Issue Brief Montana Issue Brief #2 Feb. 2004 (Final) State Tax Incentives versus Premium Assistance: What’s the Difference? Policymakers have long debated alternatives for tax incentives agree that in order to target low- bolstering private health insurance coverage income individuals, states should pursue through employer-sponsored plans and the refundable advanceable tax credits—that is, individual market, acknowledging the rising credits that are provided irrespective of tax number of low-income, working uninsured. liability and in advance of the time premiums This issue brief compares two private coverage are due (Feder et al., 2001). Table 1 provides a strategies being considered in the state of description of the various tax relief policies used Montana to reduce the number of low-income by states to encourage private health care workers and families without access to health coverage. insurance: (1) providing tax relief through a state tax credit to individuals and employers Two similar tax relief proposals were who purchase health insurance, and (2) deliberated, but not passed, by the Montana subsidizing employer premiums for low-income Legislature in 2003 (HB204, HB216). Both children and parents with Medicaid or State contained many of the features considered Children’s Health Insurance Program (SCHIP) important in expanding coverage for low- funds. In theory both approaches help to reduce income individuals. For example, HB 204 the number of uninsured by promoting coverage (Montana Health Care Affordability Act) in the private health insurance market. Here, we provided refundable, advanceable tax credits provide a framework for state policymakers to ranging from $40 to $200 per individual per evaluate the advantages and disadvantages of month depending on age cohort; and targeted each in the context of Montana’s unique low-income individuals with family incomes environment. less than 175 percent of the Federal Poverty Level (FPL), and employers with nine or fewer State Sponsored Tax Incentives employees who do not have any employees earning $150,000 or more per year in Eleven states currently use some form of tax compensation. relief to encourage low-income individuals or small employers to purchase health insurance If successful, this type of tax relief proposal coverage in the private market (State Coverage would help to fill the coverage gap that exists Initiatives, 2003). Some states have between poor children and parents who are implemented health care tax credits, where eligible for Montana’s Medicaid and Children’s qualifying medical expenditures, premiums, or Health Insurance Plan (CHIP) programs, and other fixed amounts may be subtracted directly those who do not have access to or who cannot from an individual’s or employer’s income tax afford to purchase employer-sponsored liability. Other states allow parties to deduct insurance. Results of the 2003 Montana amounts paid for private health insurance Employer Survey indicate that of employers not premiums from taxable income before tax currently offering health insurance coverage, liabilities are determined. Most proponents of 19% would do so with a tax credit of 40% or mandates that exist for premium assistance more, and an additional 48% would do so with a programs under SCHIP. Specifically, states tax credit of 50% or more. with approved HIFA waivers are no longer required to: An Alternative to Tax Incentives: Premium Assistance Under SCHIP • demonstrate the cost-effectiveness of enrolling eligibles in employer- An alternative strategy to tax credits would be to sponsored coverage over direct use public funds—through Medicaid or coverage; SCHIP—to directly subsidize the cost of employer-sponsored health insurance premiums • assure a comprehensive benefit set for low-income individuals. Some premium (i.e., meet the “SCHIP benchmark plan”) assistance programs provide subsidies directly for optional and expansion enrollees; to employees, and others provide subsidies • limit enrollee cost-sharing; directly to employers. Since the early 1990’s, federal regulations have provided states with the • establish a minimum employer option of providing employer-sponsored contribution; nor insurance in lieu of enrolling eligible individuals • implement a six-month waiting period, in Medicaid through the Health Insurance whereby applicants cannot be covered at Premium Payment (HIPP) program. Because of the time of application, or within the cumbersome federal requirements, as well as previous six months. administrative complexities at the state level, enrollment in HIPP programs over the years has Several states—including Arizona, California, been modest. Delaware, Illinois, Maine, New Jersey, New Mexico, Oregon, and Washington—have Recent changes, both legislative and regulatory, proposed employer-sponsored insurance have generated state interest in premium programs or feasibility studies as part of a assistance programs. For example, under broader HIFA waiver request (Williams, 2003). SCHIP (passed in 1997) states can implement premium assistance programs for low-income A Framework for Evaluating Policy Options children and families. According to initial guidelines (proposed in November 1999) states Generally speaking, there are several similarities were required to comply with very specific rules between tax credits and premium assistance that would serve to limit the displacement of programs. Both, for example, are strategies that existing private coverage and to ensure a seek to bolster employer-sponsored insurance comprehensive benefit set for all participants. markets, and thus take advantage of employer Responding to numerous state comments on the contributions. Also, in a time of tight state proposed rules, the Centers for Medicare and budgets, both options may be less controversial Medicaid Services (CMS) ultimately relaxed politically than new or expanded direct spending some of the rules considered to be programs (e.g., Medicaid eligibility expansion). administratively burdensome. Table 2 briefly Finally, arguments can be made that access to describes premium assistance options either a health care tax credit or a premium implemented in six states under SCHIP. assistance program may reduce the likelihood that the public coverage available in a state will States have even more flexibility in developing displace private coverage. SCHIP premium assistance programs under the new Health Insurance Flexibility and When implemented, however, both strategies Accountability (HIFA) demonstration initiative. have their advantages and disadvantages. Table To a large extent, HIFA allows for waivers of 3 provides a framework for comparing the two the benefit package and employer cost-sharing 2 approaches on cost, flexibility, complexity, tax credits than employer premium subsidies. affordability, and efficiency. This would be particularly true in states where employer coverage rates are low: providing tax Our review of the policy literature suggests credits to individuals allows individuals who do several observations regarding the relative not have access to employer-sponsored merits of tax credits versus premium assistance insurance to purchase coverage in the individual programs. Perhaps most importantly, through market. enhanced federal financial participation under SCHIP, states implementing premium assistance Conclusion programs can provide health care subsidies to individuals at a lower cost to state taxpayers This issue brief offers a general framework for than states pursuing state-only tax credit considering the benefits and costs of various options. strategies. It focuses solely on the tradeoffs associated with the two approaches, but does not In light of the tight fiscal environments in which contemplate a host of other relevant issues, most states now find themselves, the benefits of including Montana's political environment, leveraging federal dollars cannot be overstated. fiscal constraints, or programmatic and The availability of federal resources also means administrative capacity. Clearly, this that for any level of state investment in this kind information must inform the debate on the of program, larger health care subsidies can be potential advantages and disadvantages of these provided. The larger the subsidy, the more strategies for increasing health insurance affordable coverage becomes for individuals coverage. and employers, and the more likely these parties will be to choose to participate in the program. Finally, it should be noted that, to date, neither tax credits nor premium assistance programs On the other hand, the increased affordability have been shown to substantially increase a that comes with sharing premium assistance state's health insurance coverage rates. These program expenditures with the federal relatively modest outcomes notwithstanding, government is accompanied by less flexibility in such approaches are increasingly attractive to program design and more administrative states as a complement to broader health care burdens than in the case of tax credits. The coverage expansion efforts and private sector introduction of HIFA reduces these concerns partnerships. considerably, but because premium assistance programs require enrollment activities, The opinions expressed in these briefs employer coordination, and the like, they will represent those of the authors. Any questions always be more administratively onerous than or comments are welcome and should be less labor-intensive tax credit mechanisms. directed to shadac@umn.edu. Also, the ability of states to effectively target subsidies to low-income individuals without access to coverage may be more efficient using Table 1: State Sponsored Tax Incentives State Type Eligible Groups Subsidy Effective Colorado Deduction Individual, spouse, 100% of premium up to $500 2000 dependents Idaho Deduction Individual, spouse, 100% of premium 2001 dependents Iowa Deduction Individual, spouse, 100% of premium 1996 dependents Kansas Refundable Small employers $35 per employee per month 2000-2001 Credit Maine Credit Small employers with >5 low- Lower of: $125 per employee 1999 income employees with dependent coverage; or 20% of dependent premiums Missouri Deduction Certain employees, spouses, 100% of premium 2000 dependents Montana Credit, Small businesses (credit); Graduated credit up to $25 1991, 1995 Deduction individuals (deduction) per month per employee for small businesses contributing at least 50% of health insurance cost; individuals may deduct 100% of premiums New Mexico Deduction Individual, spouse, 10-25% of medical expenses 2000 dependents based on income and eligibility status North Refundable Individual, spouse, $300 (less than 225% FPL), 1998-2001 Carolina Credit dependents $100 (greater than 225% FPL) Utah Deduction Individual 100% of premium 2000 Wisconsin Deduction Employees without employer 50% of premium 1993 coverage, spouse, dependents Source: State Coverage Matrix, State Coverage Initiatives: An Initiative of The Robert Wood Johnson Foundation 4 Table 2: Characteristics of SCHIP Premium Assistance Programs State Program Eligibility Enrollment Effective Maryland Maryland Children’s Health Children 200% to 300% FPL 162 (11/02) 2001 Program Massachusetts MassHealth Family Families 150% to 200% FPL, 1,385 (9/02) 1998 Assistance Plan under 200% FPL working for small employer New Jersey NJ FamilyCare Families to 200% FPL, 389 (6/02) 2001 children to 350% FPL Rhode Island RIte Share Families to 185% FPL, 2,200 (8/02) 2001 children to 250% FPL Virginia Family Access to Medical Children to 200% FPL 2001 Insurance Secuity Plan (FAMIS) Wisconsin BadgerCare Families to 185% FPL; 62 (6/02) 1999 families remain in program until 200% FPL Sources: State Coverage Matrix, State Coverage Initiatives: An Initiative of The Robert Wood Johnson Foundation; and the National Academy for State Health Policy (2003). 5 Table 3: Refundable Tax Credits Versus Premium Assistance Programs, Advantages (+) and Disadvantages (-) Refundable Tax Credits Premium Assistance State Cost − State bears full cost. Greater overall + State shares cost with federal expenditure of state taxpayer dollars government, sometimes with enhanced for any given level of subsidy. SCHIP matching rates. Lower overall expenditure of state taxpayer dollars for any given level of subsidy. Flexibility in + State policy choice. Not subject to − States must comply with federal Program rules that accompany federal funding. requirements regarding design of Design benefits package and cost sharing. These concerns mitigated to a certain extent by HIFA waiver process. Administrative + Implementation utilizes existing − Requires outreach and coordination of Complexity administrative systems. coverage with employers to ensure + Requires less coordination and participation. verification of coverage with − Requires labor-intensive enrollment employers. process. Must determine enrollees’ + Avoids problems associated with access to ESI, employer contributions, and relative cost of premium assistance shifting employment status among low- income families. option vis-à-vis direct coverage. − Administrative mechanism for advance − Requires employer submission of payments may be problematic. detailed information about benefits and employee circumstances. Affordability for − Smaller subsidy is likely, meaning + Ability to leverage federal dollars may Individuals & lower take-up rates among individuals allow for a greater health care subsidy, Employers and employers likely. meaning higher take-up rates among − Tax credit for individuals does not individuals and employers. ensure minimum employer premium + Leverages employer premium contribution. contribution, which makes cost more affordable for individuals. Efficiency in + Allows state to target individuals if − Doesn’t help uninsured families that have Targeting availability of employer-based not received offers of health insurance Desired coverage for low-wage workers is from employer. Population limited. − Less efficient if availability of employer- − May rely heavily on individual market, based coverage for low-wage workers is where premiums are rising rapidly and limited. risk-selection by plans is seen as inequitable. − Difficult to minimize amount subsidy provided to those who are already − Difficult to minimize amount of subsidy insured. Establishing firewalls (e.g., provided to those who are already requiring eligible individual to be insured. uninsured for a specified time before enrolling) possible, but difficult to enforce. Political + May be more appealing politically. Tax − May be less appealing politically. Relies Considerations expenditure versus more direct on increase in state and federal expansion of public program, even if spending, rather than indirect state tax private coverage is the goal. expenditure. 6 References Blumberg, Linda J. “Health Insurance Tax Credits: Potential for Expanding Coverage.” Washington, D.C.: Urban Institute, August 2001. Conwell, Leslie Jackson, and Ashley C. Short. “Premium Subsidies for Employer-Sponsored Health Coverage: An Emerging State and Local Strategy to Reach the Uninsured.” Washington, D.C.: Center for Studying Health System Change, December 2001. Cubanski, Juliette, and Helen H. Schauffler. “Employer-Sponsored Health Insurance in California: Current Trends, Future Outlook, and Coverage Expansions.” Berkeley, California: Center for Health and Public Policy Studies, University of California, Berkeley, April 2001. Feder, Judith, Larry Levitt, Ellen O’Brien, and Diane Rowland. “Covering the Low-Income Uninsured: Assessing the Alternatives.” Washington, D.C.: The Kaiser Commission on Medicaid and the Uninsured, July 2001. Kaiser Commission on Medicaid and the Uninsured. “Serving Low-Income Families Through Premium Assistance: A Look at Recent State Activity.” Washington, D.C.: The Henry J. Kaiser Family Foundation, October 2003. Lutzky-Westpfahl, Amy, and Ian Hill. “Premium Assistance Programs under SCHIP: Not for the Faint of Heart?” Washington, D.C.: Urban Institute, May 2003. State Coverage Initiatives: An initiative of The Robert Wood Johnson Foundation. “State Coverage Matrix.” Available at http://www.statecoverage.net/matrix.htm. Williams, Claudia. “A Snapshot of State Experience Implementing Premium Assistance Programs.” Portland, Maine: The National Academy for State Health Policy, April 2003. 7