered by the employer system, and the cap that we have was aimed at actually trying to minimize to some degree what others have raised, which was having employees leave the employer market in this circumstance.

What you are talking about, Mr. McCrery, obviously is a much broader reform proposal, and we are certainly willing to sit down and talk about that, but this proposal was not designed with that type of a thought process in mind.

Mr. MCCLELLAN. I would also like to add that the President certainly shares your goal of helping make sure that people have affordable coverage options and they are not just given, you know, one plan that provides very generous coverage and no other choices. The President laid out on Monday, in his speech about his agenda for the future of health care, the importance of giving all Americans a range of choices about how to get their coverage, and it is through that kind of competition that our private health care system can find innovative and more cost-effective ways of delivering coverage. We need to encourage choice and competition. We need to encourage better information. I think your ideas go very far in that direction.

Chairman THOMAS. The Chair does find it ironic that the Administration, as the way you put it was that you put a cap on a provision for those who do not have insurance so that we wouldn't undermine a system in which there is no limit on the availability and therefore, as the gentleman from Louisiana said, no discretion in price sensitivity. Some folks find that pretty ironic.

The Chair would indicate that we have a short time on this vote, but thank you very much for your attendance and your indulgence. The second panel requires some degree of electronic set-up, and to allow that to occur, the Committee will stand in recess until 1:30, at which we will then enter into the presentation and a discussion with the second panel. The Committee stands in recess.

Chairman THOMAS. The Chair thanks the members of the panel. Members will be coming back from the vote. As you may know, there is a degree of construction going on, and we are currently running a gauntlet trying to get back and forth.

This panel will consist of Dr. Stuart Butler, Vice President, Domestic and Economic Policy Studies, Heritage Foundation; thanks for being with us. Iris Lav, Deputy Director, Center on Budget and Policy Priorities; Jeff Lemieux, Senior Economist, Progressive Policy Institute, and Vip Patel, Founder and Chairman of eHealthInsurance, Inc., in Sunnyvale, California.

Due to the antiquated wiring in this room, any attempt to go electronically produces a reverb back through the system. And so to assist Members, although logically we would probably like a general discussion and then some specific examples, the Chair will request that the other Members allow us to allow Mr. Patel to go first, so that if there are any questions of his presentation, we can conclude that and then perhaps turn that system off so that Members would not get the reverberation back through their microphones.

Each of you have a written statement. We will accept the written statement for the record, and within the time allowed, you may respond to us in any way you wish to present your arguments or position. Mr. Patel, nice to see you again, and would you please begin the panel?

STATEMENT OF VIP PATEL, FOUNDER AND CHAIRMAN, EHEALTHINSURANCE, INC., SUNNYVALE, CALIFORNIA

Mr. PATEL. Mr. Chairman, Mr. Rangel, Mrs. Johnson, Mr. Stark, and Members of the full Committee, over the last 5 years the process for individuals seeking to purchase their own health insurance has gone through a dramatic positive transformation, and in these next few minutes I would like to contrast the old, inefficient way of purchasing individual health insurance, a process which took weeks, to a new way of shopping on line, a process that could take as little as an hour and in which the consumer is much more empowered.

The old way versus the new way. First, in just finding a broker, many people don't know where to go to find a broker. In the old way, people might turn to their friends for a referral and possibly schedule a meeting with a broker days later. In this new way, people search on Yahoo or their favorite search engine. They are presented with a wide variety of resources for health insurance shopping, from insurance carriers themselves to thousands of health insurance brokers with web sites, to national marketplaces like www.ehealthinsurance.com.

In this example I am entering the zip code of Congressman Stark's district in California, which also happens to be the headquarters of eHealthInsurance. A full list of policy options will be presented without entering any personally identifiable information, and only the ages of those to be covered, so let's input a family of three. Please note the convenience of web sites operating around the clock, 24 by 7, and you can talk to a licensed professional on a toll-free number.

Number two, comparison shopping across a wide range of insurance companies. In the old way, some brokers specialize in only one or two insurance companies. For example, a broker may emphasize a policy from Blue Shield because they could win that special trip to Hawaii, and that may not be in the optimal interest of their customer. Hence, a consumer may need to see several brokers to explore a broad selection of options. But in this new way, consumers can explore a wide array of options with one stop shopping. Take a look at this first column here, a highly competitive marketplace with a number of insurance companies fighting for your business.

Number three, getting an unbiased look at all the price alternatives. In the old way, a broker may ask about your employment and budget to qualify which insurance products to recommend to you, and of course the higher the price, the more commission made by the broker. But in the new way, the full range of insurance products of each company is presented to the consumer, and at eHealthInsurance this is done by showing the lowest price all the way to the highest price products, and I think here there is a 7X delta between the lowest and the highest. We believe consumers want unbiased presentation where they can sort by factors important to them, and here we will sort by deductible.

Number four, obtaining a clear, apples-to-apples comparison of what you are buying. You know, health insurance is full of confusing, industry-specific jargon, and in the old way comparing options is made even more difficult when you are only able to see the benefit information across a few policies on several different pieces of paper. But in this new way there are on-line glossaries to instantly explain unfamiliar terms, such as the definition of an HMO or a PPO.

And then most powerfully, with the click of a few buttons, a number of different policies can be compared by a wide range of features for apples-to-applies comparison. Consumers can pick from HMOs, PPOs, MSAs (medical savings accounts), indemnities, etcetera, but in this example let's narrow our focus to comparing three different PPOs that all have a $1,000 deductible, that all have 20 percent co-pay, to see what really makes them different, and I think the details will be easier to see in the handout that you have been given.

But in this example we find that if you are anticipating the need for prescription drugs or maternity care, maybe the Health Net or the Blue Shield products may be good, but if you are a single healthy male, the Blue Cross PPO could be the best value. However, the deciding factor could be whether your favorite doctor is part of the plan, and in most cases health plans make their physician directories available right on line.

Finally, in the old way versus the new way of completing an application, it is no surprise that applying on line gets the consumer health insurance faster than communicating by mail.

Now, every day people approach eHealthInsurance with the misperception that health insurance is prohibitively expensive, but when they see the range of options, starting with some with very low prices, many of them find that they can in fact afford health insurance. And of course many more people could afford health insurance if the government were to provide economic assistance.

No one solution will solve the entire problem. Although some of the unhealthy and impoverished uninsured need specific solutions, I do believe honestly that tax credits represent one of the most impactful solutions for the working uninsured and the newly displaced uninsured, which together make up over two-thirds of the 40 million uninsured population.

eHealthInsurance just performed an analysis of 20,000 single policies sold, not just random quotes as you might find in some of these documents, the actual sold policies in the United States representing 93 percent of the U.S. population. So this new data shows that the average price of a policy was $159 per month or $1,900 per year, with the majority of these policies carrying less than $1,000 deductible.

And even more revealing is the average price by age bracket compared to the percentage of the uninsured in each age bracket. If for example under the Bush proposal you were able to offer a $1,000 tax credit, then two-thirds of the uninsured, those 34 and younger, could get a policy for the balance close to $50 per month, and 80 percent of the uninsured, those 44 and younger, could get a policy for the balance of $100 a month.

And with the recently passed House proposal, where the government pays for 60 percent of the premium, all age brackets could be covered with a balance close to $100 per month, and you could feel good about the fact that they are getting fairly comprehensive policies with modest deductibles. With that type of impact in your reach, now I'm not sure why anyone would be against a tax credit that could help such a large segment of the uninsured.

STATEMENT OF STUART BUTLER, PH.D., VICE PRESIDENT, DOMESTIC AND ECONOMIC POLICY STUDIES, HERITAGE FOUNDATION

Dr. BUTLER. Thank you, Mr. Chairman, for the opportunity to testify on the proposal to use refundable tax credits to make, in my view, a real start on the task of eliminating the chronic problem of uninsurance. Drawing from my testimony, I would like to emphasize three points to the Committee.

First, there is a long history of bipartisan support for refundable tax credits as one critical ingredient in the solution for the problem of uninsurance. Several Members of this Committee, as you have mentioned, right across the spectrum, have in recent years supported or introduced bills to enact health tax credits, not just you and Mrs. Johnson, Mr. Chairman, but Mr. Stark, Mr. McDermott, and many others. A bipartisan coalition in the Senate also supports the approach, and of course the President supports it.

To be sure, most Members who have introduced such legislation emphasize it is not the total solution. In particular, they emphasize that steps have to be taken to make group coverage more available to the uninsured. I agree, and have included some suggestions on this in my testimony, and I would be happy to discuss those further when we get to questions. But the bottom line is that there is in fact wide acceptance of tax credits as one critical step towards a solution, so I urge you to enact that step now and move on to the other steps.

Second, I would urge the Committee to be skeptical about many of the objections to tax credits leveled by critics. The claim that helping the uninsured with a tax credit will somehow cause the meltdown of the employer-based coverage system is especially misplaced. If a tax credit would cause a degree of so-called crowding-out, then of course exactly the same objection can be made against any help to the uninsured, such as allowing uninsured families to enroll in Medicaid or State children's health insurance programs (CHIP). In fact, studies by Professor Gruber and others show that poorly designed Medicaid expansions or State health programs can lead to as much as a one-for-one reduction in private insurance.

The critical task, then, is to design a tax credit, or indeed any form of help to the uninsured, in ways that are least likely to reduce good coverage at the place of work. I urge the Committee to look carefully at the Breaux-Jeffords-Snowe REACH Act in the Senate. Their bill includes an additional smaller credit for workers with employer-based coverage. That provision is designed to remove any incentive for employed workers to try to drop out of their employer's plan. Any tax credit program enacted by Congress also in my view should deny the credit to a worker who drops out of an existing employer-sponsored plan.

Another claim is that the proposed credit is not enough. I do have to agree that a larger credit will have more impact than a smaller credit. Nevertheless, the evidence indicates that the credits being proposed would have a significant impact, enabling many of the uninsured to afford a basic plan. And of course the Federal credits could be supplemented by State assistance. It is also worth noting that many States have artificially raised the price of coverage through unwise coverage mandates, and they should be encouraged to permit less expensive, more basic coverage to be offered.

There remains the need, however, to make affordable group coverage more available to families with poor medical histories. Washington should continue to work with the States to address that. As I mention in my testimony, Congress can help by making such vehicles as association plans and an expanded Federal Employees Health Benefits Plan (FEHBP) available within States. I would note that Mr. Stark's 1999 bill would have made the FEHBP available to the uninsured.

My third and final point, Mr. Chairman, is to urge the Committee to apply what I might call the Enron test to every proposal. What would the proposal mean for the thousands of Enron workers who have just lost their jobs? The Enron test indicates why proposals that would merely subsidize COBRA payments, either directly or with a restricted tax credit, are not the way to go. Such proposals in effect say, "If you are fired, we will help you pay for the health insurance, but only if you get it through the same company that just threw you out on the street."

Mr. Chairman, a tax credit for the unemployed must allow laid-off workers to get insurance that they can afford, and get it through an organization that they can trust. Moreover, let's also remember that 60 percent of low-income families do not even qualify for COBRA coverage if they are laid off. Restricting help to COBRA coverage would do nothing for them.

Mr. Chairman, it is not often that there is such a broad political support in Congress and the White House for a tax measure that would make such a difference to the daily problems of ordinary Americans facing economic distress. I strongly urge the Committee not to let this opportunity slip by.

Chairman THOMAS. Thank you very much. Ms. Lav? The mikes are very unidirectional, so you probably need to get fairly close to it and talk directly into it.

Ms. LAV. Thank you. Thank you, Mr. Chairman. I am Iris Lav, Deputy Director of the Center on Budget and Policy Priorities. The Center is a nonprofit policy institute here in Washington that specializes in both fiscal policy and in programs and policies affecting low- and moderate-income families, and I appreciate the invitation to be here today.

My testimony largely focuses on the Bush Administration's proposal to provide a refundable tax credit to families and individuals who do not participate in employer-based coverage for the purchase of private health insurance. We welcome the Administration's commitment of significant resources to insurance coverage, but we view a tax credit as the wrong approach for solving the problems of the uninsured.

There are three major problems: the weakening of the employer-based system through which the large majority of insured Americans currently obtain quality health insurance coverage; the vagaries of the individual insurance market for anyone except the young and healthy; and the inadequate size of the credit relative to the cost of insurance for low- and moderate-income families. None of these problems can be solved in the context of a tax credit approach without causing other problems or taking actions that I think all of us would agree are not politically feasible.

First, the tax credit would lead some employers to drop or not offer coverage. Employers will feel that employees can use the credit to buy coverage on their own. The credit also will draw younger, healthier workers away from employer coverage into the individual market. This leaves older, sicker workers in employer insurance pools, driving up the average cost of coverage. In response, employers will raise employee contributions, leading more younger, healthier workers to opt out. This insurance death spiral, in which employers ultimately cannot afford to offer insurance, would leave older and less healthy workers to find insurance on the individual market.

The nature of this individual market is the second problem. In the individual market, insurers generally can vary premiums based on age and medical history and can deny coverage altogether, yet many of the uninsured are in the very categories for whom insurance in the individual market is unavailable or prohibitively expensive. Over half of all uninsured adults have a history of serious medical conditions such as cancer, heart disease, and diabetes, or they smoke, or they are obese. Moreover, two-thirds of lower-income uninsured adults above age 50 have been diagnosed with a chronic condition. So, you know, when you look at the CEA data, they are talking about the cost for a healthy person. They are not talking about these people who are uninsured.

The third issue is whether the proposed tax credit can make insurance affordable for the populations that it is intended to reach. A healthy family of four with income of $25,000 that receives a $3,000 tax credit would have to spend more than 17 percent of the family's gross income to purchase a mid-range policy on the individual market.

One might consider ways to fix these tax credit problems, but unlike some of my colleagues, I don't think such fixes are practical. For example, one could mandate employers to offer or administer insurance, or mandate States to implement reforms in the individual market, but that is probably not in the cards.

Moreover, a tax credit is highly inefficient. Professor Jon Gruber of M.I.T., who has been discussed greatly this morning, did look at this proposal in testimony submitted for this hearing, and found that 10.5 million people would take up the Administration's tax credit, but because of employers dropping and employees switching, the net reduction in the number of uninsured ends up being only 1.9 million out of that 10.5.

What is a better approach? Expand the programs we already have in place for low- or moderate-income populations, where the bulk of the uninsured are. A number of States already have expanded to include parents, and some include other adults, under SCHIP, and others would do so if funding were provided. This approach provides quality insurance that does not exclude people with medical problems.

Finally, I would like to say a few words about the proposals to cover workers who have become uninsured in this economic downturn. The House stimulus proposal for a tax credit for unemployed individuals eligible for unemployment insurance, that they could use to either purchase COBRA or health insurance in the individual market, raises some of the same questions with respect to the individual market.

Consider a 55-year-old laid off construction worker who worked for a company too small to offer COBRA. If he has a history of heart problems, he probably would not be able to use the tax credit to access insurance in the individual market, and certainly not at an affordable price. And there would be no help under the proposal for those not eligible for unemployment insurance, which includes a lot of low- and moderate-income people.

A better approach would be to provide a deeper COBRA subsidy coupled with a largely federally paid option for States to cover unemployed workers under Medicaid. This would provide quality insurance, either employer-provided or the comprehensive Medicaid benefit, regardless of age or health status. It also would be likely to cover more workers than the House plan. The Congressional Budget Office estimates 7 to 9 million workers could be covered, depending on the Federal Medicaid matching rate.

The Progressive Policy Institute (PPI) has long argued that tax credits should be a cornerstone for a renewed push toward universal health coverage. That is not to say that tax credits alone are enough to do the job. They are not. We will also need expanded safety net programs and greatly improved purchasing pools or other purchasing arrangements, so that people can use their tax credits in an efficient, fair, and secure market, but tax credits are a very important building block.

I think that past efforts to get universal coverage have failed mostly because they caused uncertainty about the fate of employer-based coverage, which workers value very highly. However, I think that universal coverage can be achieved in the coming years, in this decade, perhaps, in a series of responsible, practical steps that enhance rather than threaten work-based coverage.

I think the first step, as you have already been working on, is to help the newly unemployed maintain their coverage. By preventing those with insurance from losing it when they lose their jobs, we can at least stop the number of uninsured from rising.

The second step is to actually reduce the number of uninsured by making certain that all Americans have good choices of health insurance at reasonable group rates; that they can exercise those choices in the most convenient and secure setting possible, that is usually their place of employment; and that financial assistance based on tax credits, like we have been discussing today, is provided to help those with low incomes.

And we have heard from virtually every witness, I think, and many Members, that to be effective at reducing the uninsured tax credits have to be both refundable and available in advance, when people need the money to purchase their coverage. Both the House-passed proposal for temporary tax credits for displaced workers and the Administration's proposed permanent tax credits for individual coverage pass those tests of refundability and payment in advance.

The temporary tax payments for displaced workers also seem to me to pass the crucial test of not threatening employer-based coverage. However, I believe the Administration's proposal for permanent tax credits for individual health coverage would in fact still disrupt employer-based coverage, in spite of their new mentions of purchasing groups in this year's version, and therefore shouldn't be enacted in its current form.

I have some suggestions to improve both proposals. They are very technical. They are explained in more detail in my prepared statement.

Some of the highlights: I encourage Committee Members to consider increasing the percentage subsidy for the temporary tax credits for displaced workers from 60 percent to a higher number, say 75 percent or more. I think that would better ensure that very few workers actually lost their health coverage when they were unemployed. And, perhaps surprisingly, I think that could help reduce employers' overall health costs by virtually eliminating adverse selection in the COBRA market.

Furthermore, I think we need to make sure that those temporary tax credits follow people to their new job for a time. Even if you get a new job, you might not be eligible for health insurance for a long period, and those tax credits, if they were to follow people to their new job, that would provide a good incentive to help people go ahead with their job search.

Second, the Administration's proposal for permanent credits for individual health insurance needs to be expanded to include employment-based coverage, and should be made available through payroll deduction at the workplace. And with the balance of my time, let me try and explain that last point, why the Administration's tax credit should be extended to people with employer-based coverage.

I think the biggest flaw in the Administration's proposal there is that it doesn't allow people who get health coverage at work to receive tax credits even if their incomes are very low. First, that is unfair, since low-income people who already struggle to afford work-based coverage would get nothing. They would have an incentive to drop out of their employer's coverage and switch to other, often higher paying jobs that didn't offer coverage because in general, as we know and as you have said, Mr. Chairman, businesses that don't offer benefits like health insurance can afford to grant higher wages instead.

Under the Administration's proposal, low-income workers would have a particularly strong incentive to take higher wages instead of the employment-based health benefits, and then use the tax credit to purchase individual coverage if they can. To save their employees the hassle of switching into no-benefit jobs to take advantage of the credits, and to retain valued employees in some cases, some small businesses would just stop offering coverage in the first place.

I believe the better path toward universal coverage is to make mainstream group coverage available through tax credits, and easily affordable through tax credits, and easily available at every workplace, whether or not the employer offers to help pay for that coverage. And I am heartened by the fact that even our friends at the Heritage Foundation, which has previously proposed some individualized health insurance reform proposals, they are now publishing papers that go through exactly how we can get tax credits available at the employer level, and I think that is extremely helpful.

To sum up, the PPI strongly supports the effort to make refundable tax credits an integral part of health reform and covering the uninsured. The tax credits shouldn't favor employer coverage or individual coverage. The right policy would be a better balance than the policies the Administration has put forward. Tax credits should be available in both markets so that both markets are strengthened, but one market shouldn't be favored over the other. Thank you.

Chairman THOMAS. Thank you very much. So what I am hearing, Mr. Lemieux, is that the mechanism is okay, it is just the mechanics surrounding it, the way in which it is utilized. But the tax credit itself, if it is done correctly, is a model that your group would support.

Mr. LEMIEUX. Yes, sir. Tax credits should be a cornerstone for the drive toward covering the uninsured.

Ms. Lav, in describing the potential horrors of this system, I am not quite clear, do you believe that the Federal law would preempt State law that is now in place?

Ms. LAV. I mean, I think that that is one of the problems, you know, that you cannot. It is very difficult to fix this individual insurance market, and that is the reason you can't rely on it. I was saying we certainly are not going to mandate States to do this.

Chairman THOMAS. All right. Then do you know that the provision that we proposed has guaranteed issue in it?

Ms. LAV. Well, you know, guarantee issue is, you know, as under HIPAA is one thing, but it is guarantee issue at what price? And when we are talking about credits for low- and moderate-income people, you know, if somebody is willing to issue them a policy at an exorbitant price, it is not any real benefit or choice for them at all.

Chairman THOMAS. And do you understand that the legislation was not a fixed dollar amount, but rather a percentage of the cost of the premium with no cap on it?

Chairman THOMAS. So that that argument I believe is much less significant if you are provided with a percentage of the cost with no cap.

Ms. LAV. Well, I think if you are living on unemployment insurance, you are going to have trouble paying the other 40 percent--

Chairman THOMAS. No, no. No, I understand all that, but the way you presented it, it was as though if people didn't realize what was in the legislation and it was a fixed dollar amount.

The other thing that I find interesting is the current State laws in all 50 States have guaranteed renewal provisions. And if I were to take the time and go through and look at what States currently provide, all 50 States, for example, require approval of product design, consumer protections, premiums, the provisions which encourage pooling. I just have a very difficult time, for someone who in criticizing it could certainly criticize it because it doesn't do enough, but that what you have done is created some arguments which I don't believe are valid, and that you immediately then shift to doing more of the same.

Do you agree with Professor Gruber that if you were to enhance Medicaid as you indicated, that it would in fact also undermine the employer-based system?

Ms. LAV. I believe that Professor Gruber has been misquoted here this morning. I am sorry he was not at this hearing to speak for himself, since his name has been invoked so much.

But as I understand it, his data suggest that there is no more than 20 percent displacement from Medicaid expansions, and that the larger data, what has been cited is from a study that was counting people who actually--as being part of the displacement who actually were not eligible for Medicaid, parents of the children. So I think that data that has been quoted here is not--

Chairman THOMAS. Do you believe it is realistic to assume that most States in their current fiscal condition would raise the percent of poverty to cover many of these displaced workers who, as we have discussed, are not really low-income people? Is that a realistic possibility?

Ms. LAV. Well, you know, the Senate Finance Committee proposal was talking about a 90 percent match and, I mean, some people were even talking about a 100 percent match. I think the real issue is how do you get some insurance to these people that is insurance that they actually can use, that is not going to cost them an amount that people cannot afford when they are on unemployment insurance, and that will be available to them even if they happen to have diabetes or some other problem which hasn't prevented them from working, but will prevent them from getting insurance. And so I think there has to be a very, very generous or even a full Federal contribution, but I think the mechanism is a much better one than throwing people onto the individual market.

Chairman THOMAS. And if you provided a 100 percent--I find it ironic that you would use "match" in reference to 100 percent--if you gave the insurance away, would that not have an impact on the employer-based system?

Ms. LAV. For unemployed people? No. I mean, you know, if you are talking about people who are unemployed. It would certainly if you were doing it on the, for the--

Ms. LAV. Regular credit, but if you are doing it for the displaced worker--and you would have to have, you know, an income cap. You couldn't let States decide to do it up to 450 percent of poverty. You would have to do it, you would have to place a cap on it, but that certainly is possible.

Chairman THOMAS. There would be a number of mandates that you would have to place on States to make it work.

Dr. Butler, thank you very much. I do believe that the Progressive Institute has also matured in its thinking, in terms of the way--

In terms of the eHealth, Mr. Patel, if we are talking about a credit which is now going to be built into the system, how difficult would it be to modify the software so that people could see what their actual out-of-pocket cost would be, if in fact that were available?

Mr. PATEL. That is a fairly straightforward exercise. It is an additional column that would, under individual single policies, show a minus $1,000. And if they were able and willing to put in their income bracket, then we could show how that scales based on that. But the computational logic in the display is pretty straightforward.

Chairman THOMAS. And is someone able to kind of reverse engineer a plan? That is, if I were looking for one that did prescription drugs in some way but didn't cost more than X dollars a month, can you input parameters for a plan and then see if any match it?

Mr. PATEL. We made it simple for people to put in parameters such as deductibles, co-pays, and they can sort on deductibles, premiums, and other items. When it comes to line item benefits, and that is where our apples-to-apples comparison chart may get pretty straightforward, but not as simple as simply typing in the word "maternity."

Chairman THOMAS. Thank you. Also, I note that there are some folks, perhaps even some on this panel, who are not as computer literate as either they would like to be, or perhaps many people out there. The argument is that this is still very, very exotic stuff, and we are dealing with a limited number of people. One of the terms of the art are a number of hits on a particular site. I mean, obviously if 2,000 or 3,000 people a month access this, it is a pretty limited universe. What are we looking at in terms of the number of hits on eHealth?

Mr. PATEL. If you don't mind me modifying the question, "hits" sometimes are misconstrued because the numbers become inflated. Unique visitors to our site are approximately half a million per month.

Chairman THOMAS. Well, that is significantly different because unique visitors could in fact visit the site several times, making different comparisons, and under the normal "hit" terminology each of those would be counted as a hit. You are talking about unduplicated counts. Is that another way of saying it?

Mr. PATEL. We have a mechanism to screen out duplicated visits from the same computer. Hence, these are truly unique visits from unique computers. Hits sometimes include different graphics and different pages--

Chairman THOMAS. So you are talking, if we could say this in a rough way, and perhaps it is too distorted, but I mean half a million head of households kind of thing looking at it, which then when you add up the number of people that could be impacted by this, gets into possibly the millions fairly quickly, and this is something that I think will only grow exponentially. So I do want to thank you for your presentations, all of you.

Chairman THOMAS. The gentleman from Washington is elevated to the top of the list.

Mr. MCDERMOTT. As you might guess. On the eHealth stuff, I thought the last witnesses were a little bit--well, I don't know--I felt misled a bit, in their talking about these health care plans for which you would pay. And they said, well, the definition is in the bill we passed last year, so I went and got it. And it says, "Qualified health insurance means insurance which constitutes medical care." Now, I don't think you would call that a defined benefit program. That is about as wide-open a definition, as unmeaningful a definition of health care, as I can imagine your paying for.

So when I looked at the eHealth, I looked at the Blue Cross of California for $127, and I suspect, and I don't know enough, I need some help, that you line up these $127 policies for young people. I mean, those would be people who say, "I haven't got enough money for health insurance, so here is a change, and I'm going to go get this." But I notice one thing about it is that it doesn't have any maternity benefits, just exactly what you would expect young people to probably need at some point.

And then you get over into things like pharmaceutical benefits, and you are talking about formularies and a whole bunch of things here. Most people don't--I mean, and that is for $470 a month. I keep thinking about my laid-off Boeing worker--and the Chair is gone. The Chair says you are going to get 60 percent. Now, do I understand that means if it is a $7,000 policy, you get 60 percent of that? You get $4,200? And that somebody in another company that is getting a $3,000 policy, they get $1,800? Is that it? So we are going to have all kinds of levels of benefits, depending on how well people guess about what their health is going to be. Am I seeing how you are constructing this? It is a guaranteed payment, not a guaranteed benefit package, is what I am getting at.

Mr. PATEL. Mr. McDermott, if I can address the pieces that I understand, specifically about the quotation, we put in two 40-year-old adults as well as a child, and so the prices you are seeing reflected in this chart are about 40 year olds. And they have a choice. It is a 40-year-old male--actually it is a 42-year-old male, a 41-year-old female, and a child that is 5 years old. Here what we are demonstrating is that there are options--

Mr. MCDERMOTT. Are they assumed to be absolutely healthy? No medical underwriting in this at all?

Mr. PATEL. Yes. At that point the quotation is typically on what is called Tier 1 pricing data, so it is unadjusted average prices that the health plans actually sell. But I should point out that some of the plans don't include maternity. The first one doesn't, the much lower priced one at $127 per month for all three individuals, but the $457 policy as well as the $470 policy do include maternity benefits. They are much more robust policies.

And what I am pleased to report to you today actually is, you know, we have an affiliate relationship with the union organization that serves those specific Boeing employees that you mentioned, the SCPEA union, Southern California Professional Engineering Association, and off of their own web site they have a pointer to eHealthInsurance, understanding that sometimes COBRA policies can be very expensive, and they would like their people to be empowered to go and shop and find a policy that is right for them. And so I am happy that we are able to serve some of those constituents in the Boeing area.

Mr. MCDERMOTT. But you do recognize that they are going to have less benefits when they come to your--when they leave that Boeing contract and come down onto your web site, they are looking at less benefits.

Mr. PATEL. It wouldn't surprise me if there is a difference. But this is a fairly robust policy, when we look at the $450 per month for three people. It includes most aspects of a plan that--

Mr. MCDERMOTT. One week of your unemployment would pay for it, but of course you are going to get this six times, 60 percent of $7,000. You get $4,200 from the government, so you have only got to make up $3,000, huh? If you can do that.

Mr. PATEL. Yes, for the COBRA policy. That is challenging. For a policy that someone might buy on their own, I think this would equate to--

Mr. MCDERMOTT. So you are really suggesting it would be better to leave the Boeing COBRA policy and go down and get one of these individual policies.

Mr. PATEL. It would be cheaper for some people to do that. For those that have health conditions, and where the policies might be more expensive, it is better for them to stay with the COBRA.

I am sorry I wasn't here for your testimony, Mr. Patel, but you know one of the criticisms of allowing people to purchase individual policies outside the employer structure is that there aren't good policies available on the market, and yet I think you had mentioned something like 87 percent of the policies that you served were sort of comprehensive. I mean, is this sort of representative of the general outside market, or it is just something that you are involved with?

Mr. PATEL. No, I believe what we are demonstrating here is statistically significant and representative of the majority of the United States. You know, on our site we have 10,000 different plans across 100 different health insurance companies, and so the information that we release, when we actually look at the data, we wanted to know, are these bare-bones policies or are they of real substance?

And that is where we found that, you know, two-thirds of the policies had less than a $1,000 deductible and that 87 percent of them are what we considered comprehensive. And that is a very vague term, but it is where we used kind of the equivalent of what is in Medicare A, Medicare B, and some med supplement with prescription drugs to constitute what is comprehensive, and we found that 87 percent of these policies were in fact meeting the definition.

Mrs. THURMAN. Hello, and thank you for being here today and giving us an opportunity to kind of discuss the issues versus just--you know, so we can see where some of the problems are and where potentially we could actually do things to help.

Mr. Patel, I am very familiar with your information and have worked with you, and anything that can give somebody an opportunity to look and be able to see what might be available to them I think is a good idea. You mentioned, though, in your model that you had a 41-year-old, a 42-year-old, and a child. What was the average income? Was there an income in that?

Mr. PATEL. No, we don't have income data. When we ask people to apply for health insurance, they don't share that information.

Mrs. THURMAN. So part of the problem that we have might even be as to understanding, with the tax credits that were being talked about, there may be several of these people that would never be able to, really be able to use that because of the income level that they are at. I mean, we may find that, which I think is quite frankly one of the issues we even have with the uninsured issue of unemployed, because it is based on last year's salary, not this year's, and you have a Boeing employee that was at $30,000 who would not have an opportunity to participate, in my estimation, with any of this.

Mr. PATEL. I could say absolutely yes. I wanted to be very clear that this is not the solution for everyone, and that impoverished individuals will absolutely need a specific solution. And this would represent people in my own family, it would represent people that I have worked with as a Big Brother, that they will need certain programs to help them overcome the affordability barrier. They have not a single dollar of discretionary income to provide towards health insurance. And I have been shocked to find that in some places people below 100 percent of the Federal poverty level even don't qualify for Medicaid.

Mrs. THURMAN. The other question that I have, and maybe this is to Dr. Butler, you know, as I talked about earlier, certainly the issue that is going on in Florida, we have not taken a new high-risk person in since like 1991, somewhere around there. They have got a $100 million deficit. But one of the other things that we are hearing is there is very limited, if any, ability to go out on an outside market as an individual. Maybe in what Mr. Patel is looking at, which is a PPO, is an HMO, managed care, but there are several areas of this country, as we know, that don't have even those instruments available to them.

What kind of research have you done in looking at this tax credit that shows that even if you had a tax credit, that you would have an insurance instrument available to you as an individual?

Dr. BUTLER. I think there are two ways of responding to that. The first is just to amplify what Mr. Patel said, that one of the advantages of a credit that is available for people to go outside say COBRA coverage or any other insurance is that they then can look and they can seek the kind of coverage that is available, that fits their needs.

The second point is that once you provide a subsidy in some way, the market will change, just as the market changed for employer-based coverage once the IRS ruled that you could get a tax exclusion for it. In other words, once you start to put money in people's pockets, then other kinds of markets begin to develop. I am not suggesting that we take a laissez faire approach. I have suggested in my testimony that--

Mrs. THURMAN. In the self-employed, is there a cap on their tax credit? Could they only make up to a certain amount? I don't know the answer to that.

Mrs. THURMAN. Yes, under current law. If they made $80,000 a year, can they still get the--

Dr. BUTLER. I believe it is a straight deduction. Yes, it is a deduction, I believe, without any limit. A credit is much more advantageous for people at the lower income level.

Mrs. THURMAN. And then maybe you two all can give me some ideas of what you are finding out there on the open market for individual instruments of insurance.

Ms. LAV. I mean, unlike the eHealth or the CEA, there was a Kaiser study which looked at people that had--and went beyond the surface to the individual underwriting with people that actually had real life problems, which as I said, half of the uninsured and two-thirds of the low-income older uninsured have. And they found lots of refusals, lots of exclusions, downright refusals, lots of exclusions of whatever that person's problem was, which may be why they need the insurance, and insurance premiums that were two or even three times the basic premium that we are talking about here today. So I think that is really what you would find in the real world.

Mr. MCCRERY. I am sorry. I am going to try to get Rob Portman in before we go vote, and then Pete Stark. Mr. Portman?

Mr. PORTMAN. Thank you, Mr. Chairman, and thank you for your testimony today and your patience in waiting for us. I guess I have a couple more elementary questions. First, Mr. Patel, I would appreciate your talking a little bit about some of the current opportunities out there, and maybe the additional opportunities that would come with a more vigorous individual market.

And I think Dr. Butler is right, I think the market will change. How much it changes is uncertain in health care. We have seen that, and that is one reason we have a problem today, is that the market hasn't adjusted as some of us thought it might, even in the current configuration, particularly for smaller businesses. And, you know, I have constituents back home who are coming to me now and telling me woes that sound a lot like 1992, 1993 and 1994. You know, in my own town of Cincinnati we have had a pretty aggressive HMO health care market, and now we are seeing 11, 12, 15, 20 percent increases for smaller businesses.

The first question I would have is really for anybody, but Dr. Butler may be the most qualified to answer it, and that would be, what are other countries doing in terms of the individual market? Most countries have more of a socialized or nationalized system, I suppose, that are developed countries. But do you have any comparative information on this development of an individual market that might be successful?

Dr. BUTLER. Well, I don't have it off the top of my head. In the British market about 10 percent of people are involved in the individual market, or small groups, based on the place of employment. In Switzerland there is in fact an interesting combination of a national program and national subsidy and a requirement for insurance, with private plans being made available to people.

Mr. PORTMAN. Is it like the British system, where you opt out of the national plan, or is it something you do concurrent--

Dr. BUTLER. Unfortunately, in the British system you don't opt out in the sense of getting your money back. You have to buy twice.

Dr. BUTLER. But some people, many people choose to do that because of the deficiencies of the government-sponsored system in Britain.

Mr. PORTMAN. I guess the question I would have is, is there any experience in any other country that we have where we have gone to an individual market and we have been able to see the kinds of affordable health care for individuals that we all like to see in this country? I know you have some ideas about pooling, and particularly among small business--

Dr. BUTLER. Well, I would look at the--I think a good equivalent of what you are talking about is the very health plan that you are in, the Federal employees system, which although it is technically an employer-based system, it is in fact 10 million people shopping as individuals for plans. That is what it actually is.

Dr. BUTLER. I don't disagree with that, but all I am trying to point out is that there is a very strong market there for what is a subsidized individual system, and that if you were to provide a subsidy certainly at the 75 percent level, which is what we are talking about in the FEHBP, I think you would solve almost all the problem. If you are not going to get that far, you are obviously not going to solve as much of the problem.

I am just making the point that a market has developed, a very effective market, in the FEHBP system, based on subsidizing people directly and having advanceability, because you get a lower premium and the plan itself gets a direct payment, which is exactly what the Administration is arguing for. So I think you actually have in place, right before you, the basic structure of a market that would develop if you did provide this subsidy.

Mr. PORTMAN. There was discussion earlier about the efficiencies in various plans, and I think it was Ms. Lav who talked about some of the inefficiencies in an individual market, and yet there are a lot of inefficiencies in the current system. And when you think about it, the way in which we subsidize now through the employer-based system, there are obviously some plans that get a larger Federal subsidy than others based on the kind of plan that is offered.

And the question is, on the individual market, can you overcome some of those inefficiencies by providing more of a blanket subsidy, in essence, or caps on the kinds of plans that are being offered, so you don't have a Cadillac plan and a Ford plan and then some with no plan at all, all of which are subsidized by the Federal Government. Do you have a response to that?

Ms. LAV. Well, while there are inefficiencies in almost all of these systems, I think what you are doing is making it worse with the individual market, because in the employer plan, in the FEHBP, you are not saying some people can get insurance if you are healthy and some people, if they are not healthy and you really need it, don't get insurance. And so I think that is the ultimate in efficiency, which is what is throwing people on the individual--

Mr. PORTMAN. But we have built safeguards into the system already, and we could always do more, correct?

Mr. PORTMAN. We have already built in safeguards with regard to preexisting conditions and other prohibitions on exclusions. Couldn't you build that into a system?

Ms. LAV. Not unless you are willing to go to some kind of community rating or price control so people could actually afford it if they are sick, because insurers always will have the advantage, if they can, to shed the individuals who they think are going to cost them money. And they won't want to take them up, and unless they have to take them up, just as in the FEHBP the insurers have to take all comers, then it is not going to work.

Mr. STARK. I guess I will just have to ask you to raise your hands, but I am going to guess that we could provide Medicare for the under-65 population for probably $3,000 a year. It was $4,000 for the 55 to 65, for the buy-in, so I am extrapolating. Kids are only about $1,000, so you can fuss with me about the $3,000, but I am pretty close.

If you add a maximum co-pay of $1,000, one exposure to the hospital, and $100 for the doctor, you are talking about at most $4,000 for a plan that--I handed out this list of benefits that I got off the e-group--that is probably just as good as that, and most of those had a $3,000 premium and a $1,000 co-pay. So you could have Medicare with completely open enrollment and community rating, and why would anyone therefore object if using this tax credit, we allowed people to purchase Medicare as an alternative?

That is all we would need to keep the insurance companies honest. If they want to compete, let them compete. And we already have it for the seniors, where obviously the private insurance didn't want to compete. And so I would be perfectly willing to say, "Okay, let's do it," but just let Medicare offer a plan at budget net and cost as we do now, with the subsidy for Part B no higher, and go at it that way. Who would object to that?

Dr. BUTLER. I think you would immediately see, of course, the adverse selection against Medicare, which is one of the big concerns with that. The people who would quickly and immediately take that option would be the people with the highest cost.

Mr. STARK. Yes, but our first concern is the guy who doesn't get any insurance through the highest market.

Dr. BUTLER. I understand that. I am just trying to point out that the cost of providing that coverage--

Mr. STARK. It is interesting to see how the conservatives always worry about the poor people and the sick people first, that they are jamming it to us rich healthy people. I like that, Stuart. You are true to form. Always worry about the rich people, never give a hoot for the poor. At least you are consistent.

Mr. STARK. Yes, your record is very clear. You don't give a rat's behind for the poor and the indigent. All you worry about is rich people getting their tax breaks.

Dr. BUTLER. If you look at the proposals that I have actually put forward, you will find that in fact I, like Mr. McDermott and Mr. McCrery have been more radical than most in terms of saying we should in fact remove the subsidy almost entirely from the rich people who get the current exclusion, and provide it almost entirely to middle- and low-income people, and I am on the record as saying that.

Mr. MCCRERY. I have a related question to Ms. Lav, kind of the flip side of this. Ms. Lav, I appreciate your objections of a subsidy or a tax credit with respect to very low-income people, that a tax credit is not going to do them any good if they have to come with $1,000 or $2,000 out-of-pocket to make it, to pay the full premium. My question to you, though, is would you be willing to cap the current tax subsidy for employer-provided health insurance in order to finance more generous tax credits for low-income people?

Ms. LAV. I don't think that particular trade-off would be a very good one, because--

Ms. LAV. Even though I am saying that the tax credit is inadequate, my written testimony reflects this, I am not really willing to say that there should be a bigger tax credit, because the larger the tax credit, the more you are pulling away from the employer-provided system. I actually would like to see--

Mr. MCCRERY. Okay. Well, let's say we are going to expand Medicaid. Let's say we are going to expand Medicaid. That costs money, too. How about capping the tax subsidy on employer-provided health insurance to pay for the increase in the Medicaid program? Would you be in favor of that?

Ms. LAV. I actually have not analyzed that trade-off, so I am not really prepared to--

Mr. MCCRERY. So you are saying you could maybe live with a cap on the tax subsidy for health insurance?

Ms. LAV. I am not saying that. I am saying that, you know, I think we do not want to ruin the part of the health insurance system that works well, and I think that is the employer-provided system. So I think we would have to go very, very cautiously there. We don't want incentives for employers not to provide insurance, and they already are having incentives not to. You know, we already have very rapidly rising health care costs right now, and so I don't think this is the time to necessarily dump on employers in that way.

I mean, I know economically it is passed on to the employees, you know, in the long run in the trade-off for wages. But I think that in the first instance right now I think employers would look at it as a problem. So I am not willing to say that, you know.

I mean, I think if we were ever getting to the point where we were looking at a comprehensive solution to, you know, to try and move toward universal coverage, that would be one among many, many elements that could be considered.

Mr. MCCRERY. Thank you very much for that concession, and thank you all very much for the work that you have done and continue to do on this problem of the uninsured. Mr. Patel, I think if for no other reason we should thank you for illustrating very clearly how providing very coherent, cogent information to consumers is possible, and certainly we do that through the Medicare program, through Medicare+ Choice. You have done it for your company. And so it is possible to provide that kind of good information to consumers so they can make good choices.

[Questions submitted from Mr. Doggett to Mr. McClellan and Mr. Weinberger, and their responses follow:]

Council of Economic Advisors, and
U.S. Department of the Treasury
Washington, DC
May 23, 2002

I was pleased to hear that the Administration is concerned about the plight of the uninsured, yet I was disappointed to learn that its proposal relies too heavily on individual insurance coverage. In many states, there are no “guaranteed issue” or “community rating” requirements on private insurers, so consumers looking for individual coverage, even with a tax credit, will pay higher than average rates or face denials and exclusions for preexisting conditions.

(a) How does the President’s proposal ensure that affordable and comprehensive policies are available for those uninsured consumers using your proposed tax credit to purchase coverage in the individual health insurance market?

(b) The Kaiser Family Foundation, the Center for Studying Health System Change, Consumers Union and others conclude that without substantial reforms, health coverage in the individual market is often prohibitively expensive or inadequate, particularly for low-income individuals in poor health. Would you support individual health insurance market reforms - such as a “guaranteed issue” requirement already adopted in some states - to ensure that uninsured individuals can actually receive coverage in the individual market?

(c) Please provide me with any evidence you have that refutes the claim made by Dr. Jeff Lemieux, in his testimony at the February 13, 2002 hearing, that “Because [the Administration’s proposed] tax credits would cover up to 90 percent of a premium, the Administration’s proposal could spawn the development of inferior insurance plans for low-income people.”

(d) Please provide any evidence you have that conclusively demonstrates that individuals with low-income or poor health can find comprehensive insurance - with prescription drug coverage and modest cost-sharing - in the individual health insurance market.

1a) Analysis by the Council of Economic Advisers finds that Preferred Provider Organization (PPO) policies with significantly lower premiums are almost always available. These plans are not “first-dollar” plans, but they provide effective health coverage. They typically cover all major types of medical services and treatment, have per person deductibles of $1,000($2,000 per family) while also covering preventive and emergency care, they generally provide significant discounts on all prescriptions and in-network services, and they support a range of provider choices. The average premium for a plan of this type was less than $3,000, and was less than $1,000 for young individuals. For lower-income uninsured Americans, the proposed health insurance credit thus typically covers more than half of the premium the purchaser would face, and generally covers more than a third. Such affordable policies are substantially less common in states with community rating than in states without such regulation. This analysis is supported by an independent survey of its clients by eHealthInsurance, and by a survey of the actual inquiry and purchasing behavior of persons who seek policies in the individual market by the Coalition for Affordable Health Insurance.

These affordable policies aren’t just for those in perfect or good health. Analysis by the National Association of Health Underwrititers (NAHU) found that individual health insurance was available and affordable for those with various chronic conditions, including people with allergies, past surgeries, depression, and heart conditions.

1b) First, this interpretation of the Kaiser study is misguided. The National Association of Health Underwriters (NAHU) participated in that research and has issued a written response disagreeing with Kaiser’s interpretation of the data http://www.nahu.org/news/Kaiser-NAHU_Analysis.doc) While Kaiser focuses on the fact that average premium offers are higher for people with chronic or preexisting conditions, the lowest offer that the applicants received in each of the geographic areas that was studied was actually not much higher than the rate for healthy applicants. Except for the one person who was HIV-positive each of the individual received an offer of insurance. Furthermore, many states have high-risk pools that would help those who could not get affordable insurance in the individual market.

This does not suggest that guaranteed issue regulations are effective in expanding coverage. States with guaranteed issue regulations require that insurers write policies for all comers. When coupled with community rating (such as in Maine, New Jersey, New York, and Vermont), this policy means that even those with very high expected health care costs will face the same price as healthy people. The drawback of these policies and many other forms of regulation is that the premiums facing most purchasers may be higher than they would be in the absence of regulation, since the premium collected must be sufficient to cover the expected expenses of the group. Given higher premiums, the healthiest individuals (those with low expected costs) may chose not to buy policies. Regulation thus provides another cause for adverse selection, and a spiraling upward of premiums. In fact, in many states with guaranteed issue the premiums for people with the many of the preexisting conditions studied by Kaiser would face much higher premiums than they would in individual markets without such regulations. According to NAHU, “almost all of the applicants [with chronic conditions] would have faced vastly higher health insurance costs” in states with guaranteed issue and community rating. We are currently studying proposals for improving high-risk pools. These pools canprovide access to insurance for persons with pre-existing conditions without excessively raising costs for healthy persons, and are functioning well now in many states.

1c) The health insurance tax credit proposal has coverage requirements that exceed current HIPAA standards. Our standards would require coverage of catastrophic expenses for in and out patient care. These standards of coverage are consistent with benefits included in a broad health insurance plan and with the plans described in the CEA Health Insurance White Paper. Our standards ensure that policies that did not provide meaningful coverage of serious illness would not be eligible for the credit. Just because the plans are less expensive and do not provide first-dollar coverage does not mean that they are inadequate. Covering large expenses is the most important aspect of insurance, and the health insurance credit would work in conjunction with existing markets to enable millions more to have this kind of protection. Moreover, in addition to protection against the cost of major medical needs many of the policies examined also provide for inexpensive periodic screening and access to discount services should a medical problem arise.

1d) As discussed above, for lower-income Americans, the proposed health insurance credit typically covers more than half of the premium the purchaser would face for insurance that provides access to the private market, and generally covers more than a third. Please refer to the CEA Health Insurance White Paper’s appendix on this point. A recent study by the health insurance distributor eHealthInsurance (of people purchasing their policies) found that three-quarters of premiums for individual health insurance plans that it sold were less than $2,000 and three-quarters of family premiums were less than $5,000. Many cost-effective plans include some prescription drug coverage. A Kaiser study, analyzed carefully by the National Association of Health Underwriters, found that even hypothetical applicants with chronic conditions could generally get health insurance in every market they surveyed and that it wasn’t that much more expensive. The NAHU analysis is supported by a recent study by the Council for Affordable Health Insurance, Real People, Real Coverage, which surveyed member companies and found that 81 percent of actual applicants got a policy and 70 percent got their policies at standard rates.

In Texas, the Medicaid and SCHIP programs have had some success in ensuring that low-income families have access to medical care, including care for preexisting illnesses and disabilities. In your testimony at the February 13, 2002 hearing, you questioned the accuracy of estimates by Dr. Jon Gruber concerning the cost-effectiveness of tax credits relative to expansions of public insurance.

(a) On a per-insured-individual basis, is the tax credit you propose more or less expensive than an expansion of existing public insurance programs?

(c) Under your proposal, how many currently insured individuals would move from employer (group) coverage to individual (nongroup) coverage?

(d) How do your estimates from the preceding three questions compare to those estimates of proposals to expand public insurance programs?

(e) Please provide any evidence you have to support your answers to the preceding four questions.

2a) A February 2002 Kaiser study estimates the annual public cost of the tax credit per newly insured person is $2,757. There are several reasons that this estimate may be much too high. For example, an author of the Kaiser study noted that he assumes policies cost $10,000 in the individual market. When the authors follow more standard assumptions and allow for access to less expensive health insurance (with premiums more in line with the range we find available in the marketplace), many more previously uninsured people take up health insurance and the cost per newly insured person is only $1,527. Even a narrow expansion of public insurance, such as expanding Medicaid to parents (mandatory Medicaid/CHIP expansion to parents with incomes up to 200% of the federal poverty level), would be more costly, at $2,974 per newly insured person, than the tax credit proposal. This is true even though Medicaid plans typically provide limited choices of providers and treatments, and documented problems in access to care in many states. And most uninsured Americans would not even be eligible to benefit from that proposal.

2b) Research and independent analysis by Treasury experts indicates that the tax credit will allow 6 million or more Americans who would otherwise be uninsured during the year to gain one or more months of coverage. The credit covers a substantial portion of the premium most currently uninsured people would face in the private individual insurance market, thus increasing participation in and enhancing the efficiency of the individual market for health insurance.

2c) According to the estimates of the Department of Treasury’s professional staff, approximately 15 percent of those using the credit would be individuals who move from employer to individual (nongroup) coverage. This amounts to about 1 percent of those currently with employer coverage. The credit is designed to minimize such crowdout; as noted below, however, crowdout is a substantial problem for Medicaid expansions.

2d) The current estimates of switching from employer to public health insurance coverage in Professor Gruber’s most recent work (in reports sponsored by Kaiser and by the Center for Budget and Policy Priorities) and in the larger Kaiser study which he references, most likely underestimates the amount of switching that would occur in a new public insurance expansion. There is a large body of academic economic research that finds considerable amounts of such switching in Medicaid expansions. Much of that research has been done by Professor Gruber himself; in his study that was peer-reviewed and published in an academic journal (David Cutler and Jon Gruber, Does Public Insurance Crowd Out Private Insurance?, Quarterly Journal of Economics, 111(2), May 1996, 391-430), Professor Gruber found that at least 48 percent and up to 75 percent of the takeup of Medicaid expansions represented replacement of private health insurance coverage. In a recent review, Kronick and Gilmer conclude that most studies find about 20 percent, on average, of the increase in Medicaid enrollments from past Medicaid expansions came through the crowding out of private insurance. They find relatively more crowdout for Medicaid expansions to relatively high income levels, between 100% and 200% of the federal poverty line than at lower income levels.. Moreover, individual state measures intended to prevent this crowding out were ineffective [Kronick and Gilmer (Jan/Feb 2002) "Insuring low-income adults: Does public coverage crowd out private?" Health Affairs 21.1, 225-240]. Thus, it is likely that further Medicaid expansions to higher income levels than those observed in the past would result in even greater crowdout of employer coverage.

Furthermore, measures intended to reduce crowd out in public programs such as requiring a previous lack of insurance, run the risk of encouraging individuals to go without insurance in order to qualify for a benefit. In contrast, the health insurance tax credit provides a broad incentive to immediately purchase insurance before an injury or illness occurs.

3. RAND, the Urban Institute, the American Academy of Actuaries, Consumers Union and others, conclude that expansions to MSAs will undermine access to health insurance and lead to the creation of lucrative tax shelters.

(c) How many previously uninsured individuals would obtain coverage through the Administration's MSA proposal?

(d) What is the per-insured-individual cost of the Administration's MSA proposal?

(e) Please provide any evidence you have to support your answers to the preceding three questions.

3a) Lowering the eligible deductible for MSAs will make them more appealing to families at all income levels including moderate income families. Currently about one-third of returns reporting an MSA deduction reported AGI of $50,000 or less. Lowering the deductible will make the MSA plans more attractive to families with moderate health expenses and will thus reduce the possibility that “adverse selection” between MSA plans and conventional insurance will be a problem. Indeed, many Americans are now purchasing plans with deductibles in line with our proposed MSA requirements, and also with coverage of basic and preventive health care, even though they are receiving little assistance from the government with these out-of-pocket costs.

3b) As indicated above, lowering the minimum MSA deductible will most likely make these plans much more attractive to moderate income individuals. The amount that can be contributed to an MSA under the President's proposal cannot exceed the maximum annual deductible, ($2,500 in the case of a single policy). The cap on the maximum contribution limits the extent to which a high income individual will contribute more than a moderate income individual to an MSA and limits the extent to which an MSA can be used as a tax shelter for healthy high income individuals. Rather, the proposal is designed to enable the millions of Americans who are facing rapidly rising out-of-pocket costs in their insurance plans to get access to the same tax-favored status for those costs as already exists for employer payments toward health insurance premium payments. In addition, according to the Congressional Research Service, higher-income individuals tend to be older and to use more medical service, futher mitigating the extent to which MSAs can be used as a tax shelter. Indeed, since tax-free contributions cannot exceed the policy deductible, the allowable contributions into the MSAs will be reduced (and are more likely to be consumed by even modest use of medical services), rendering MSAs an even less effective tax shelter.

3c) The primary proposal for expanding private health insurance is the refundable, advanceable tax credit, targeted to lower and moderate income families. The primary purpose of the permanent extension and expansion of MSA is to provide additional opportunities to employers and employees to find cost effective ways to provide insurance and choice. We also support proposals to expand public insurance coverage.

3c) Under the current law forty percent of the MSA accounts appear to have been opened by individuals who had been previously uninsured. And all remaining individuals are able to purchase policies with more affordable protection against high expenses, and they also get new tax subsidies for out-of-pocket expenses.

3d) As explained above the primary purpose of the MSA proposal is to provide greater choice and to make coverage more affordable for the millions of Americans with employer coverage who are facing rapidly rising out of pocket costs. In addition, the proposal provides greater tax equity for families who choose cost effective coverage, and families who choose coverage with broad provider networks (and higher out-of-pocket payments) rather than narrow, closed-panel HMO plans with low out-of-pocket costs.

Nearly one-quarter of the uninsured have access to employer-sponsored coverage but do not purchase it. Despite a subsidy from their employers, many of these individuals cannot afford the premiums for coverage.

(a) What does the Administration's proposal do to assist these uninsured individuals?

(b) Would you support a tax credit that is available in both the individual and employer-sponsored insurance markets?

4a) First, many of these low-income uninsured individuals will be eligible for the Health Insurance Tax Credit and thus will have the option of purchasing insurance with the credit. Second, we encourage the development of high-risk pools, state-sponsored pools, and other targeted assistance programs. Most states already have such programs, and additional Federal support as envisioned in the House-passed economic stimulus bill would enable those who faced high premiums on the individual market to purchase affordable coverage.

4b) Plans to subsidize the purchase of insurance through employers are very expensive, on top of an unlimited tax deduction worth a total of $120 billion a year already. Several studies have shown that extending a health insurance credit to those who choose to purchase health insurance through their employers is very expensive and does not result in a large decrease in the uninsured per dollar spent. For example, one PPI proposal was estimated by the proponents to cost $40 billion per year Such a credit could result in simply shifting the burden of health insurance premiums from employers to the federal government.

The Administration’s proposed FY2003 budget for the Department of Health and Human Services reveals contradictions in spending priorities. While there is a modest increase for Community Health Centers (CHCs) and the National Health Service Corps (NHSC), there are severe cuts to funds for medical professionals’ training as well as funds for coordination among health providers. In fact, cuts to the Health Professions Nurse Loan Program and the Community Access Program alone are more than twice as large as the meager funding increase for CHCs and the NHSC. According to the Administration’s budget data, that represents approximately $398 million in cuts compared to $158 million in funding increases. This is on top of the Administration’s decision to allow significant cuts in Medicaid funding aimed at providers serving large numbers of the uninsured.

(a) At a time when hospitals face significant staff shortages, how do your proposals address the concern that the same Community Health Centers supported by the Administration are unable to find sufficient medical staff?

(b) As the President stated during his February 11 speech at the Medical College of Wisconsin, Medicaid and SCHIP play vital roles in providing medical care to vulnerable families. However, many states face financial constraints that threaten the vitality of these two crucial programs. What actions do you propose the Administration take to help states avoid detrimental cuts in both benefits and eligibility for Medicaid and SCHIP?

What the Congressman refers to as allowing “significant cuts in Medicaid funding aimed at providers serving large numbers of uninsured” is actually the closing of a loop-hole that allowed States to bill the Federal government inappropriately for billions of dollars in excess Federal matching funds. The Medicaid law prohibits State financing practices that increase Federal Medicaid spending beyond statutory matching rates. Recent studies by the Inspector General of the Department of Health and Human Services and by the Congressional Budget Office have identified provider payment policies that have allowed billions of dollars in Federal Medicaid funds to be used for purposes other than that intended including nonhealth expenditure. It was clearly not the intent of Congress as expressed in the Medicaid law to allow states to collect such excess funds. The Administration has taken steps to increase State accountability while also increasing State flexibility, and will continue to work to implement the Medicaid law effectively.

5a) The Administration supports several proposals to encourage people to enter the medical professions and to target more medical professionals to underserved areas. The Budget significantly increases funding to finance scholarships for health professionals from disadvantaged backgrounds, and to encourage additional providers to locate in medically underserved areas. The Budget includes $99 million to help boost the supply of nurses by providing grants to schools of nursing.

5b) Medicaid and SCHIP are valuable programs that bring health insurance to millions of low-income families. The federal government already pays a large share of the costs of these programs and matches States’ spending between 50 and 76 percent for Medicaid and 65 and 83 percent for SCHIP. Finally, in the FY 2003 budget, the Administration has proposed allowing States to keep $3.2 billion in SCHIP funds, which were set to return to the Treasury at the end of this fiscal year and the next. This additional funding will assist states in maintaining their current coverage levels, and will ensure that no state has insufficient Federal matching funds to expand their SCHIP program if they wish to do so. The Administration is eager to work with any state that wants to take advantage of these matching funds, and has proposed a range of initiatives such as the “HIFA Model Waiver” for quick approval of any new state proposals to assist lower-income populations.

Cost of Group Health Insurance As a Percentage of Family Income
Credit = $1,000 per adult, $500 per child
With a $2,000 tax credit one adult, two children		With a $3,000 tax credit two adults, two children
Family Income (2001$)	Percentage of Income	Family Income (2001$)	Percentage of Income
$7,100 approximately 50% of poverty	70%	$9,000 approximately 50% of poverty	45%
$14,300 approximately at poverty level	35%	$18,000 approximately at poverty level	22%
$21,400 approximately 150% of poverty	23%	$27,000 approximately 150% of poverty	15%