Number 3 — May 2002

Health Coverage for Laid-off Workers: Searching for Common Ground

by Stan Dorn and Jack A. Meyer

During the federal stimulus debate, a broad range of policymakers agreed on investing significant resources to provide health coverage to uninsured, laid-off workers. Lawmakers disagreed, however, whether coverage should be offered in part through the private, non-group market or some combination of employer-sponsored coverage, Medicaid, and the State Children’s Health Insurance Program (SCHIP). As a result, health coverage was left out of the final bill.  At least in part, this dispute appeared to reflect broader, philosophical disagreements about private vs. public solutions.

The problem has not gone away. More than eight million Americans are still unemployed. [1] Two in five unemployed workers and many of their dependents lack health coverage. [2] The first two months of this year alone, more than 400,000 workers suffered large-scale lay-offs. [3] In March 2002, unemployment reached 5.7 percent, only slightly below its 5.8 percent peak in December. [4] Even though economic recovery apparently has begun, the Federal Reserve Board projects unemployment in the range of 6 percent to 6.25 percent by the end of 2002. [5]

In March 2002, the average duration of unemployment was 15.4 weeks, but many had been unemployed longer, including 1.2 million people out of work for more than six months. [6] More than half a million had been unemployed for over a year. [7] Even brief periods without coverage can cause workers and their families to go without necessary health care and create significant financial problems. [8] Moreover, under federal rules, a worker uncovered for just 63 days can later be denied coverage of pre-existing conditions for 12 to 18 months after health coverage restarts, threatening ongoing harm to short-term unemployed workers and family members with chronic illness.

To address this problem while bridging previous disagreements, Congress could provide unemployed workers with affordable coverage using policies that integrate elements appealing to different schools of thought. Those elements include federal income tax credits, the private, non-group health insurance market, employer coverage, and public programs like Medicaid and SCHIP. This paper describes in general terms two such hybrid approaches, suggesting various possibilities for structuring each approach to help laid-off, uninsured workers without undermining current systems of coverage.

For purposes of analysis, we assume that one objective would be to provide access to coverage at least as generous as what employers typically offer. Such coverage could facilitate continuity of care among those formerly covered by employers. [9] Moreover, evidence suggests that relatively broad coverage improves access to primary care, preventive services, and early treatment of illness; and that most workers and employers offered “bare bones” coverage in the past have not taken it up. [10]

The point of this discussion is not to advocate any of the assorted policies described below. Rather, this paper seeks to illustrate that pragmatic approaches to helping laid-off workers obtain affordable health coverage could be made attractive to people with different perspectives and policy preferences.

This first approach would resolve the philosophical impasse by letting affected individuals choose between public and private alternatives. Here are two key elements:

·   Tax credits usable in the private, non-group market. This market offers a remarkably broad range of plans from which many workers could pick coverage that fits their individual circumstances. Under this option, Congress could perhaps avoid regulating the non-group market within a subsidy system for laid-off workers, because such workers unhappy with that market could use their credits to obtain comprehensive, affordable coverage elsewhere, as explained below.

·   Tax credits usable for comprehensive group coverage, including through public programs like Medicaid and SCHIP. Many laid-off workers, particularly at lower income levels, do not qualify for former employer coverage through COBRA or “mini-COBRA” laws adopted in 38 states. To give all tax credit beneficiaries access to broad coverage, tax credits could be made usable through not only COBRA but also groups not sponsored by former employers.  Such groups could include the Federal Employees Health Benefits Program (FEHBP), state Medicaid and SCHIP programs, and state-chosen groups such as purchasing cooperatives, public employee plans, etc.

For FEHBP to be a viable option, existing FEHBP enrollees would need to be insulated from possible adverse effects, particularly increased claims costs that would result if sicker-than-average unemployed people tended to enroll. One strategy would place tax credit enrollees into a separate pool, with new federal funds paying any increased costs over each plan’s usual FEHBP premiums for federal workers. Such an approach would not be entirely unprecedented. FEHBP has covered diverse groups outside civilian federal employment, including military retirees, former spouses of federal workers, and D.C. schoolteachers. [11] Many key administrative functions could be handled by the Office of Personnel Management, which runs FEHBP, and state workforce agencies, which could determine eligibility for credits, help laid-off workers choose a plan, deduct worker premium payments from unemployment benefits, etc.

If tax credit beneficiaries could enroll in Medicaid and SCHIP, states could likewise be insulated from new costs, as explained below. Such enrollment could help unemployed, low-income parents join health plans together with their children, most of whom already qualify for these programs. This could increase the number who sign-up for coverage and simplify the process of seeking care. States might also be allowed to give Medicaid and SCHIP beneficiaries in families with laid-off workers a choice to use the tax credit system, with firewalls in place as described below.

To bridge the philosophical gulf, this approach would use both subsidy systems, applying each to the population most familiar with it. Important features include: 

·   Medicaid and SCHIP for lower-income unemployed. Laid-off workers with incomes below a designated level would qualify for Medicaid or SCHIP.  Federal law could set either a single, nationwide standard or a “default” minimum level that states would have the option to raise.

·   Tax credits for higher-income unemployed. Those with incomes above the designated level could receive tax credits to buy insurance through the non-group market, former employers covered by COBRA, or other groups available under current law or offered by states. Such credits could decline with income, starting at high percentages of premium costs for families with income just above the cutoff for public programs. Alternatively, credits could stay at one level for all higher-income unemployed.

·   Immediate coverage. To prevent health care delays while government agencies sort out which program is responsible for a particular person, subsidy applicants could immediately receive tax credits or be enrolled in their state’s public program, based on an initial income evaluation. Using current models, financial reconciliation among government agencies could happen later, after laid-off workers begin receiving coverage.

An earlier publication in the Covering America series analyzed a similar hybrid proposal aimed at a much larger group of uninsured. [12]

Following is a partial list:

·   No new state costs. Just as federal dollars would fund all subsidy costs for tax credits, so the federal government could pay all costs for Medicaid and SCHIP expansions under option 2 and, together with worker premium payments, all costs for buying into these programs under option 1. Such funding may be necessary for states with major budget shortfalls to expand or revise these programs.

·   Incentives for rapid state action. Powerful financial incentives may also be needed for states to overcome normal hurdles to quick policy change and act (whether opening programs to credits or implementing expansions) by a specific, early date. For example, states that met their target dates under either option could receive new health care block grants or enhanced federal match rates for all their Medicaid and SCHIP beneficiaries.

·   Substantial assistance for laid-off workers with little or no discretionary income. Programs helping low-income workers purchase health coverage have found that few enroll if asked to pay more than small amounts. [13] For such workers to use tax credits under option 1 and purchase insurance resembling typical employer-sponsored coverage, credits would need to cover more premium costs than under most recent federal proposals. To control federal spending, credits could shrink for higher-income families, as they do under many broader health insurance tax credit proposals and the current Earned Income Tax Credit.  With option 2, public programs would cover all or virtually all premium costs for low-income beneficiaries.

·   Firewalls to keep credits from replacing Medicaid and SCHIP. States facing budget problems could have an incentive to move current beneficiaries from these two programs, which states partially fund, into tax credits financed exclusively by the federal government. If children and other vulnerable populations were forced out of their current public coverage into a tax credit system, continuity of care could be disrupted, and federal dollars intended for the uninsured would turn into state fiscal relief. If the new, untested system experienced glitches, some public program beneficiaries could lose benefits, experience increased costs, or fall through the cracks and be dropped from coverage. To prevent this, the financial incentives described above could be conditioned on states retaining prior eligibility rules; tax credit applicants could be screened for Medicaid and SCHIP eligibility and enrolled if eligible; and states could be required to retain current levels of financial responsibility for any Medicaid and SCHIP eligibles given tax credits. Less rigorous safeguards might suffice under option 2, if public programs, rather than tax credits, were available throughout the income range served by these programs.

·   Income measurement. Some of the ideas mentioned above require assessing laid-off workers’ income, which necessarily involves some administrative complexity and risk of error. Using existing institutions could simplify this process somewhat. For example, family income could be checked using recent earnings data within reach of state workforce agencies, supplemented by federal income tax information and application forms completed by laid-off workers seeking health coverage.

·   Assistance for involuntarily unemployed workers not receiving unemployment insurance (UI). Subsidies could cover, not just UI recipients and those whose UI has expired, but also involuntarily unemployed workers denied UI because they worked at low-wage jobs not meeting earnings requirements for UI; they seek only part-time work; or they recently entered or rejoined the workforce, and their state’s UI program does not count their most recent earnings.

Final comments

Some may believe that, with the economy in apparent recovery, deficit reduction should be a higher priority than providing health coverage for laid-off workers, most of whom will regain employment within months. Others may question whether laid-off, uninsured workers are the right group to target for coverage expansions. For example, policymakers could focus instead on the lowest income uninsured Americans, including both employed and unemployed workers ineligible for government assistance today.  Prioritizing the latter group, rather than uninsured, laid-off workers at all income levels, could focus resources more equitably based simply on families’ inability to afford coverage. In addition, such an approach would value work more than subsidies limited to the unemployed and help people suffering greater harm because of longer periods without insurance.

That said, one striking feature of the stimulus debate was the bipartisan agreement to invest tens of billions of dollars providing health coverage to uninsured workers laid-off, through no fault of their own, during the recent economic downturn. Such a broad consensus on domestic priorities does not happen very often. It provides an opportunity to help a large and generally needy group of uninsured Americans who have fallen through a major structural gap in the country’s health coverage system, even if other groups also have compelling claims to limited public resources.

Stan Dorn is a Senior Policy Analyst at the Economic and Social Research Institute. Jack Meyer is ESRI’s founder and President. The authors would like to thank Stuart Butler of The Heritage Foundation, health policy consultant Lynn Etheredge, Lee Partridge of the American Public Human Services Association, Alan Weil of The Urban Institute, as well as Todd Kutyla, Sharon Silow-Carroll, Emily Waldman, and Elliot Wicks of ESRI for their many helpful comments. Of course, these advisers are not responsible for the final contents of this Issue Alert.

Covering America promotes serious consideration of a diverse range of comprehensive proposals to provide affordable health coverage for millions of uninsured Americans. The Covering America project is coordinated by the Economic and Social Research Institute, a nonprofit, nonpartisan institute in Washington, D.C., and is made possible by a grant from the Robert Wood Johnson Foundation, Princeton, New Jersey.

Notes