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Report: Subsidies for Low-Income Individuals Better Way to Cover Uninsured

By Ben Weyl, CQ Staff

October 22, 2008 -- Providing subsidies to individuals rather than to businesses is a fairer and more efficient way to extend health coverage to the uninsured, according to a new report released by the Urban Institute.

Subsidies for individuals and family members are better at targeting low-income people—those who are least likely to be insured, argue report authors Linda J. Blumberg and John Holahan. Such a system is more equitable since individuals with similar economic circumstances would receive similar treatment. Furthermore, employer subsidies are of little use to workers who cannot afford health insurance even if their employers offer it or to those who are unemployed, they said.

"Given these issues," they conclude, "it is probably best to rely primarily on individual and family income-related subsidies."

Support for employer subsidies has gained traction in recent years in part because of the disparity between small and large companies in employee coverage. According to the report, 33 percent of workers in small businesses (those with fewer than 25 employees) are uninsured, versus just 13 percent of workers in the largest businesses (more than 1,000 employees). Businesses with fewer than 25 employees comprise 35 percent of the uninsured workforce, according to the report; nearly half of all uninsured workers are employed in businesses with fewer than 100 people.

One reason for the discrepancy is that small businesses are simply less likely to offer health insurance. Some policy makers have therefore gravitated to the idea of employer subsidies in hopes that more small businesses will offer coverage, thus decreasing the number of uninsured. For example, bipartisan legislation in the Senate (S 2795) would give tax credits to employers who purchase insurance from a small business pool.

However, authors note that small businesses are considerably less efficient at providing coverage so there is good reason to oppose attempting to expand coverage in this manner. It is also not clear that many more small businesses would offer health insurance even if given subsidies, they said.

"Because small employer purchasers face higher prices for the same benefits and tend to face significant barriers related to having a lower-wage workforce, inducing a substantial share of currently non-offering small employers to provide [employer-sponsored insurance] absent a mandate would be difficult," the authors said.

Providing income-related subsidies to individuals makes more sense because of the inverse relationship between income and being insured, according to the report. While nearly 50 percent of workers below the poverty line lacked health insurance, just 5 percent of workers making 500 percent of the poverty line were uninsured. Providing increased assistance to individuals as their income declines would be the most effective way to increase the number of insured, the authors found. This also would more effectively target those in need because most small businesses have a combination of low and high wage earners.

In an interview, Blumberg said the health care proposal put out by Democratic presidential candidate Barack Obama of Illinois is more in sync with the report's suggestions than the proposal of GOP nominee John McCain of Arizona.

McCain's health care plan provides no employer subsidies and includes a refundable tax credit of up to $2,500 for individuals and $5,000 for families. While Obama would create a new public plan that individuals could buy coverage from modeled on the Federal Employees Health Benefits Program, McCain's proposal does not have any guaranteed new source or pool for purchasing coverage, Blumberg said. Because providing individual subsidies is likely to seriously undermine the employer-based health insurance system, according to the report, an alternative guaranteed source for purchasing coverage is crucial, Blumberg said. Without such a source, significant numbers of people are likely to become uninsured, the report said.

"If you look at the conclusions of our report, while we believe the individual [subsidy] is more effective, you have to be really careful with what you do with replacing the employer system," Blumberg said. "They are going the individual route that we prefer but they're not filling in all the pieces."

The McCain proposal, she added, does not tie those subsidies to income, which diminishes their effectiveness. "They're not targeting those dollars to those who need it most," she said.

The Obama proposal centers on income-related subsidies to individuals and also offers small businesses a refundable tax credit of up to 50 percent of premiums for employees. "Largely, they're focused on individual subsidies," Blumberg said, "and they do a good job, in my opinion, of providing a structured marketplace for individuals with those subsidies."

Blumberg criticized the employer subsidies but said she understood why, for political reasons, Obama included them.

"I think that's not the most efficient way to go. From my perspective, we have to be careful about encouraging small employers to provide coverage," she said. "They're really pretty inefficient purchasers."

"What [Obama is] trying to do is stem the decline of employer-based coverage. People like being covered by employers," she continued. "The more you disrupt what people have now, the more you risk upsetting people." Employer subsidies makes sense "more from a political perspective, than from . . . a policy perspective."

Obama also would require large companies to provide coverage to their employees or contribute to the costs of the new public plan.

Complicating matters, subsidies for low-income individuals and family members will bring significant costs, according to the report, at a time of quickly growing deficits, but Blumberg said that might not be an obstacle to overhauling the health insurance system in light of the political and economic climate.

"The insecurity that people feel may help push the health reform process even in difficult times," she said. With more and more people worried the economic downturn could cost them their job along with their health insurance, "their feelings of insecurity could push the political process forward."

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