Approximately 39 million Americans--22 percent of all children and 19 percent of all young adults--have no health insurance coverage, according to the 2001 Census.

How should public policy alleviate the problems of the uninsured? While the United States relies at present mainly on individuals, employers, and states to provide health insurance, the debate over the use of tax-based credits or vouchers to help people bear the cost of buying private health insurance is a topic that has been on the policy agenda for many years. The discussion today focuses particularly on those who lose coverage in an economic downturn. In Responsible Tax Credits for Health Insurance (AEI Press, January 2002), authors Mark V. Pauly and John S. Hoff, who have studied this topic for more than a decade, review the arguments for and against tax credits or vouchers to obtain health insurance coverage.

The authors discuss the major changes in the political and economic climate that have taken place since the early 1990s. They conclude that, on the economic side, a look at the private insurance market since 1994 shows not only that the market can control the growth of premiums, but that it can also respond to consumer complaints when managed care controls become too tight. On the political side, neither wide-ranging reforms nor the use of heavy mandates and regulation are in the cards, but more realistic expectations, coupled with a federal budget that might be able to pay for some but not all of the uninsured, means there may be good prospects for an incremental, voluntary, budget-constrained strategy to deal with the uninsured, a strategy for which credits, with substantial built-in flexibility, are ideal.

Pauly and Hoff explore the options available under a system of flexible credits and they pose and discuss some of the policy questions that need to be addressed before design can proceed. Their observations and conclusions include:  

1. The failure of large-scale compulsory proposals for covering those without health insurance have set the stage for the use of flexible, well-designed, refundable tax credits or vouchers to cover part of the premiums for private health insurance.
2. The design of tax credits poses a variety of policy choices that ought to be considered but thus far have not been seriously discussed.
3. One issue is the comprehensiveness of coverage of the insurance eligible for the credit. More comprehensive policies carry higher premiums, which can discourage coverage; plans that ensure some coverage for almost everyone may be preferable to those that provide such coverage to only a few.
4. Another issue is whether the credit should be the same for all or should vary with the level of risk. For a given amount of spending, a uniform credit will induce more people to be covered, but the additional people will not need insurance as much.
5. While many of the parameters of an ideal plan must be politically chosen, the authors outline a sample plan with fixed dollar credits for basic coverage that vary inversely with income.

Such a plan would involve substantial tax credits for low- and middle-income people, but these credits should be thought of as tax reductions rather than as additional federal expenditures.

Mark Pauly is professor of health care systems and economics and the Bendheim Professor at the Wharton School, University of Pennsylvania. At the time this study was written, John Hoff was a lawyer in private practice in Washington, D.C., specializing in health policy.