Administrative issues involving the tax system and health reform

1. Administrative issues involving the tax system and health reform Reaction to papers by Holtzblatt and Havener & Kirby Stan Dorn The Urban Institute Sdorn@urban.org 202.261.5561

2. General reaction to papers • Extremely useful resources for future work • Sobering reminders of the many practical limitations of the tax system • “The Devil We [health wonks] Don’t Know” has horns Urban Institute

3. Focus of my comments • What do these papers (and other information) suggest about the tax system’s ability to help subsidize coverage for the low-income uninsured? 2 functions: • How can the tax system support subsidy determinations by other systems (e.g., Medicaid)? • Can the tax system be effective in subsidizing the low-income uninsured (i.e., through refundable, advanceable tax credits)? Urban Institute

4. Uninsured by Income: 2006 Source: Urban Institute, Kaiser Commission on Medicaid and the Uninsured, analysis of March 2007 CPS data. Urban Institute

5. Function 1: Tax system as support to other systems’ delivery of subsidies • Source of income data – not just on returns • Administrative data – high reliability • Administrative data includes many non-filers • Tax data now verify Medicaid applications • But can this data replace application forms? Can it identify subsidy-eligible individuals? • Pernicious effects of requiring application forms: among non-filers, 2% take-up of telephone credit rebates – form required just SSN, name, address Urban Institute

6. Medicare Part B premium subsidies • Means-testing implemented in 2007 • Subsidy level based on income shown on tax return from 2 years in past (2005) • Individuals are held harmless if income rose • If income fell, individuals can apply to SSA offices and obtain deeper subsidies • In year 1 of this new means-testing system, every Part B enrollee received a preliminary income determination and corresponding subsidy – without filing an application! Urban Institute

7. Implications • By trading off precision of income measurement policymakers can dramatically: • Increase take-up by reducing red tape • Lower public sector administrative costs • Part B an extreme case – most seniors qualify for maximum subsidy. Still, there are lessons: • Define eligibility based on available data • E.g.: income = prior year AGI (Bush/43 tax credit proposal) • Structure subsidies to lessen the need for precise and up-to-the minute measurement • Annual eligibility periods, based on most recent prior data • Changed circumstances can’t lower subsidy • Broad subsidy bands Urban Institute

8. How apply to non-elderly? Incomes fluctuate • Annual income determinations based mainly on administrative tax data • What IT investment required to make such determinations soon after administrative data delivered to IRS, while data are still “fresh”? • What happens during the year? Suppose an uninsured person seeks care, starts work, etc. • Grant subsidies based on last year’s tax data, with opportunity to show reduced income (a la Part B) • Any way to capture wage changes, most common source of income fluctuation? • Adjust prior-year tax income based on most recent wage data in National Database of New Hires Urban Institute

9. Function 2: delivering subsidies through refundable, advanceable tax credits • Health Coverage Tax Credit – the only refundable, advanceable credit subsidizing coverage for the otherwise uninsured • Pays 65% of premiums for displaced workers, certain others • HCTC usable for COBRA and state-qualified plans • Key HCTC success - No marketing fraud by insurers • Contrast: Bentsen child credits, Medicaid, Medicare • Credits for any non-group plans? Asking for trouble • Give consumer the government’s money to spend, irresistible magnet for con artists Urban Institute

10. High administrative costs • Numerous monthly transactions per enrollee • IRS bills consumer for 35% premium share • When payment arrives, IRS forwards to FMS • FMS combines with 65% credit, delivers electronically to health plan, with accompanying data identifying enrollee, before monthly premium due date • Why this system? Encourage plan participation • Instead, have plan bill consumer for premium share, invoice IRS for credit covering remainder • 1 payment per health plan per month (or quarter) • Used by CMS for Part D low-income subsidies Urban Institute

11. Prompt start of advance payment • Problem: must enroll in qualified coverage before IRS determines eligibility • Accordingly, must pay premiums in full for months before IRS determines eligibility for advance payment • Solution: create an alternative administrative process, available at the taxpayer’s option, to demonstrate individual eligibility, before enrolled in qualified plan • Once found eligible, enroll in qualified plan • Precedents: Medicaid, SCHIP (HUD Section 8) Urban Institute

12. What’s the point of tax credits? • To make them effective, need to: • Pay health plans the way CMS does for Medicare Part D low-income subsidies • Structure eligibility and enrollment the way Medicaid and SCHIP do • Carefully control enrollment process into qualified health coverage, to prevent marketing fraud Urban Institute

13. Stuart Butler: “Tax credits are just money that Republicans can vote for.” Urban Institute

14. Pete Stark “I can use the tax code to make water flow uphill.” But it takes money and time to build the IT and other systems that let this happen effectively and efficiently. Urban Institute