This report reviews the features of tax-based approaches to subsidizing health insurance, including tax credits and tax deductions, and summarizes their associated benefits and drawbacks. Different approaches could affect consumer premium payments, health insurance enrollment, federal costs, total health spending, and work incentives.

The Benefits and Drawbacks of Alternative Tax Subsidization Approaches for Health Insurance

Christine Buttorff, Katherine Grace Carman, Christine Eibner

ResearchPublished Jul 13, 2017

This report reviews the implications of tax-based approaches to subsidizing health insurance enrollment in the individual market. The authors compare three approaches: (1) pegging the tax credit to the price of a benchmark plan, as is done under the Affordable Care Act (ACA) and proposed under the Senate's Better Care Reconciliation Act (BCRA); (2) capping the federal government's contribution for each consumer, as proposed under the House's American Health Care Act (AHCA); and (3) using a tax deduction method, as was proposed by President Donald Trump during the 2016 election campaign. The report also considers possible adjustments to these tax-based subsidies that address variation in the price of health insurance and in consumers' ability to afford coverage. The report aims to address how various design options for tax policy may affect outcomes, including health insurance enrollment and federal costs, and to discuss possible unintended consequences.

Key Takeaways

There Are Many Ways of Providing Tax-Based Subsidies for the Purchase of Health Insurance, and There Are Unavoidable Trade-Offs Between the Approaches

  • While the ACA's approach is designed to limit consumer premium payments to an affordable level for eligible consumers, it does not directly limit federal spending per enrollee.
  • An alternative approach that provides a capped federal contribution for each enrollee might better constrain federal spending, although this would depend on the value of the credit and the eligibility criteria.
  • Among the approaches considered, the tax deduction may be the least effective at promoting health insurance enrollment, because it would require consumers to shoulder the full cost of premiums up front and because it provides smaller benefits to low-income consumers, who are also less likely to be insured.

Any Tax-Based Subsidy That Increases Health Insurance Enrollment Is Likely to Increase Health Systems Costs, Because Consumers Who Have Health Insurance Tend to Use More Care

  • Some approaches to subsidizing health insurance may do a better job at constraining costs than others.
  • Approaches that encourage the use of high-deductible health plans and that encourage insurers to negotiate lower payments with providers may lead to lower per capita spending than approaches that increase the subsidy as health spending increases.
  • Higher deductibles and lower provider payment rates may have other unintended effects, such as leaving consumers with unaffordable out-of-pocket costs or limited access to care.

ACA's Approach May Have the Largest Effect on Work Incentives of the Three Approaches Considered, Since Eligibility Is Income-Based

  • Fixed credits will likely have little impact on work incentives, unless they are scaled with income, and tax deductions will have an uncertain impact on work incentives.

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Buttorff, Christine, Katherine Grace Carman, and Christine Eibner, The Benefits and Drawbacks of Alternative Tax Subsidization Approaches for Health Insurance. Santa Monica, CA: RAND Corporation, 2017. https://www.rand.org/pubs/research_reports/RR1961.html.
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The research described in this report was sponsored by the Robert Wood Johnson Foundation and conducted by RAND Health.

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