When the Trade Act of 2002 became law, the nation began a major experiment in helping uninsured Americans purchase health coverage. This legislation created Health Coverage Tax Credits (HCTCs), which pay 65 percent of beneficiaries' premiums for qualified coverage. Such coverage consists primarily of COBRA plans sponsored by former employers and private health plans offered to HCTC beneficiaries by state arrangement. The credits are refundable, which means they are paid in full to eligible households, including those who owe little or no federal income tax. The credits are also advanceable, which means that at the beneficiary's request they can be paid directly to the insurer each month, as premiums are due.
The HCTC program has made an excellent start establishing basic program infrastructure and preventing the kind of widespread fraud that was reported in connection with an earlier health insurance tax credit program. However, enrollment in the new tax credit has been low; consumers have experienced delays and confusion as a result of the complex enrollment process for advance payment; and there has been some dissatisfaction with the coverage offered by participating health plans.
To gather evidence about the effectiveness of the new tax credits and to assess progress in finding solutions to emerging challenges, researchers from the Economic and Social Research Institute (ESRI) visited Maryland, Michigan, and North Carolina. In those states, enrollment of potentially eligible individuals into HCTC advance payment, though small in absolute terms (between 8 percent and 12 percent of potentially eligible individuals), was larger than the comparable national enrollment rate of 6.1 percent (representing 13,500 individuals of the nearly 222,000 who were potentially eligible for advance payment). Through these visits, the researchers sought to learn how three very different states, each using its own distinctive approach to implementation, achieved this comparative success. The authors also hoped that these visits would help identify obstacles that even the most effective state officials and private sector leaders face with the new program, as well as point the way toward possible solutions.
Following are some key findings from the three-state study:
Public and private entities involved in state-level HCTC implementation were dedicated, creative, and effective. Gubernatorial leadership was critical in making HCTC implementation a top priority, with both public and private actors showing remarkable commitment to the program. In all three case study states, government officials worked together across traditional organizational boundaries to get HCTC-related systems up and running in remarkably brief periods of time. All three states likewise devised creative mechanisms to prevent beneficiaries from being required to pay premiums in full for several months before the start of advance payment. These mechanisms included so-called "bridge" or "gap filler" programs in North Carolina and Maryland that used National Emergency Grants (NEGs) from the U.S. Department of Labor (DOL) to subsidize beneficiaries' premiums while they waited for their advance payment to start.
Agencies involved in national HCTC implementation received generally positive reviews. In all three states, public and private stakeholders commended the responsive and nimble assistance they received from the Treasury Department, the Internal Revenue Service (IRS), and the private contractors working with the IRS. The leadership at DOL was viewed with more ambivalence. When unexpected problems emerged with advance payment, DOL received plaudits for creatively adjusting its policy on states' permissible use of NEG dollars. However, concerns were expressed about DOL delays in ruling on specific state requests for NEG funds.
Enrollment into advance payment was complex, which increased administrative costs and reduced take-up of the tax credit. To apply for HCTC, a displaced worker was required to make various applications to at least three different entities (the state workforce agency, the health plan, and the national HCTC office). To further complicate the application process, workers were responsible for passing documentation, in hard-copy form, back and forth between various entities to which they were applying. Privacy concerns often prevented federal officials, state officials, and health plans from sharing data or even speaking directly with one another about particular beneficiaries' applications. As a result, beneficiaries frequently had to act as "go betweens" communicating technical matters between multiple public and private agencies; these efforts increased administrative costs, and when beneficiaries could not act as satisfactory intermediaries, many lost coverage. To their credit, the officials administering the national HCTC program have taken several promising steps in recent months to simplify the enrollment process, though more may need to be done.
Most informants agreed that the main reason why few beneficiaries enrolled in advance payment was workers' perception that they could not afford to pay 35 percent of premiums. According to the vast majority of informants in the three study states, beneficiaries' inability to pay their 35 percent premium share was by far the most important factor limiting enrollment. That problem was compounded by other obstacles to take-up, including delays in the start of individual beneficiaries' advance payment and the general complexity and confusion of enrollment.
Most enrollees preferred comprehensive coverage to less expensive insurance with high cost-sharing. In Maryland, 60 percent of beneficiaries enrolled in the high-risk pool's more comprehensive HMO option, which had no deductible, rather than the PPO, which had a $1,000 deductible, even though the HMO cost roughly 50 percent more. In Michigan, every beneficiary who enrolled in state-qualified coverage chose the more comprehensive plan, even though it cost 32 percent more than the plan with 50 percent coinsurance and no coverage of physician visits or preventive care. In North Carolina, 52 percent selected coverage with $250 or $500 deductibles, even though such coverage cost between 22 and 70 percent more than the highest-deductible plans. By contrast, a number of North Carolinians who selected higher-deductible plans to lower their premium costs later expressed strong dissatisfaction with that coverage. For example, some adults with chronic illnesses could not afford to refill their prescriptions, perceived their coverage as largely pointless, and eventually disenrolled.
Health coverage with pure or modified community rating avoided some serious problems with nongroup coverage that based premium levels on individualized assessment of health status. In Michigan and Maryland, stakeholders expressed no dissatisfaction with those states' rating rules for HCTC coverage. Michigan's coverage was purely community rated, with all enrollees into a given plan charged the same premiums, regardless of age, gender, area of residence, or individual health history. Similarly, Maryland's high-risk pool varied premiums based on age alone, without any medical underwriting (the process through which insurers assess each applicant's individual health risk).
On the other hand, North Carolina's rating rules permitted premium variation based on factors that included age, gender, and medical underwriting. These variations created tremendous dissatisfaction, according to virtually every stakeholder interviewed. Beneficiaries, officials, and others typically found it unfair that HCTC's state-qualified coverage was least affordable to those who needed it most, with premiums that varied dramatically based on factors outside the individual's control. For example, premiums could increase by 45 percent because of gender (for plans that excluded routine maternity care); by 179 percent for women who opted to include coverage for routine maternity care; by 211 percent because of age; by 253 percent because of individual health history and health status; and by more than 1,300 percent because of all these factors combined.
Medical underwriting in North Carolina also had a dramatic effect on take-up. Among the displaced workers who were quoted higher premium rates after the underwriting process concluded, fully 69 percent dropped out of the program at that point. If these individuals had instead completed their enrollment into advance payment, more than 3,900 additional North Carolinians would have received coverage, increasing total, national HCTC enrollment by 42 percent.
Some adverse selection and risk segmentation among plan options may have taken place. In Maryland's high-risk pool, there appeared to be a stark difference between HCTC enrollees into the pool's more generous HMO plan (which had no deductible) and the pool's less expensive and less comprehensive PPO plan (which had a $1,000 deductible). Average per-member-per-month claims were $2,817 for HCTC beneficiaries in the former plan but only $433 in the latter. While additional data may be needed to come to a definitive conclusion, state officials were convinced that adverse selection had taken place, with HCTC beneficiaries who knew their health problems required more expensive care disproportionately tending to enroll in the more comprehensive plan.
Consumer protections achieved mixed results. Through strenuous efforts by public and private agencies, most workers affected by well-publicized economic displacements made it onto HCTC before 63 day gaps emerged that would have permitted insurers to exclude preexisting conditions. Officials expressed concern that more routine, lower-profile displacements could easily lead to gaps lasting 63 days or longer. HCTC was used by almost no one who experienced gaps that triggered preexisting-condition exclusions, since potential beneficiaries apparently viewed such limited coverage as not worth the cost.
Widespread marketing fraud was not a major problem, although there were isolated instances of fraudulent enrollment. HCTC's centralized enrollment systems prevented the kind of large-scale marketing fraud that was reported for an earlier insurance tax credit program that permitted nongroup insurers to obtain credits by directly recruiting and enrolling potential beneficiaries. However, some nongroup insurers in North Carolina that were not state-qualified plans may have misrepresented themselves to a small number of HCTC beneficiaries and defrauded them of premium payments.
In view of these findings, a number of steps are worth serious consideration, both to improve HCTC's ability to help eligible workers and to enable policymakers to extrapolate from the HCTC experience in designing broader health insurance tax credits. For example, increasing the size of HCTCs (whether for all or some beneficiaries) and new federal strategies to get short-term subsidies to qualified individuals promptly—without asking them to pay monthly premiums in full—will likely be needed to substantially increase enrollment. In addition, further simplification and streamlining of advance-payment procedures may be required to improve take-up and lower administrative costs. Such simplification could give applicants the ability to waive confidentiality, thereby permitting direct communication between multiple public and private agencies that are trying to help particular individuals enroll. Among other benefits, that could permit workers to seek HCTC advance payment by filing one application with one agency, which could then communicate with other entities as necessary. Similarly, careful refinement of consumer protection rules could prove helpful to beneficiaries, government agencies, and health plans alike.
It is likewise important to conduct further research that could provide additional information about the problems that have emerged and suggest possible solutions. Only after the HCTC program has been strengthened and tested will it be possible for the HCTC experiment to yield firm conclusions about the inherent capacity of the federal income tax system to subsidize health coverage for the uninsured.