Health Plan Options Under the Health Coverage Tax Credit Program

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Abstract

By March 2006, 40 states, which included 87 percent of potentially eligible individuals, had arranged state-qualified coverage for Health Coverage Tax Credit (HCTC) beneficiaries. High-risk pools provided such coverage in 20 states. Medically underwritten coverage, plans with pure community rating, and plans with modified community rating were each available in nine states. Altogether, 280 state-qualified options were offered. In 36 states, more than one plan was available, and the median state included five options. However, in 26 states, all coverage had individual deductibles of $500 or more, including 12 states where all deductibles were $1,000 or more.

Background

In August 2002, President Bush signed into law the Trade Act of 2002, creating Health Coverage Tax Credits (HCTCs), which subsidize 65 percent of health insurance premiums for certain early retirees receiving pension payments from the Pension Benefit Guaranty Corporation (PBGC) and displaced workers who lost employment because of foreign trade. HCTCs are federal income tax credits that are fully refundable, which means that they are paid in full to all who qualify, including those who owe little or no federal income tax. For premium payments made in December 2002 and later months, beneficiaries have been able to receive HCTCs after filing their annual federal income tax forms. Beginning in August 2003, HCTCs were also available through advance payment directly to recipients' health plans over the course of the year.

Whether obtained in advance or after the end of the year, HCTCs may be used only for qualified health plans, which fall into two categories. First, automatically-qualified plans are available in every state, without any need for state action. These plans include COBRA coverage, individual coverage received by beneficiaries during at least their last 30 days before separation from work, and coverage through a spouse’s employer (if the employer pays less than 50 percent of the premium).

Second, state-qualified coverage includes, at state option, so-called "mini-COBRA" plans as well as other private health insurance arranged by a state that meets the following requirements:

• The state-qualified plan may not charge HCTC beneficiaries higher premiums than it would charge other, similarly situated enrollees;
• HCTC beneficiaries may not receive fewer benefits than the plan would provide to other, similarly situated enrollees;
• For HCTC beneficiaries with at least three months of continuous coverage immediately before seeking to enroll, the plan must guarantee issue of a policy; and
• For HCTC beneficiaries with such continuous coverage, the plan may not exclude coverage of preexisting conditions.

Although the target population is relatively small, this refundable, advanceable federal income tax credit—the first such credit targeting the uninsured since the early 1990s—offers a unique opportunity to garner practical lessons about how to design future tax credits aimed at much larger groups of uninsured.

One important health policy question pertains to the health plans for which credits may be used. The HCTC statute takes a novel approach to this question. HCTC's requirements for state-qualified plans depart from generally applicable state insurance regulations, primarily because three months of continuous coverage bring an individual within HCTC's guaranteed issue and preexisting condition requirements. By contrast, federal HIPAA law applies such requirements only to individuals with at least 12 months of continuous coverage. While some states reduce that period to six months, only the HCTC program cuts it to three months.

On the other hand, HCTC departs from a number of other federally subsidized health programs in that HCTC's state-qualified plans are subject to no requirements for covered benefits, no limits on cost-sharing, and no limits on the factors that may be used to determine premiums charged to particular enrollees. The only federal rules on these topics forbid HCTC beneficiaries from being treated more harshly than other enrollees and bar preexisting condition exclusions for individuals with continuous coverage, as noted above. By contrast, Medicare, Medicaid, and SCHIP all have federal rules specifying, to a significant degree, the benefits that are offered and the out-of-pocket costs that may be imposed. Generally, the latter, longstanding federal programs do not permit factors like age, gender, and individual health risk to determine the premiums beneficiaries must pay.

To assess the impact of these unique requirements, this report investigates the state-qualified health plans offered to HCTC beneficiaries as of March 2006, more than two and a half years following initial implementation of HCTC advance payment. We asked two basic questions: how robust was health plan participation? And what coverage options were available to HCTC beneficiaries?

Several related issues are outside the scope of this report. Other than to note individual deductible levels and optional coverage riders that added particular benefits to underlying plans, we did not gather information on the services covered by the many health plans that now participate in HCTC. Moreover, while this analysis shows the factors that were taken into account in determining premiums, we did not gather data about the precise premiums that each plan would charge to enrollees of various ages, genders, etc. These topics have been investigated as to some state-qualified plans but have not been the subject of nationwide surveys.

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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.