Statement of Lynn Etheredge, Consultant, Health Insurance Reform Project,
 George Washington University

Testimony Before the Subcommittee on Health
of the House Committee on Ways and Means

Hearing on Hearing on the Nation's Uninsured

April 4, 2001

Chairman Nancy Johnson and Members of the Committee,

Thank you for the invitation to participate in your discussions this morning. The focus of my presentation will be on the idea of a "flexible benefits" tax credit. A flexible benefits tax credit offers Congress a means to achieve health insurance coverage for most uninsured workers and children, as well as to close large gaps in retirement/savings plan coverage and offer a future with real economic security for American families.

Separate tax credits for health insurance, retirement/savings plans, higher education, first-home purchase and other purposes have been discussed for a number of years. A "flexible benefits" tax credit is a new approach. In this statement, I will outline major features of this approach and its advantages. A recent paper (attached) provides additional material.

To start with a basic example, let us assume that the government makes available a $1,000-$1,500 per worker "flexible benefits" tax credit for low to moderate income workers. Here's how the flexible benefits provisions could work:

*A worker without employer provided health insurance would be expected to use this credit to purchase health insurance, via automatic enrollment and payroll withholding at his/her workplace. If a worker did not elect to use a credit to purchase private health insurance, by declining in writing, the tax credit would be assigned to state government for safety net coverage (a "default" option). Thus all eligible workers would have health insurance coverage, either through a private health insurance plan of his/her selection or a public program. A $1,500 premium (e.g. a $1,000 tax credit plus about a $10/week worker contribution) would support a Medicare-level benefit for workers.

*A worker who has health insurance coverage, but does not have an employer-provided retirement/savings plan, could elect to have his/her $1,000 $1,500 flexible benefits tax credit paid into a retirement/savings plan (such as an IRA). With a $1,500 tax credit (and $500 worker contribution) annually, a worker could anticipate savings of $150,000 or more at retirement (in current dollars). A two-worker family could invest twice the amount and have twice the total account balance. IRA funds can now be withdrawn for higher education, first-time home purchase, and catastrophic medical expenses. Early distributions from retirement/savings plans that use flexible benefits tax credits could similarly be made available for these purposes.

*A worker who already has employer-provided health insurance and a retirement/savings plan could elect to receive his/her $1,000-$1,500 flexible benefits tax credit as cash income.

For American families, a flexible benefits tax credit would thus offer a menu of assistance options from which they could choose depending on their differing circumstances, as well as on how their needs change over time. While 42 million Americans now lack health insurance coverage, measured at a point in time, lack of health insurance coverage is most often a short-term problem - for example, six months to a year. At other times, a family's financial needs may include higher education or first-time home purchase. For older workers, such as baby-boomers, retirement savings becomes an important issue. About one-half of the workforce now lacks employer-offered retirement/savings plans.

A flexible benefits tax credit could also be used to provide incentives for coverage of uninsured children, particularly the 94% of uninsured children below 200% of poverty - 6.7 million children - who are already eligible for Medicaid or SCHIP but are not signed up. Workers could be required to have health insurance for their children (signing them up for SCHIP or Medicaid, or purchasing private coverage) as a condition for receiving flexible benefits tax credits for their own health insurance coverage. The flexible benefits tax credit would be an incentive, e.g. $2,000/couple, for childrens' coverage.

As illustrated by the above example, a flexible benefits tax credit design can broaden benefits (and potential political support) without additional budget costs. If there were a $1,000-$1,500 per worker single-purpose tax credit, for example, expanding it into a flexible benefits tax credit (to include such benefits as retirement savings, higher education, first-home ownership, etc.) would not increase government's budget costs (which would still be $1,000-$1,500 per worker). But it would offer workers more opportunities to use such credits and would appeal to advocates for more causes.

A flexible benefits tax credit also maintains incentives for employer group health insurance. Stand-alone health insurance tax credits often include higher subsidies for employers' health insurance to lessen the chances of unravelling employer group coverage. This just makes current subsidies more expensive. A flexible benefits tax credit handles these issues directly and with potential public appeal. It provides the same tax credit for workers with and without employer health benefits, and this maintains the existing tax advantages for employer group insurance. Workers who now have employer group health insurance could elect to receive their flexible benefits tax credit as cash (a retirement/savings plan contribution or immediate income). This gives these workers, rather than employers, the additional income.

A flexible benefits tax credit offers a means to close the major gaps in health insurance coverage - which are mostly among workers and their families - and in retirement/savings plans. The national savings rate, for example, is now at its lowest rate in more than 40 years, and many in the baby boom generation are not saving enough for retirement. Increasing savings thus can be a prudent investment in the economy's growth, as well as in the financial security of American families.

A flexible benefits tax credit would be compatible with a number of different tax reform ideas. The attached paper provides a more detailed discussion, including two examples, and estimates for increased coverage and federal budget costs. A $1,000 per worker tax credit targeted for about 2/3 of the workforce, for example, would cost about $70 billion annually, or $785 billion (inflation adjusted) over 10 years, less than 30% of the available $2.7 trillion surplus. The paper also considers topics such as Medicare benefits as a benchmark, the role of employers, automatic enrollment, flat credits for lower-income workers, direct payment of credits to health and retirement/savings plans, and federal-state regulatory roles.

In closing, let me return to my opening observations. A flexible benefits tax credit offers a new approach to accomplish many of the goals that this Committee has been considering in separate legislative proposals. A flexible benefits tax credit could achieve health insurance coverage for most uninsured workers (with Medicare-level benefits) and children, and offer a future with real economic security for American families (several hundred thousand dollars of retirement savings). These would be important benefits for many millions of American families, and a flexible benefits tax credit would give them new choices to elect such benefits. I believe they would welcome these benefits and these choices.