Tax Credits for Funding Population Health
The health and well-being of the populations in regions across the United States is produced by a variety of conditions and determinants—including safe environments, housing, education, and economic conditions. Clinical health care is but one of these. Absent a shift in focus to population health, chronic conditions and health care costs will continue to rise, productivity will suffer, and deep health inequities will remain.
Yet, despite the critical nature of this mission, most partnerships are funded on a shoestring budget, and overwhelmingly by grants. There are a number of more substantial and sustainable funding sources to which we might turn, but none are especially easy to develop. ReThink Health explored one possibility: tax credits.
Tax credits are a type of tax break. They work by reducing the cost of a good or service, thereby stimulating the markets for those goods and services, leveraging private capital in the process.
We sought to identify the conditions under which a tax credit policy would provide:
- A sound and sustainable financing source for population health.
- A sound investment for taxpayers.
Here’s a summary of what we found:
Tax breaks are widely used at both the state and federal levels, spanning numerous sectors, including health. At the federal level, tax breaks were claimed on 169 million tax returns, estimated to total $1.5 trillion in 2017. But, outside some notable and important tax credits that impact the social determinants of health, such as the Earned Income Tax Credit and the Low Income Housing Tax Credit, this ubiquitous instrument is not being used for population health.
The design of a tax credit program matters greatly to its success, and we can pinpoint what those design features are. It’s important to acknowledge that not all tax credit programs are effective at producing the desired outcomes. Indeed, certain types of tax breaks, especially the $45 billion in business incentives offered by state and local governments each year, have been shown not to be effective at creating jobs and economic growth.
A tax credit program for population health could be constructed to ensure positive returns on investment for taxpayers. There is a sizeable and growing set of evidence-based population health interventions with enough financial return on investment (ROI) to be stimulated by tax credits. Limiting the tax credit to evidenced-based interventions with positive ROI ensures that the tax credit serves as a sound investment for taxpayers and accomplishes its health objectives.
Compared to the federal government, states have a unique set of incentives and opportunities to enact a tax credit for population health. First, containing Medicaid costs is increasingly important for states. All states except Vermont have some type of a balanced budget requirement, and Medicaid is the second largest expenditure item behind K-12 education. Second, states are becoming increasingly aware that their $45 billion investment in business incentives is failing to produce as expected. The Pew Charitable Trusts has called for improved accountability measures and evaluation, and since 2012, 21 states have enacted laws requiring regular evaluation. Because health and the economy are linked, states desiring higher ROI could choose to redeploy their tax credit dollars in population health instead. Finally, some states are showing willingness to use tax credits for singular population health investments, including the administration of an opioid program in New Hampshire and a lead abatement program in Massachusetts.
One constraint on the use of tax credits for population health: most service providers are based in the nonprofit or public sectors. A tax credit will not be valuable to them because they have zero or limited tax liability. Our analysis focused on how tax credits might help fund a portfolio of population health investments (which can be tailored to local needs) and identified two possibilities.
Providing Tax Credits to Self-insured Employers or Health Plans
Both health plans and self-insured employers have huge financial interests in containing health care costs. While the population covered by such a tax credit is limited to those with private insurance, it is quite significant. For-profit health plans fully insure 62 million Americans (with total enrollment of 122 million Americans), and an estimated 100 million Americans are covered by self-funded employer plans. We should also expect that these private companies would be primarily interested in interventions with relatively short payback periods. Nonetheless there are many important investments that could be made.
For example, an evidence-based opioid program analyzed by the Washington State Institute for Public Policy was shown to have a total cost of $356 per person and was shown to create financial benefits of almost $2,700 and social benefits of $5,300, both accruing over two years. But these returns are split between a number of beneficiaries, including taxpayers who save $370 in health care costs and health plans that save $383 in health care costs. (Participants in the program save $79 in health care costs and earn an additional $1,279.) As it stands, neither the taxpayers nor the health plans have much of an incentive to invest because their returns are about the same as their costs, and it takes two years to break even. Now imagine the cost of the program is split between a health plan and taxpayers with the use of a 50% tax credit. The net cost to each would become $178 and both would more than double their money in two years.
A Charitable State Tax Credit
Tax credits could be used to spur charitable giving—for instance, to wellness funds. A number of states offer tax credits for donations to specific organizations or purposes. The largest of the state programs raised $20 million in Arizona (for specified anti-poverty organizations), $40 million in Michigan (for homeless shelters and food banks, a program ended in 2011), and $24 million per year in Iowa (for community foundations). Colorado’s tax credit for donations to child care providers has raised an average of $12.6 million in each of the past eight years.
Research suggests that the demand for charitable giving can be spurred through tax credits, although giving seems to respond to a variety of factors: the health of the economy, the sector being donated to, the income of the giver, whether it is structured as a match, and other features of the state tax code. If a tax credit were offered for population health donations, we would want to ensure through the design of the program that the amount of giving will actually increase. A poor outcome would be paying for a donation that already occurs and/or shifting the donation from one sector to another without increasing the overall level of giving.
Meet Our Project Team
Could Tax Credits Be a Source of Sustainable Financing for Population Health?
We clear up some misconceptions about tax credits and go over the basics of how they might be used to fund population health efforts. It’s time to cut through the myths and see where the real opportunities lie.
Exploring the Potential of Tax Credits for Funding Population Health
In this paper, published by the National Academy of Medicine, ReThink Health’s Stacy Becker and our Tax Credit R&D Team explore the potential for stewards to use tax credits as a means to fund efforts to transform the system that produces health and well-being.
Establishing a Charitable State Tax Credit to Finance Regional Wellness Funds
We developed a prototype for how stewards might introduce a tax credit that encourages charitable donations to wellness funds (pools of money for funding efforts to improve health and well-being). We explain the key differences between a tax credit and a tax reduction, and explore why local—as opposed to federal—control is key to directing funding where it is needed most.
Incenting the Private Sector to Invest in Population Health: A Tax Credit for Self-Insured Employers
We developed a prototype for how state policymakers could create a tax credit for self-insured employers, which would engage the private sector in transforming population health.
Getting Smart About Tax Policy: Reflections from the NASEM Conference on Financing Population Health
Some key takeaways from our tax policy research team’s presentation, titled Exploring Tax Policy to Advance Population Health, Health Equity, and Economic Prosperity, to the National Academy of Sciences, Engineering, and Medicine’s (NASEM) Population Health Roundtable.