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GAO-521R: 

United States Government Accountability Office: 
Washington, DC 20548: 

April 30, 2010: 

The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley: 
Ranking Member:
Committee on Finance:
United States Senate: 

The Honorable Sander M. Levin: 
Acting Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives: 

Subject: Health Coverage Tax Credit: Participation and Administrative 
Costs: 

This report formally transmits the attached slides (see enclosure I) 
in response to section 1899L of the American Recovery and Reinvestment 
Act of 2009.[Footnote 1] The statute required the Comptroller General 
to examine issues related to participation in and administrative costs 
associated with the Health Coverage Tax Credit program administered by 
the Internal Revenue Service (IRS) in the Department of the Treasury, 
and to provide the results to Congress by March 1, 2010. We provided 
briefings to staff of your committees on March 1 and 2, 2010. We 
incorporated additional information and revised as appropriate the 
slides we used to brief your staffs. 

We provided a draft of this report to the IRS for review and comment. 
In its comments, IRS said that the per-participant administrative 
costs for the HCTC program were higher than for other programs it 
administers, and provided observations to explain the higher costs. 
(See enclosure II.) Evaluating the administrative costs of the HCTC 
program relative to other programs was beyond the scope of this report. 

We are sending copies of this report to the Secretary of the Treasury 
and the Commissioner of IRS. In addition, the report will be available 
at no charge on the GAO Web site at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions regarding this report, please 
contact me at (202) 512-7114 or dickenj@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. Key contributions to this report were 
made by Randy DiRosa, Assistant Director; Gerardine Brennan; Julianne 
Flowers; Jawaria Gilani; Krister Friday; Emily Loriso; and Jeffrey 
Miller. 

Signed by: 

John E. Dicken:
Director, Health Care: 

Enclosures: 

[End of section] 

Enclosure I: 

Health Coverage Tax Credit: Participation and Administrative Costs: 

Briefing for the staffs of the: 

Committee on Finance United States Senate: 

Committee on Ways and Means House of Representatives: 

Updated: 

Overview: 
* Introduction; 
* Objectives; 
* Scope and Methodology; 
* Summary of Results; 
* Background; 
* Results; 
* Agency Comments; 
* Contributors. 

Introduction: 

The Health Coverage Tax Credit (HCTC) is a tax credit created by the 
Trade Adjustment Assistance Reform Act of 2002 that pays a share of 
health plan premiums for eligible individuals: 

* certain workers who lost their jobs due to foreign competition and 
are eligible for Trade Adjustment Assistance (TAA) benefits, and; 

* certain retirees age 55 and over whose pensions were taken over by 
the Pension Benefit Guaranty Corporation (PBGC). 

From calendar years 2003 through 2008, [Footnote 2] the federal 
government incurred expenses of nearly $680 million in tax credits and 
administrative costs for the program. 

Congressional interest in the HCTC: 

* Participation: 

- fewer than 30,000 of the hundreds of thousands of potentially 
eligible individuals each year have participated; 

- some individuals identified as potentially eligible for the credit 
may not actually be eligible;[Footnote 3] 

- some eligible individuals may be going without insurance; and; 

- the health status of those who choose to participate may be poorer 
than those who choose not to, which could adversely affect premium 
rates for HCTC participants and insurers' willingness to provide them 
coverage. 

* Administrative costs: 

- what the Internal Revenue Service's (IRS) costs are to administer 
the program; and; 

- whether health plans incur additional costs for HCTC participants 
compared to nonparticipants. 

* The American Recovery and Reinvestment Act of 2009 (Recovery Act) 
[Footnote 4]: 

- made several temporary and permanent changes to the HCTC and the 
Trade Adjustment Assistance Program intended to increase 
participation-—such as increasing the amount of the credit and 
expanding eligibility;[Footnote 5] and; 

- authorized additional funding to implement these changes. 

- Certain Recovery Act changes to the HCTC expire on December 31, 2010. 

* The Patient Protection and Affordable Care Act includes a tax credit 
similar to the HCTC.[Footnote 6] 

[End of section] 

Objectives: 

The Recovery Act required that GAO examine issues related to HCTC 
participation and administrative costs. 

1. Did HCTC participation change after key Recovery Act changes took 
effect and what factors have influenced participation? 

2. What is known about the health insurance coverage and health status 
of HCTC participants and eligible nonparticipants? 

3. What are the administrative costs of the HCTC to IRS and what 
additional administrative costs for HCTC participants are incurred by 
health plans? 

[End of section] 

Scope and Methodology: 

1. To examine how HCTC participation changed after key Recovery Act 
changes took effect, we: 

Analyzed IRS program data on HCTC participation and eligibility. 

* We analyzed the average number of advance HCTC participants and 
potentially eligible individuals per month during the 6 months before 
and the 6 months after key Recovery Act changes took effect. We 
defined the pre- and post-Recovery Act periods as follows: 

- Pre-Recovery Act: October 1, 2008, through March 31, 2009. 

- Post-Recovery Act: July 1, 2009, through December 31, 2009. 

- We did not include 2003 through September 2008 data because we 
wanted to isolate changes in participation that may be related to the 
Recovery Act. 

- Participation in April, May, and June of 2009 was not included in 
this analysis because participation during these months may have been 
split among some individuals who applied for the credit before key 
Recovery Act changes took effect and others who applied after. 

* We interviewed officials from IRS and its HCTC program contractors 
and reviewed supporting documentation to clarify our understanding of 
the HCTC participation and eligibility data, and determined that the 
data were sufficiently reliable for the purposes of our reporting. 

1. To identify what factors have influenced participation in the HCTC, 
we: 

* Analyzed IRS survey data from two surveys of individuals potentially-
eligible for the HCTC conducted in 2009. 

- The first survey included responses from 1,205 individuals who 
became potentially eligible for the program before key Recovery Act 
changes took effect (before April 1, 2009), and had a response rate of 
9 percent. 

- The second survey included responses from 942 individuals who became 
potentially eligible after key Recovery Act changes took effect (after 
June 30, 2009), and had a response rate of 12 percent. 

- For both surveys, IRS included questions we provided to support our 
analysis. 

- Because of low response rates, we cannot generalize the survey 
results to all individuals potentially eligible for the HCTC and we 
cannot meaningfully compare pre- and post-Recovery Act survey results 
for the questions relevant to our study. However, we determined that 
the data were sufficiently reliable to report combined results for 
these questions from the two surveys and to provide information about 
the views of those who responded to the surveys.[Footnote 7] 

* Reviewed Recovery Act changes and examined data on TAA-related 
layoffs and PBGC pension takeovers which may have contributed to 
changes in HCTC participation after key Recovery Act changes took 
effect. 

2. To examine what is known about the health insurance coverage and 
health status of HCTC participants and nonparticipants, we: 

* Analyzed combined results from two IRS surveys of individuals 
potentially eligible for the HCTC conducted in 2009. Because of low 
response rates, we used the survey results only to provide information 
about the views of those who responded to the survey and were eligible 
to participate. 

* For comparative purposes, we also compared the health status data 
from IRS's surveys to data on self-reported health status of the U.S. 
population from the 2007 Community Tracking Study (CTS). 

- The CTS is conducted by the Center for Studying Health System 
Change, a nonpartisan policy research organization. It is a nationally 
representative survey of U.S. households that has been conducted five 
times since 1996—the most recent CTS data available are from 2007. 

- The response rate for the 2007 household survey was 43 percent. 
Based on our review of the survey documentation, we determined that 
these data were reliable for the purposes of our reporting. 

3. To examine the administrative costs of the HCTC to IRS, we analyzed 
HCTC administrative costs as a share of total HCTC-related costs, 
[Footnote 8] using administrative cost and tax credit data obtained 
from IRS: 

* Administrative cost data: 

- IRS administrative costs for 2003 through 2009; 

- IRS's administrative spending plans for 2010 and 2011. 

* Tax credit data: 

- Total advance tax credits for 2003 through 2009; 

- Total end-of-year tax credits for 2003 through 2008. 

* We interviewed IRS officials and reviewed supporting documentation 
to clarify our understanding of the administrative cost and tax credit 
data and determined that they were reliable for the purposes of our 
reporting. 

3. To examine the additional administrative costs incurred by health 
plans for HCTC participants we obtained information from health plans 
and third-party administrators (TPA) that provide or administer 
coverage for HCTC participants.[Footnote 9] 

* We requested information from the 10 health plans and 10 TPAs with 
the highest number of HCTC participants. We obtained information from 
7 and 6, respectively. 

* The information obtained focused on whether the plans and TPAs 
incurred costs in addition to the administrative costs they typically 
incur for non-HCTC participants. 

We conducted our work from May 2009 through March 2010 in accordance 
with all sections of GAO's Quality Assurance Framework that are 
relevant to our objectives. The framework requires that we plan and 
perform the engagement to obtain sufficient and appropriate evidence 
to meet our stated objectives and to discuss any limitations in our 
work. We believe that the information and the data obtained, and the 
analysis conducted, provide a reasonable basis for any findings and 
conclusions in this product. 

Summary of Results: 

1. HCTC participation increased after key Recovery Act changes took 
effect, and respondents to IRS's surveys of potentially eligible 
individuals most frequently reported affordability as a reason for 
participation, and ineligibility as a reason for nonparticipation. 

2. Over 20 percent of HCTC-eligible IRS survey respondents who did not 
intend to participate in the HCTC reported that they were uninsured, 
and most participants and nonparticipants reported good to excellent 
health status. 

3. The HCTC administrative costs to IRS averaged 17 percent of total 
HCTC-related costs, and most health plans reported that any additional 
administrative costs were minimal. 

[End of section] 

Background: 

Prior to the Recovery Act temporary increase, the HCTC covered 65 
percent of health plan premiums for: 

* manufacturing workers who lost their jobs due to foreign competition 
and were eligible for Trade Adjustment Assistance (TAA) benefits, and; 

* retirees between the ages of 55 and 64 whose pensions were taken 
over by the Pension Benefit Guaranty Corporation (PBGC). 

Participants can receive the HCTC in two ways: 

* end of year: as a tax credit when they file their federal income tax 
returns, or; 

* advance: as an advance payment directly to their health plans when 
their premiums are due each month. 

Individuals who participate are responsible for paying their share of 
the health plan premium to IRS. Advance credit participants provide 
payments to IRS, and IRS processes the payment of the full premium to 
health plans—including the participants' and government's shares. 

HCTC participants may obtain coverage from the following types of 
health plans: 

* COBRA group plans,[Footnote 10], 

* group plans obtained through a spouse's employer, 

* individual health insurance plans,[Footnote 11] and, 

* state qualified plans, which may be group or individual.[Footnote 12] 

From 2003 through 2008, total annual HCTC participation averaged about 
26,000 individuals, with declining participation since 2005. 

During this period, the share of individuals participating in the 
advance credit increased. 

Figure: Total annual participation in the HCTC, 2003 through 2008: 

[Refer to PDF for image: stacked vertical bar graph] 

2003: 
Advance participants: 6,816 (32%); 
End-of-year participants: 14,691 (68%). 
Total: 21,507. 

2004: 
Advance participants: 18,935 (70%); 
End-of-year participants: 8,180 (30%). 
Total: 27,115. 

2005: 
Advance participants: 22,040 (79%); 
End-of-year participants: 5,776 (21%). 
Total: 27,816. 

2006: 
Advance participants: 22,379 (82%); 
End-of-year participants: 5,090 (18%). 
Total: 27,469. 

2007: 
Advance participants: 21,877 (82%); 
End-of-year participants: 4,958 (18%). 
Total: 26,835. 

2008: 
Advance participants: 20,489 (83%); 
End-of-year participants: 4,335 (17%). 
Total: 24,824. 

Source: GAO analysis of IRS program data. 

Note: Advance participants include individuals who claimed both the 
advance and end-of-year credit in the same year, and end-of-year 
participants include those who only claimed end-of-year credits. 

[End of figure] 

From 2003 through 2008, the average number of advance participants per 
month peaked at 16,000 in 2006, and then declined to about 14,000. 
[Footnote 13] 

Figure: Average monthly participation in the advance HCTC 2003 through 
2008: 

[Refer to PDF for image: vertical bar graph] 

Year: 2003; 
Advance participation: 7,110. 

Year: 2004; 
Advance participation: 12,443. 

Year: 2005; 
Advance participation: 15,001. 

Year: 2006; 
Advance participation: 15,958. 

Year: 2007; 
Advance participation: 15,264. 

Year: 2008; 
Advance participation: 13,960. 

Source: GAO analysis of IRS program data. 

Notes: This analysis includes individuals who claimed both advance and 
end of year credits in the same year, but does not include HCTC 
participants who only filed for the end-of-year. In 2003 the advance 
credit was not available until August, and a larger share of HCTC 
participants that year took the end-of-year credit compared to the 
other years. 

[End of figure] 

Key Recovery Act changes to the HCTC in 2009: 

* Made it easier for TAA participants to receive the HCTC by 
suspending certain HCTC eligibility requirements (March 1)[Footnote 
14]; 

* Increased the credit from 65 percent to 80 percent of premiums 
(April 1); 

* Expanded TAA eligibility to additional workers (May 18); 

* Required retroactive credits for payments made to health plans while 
a participant's eligibility was being determined (August 17)[Footnote 
15]. 

Most HCTC-related Recovery Act changes will expire on December 31, 
2010. Certain changes, such as the expansion of TAA eligibility to 
additional workers, are permanent changes. 

IRS and its contractors administer the HCTC administrative activities 
include: 

* Management of computer systems and customer calling centers; 

* Communication with potentially eligible individuals; 

* Processing of applications for enrollment in the advance credit; 

* Collection of participants' share of premiums; 

* Processing government's share of premium payments to health plans. 

Figure: HCTC Operational Divisions: 

[Refer to PDF for image: illustration] 

Customer Service Operations: 

* All operations managed by contractors. 

* Answers calls from participants and responds to written 
correspondence regarding participant questions. 

* Processes registrations and resolves simple account issues. 

Systems Operations: 

* Runs and manages all systems network applications for HCTC including 
management of two main systems. 

- The Payment Processing system—managed internally by IRS, maintains 
financial records of all HCTC eligible participants.[A] 

- Case Management system—maintained by contractors, provides health 
plan information and participant information for all HCTC participants. 

Payment Processing Office: 

* Processes and approves all payments to HCTC participants and health 
plans.[A] 

* Balances the general HCTC ledger and work escalated payment issues. 

Stakeholder Engagement Operations: 

* Educates internal stakeholders on program operations and 
requirements. 

* Answers eligibility questions and responds to high-level marketing 
and outreach inquires. 

Campus Management Operations: 

* Ensures eligibility indicators are put on a taxpayer’s account. 

* Assists in identifying tax returns for review. 

Source: GAO analysis of IRS information. 

[A] All payments that are made to HCTC participants and health plans 
are made by the Financial Management Service, a separate agency within 
the Department of the Treasury. 

[End of figure] 

* Health plans provide coverage for HCTC participants. 

* Total HCTC-related costs include IRS administrative costs and HCTC 
health plans' premium costs. 

Figure: Total HCTC-related cost components: 

[Refer to PDF for image: illustration] 

Total HCTC minus related costs[A], equals: 

IRS administrative costs, plus: 

HCTC health plans' premiums[B]: 
(Government share of health plan premium plus participant share of 
health plan premium). 

Source: GAO analysis. 

[A] For the purposes of our analysis, total HCTC-related costs do not 
include participants' compliance costs, such as their costs to 
complete application forms, or out-of-pocket costs for health care not 
covered by the health plan. 

[B] Health plan premiums cover medical care costs and the plans' 
administrative costs. Health plans' administrative costs may include 
billing, enrollment, claims payment, taxes, risk charges, 
underwriting, broker commissions, overhead, and profit. 

The Patient Protection and Affordable Care Act as amended by the 
Health Care and Education Reconciliation Act of 2010 includes a tax 
credit to help individuals pay for health coverage. Like the HCTC, it 
will be: 

* administered by the IRS and; 

* available in advance as a payment directly to health plans or as a 
credit on participants' end-of-year taxes. 

A key difference between the administration of the new credit and the 
HCTC is that, under the new credit, participants will pay their share 
of the health plans' premiums directly to the health plans and IRS 
will only process the governments' share of the payment. 

[End of section] 

Results: 

1: Change in Participation and Factors Influencing Participation: 

* HCTC participation increased after key Recovery Act changes took 
effect. 

* Respondents to IRS's surveys of potentially eligible individuals 
most commonly reported improved affordability of health insurance 
coverage as a reason for participation in the HCTC and most commonly 
reported ineligibility for the credit as a reason for nonparticipation 
in the HCTC. 

* Recovery Act changes and other factors may have contributed to 
increased participation. 

1: Change in Participation and Factors Influencing Participation: 
Participation: 

* HCTC participation increased after key Recovery Act changes took 
effect: 

- The average number of advance participants per month increased by 36 
percent.[Footnote 16] 

- This was higher than the increase in the average number of 
potentially eligible individuals per month-23 percent. 

* Increased participation was primarily among TAA-eligible individuals 
rather than PBGC-eligible individuals. 

Figure: Average number of advance HCTC participants per month and 
potentially eligible individuals, before and after key Recovery Act 
changes took effect: 

[Refer to PDF for image: 2 vertical bar graphs] 

Participants: 

Total: 
Pre-Recovery Act: 13,939; 
Post-Recovery Act: 18,931 (36% increase). 

TAA-eligible: 
Pre-Recovery Act: 6,043; 
Post-Recovery Act: 10,076 (67% increase). 

PBGC-eligible: 
Pre-Recovery Act: 7,896; 
Post-Recovery Act: 8,855 (12% increase). 

Potentially-eligible individuals: 

Total: 
Pre-Recovery Act: 277,153; 
Post-Recovery Act: 339,784 (23% increase). 

TAA-eligible: 
Pre-Recovery Act: 109,028; 
Post-Recovery Act: 152,244 (40% increase). 

PBGC-eligible: 
Pre-Recovery Act: 168,125; 
Post-Recovery Act: 187,540 (12% increase). 

Source: GAO analysis of IRS program data. 

Notes: This analysis compares data from the 6 months preceding the 
first major Recovery Act change (October 2008 through March 2009) and 
the 6 months following the implementation of most Recovery Act changes 
(July 2009 through December 2009). Data from the months of April, May, 
and June of 2009 were not included in this analysis because 
participation during these months may have been split among some 
individuals who applied for the credit before the Recovery Act changes 
took effect and others who applied after. The analysis of participants 
does not include participants who filed for the end-of-year credit, 
because these data were not available at the time of our analysis. 

These figures do not include participants' qualified family members, 
who are also eligible to participate in the HCTC. IRS's estimate of 
the total number of covered individuals, including qualified family 
members, equals the number of participants multiplied by a factor of 

[End of figure] 

1: Change in Participation and Factors Influencing Participation: 
Influencing Factors: 

Most commonly reported factors influencing participation among IRS 
survey respondents: 

* Participants most commonly reported affordability of health 
insurance coverage as a reason for participation in the HCTC, followed 
by the need for health insurance. 

* Among individuals who said they were interested in participating in 
the HCTC but did not intend to participate, the most commonly reported 
reasons for nonparticipation were: 

- ineligibility-—for example due to being covered by Medicare or 
Medicaid or not meeting an age requirement, 

- followed by affordability-—such as being unable to afford to pay for 
premiums even with the credit or to pay for premiums while waiting for 
their enrollment to be approved. 

Recovery Act changes provided incentives for increased participation. 

* The increase in the amount of the credit and the retroactive credit 
made health plan premiums more affordable. 

* Expanded HCTC eligibility rules for TAA individuals and the 
expansion of TAA eligibility to additional industries increased the 
number of people eligible. 

Economic factors increased the number of individuals potentially 
eligible to participate. 

* Increased trade-related layoffs. 

* PBGC took over more pensions. 

2: Health Insurance Coverage and Health Status of Survey Respondents: 

Insurance coverage status: 

* Over 20 percent of IRS survey respondents who were eligible for the 
HCTC, but did not intend to participate, reported that they were 
uninsured.[Footnote 17] 

Health status: 

* IRS survey respondents who were eligible for the HCTC and insured—
including HCTC participants and nonparticipants with other coverage—
reported health status that was similar to or better than the health 
status of the U.S. population. Over 80 percent of each group reported 
good to excellent health status. 

* Uninsured survey respondents who were eligible for the HCTC but did 
not plan to participate reported somewhat lower health status—with 
fewer than 70 percent reporting good to excellent health status. 

3: HCTC Administrative Costs: 

From 2003 through 2008, HCTC administrative costs to IRS averaged 17 
percent of total HCTC-related costs, with variation related to start 
up costs in early years. 

Most HCTC health plan and TPA officials that provided information 
reported that any additional administrative costs for HCTC 
participants compared to the typical costs incurred for non-HCTC 
participants were minimal. 

3: HCTC Administrative Costs: IRS Costs: 

Administrative costs of the HCTC to IRS from 2003 through 2008 totaled
$161 million, accounting for 17 percent of total HCTC-related costs 
during that time. 

Figure: Total HCTC-Related Costs, 2003 through 2008[A]: 

[Refer to PDF for image: pie-chart] 

Total HCTC-related costs: $953 Million. 

Health plan premiums[B]: $793 million (83%): 
- Participant share of health plan premiums: $277 million (29%);
- Government share of health plan premiums: $515 million (54%). 
IRS administrative costs: $161 million (17%). 

Note: Numbers do not always sum to totals due to rounding. 

[a] HCTC-related costs include IRS's administrative costs and HCTC 
health plan premiums. 

[B] Premiums paid to health plans cover participants' medical care and 
the plans' administrative costs, which are distinct from IRS's 
administrative costs. 

Source: GAO analysis of IRS data. 

[End of figure] 

From 2003 through 2008, IRS's administrative costs varied each year 
due primarily to the amount of funds required for start up costs early 
in the program. 

* In 2003 and 2004, IRS incurred large program start up costs, such as 
for the development of computer systems. These costs accounted for 25 
percent and 34 percent of total HCTC-related costs in these 2 years, 
respectively. 

* From 2005 through 2008, IRS's administrative costs did not include 
similar costs, and as a result, administrative costs ranged from 8 to 
14 percent of total HCTC-related costs. 

* IRS officials told us that they expect similar variation in annual 
spending based on cyclical requirements, such as systems upgrades. 
[Footnote 18] 

Figure: Components of HCTC-Related Costs as a Share of Total Costs, 
2003 through 2008: 

[Refer to PDF for image: vertical bar graph] 

2003: 
IRS administrative costs: $23,010,389 (25%); 
Government share of health plans' premiums: $45,343,530 (49%); 
Participant share of health plans' premiums: $24,577,285 (26%). 

2004: 
IRS administrative costs: $65,183,114 (34%); 
Government share of health plans' premiums: $80,658,675 (43%); 
Participant share of health plans' premiums: $43,431,594 (23%). 

2005: 
IRS administrative costs: $22,810,677 (14%); 
Government share of health plans' premiums: $91,462,587 (55%); 
Participant share of health plans' premiums: $49,249,085 (30%); 

2006: 
IRS administrative costs: $19,097,198 (11%); 
Government share of health plans' premiums: $99,424,760 (58%); 
Participant share of health plans' premiums: $53,536,409 (31%); 

2007: 
IRS administrative costs: $13,615,746 (8%); 
Government share of health plans' premiums: $102,073,047 (60%); 
Participant share of health plans' premiums: $54,962,410 (32%); 

2008: 
IRS administrative costs: $16,886,804 (10%); 
Government share of health plans' premiums: $95,863,878 (58%); 
Participant share of health plans' premiums: $51,619,011 (31%); 

Source: GAO analysis of IRS data. 

[A] From 2003 through 2008, 92 percent of IRS's administrative costs 
were for contractors' services and supplies, and 8 percent were for 
expenses internal to IRS, such as staff salaries and printing. 

[End of figure] 

IRS's future administrative costs for the HCTC could vary based on 
cyclical requirements and the number of participants. 

* From 2009 through 2011 IRS plans to spend about $40 million for the 
HCTC program to implement legislative changes and upgrade computer 
systems, thus administrative costs as a share of total HCTC-related 
costs are likely to rise during these years. 

* IRS officials told us that absent major program changes, they would 
not expect similar levels of spending on these types of systems 
operations until the need for another systems upgrade, thus 
administrative costs as a share of total HCTC-related costs would 
likely decrease after 2011. 

* According to IRS officials, computer systems upgrades are typically 
required every 5 to 6 years. 

* IRS analysis indicates that some economies of scale could be 
realized for the program if participation increases. For example, the 
analysis found that increased participation would not result in 
increased costs for computer systems. 

3: HCTC Administrative Costs: Health Plan Costs: 

A share of the $793 million in health plan premiums paid from 2003 
through 2008 covers the health plans' administrative costs. 

Industry estimates of health plans' typical administrative costs for 
all enrollees vary greatly, from 5 to 26 percent for group plans, such 
as employer-sponsored plans, and 25 to 40 percent for individual, 
nongroup plans.[Footnote 19] 

In 2009, most advance HCTC participants were enrolled in group plans. 
The monthly average percentages of advance participants by plan type 
were: 

* 63 percent in group plans under COBRA, 

* 37 percent in state qualified plans, which include both group and 
individual plans,[Footnote 20] and, 

* 1 percent in other individual health insurance plans.[Footnote 21] 

Officials from all seven health plans and four of the six TPA's that 
provided information reported that any additional administrative costs 
for HCTC participants compared to non-HCTC participants were minimal. 

* Officials from all plans and TPAs providing information said that 
one or more administrative processes for HCTC participants were 
different than those used for non-HCTC participants. For example, 
several said they received a single monthly payment for all HCTC 
participants, rather than separate payments for each, and this payment 
needed to be reconciled with their records. 

* Officials also told us that the different processes did not 
typically translate into notable additional costs, either because the 
number of HCTC participants were small or because the processes were 
not cumbersome. 

* Officials from two of the TPAs reported additional administrative 
costs for HCTC participants compared to non-HCTC participants on a per 
participant basis, citing additional manual processes—such as the 
manual handling of credits back to IRS when participants dropped 
coverage. 

* One health plan told us that it cost no more to administer plans for 
HCTC participants compared to non-HCTC participants, and one TPA 
reported that it likely costs less to administer plans for HCTC 
participants. Both made systems changes to help improve their ability 
to manage HCTC participants. 

[End of section] 

Agency Comments: 

We provided a draft of this report to the IRS. In its comments, IRS 
said that the per-participant administrative costs for the HCTC 
program were higher than for other programs it administers, and 
provided observations to explain the higher costs (see enclosure II). 
Evaluating the administrative costs of the HCTC program relative to 
other programs was beyond the scope of this report. 

[End of section] 

Contributors: 

If you or your staffs have any questions regarding this briefing, 
please contact John E. Dicken at (202) 512-7114 or dickenj@gao.gov. 
Key contributions to this briefing were made by Randy DiRosa, 
Assistant Director; Gerardine Brennan; Julianne Flowers; Jawaria 
Gilani; Krister Friday; Emily Loriso; and Jeffrey Miller. 

[End of Enclosure I] 

Enclosure II: Comments from the Department of Treasury: 

Department Of The Treasury: 
Internal Revenue Service: 
Deputy Commissioner: 
Washington, D.C. 20224: 

Mr. John E. Dicken: 
Director, Health Care: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Mr. Dicken: 

Thank you for your helpful work on the draft report entitled, Health 
Coverage Tax Credit: Participation and Administrative Costs. Your 
report recognizes the considerable efforts of the Internal Revenue 
Service (IRS) to effectively and efficiently deliver the Health
Coverage Tax Credit (HCTC) to eligible taxpayers each year. On behalf 
of nearly 30,000 taxpayers, the IRS consistently pays over 1,000 
health insurers and third party administrators to subsidize health 
care costs for beneficiaries. 

The Trade Adjustment Assistance Act of 2002, recently reauthorized by 
the American Recovery and Reinvestment Act of 2009, created the unique 
HCTC to serve two very specific populations: those receiving Trade 
Adjustment Assistance benefits and those individuals whose pension was 
taken over by the Pension Benefit Guaranty Corporation. Considerable 
effort is expended by the IRS to ensure pre-qualified individuals are 
notified about the availability of the tax credit, the eligibility 
requirements, and the health plan options available to claim the 
credit. These tasks are particular to the success of the HCTC. 

I know that one of the areas that your report examines is 
administrative costs of the HCTC. The IRS is committed to running 
efficient programs that deliver the benefits and services available to 
taxpayers at the lowest possible cost. I would observe that the unit
costs of operating the HCTC are substantially higher than other more 
broad-based programs that the IRS administers, because of a few 
important factors. 

First, the HCTC is only available to very small population relative to 
the approximately 140 million individual tax filers. As a result, the 
fixed costs that are a part of any tax program are spread over fewer 
filers. Second, HCTC is not available to the general public, and 
significant administrative resources are expended in determining who 
may be eligible by virtue of receiving Trade Adjustment Assistance or 
receiving benefits from the Pension Benefit Guaranty Corporation. 
Eligibility for the program in many cases varies depending on the 
specific employer involved as well as the specific geographic location 
where the individual worked. These determinations are communications- 
and resource-intensive. In addition, once trade-affected workers are 
enrolled, the IRS must work with state workforce agencies to confirm 
eligibility of beneficiaries on a monthly basis. 

In order to accommodate these requirements specific to trade-affected 
workers and PBGC beneficiaries, the IRS had to create one-off program 
features that do not benefit from the economies of scale that the tax 
system generally provides. Notwithstanding these observations on 
costs, the IRS remains focused on maximizing outreach and delivering 
high quality services to the populations that the HCTC was designed to 
assist. 

Thank you again for the valuable feedback included in the report. If 
you have any questions, please contact David Williams, Director, 
Electronic Tax Administration and Refundable Credits, Wage and 
Investment Division, at (202) 622-7990. 

Sincerely, 

Signed by: 

Steven T. Miller: 

[End of section] 

Footnotes: 

[1] Pub. L. No. 111-5, div. B, title I, § 1899L, 123 Stat. 115, 435-36. 

[2] At the time of this study, final data on tax credits were 
available only through 2008. 

[3] Not all individuals initially identified as potentially eligible 
will meet all eligibility criteria for the HCTC. For example, 
individuals entitled to benefits under Medicare are not eligible for 
the HCTC. 

[4] Pub. L No. 111-5, div. B, title I, 123 Stat. 115, 306-436. 

[5] The changes took effect on various dates throughout 2009. 

[6] Pub. L No. 111-148, §§ 1401-21, as amended by the Health Care and 
Education Reconciliation Act of 2010, Pub. L No. 111-152, §§ 1001-05. 

[7] The age, income, and geographical distribution of survey 
respondents was similar to that of nonrespondents. 

[8] HCTC-related costs include IRS's administrative costs and total 
premiums paid to health plans. For the purposes of our analysis, total 
HCTC-related costs do not include participants' compliance costs, such 
as their costs to complete application forms, or out-of-pocket costs 
for health care not covered by the health plan. 

[9] A TPA is an organization that performs claims administration and 
related business functions for a self-insured employer. 

[10] The Consolidated Omnibus Budget Reconciliation Act of 1985 
requires employers who provide health insurance to continue to provide 
coverage to their employees and their families at the group rates in 
certain circumstances. 

[11] Coverage under individual health insurance may be obtained when 
the individual was covered under individual health insurance for the 
entire 30-day period that ends on the date the individual became 
separated from the employment that qualified the individual for TAA or 
PBGC benefits. 

[12] Seven types of HCTC coverage alternatives may be designated by 
states, including private group or individual plans, mini-COBRA group 
plans, and high-risk pool plans. For more information on state-
qualified health plans see, GAO, Health Coverage Tax Credit: 
Simplified and More Timely Enrollment Process Could Increase 
Participation, [hyperlink, http://www.gao.gov/products/GAO-04-1029] 
(Washington, D.C.: Sept. 30, 2004.) 

[13] Individuals who participate in the advance credit are typically 
enrolled in the program for more than 1 month, but many are not 
enrolled for an entire year. Therefore, total participation in any 
given month is never as high as total annual participation. 

[14] Prior to the Recovery Act, in order for TAA participants to be 
eligible for the HCTC they were generally required to be receiving 
certain payments under TAA and enrolled in TAA training programs—the 
Recovery Act suspended these requirements. 

[15] IRS began notifying eligible individuals about this new provision 
in April 2009. 

[16] This analysis compares data from the 6 months preceding the first 
major Recovery Act change (October 2008 through March 2009) and the 6 
months following the implementation of most Recovery Act changes (July 
2009 through December 2009). Data from the months of April, May, and 
June of 2009 were not included in this analysis because participation 
during these months may have been split among some individuals who 
applied for the credit before the Recovery Act changes took effect and 
others who applied after. The analysis of participants does not 
include participants who filed for the end-of-year credit, because 
these data were not available at the time of our analysis. Advance 
participants made up over 80 percent of total participation from 2006 
through 2008. 

[17] This analysis excluded certain individuals who were not eligible 
for the HCTC because they were covered by Medicare, Medicaid, or 
military health care, or because they did not meet an age requirement. 

[18] The HCTC systems upgrades are typically handled by contractors, 
and IRS does not depreciate such costs over time. 

[19] These ranges are based on GAO's review of industry data from 4 
studies published between 2000 and 2007, and two government reports, 
see CBO, Key Issues in Analyzing Major Health Insurance Proposals 
(Washington, D.C.: December 2008), and GAO, Private Health Insurance: 
Small Employers Continue to Face Challenges in Providing Coverage, 
[hyperlink, http://www.gao.gov/products/GAO-02-8] (Washington, D.C.: 
Oct. 31, 2001). 

[20] As of December 2009, 62 percent of the HCTC state-qualified 
health plans were private group or individual plans, 21 percent were 
high-risk pool plans, 13 percent were mini-COBRA group plans, and 4 
percent were other types of plans. 

[21] Numbers do not add to 100 due to rounding. 

[End of section] 

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