assure that the voucher would go to subsidize catastrophic coverage with high lifetime maximums rather than first-dollar coverage.

The voucher could be made available on the basis of income by extending the percent of poverty standards now in place for Medicaid, but excluding children currently on Medicaid. This would be an additional administrative burden on the states, but a system for determining income eligibility already exists for Medicaid and could be expanded. A more complicated procedure would be to try to make the voucher available only to those children who were uninsured. It is more complicated because it creates strong incentives for employers and employees currently paying for dependent coverage to drop such coverage, the so-called crowding out problem. Establishing regulations to prevent crowding out would be difficult in the absence of some inducement to maintain coverage.

Enforcement problems associated with vouchers could be reduced to the extent that the federal subsidy did not cover the entire cost of the insurance plan. With a partial subsidy, the individual who would bear some of the cost of the insurance would have an incentive to use the voucher wisely and to purchase a plan that would provide them with the most value. Allowing an eligible employee to use the voucher to buy into his or her employer's group policy might be a way to reduce the danger of crowding-out.

Federal Tax Policy to Encourage Additional Coverage

Proposals to expand health insurance through the use of tax policy are based on the notion that it is better to offer a positive incentive rather than direct subsidies or mandates. Tax policy proposals to reform health care markets are supported by a number of economists and health policy experts, but are probably the least understood by politicians and the public.27 In addition to being misunderstood, any change in tax policy creates winners and losers, so the losers can be expected to strongly oppose the change. Scholars of tax policy have also criticized any use of the tax system to achieve any social objective because such proposals complicate the tax system, create distorting incentives, and interfere with the objective to create an efficient and fair system of raising revenue.28 Any attempt to use tax policy to encourage more coverage of children will not be immune to that criticism. However, if properly designed, a tax policy proposal could increase children's coverage while removing some of the present complications and distortions of tax law.

Any attempt to use tax policy as a positive incentive to expand health insurance for children would face two administrative problems. First, the current federal income tax system is administered by the Internal Revenue Service (IRS), an agency that many feel is already overburdened by the complexity of the tax law. Adding any new provisions to encourage health insurance for children would add to this complexity and to the enforcement and administrative problems faced by the IRS.

Keeping any new provision relatively simple would reduce the problems faced by the IRS, but would likely reduce the ability to target new health coverage to the presently uninsured or to assure that private insurance contained the features that would be deemed best for children. For example, if the desire of Congress was to subsidize the purchase by low-income people of catastrophic policies that included good prevention and screening services, the IRS would have to take on some of the functions of a welfare or insurance regulatory agency to assure that the benefit design of the qualifying plans met some federal standard and that only eligible people received the subsidy. The alternative is to have the IRS work


For some of the health reform proposals based on tax policy, see Mark Pauly, Patricia Danzon, Paul Feldstein, and John Hoff, Responsible National Health Insurance. Washington, D.C.: The AEI Press, 1992; Stuart M. Butler, ed., Is Tax Reform the Key to Health Care Reform? The Heritage Foundation, 1990; C. Eugene Steuerle, "Beyond Paralysis in Health Policy: A Proposal to Focus on Children," National Tax Journal, Vol. 45, No. 3, September 1992, pp. 357-368.


Joint Economic Committee, "The Inefficiency of Targeted Tax Policies," United States Congress, April 1997.

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