Analysis of Refundable Tax Credit
Tax code incentives aim to expand health insurance coverage by reducing the absolute cost that individuals face when buying insurance. When a tax credit is provided, individuals subtract the amount of the tax credit from their total tax liability. If the credit is refundable, people without a tax liability receive a direct payment.
These are the nine performance dimensions against which we measured the refundable tax credit:
- Consumer Financial Risk
- Patient Experience
- Operational Feasibility
Refundable tax credits for individuals and families will have no discernable effect on total health care spending:
- Using our model, we estimate that aggregate health care spending will increase $930 million to $4.47 billion (0 to 2 percent) with a refundable tax credit for individuals and families to obtain coverage.
- Our results indicate that net government spending will increase $4.72 to $63.47 billion (0.5 to 6.4 percent); this reflects an increase due to the cost of the subsidy ($5.8 to $69.0 billion) and a small decline in Medicaid spending (–$1.08 to –$5.53 billion).
- Our results indicate that individual/family out-of-pocket spending will increase $690 million to $4.67 billion (0.2 to 1.9 percent).
- Published estimates of the magnitude of the increase in spending vary widely and depend on assumptions about the size and form of the credit, as well as the additional policy changes that accompany it.
Refundable tax credits for individuals and/or families to purchase coverage will have no significant effect on total spending. The net effect will depend on the size and form of the credit, as well as on what policies, if any, are tied to the change (e.g., the elimination of the tax free treatment of employer-provided health insurance, mandates to purchase insurance) but in all of our modeled scenarios the difference in spending is close to zero.
The number of people who obtain insurance will rise as some previously uninsured individuals who are eligible for the credit purchase insurance. The increase in coverage with the credit, and the associated increase in utilization of some health services, will have little effect on overall health spending. Depending on the size of the credit and the income eligibility levels, the amount that individuals spend on health care will, for the most part, be higher among those who are newly purchasing insurance. The magnitude of this effect is unclear and may depend on the relative costs of different types of medical care, since coverage may shift utilization from some types of services to others. Previously uninsured individuals may actually offset spending increases by using primary and preventive care instead of emergency care.
We modeled a refundable tax credit with the following design:
- Individuals and families can claim an annual Federal tax refund on money spent to purchase a nongroup insurance policy.
- Individuals and families below income thresholds of $15,000 and $30,000, respectively, are eligible for the full amount of the tax credit.
- The tax credit amount decreases on a sliding scale as income rises; it phases out at $30,000 (individuals) and $60,000 (families).
- To qualify for the credit, individuals or families must purchase a policy comparable to what is currently offered in the nongroup market.
- The amount of the tax credit that is claimed cannot exceed the amount spent on premiums.
- The consumer pays premium costs in excess of the credit amount.
- Individuals and families that want to purchase insurance are able to do so (that is, we designed this policy option with guaranteed issue).
We made the following assumptions in modeling the tax credit option:
- The elasticity of take-up among the previously uninsured is 0.4 (that is, a 10 percent decrease in premium costs leads to a 4 percent increase in take-up rates).
- Some individuals with group coverage will choose to switch to nongroup coverage to take advantage of the credit.
- Some individuals with Medicaid will switch to nongroup coverage.
- Some employers will drop coverage altogether. The probability that a firm will drop coverage depends on the proportion of employees in the firm who are eligible for the new tax credit.
Although this policy option would likely occur in conjunction with other policies, we modeled a refundable tax credit for individuals and families separate from other policy options.
Consumer Financial Risk
A refundable tax credit will not change consumer financial risk for the overall non-elderly population, but it is likely to increase the amount spent on health care for most of the newly insured:
- We estimate, using the COMPARE microsimulation model, little change in the median percentage of income spent on health care and the percentage of families that spend more than 10 percent of their income on such care.
- How the tax credit affects consumer financial risk depends heavily on the consumer's insurance status prior to the credit; consumer financial risk would increase substantially for those who were formerly uninsured.
- Previous studies have estimated similar levels of consumer financial risk under refundable tax credit policies.
The effect of tax credits for individuals to obtain coverage on waste is uncertain because of limited evidence, studies with mixed results, and the relatively small number of persons affected:
- No studies directly evaluate the relationship between refundable tax credits and waste; published studies do not provide a clear direction on the likely effect.
- Economic theory suggests that tax credits will discourage individuals from purchasing overly generous health plans, which tend to increase the use of low value care.
- Our modeling estimates that 2.3 to 10 million persons who were previously uninsured would become insured under this policy change, which is not likely to have a large overall effect on reducing waste.
Creating tax incentives for individuals to obtain coverage will not affect the reliability of the health care system, although some individuals may be more likely to obtain needed care:
- No empirical studies have directly explored the relationship between refundable tax credits and reliability.
- Evidence on the relationship between insurance status and reliability suggests that there may be no effect.
No studies directly examine the link between refundable tax credits and changes in patient experience:
- No empirical studies directly analyze the relationship between refundable tax credits and changes in patient experience.
- Theory suggests that the patient experience of formerly uninsured individuals will improve if they acquire insurance.
We estimate a small gain in life-years among those newly insured under a tax credit:
- We estimate an increase of 360,000 to 1,510,000 life-years, depending on the size of the credit.
- Theory and published studies suggest that, if a refundable tax credit for insurance increases rates of coverage, the health of some groups should improve.
- The magnitude of the effect on health may depend on the health of an individual before gaining insurance and on other socioeconomic factors, as well as on changes in access afforded by health insurance and the reliability of care received.
Using our model, we estimate small increases in the number of people who become newly insured as a result of this policy change:
- Given our model results, we expect that 2.3 to 10 million people would become newly insured under this policy change.
- Published estimates of the magnitude of the increase vary widely and depend on assumptions about the size and structure of the credit; the extent to which the credit is used to purchase coverage; and estimates of how coverage will shift among individual, employer-sponsored, and public programs.
Refundable tax credits for individuals to obtain coverage are not expected to change the overall capacity of the health care system:
- We would not expect this policy option to change overall health system capacity because of the small number of people who become newly insured.
- No empirical studies directly evaluate the effect of tax credits on capacity.
A refundable tax credit would present a moderate degree of challenge for implementation:
- A refundable health insurance tax credit should be less burdensome to implement than some other insurance coverage policy options, since it would be administered through the federal tax system and since other refundable federal tax credits already exist.
- Implementing a refundable health insurance tax credit would require expanding and improving some mechanisms used to administer existing refundable tax credits.
- The extent of the additional complexity and difficulty would depend on a number of factors, including the scope of the credit, and would likely involve a trade-off among reaching the target population, minimizing fraud, and increased administrative costs.