Individual Mandate with Income-Related Tax Credits

VII. Key Issues: Regulation & Reform >> C. Health Reform >> Mandatory Health Reform Plans >> Individual Mandate with Income-Related Tax Credits

 

Basic Design

This approach would be identical to income-related tax credits except that it would be coupled with a mandate that all individuals and families purchase catastrophic health coverage, with the scope of minimum coverage (i.e., maximum annual limit on patient cost-sharing) also being income-related.  The most detailed proposal of this sort is Responsible National Health Insurance (RNHI), but even RNHI does not specify any specific values for the tax credits or income levels at which subsidies for the purchase of coverage should be phased out.

• Eligibility: all U.S. residents would be included, with the possible exception of those on Medicare. Except for Medicaid long-term care, all means-tested health programs such as SCHIP would be eliminated. Medicare could either be retained as a separate program, phased into private coverage over time, or beneficiaries could voluntarily choose between Medicare and private coverage. Those failing to obtain coverage would be auto-enrolled in a government-designated “fallback plan” available in each geographic market.
• Benefits: the maximum level of out-of-pocket spending under a qualified health plan would vary with income, with no (or minimal) patient cost-sharing for those with the lowest incomes and a sizable amount of cost-sharing permitted for those with higher incomes. All qualified plans would cover “core” acute-care benefits for those reaching the catastrophic expense threshold; the federal government would define core services as it now does for mandatory services covered under Medicaid. Individuals would be permitted to purchase additional benefits or policies with less cost-sharing, but the added costs of such policies would not be subsidized. Medicaid would continue to provide subsidized long-term care coverage for those who need it.
• Freedom of Choice: individuals may obtain their coverage through an employer, private individual insurance, private health plan (e.g., HMO) or government-designated “fallback plan” in each geographic area (selected through competitive bidding); more comprehensive coverage could be purchased with after-tax dollars.
• Financing: everyone would receive a refundable, advanceable tax credit or voucher that would vary by income and possibly other actuarial factors (age, gender, family size or health status).  Since the lowest income families would receive a voucher sufficient to cover the premium for the fallback plan in their geographic area, the competitive. These subsidies would be largely or completely financed by eliminating the current tax exclusion for employer-provided health coverage and through Medicaid acute care savings.
• Regulation: only the fallback insurer would be required to guarantee enrollment for any applicant; plans would have to offer “core” benefits, but could offer any other benefits desired (e.g., preventive benefits without cost-sharing) and there would be no regulation of premiums, provider reimbursement levels, methods of cost containment or types of providers that could be included within a plan.

Theory

• Mark V. Pauly, Patricia Danzon, Paul Feldstein, and John Hoff. A plan for ‘responsible national health insurance.’ Health Affairs, Spring 1991; 10(1): 5-25.
• Mark V. Pauly, Patricia Danzon, Paul J. Feldstein, and John Hoff. Responsible National Health Insurance. Washington, D.C.: American Enterprise Institute 1992.
• Mark Pauly and B. Herring. Expanding Health Insurance Coverage via Tax Credits: Trade-offs and Outcomes. Health Affairs 2001; 20:9-26.

Practice

• U.S. The Affordable Care Act uses income-related subsidies for individuals qualified to purchase coverage in the state health exchanges (generally, those in the individual and small-group market). Such subsidies are similar in effect to income-related tax credits except they are not universal. As well, the ACA includes an individual mandate for comprehensive, rather than catastrophic coverage, along with an employer mandates, which are incompatible with the spirit of RNHI.
• States. Massachusetts is currently the only state with an individual mandate for health insurance in place, but this too is for comprehensive rather than catastrophic benefits and it is coupled with an employer mandate to partially finance health insurance coverage.
• Other Countries. Switzerland’s national health system uses universal income-related subsidies for the purchase of health insurance, but this is coupled with an individual mandate for somewhat more comprehensive benefits and various regulatory provisions (e.g., community rating of premiums) incompatible with the spirit of RNHI.

• Uwe E. Reinhardt. The Swiss Health System: Regulated Competition Without Managed Care. Journal of the American Medical Association. 2004;292(10):1227-1231.
• Peter Zweifel. Switzerland. Journal of Health Politics, Policy and Law. 2000;25:937-944.
• Regina E. Herzlinger and R. Parsa-Parsi. Consumer-Driven Health Care: Lessons from Switzerland. Journal of the American Medical Association. 2004;292:1213-1220.