Journal Issue: The Next Generation of Antipoverty Policies Volume 17 Number 2 Fall 2007
How the Proposal Addresses the Challenges Facing Low-Income Families
My plan is designed to overcome the challenges facing low-income families by facilitating transitions across sources of coverage, minimizing work disincentives, and pursuing the goal of horizontal equity. It is also designed to minimize incentives for employers and employees to replace their current payments with public support.
The plan facilitates transitions by providing realistic options for new sources of coverage when another source ends. As the parent (or parents) in a family goes to work and income rises, the family will at some point exceed the income thresholds for the fully subsidized Medicaid program. If the parent works at a firm that offers health insurance coverage, the EIHC will be there to subsidize the share the employee is expected to pay, and in some circumstances subsidize part of the employer’s cost as well. If there is no employer-sponsored coverage, the state plan is available, also on a subsidized basis. Movement across these forms of coverage will still involve some changes, but will avoid the penalties and discontinuities in today’s health care system.
The plan minimizes work disincentives by trying to keep as low as possible the effective marginal tax rates families face as their earnings increase. Because the plan must meet the needs both of people without access to employer- sponsored coverage and of those who do have access and have widely varying rates of employer subsidy, achieving that goal is complicated. The design is best explained by considering three families, each with one worker, a nonworking spouse, and two children. In each family the worker earns $40,000 a year. In one family, the employer does not offer health insurance; in the second family, employer-provided coverage is available if the employee contributes 40 percent of the $10,000 cost of the plan; in the third family, workplace coverage is available with an employee contribution of 20 percent, or $2,000. Although all three families have the same income, their ability to obtain health insurance is quite different. If a family with income of $40,000 can afford to contribute 2.5 percent of its income, or $1,000, toward the cost of coverage, the first family faces a shortfall of $9,000, the second a shortfall of $3,000, and the third a shortfall of $1,000.
A tax credit that treats all three families the same will be either inadequate or inefficient. If the credit is much less than $9,000, the first family will have inadequate coverage. If the credit is high enough to meet the first family’s needs, the second and third families will receive much more than they need to get coverage. A tax credit that exactly meets each family’s needs would be adequate and appears to be efficient, but creates a different problem. If the second family receives a credit of $3,000 and the third family a credit of $1,000, the third family’s employer has no incentive to continue providing such a generous subsidy toward coverage. The third employer could reduce its subsidy by $2,000 and the employee would be no worse off. In the extreme, both the second and third employers might choose to drop coverage entirely, knowing the families would get a $9,000 credit, which would come close to meeting the family’s financial needs for obtaining good coverage.
In fact, substantial barriers keep employers from making such radical changes.44 But even having to replace some private dollars with public dollars would be expensive and could make the cost of the program, relative to the number of people who newly gain insurance coverage, unacceptably high.
Two features of the plan are designed to address these problems while still striving for equity. First, the large credit available to those without employer coverage can be used only to purchase a public plan, and the credit falls short of the value of a typical private plan. An employer who drops coverage entirely would leave the firm’s employees substantially worse off with respect to insurance choices. Some employers might take this step nonetheless, but the plan is designed to minimize the likelihood that they will.
Second, the plan rebates a portion of the gap between each family’s out-of-pocket premium costs and its EIHC maximum credit. An employer who offers generous subsidies would receive a modest rebate for the employees of the firm who are eligible for the EIHC. The employees also receive a modest rebate, which provides them with additional value associated with the employer contribution toward coverage even if they lose some of the value of the credit. Together these features should help discourage employers from reducing their contribution levels.
The plan also supports workers who are increasing their earnings. Consider two possible scenarios for the second worker. In the first, the worker gets a raise in cash salary from $40,000 to $42,000. In the second, the worker moves to a new job that gives the same salary but an increase in the employer subsidy for health insurance from $6,000 to $8,000, so that the worker’s situation is now identical to that of the third worker. Both scenarios represent a $2,000 increase in the worker’s total compensation, which public policy should support. As workers’ earnings go up, their need for assistance falls, so some decline in support is appropriate. But the design of the credit should not “tax” away all of the increase or it will impede career advancement.
The first scenario moves the worker farther along the phase-out schedule of the EIHC (see table 1). The credit will decline at the rate of the phase-out, but the worker will be much better off after the raise. In the second scenario the employee will lose $1,150 in EIHC, because the value is capped at the actual amount the employee must pay. The employee and employer will each get a rebate of $192, which represents one-sixth of the amount by which the maximum EIHC exceeds the employee contribution to coverage. The employee in the second scenario faces a steeper marginal tax rate. However, the extra salary in scenario one is subject to payroll and income taxes that reduce the difference between the net effect of the two scenarios.
Although the policy goal is to keep marginal tax rates from becoming too large, a family may consider the situation somewhat differently. In its original circumstances, with a $40,000 salary and a $4,000 contribution toward coverage, the family must come up with $850 to purchase coverage. With a cash raise, the family now has substantially more resources available to make a slightly larger contribution. If the worker takes a job with a higher employer subsidy, he no longer needs to make a contribution out of his own pocket, and he gains a small rebate to deposit into a flexible spending account. Either change is positive for the family, regardless of the precise marginal tax calculation.