Number 77 October 31, 2001

Due to the September 11 terrorist attacks, more than 100,000 airline and related industry employees are expected to be laid off. From this tragedy has arisen an opportunity to get to the root of the problem of lost health coverage.

President Bush has proposed giving $14 billion to states so that displaced workers can maintain their coverage. California should use the funds to offer individuals refundable tax credits for the purchase of any portable, private health insurance policy, thereby freeing them from employer-provided coverage. A two-year refundable tax credit could be worth $1,000 for an individual or $2,000 for a family, as the Health Coverage, Access, Relief, and Equity Act by Senators James Jeffords and John Breaux proposed.

The Secretary of Labor provides federal National Emergency Grants (NEGs) to states experiencing mass layoffs. President Bush freed $3 billion in NEGs to give low-income workers the option of temporarily continuing their employer-provided health insurance coverage. States may also be awarded $11 billion in unspent Medicaid and State Children’s Health Insurance Program (SCHIP) funds to help workers keep their employer-provided health coverage.

Those workers who are laid off will lose their health insurance because it was obtained through employment. Since employer-provided health insurance is exempt from federal and state income and payroll taxes, unlike the cost of privately purchased health insurance, employer-based health policies are the primary source of coverage. Individuals have little control over employer-based health-care policies and thus face a constant threat of losing their coverage if they become unemployed.

Employer-based health insurance poses yet another problem. Employers often purchase benefits that an employee would not select if purchasing it on his or her own. This is because the employee is often unaware of the cost. The more that individuals are insulated from the cost of their health care, the less incentive they have to be price sensitive. Not subject to the full price, people overutilize services. This has been the experience in Canada where citizens think health care is “free” and, therefore, they overutilize it.

If workers and their families, however, owned and controlled their own health insurance, they wouldn’t lose the insurance in the event of unemployment. Offering a refundable tax credit would eliminate tax bias and allow individuals to purchase their own personal and portable benefits, such as a medical savings account (MSA), on the same terms as businesses. MSAs combine catastrophic medical insurance with personal tax-deferred savings and investment accounts to pay for non-catastrophic medical expenses.

Rather than confining workers and families to an inferior government program, individual control over health-care policies should be restored. California should use the unspent money to offer refundable tax credits to the previously uninsured, as well, so workers could select private health insurance coverage. Extending a refundable tax credit to the uninsured would make private health insurance less expensive and increase the number of individuals with health insurance. The tax credit would also give individuals an incentive to become more careful consumers of health insurance.

As layoffs continue, more workers will be displaced and most will lose their health insurance. California should seize this opportunity to solve the problems related to employer-provided health insurance. The economic victims of the September 11 terrorist attacks should not become victims of California’s inefficient and inflexible health-care system. This would add insult to injury.

Rather, California should offer a refundable tax credit for private health insurance that would give consumers choice, affordability, and control in purchasing portable health insurance.

Laura Dykes is a public policy fellow at the California-based Pacific Research Institute’s Center for Entrepreneurship.