Free-Lunch Health Insurance

A simple idea for insuring some of the poor.

The tax break for employer-provided health insurance—worth about $140 billion per year—islarger than several welfare programs combined. But it doesn’t work very well. Three years into an economic expansion, the number of uninsured is rising—at 45 million and counting. President Bush and Congress are pushing a host of new tax credits and tax-favored savings vehicles as a means of reducing the rolls of the uninsured.

The simplest solution—having the government expand coverage of the poor not covered by Medicaid, who make up the bulk of the uninsured—is generally ruled out for ideological and fiscal reasons. Such a free-lunch solution may actually be the most effective way to attack the health-insurance crisis. At least that’s what Massachusetts Institute of Technology economist  Jonathan Gruber concludes in a recent paper. Gruber is no Ira Magaziner. A former deputy assistant secretary at treasury in the Clinton administration, Gruber is not a proponent of universal coverage and believes that Medicaid is too generous. But he does believe we can do better.

Gruber set out to investigate the relative merits of different approaches to insuring more Americans. He aimed to add 3 million people to insurance rolls. The two main criteria he used were efficiency (getting dollar values of insurance for dollars spent) and targeting (the ability of an approach to rope in large numbers of previously uninsured people and only small numbers of previously insured people). Gruber constructed a model that estimates how individuals and companies would react to different tax-based incentives and then compared the results to the effectiveness of a more straightforward method.

If the government simply gave free public health insurance to everybody whose income places them at or below the poverty level, it could add the 3 million insured. Of those who could take advantage of such a program, Gruber concluded, 87 percent would have been formerly uninsured. Taxpayers would spend $1.17 for each dollar value of insurance gained. (The results are summarized in Table 5 of the paper.) 

Next, Gruber examined a proposal similar to that contained in President Bush’s 2004 budget, which would offer individuals tax credits (a maximum of $3,000 per family) to buy insurance. In order to get 3 million new insured under this scheme, the program would have to be large. Only 37.4 percent of those who would respond to such a credit would have previously lacked insurance. Taxpayers would lose $3.24 in tax revenue for every dollar value of insurance gained.

An employee tax credit, which offers a credit to those uninsured who are offered health insurance at work, but don’t buy it, would be even less effective. Only 5.7 percent of those who would take advantage of the offer would have lacked insurance before. Taxpayers would thus lose $5.82 in revenue for each dollar in insurance gained.

Finally, Gruber analyzed a proposal similar to one proposed by former Rep. Richard Gephardt in the 2004 campaign—give employers tax credits for providing insurance on top of the deduction.To add 3 million new insured individuals through this route, taxpayers would lose $2.36 in revenue for each dollar in insurance gained.

The results aren’t that surprising, says Gruber. Such credits aren’t really designed to get people who were formerly uninsured to buy insurance. Since half of the uninsured don’t pay taxes and since refundable credits are highly complicated, tax credits aren’t very appealing to uninsured people. Even if they were appealing, they’re often not enough: “A $3,000 credit to help a working poor person buy a $10,000 policy isn’t going to change anybody’s mind,” said Gruber. The credits also encourage employers to drop or reduce coverage, thus raising the number of uninsured.

The real issue is more philosophical. In general, the government doesn’t have a problem narrowly tailoring entitlement programs so that only lower-income citizens are eligible—think of food stamps, Pell grants, Medicaid. But tax credits and tax-favored savings vehicles are different than entitlement programs: The tendency is to make them available to the broadest possible group. That makes them politically appealing, but also inefficient in achieving broader social goals. You have to give credits to many people in order to help a few. To analogize, entitlements combat hunger by giving the hungry loaves of bread. Tax credits combat hunger by offering a few slices to a lot of people, only some of whom are truly hungry.

The current Republican crowd in Washington has proven willing to embrace expanded government when it comes to defense, farming, and prescription drugs for seniors. But any suggestion that the government simply purchase health care for more people would likely be met by a collective harrumph. Too bad. If Gruber’s model is spitting out accurate conclusions, and if we do want to make some incremental progress on the insurance front, the approach least likely to be embraced may be the one most likely to succeed.