politicians love them... but...

Health Care Tax Credits: Not So Fast

The U.S. is already trying a small experiment with health care tax credits—and it is not exactly a roaring success. A new study by The Urban Institute’s Stan Dorn does a nice job of describing what has gone wrong. In short: Very few of those who are eligible are taking the credit and massive administrative costs are eating up one-third of the program’s budget. Other than that, things are going swimmingly.

The credit was created in 2002 as part of the Trade Adjustment Assistance Act. The idea was to help workers who lost jobs to foreign competition buy health insurance. The credit pays 65% of premiums for workers, retirees and their families, but in 2006, only 28,000 households took it, about one of every eight of those eligible.

Why so few? Dorn identifies several problems. The most important may be that even with a generous 65% subsidy, many people still can't afford coverage. To make matters worse, enrollment is complicated, and the policies are not very good (many exclude pre-existing conditions and limit coverage for preventative care and the like). Even though the credit is refundable, participants also have a cash-flow problem—they have to pay full premiums upfront for several months before the tax break kicks in.

The administrative cost problem may be more troubling. The program is immensely complex and, in an effort to encourage private insurers to participate, much of the administrative burden is dumped on the Internal Revenue Service. As a result, Dorn reports, it costs the IRS $1 to deliver $5 in benefits. Add in plan costs and fully 34% of the program’s budget goes to overhead.

A bigger program would probably slash the cost-per-enrolee quite a bit, but even so, the government’s experience with TAA suggests that tax credits may not be the panacea that their supporters claim. But, then, in health care, nothing ever is.