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Health care tax credits may need tuneup

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WASHINGTON—Five years after Congress created a small program that health care experts said could be a blueprint to significantly reduce the ranks of the nation's uninsured, key legislators say the program needs a tuneup.

As part of trade legislation passed in 2002, Congress created and funded a program that provides a 65% tax credit for eligible individuals to apply toward their premiums for qualified health care coverage.

The health coverage tax credit is available to employees who have lost their jobs due to foreign competition and those age 55 through 64 whose pension plans have been taken over by the Pension Benefit Guaranty Corp. The latter group comprises about two-thirds of the 250,000 people potentially eligible for the credit.

The HCTC offsets the cost of a variety of health insurance plans, including COBRA continuation coverage, individual plans offered by commercial insurers and state pools that meet standards, such as not excluding pre-existing medical conditions for those who maintained coverage before they lost their jobs or before their pension plans folded.

Nearly 60% of beneficiaries use the credit to pay COBRA premiums.

Unlike other federal tax credits, the HCTC is available regardless of whether an individual pays any federal taxes.

Under a system implemented by the Internal Revenue Service, the beneficiary pays 35% of his or her premium to the government. Then, the IRS remits the full amount to the health plan or plan administrator.

In a typical month, about 16,000 people are enrolled or are enrolling to receive the tax credit. Additionally, roughly 6,000 people not enrolled in the monthly program claim the HCTC each year when they file their taxes.

Last year, the government spent close to $100 million on the tax credits, a drop in the bucket vs. the billions the government, for example, spends on Medicaid.

While the HCTC program is small, health policy experts have watched it closely as a possible template for broader programs to aid millions of U.S. residents who could not afford health insurance otherwise.

After the HCTC legislation was enacted, top members of the Senate Finance Committee—Sen. Charles Grassley, R-Iowa, then the panel's chairman, and Sen. Max Baucus, D-Mont., then the ranking minority member and now the chairman—introduced a measure in 2003 that would have extended the tax credit to individuals receiving unemployment benefits.

While the HCTC still may be a model to reduce the number of uninsured, key legislators, concerned about the small percentage of beneficiaries who opt for coverage, say improvements in the HCTC are needed. In a typical month, about 22,000 people of the 250,000 potentially eligible use the credit.

Speaking last month before the Trade Adjustment Assistance Coalition, Sen. Baucus attributed the low HCTC takeup rate to affordability. "Even with a full-time job, most workers pay less than 25% of their health care premium. Workers who lost their jobs cannot afford to pay more for health coverage," he said in referring to the 35% of the health insurance premium those utilizing the HCTC must pay.

To boost participation and continue the program beyond its current Sept. 30 expiration, Sen. Baucus said he intends to seek an increase in the health care tax credit as part of the broader trade legislation.

Others concur that changes are needed.

Rep. George Miller, D-Calif., who chairs the House Education and Labor Committee, believes either the tax credit should be improved or legislators need to find another way to assure that beneficiaries have access to affordable coverage, a spokesman for Rep. Miller said.

"There is growing recognition that the program isn't working as it should," said Stan Dorn, a senior research associate at the Urban Institute in Washington. Mr. Dorn recommends, among other things, a supplemental tax credit for those with very low incomes.

For low-income beneficiaries—those at or below 200% of the federal poverty level, which is $20,650 for a family of four—the tax credit should be about 90% of the premium, said Mr. Dorn.

A similar approach with much greater success, at least initially, is being taken in Massachusetts. As part of that state's sweeping 2006 health care law—aimed at helping the state achieve near universal health care coverage within a few years—the state links the portion of health insurance premiums it pays for eligible state residents to the resident's income.

For very low-income residents—those who earn up to 100% of the federal poverty level—Massachusetts pays the entire premium and nearly the entire premium for those with incomes between 101% and 150% of the federal poverty level.

Even though Massachusetts' Commonwealth Care program was launched only late last year, 50% of those eligible have already enrolled—an opt-in rate roughly five times higher than the HCTC's.

Another change that could increase HCTC enrollment involves the interplay of the tax credit to Medicare, Mr. Dorn and other experts say.

Under current law, the primary beneficiary loses the tax credit when he or she becomes eligible for Medicare at age 65. If, however, the primary beneficiary has a younger spouse, the spouse cannot use the credit even if he or she is not eligible for Medicare.

"That certainly was an unintended consequence," said Joann Volk, a legislative representative at the AFL-CIO in Washington.

That is a structural gap that needs to be fixed, Mr. Dorn said.

On the plus side, Mr. Dorn and others note that IRS administration of the collection and remittance of premium payments has gone smoothly.

An IRS official said the systems set in place could handle a significant increase in the number of beneficiaries.