Means-Testing Tax Credits for the Uninsured: Key Design Considerations

Over at Forbes, I have a lengthy piece describing important details of how to design tax credits to help the uninsured afford coverage. In this supplementary article, you’ll see some charts that illustrate how different designs affect people across the age spectrum.

To summarize the point from the Forbes piece: it’s not enough that tax credits be means-tested, insofar as means-testing merely involves increasing the dollar value of the assistance that low-income individuals receive (and/or decreasing the value for high earners). It’s critical that the tax credits have a flexible design, such that they can account for variations in health insurance premiums between the sick and the healthy, and between people living in high-cost vs. low-cost localities.

In the following three charts, which are also in the Forbes article, you’ll see how 60-year-old childless adults fare under three tax credit frameworks. The first chart, also discussed in the FREOPP blog post “How to Make Ryancare Premiums Affordable for the Near-Elderly,” shows how the American Health Care Act’s flat tax credit, in green, provides a constant level of assistance regardless of income, whereas the Affordable Care Act’s means-tested credit, in blue, phases out as you go up the income scale (resulting in higher premiums net of subsidies).

The grey shaded area represents the people who will face higher net premiums under the AHCA, because they get a smaller tax credit. As you can see, a lot of 60-year-old childless adults will face higher net premiums.

One approach to addressing this problem, alluded to above, is to increase the dollar value of the tax credit for 60-year-olds from $4,000 per year to some higher figure as you go down the income scale. However, if this dollar value isn’t large enough, it would spend more money without significantly improving the coverage numbers, because net premiums would still be too high, as shown by the red dashed line and shaded area in the below chart.

The right way to address this problem is not to use a fixed-dollar means test, but a flexible test in which an individual’s exposure to health insurance premiums is capped as a percentage of his or her income. For example, someone making $36,000 could have his exposure to premiums capped at 10 percent of his income ($3,600), with the tax credit filling in the rest. This flexible test ensures that people with poor health status, or living in high-cost localities, aren’t exposed to unaffordable premiums. The AHCA uses exactly this type of approach for the years 2018 and 2019, as specified in Section 202 of the bill:

By simply extending Section 202’s schedule to 2020 and beyond, the problem of high net premiums for the low-income near-elderly is virtually eliminated, as shown in the below chart:

The grey dotted line in the above chart represents the impact of combining the Section 202 schedule for the working poor with a standard income tax deduction for the purchase of health insurance, a proposal by Rep. Bruce Westerman (R., Ark.). The standard deduction helps to lower premiums for people above 400 percent of the Federal Poverty Level.

Here are the same three charts for 50-year-old childless adults. Note that the size of the shaded area is smaller in each chart; this is because the AHCA’s design flaw falls heaviest on older Americans:

Now, the same three charts for 40-year-old childless adults:

And, finally, for 30-year-old childless adults:

Millions of people will be affected, depending on exactly how the Senate chooses to means-test its tax credits. The good news is that GOP senators want to address this problem. It’ll be important to watch closely to make sure they get it right.