Tax
Initiatives Gain Strength
By Grace-Marie Arnett
February
26, 1999
Several key members of Congress and a number of
influential organizations are working on initiatives that would reverse
the alarming growth in the number of Americans without health
insurance.
House Majority Leader Dick Armey is leading the
charge. He delivered a speech before the American Hospital Association
recently in which he put himself squarely on record as supporting the
free-market health care reform proposals long advocated by the Galen
Institute and our colleagues from the market-based think tanks. Here's
what Mr. Armey said:
"I believe the time has come for a whole new
approach to health care. I think we can offer better solutions for the
uninsured, help end frustrations with HMOs, and preserve the high
quality of American medicine - all at the same time. How? By shifting
more choice and control to patients, so they can take more
responsibility for their health care -- and take their business
elsewhere when dissatisfied. Most of today's problems in health care can
be traced back to one source: the lack of a consumer-driven market. And
the main source of that problem is the tax code."
Mr. Armey's
bill would provide tax credits or vouchers to Americans so they can
provide for their own health care in the private market. Rep. Bill
Thomas, (R-CA) chairman of the Health Subcommittee of the House Ways and
Means Committee, is working on his own bill, which will be co-sponsored
by Rep. Jim McCrery (R-LA). And Rep. John Shadegg (R-AZ) also has a bill
he is ready to introduce providing tax credits for health
insurance.
There is bi-partisan support for this legislation as
well: Rep. Jim McDermott (D-WA) has introduced a straightforward tax
credit bill. In the last Congress, Senator Barbara Boxer (D-CA)
introduced legislation that would have provided tax deductions to
individuals to purchase their own health insurance. She reportedly now
is exploring a tax credit initiative.
Other organizations, like
the American Medical Association, the National Association of Health
Underwriters, and the Council for Affordable Health Insurance, are
working to gain support for their own proposals on tax credits for the
uninsured.
A quiet revolution is brewing in the health sector
with growing anger over the bureaucratic control of health care in both
the public and private sectors. With the failure in the last Congress of
the wrong-headed patient's bill of rights, some leaders are embracing
the new ideas that give individuals the freedom to control their own
health care arrangements. These proposals would begin to unlock a
central structural defect in the health sector -- namely, a tax code
provision that ties health insurance to the
workplace.
Congress already has taken two small steps
toward solutions -- creating Medical Savings Accounts and giving the
self-employed a direct tax break for purchasing health insurance.
Enacting tax credits for the uninsured is the next important step in
freeing patients and doctors to regain control over medical care.
Individuals should be able to purchase and own their own health
insurance, and providing a new system of tax credits would be an
important first step in that direction.
How we got
here
The Health Policy Consensus Group, which the Galen
Institute coordinates, identifies the problem:
The United States does not have a properly
functioning market for health care, and the financing system needs to
be reformed. The market is distorted by a tax policy that is
mistargeted, miscalibrated, and open-ended. This tax policy provides
generous benefits to those who have higher incomes and receive health
insurance through the workplace. Yet it offers little or no assistance
to those at the lower end of the income scale. Particularly at a
disadvantage in the current system are those who fall between the
cracks of this tax subsidy and Medicaid.
Reforming the tax
treatment of health insurance is essential to creating a more
efficient and equitable market for medical services and health
insurance in the United States. Correcting the tax distortion would
lower the costs of health insurance coverage in both the public and
private sectors and thereby allow broader access to quality health
care.
A Rich but Hidden Tax Subsidy: The
History
Early in the 20th Century, the link between health
insurance and the workplace began to be established in the United
States. During and after World War II, however, employment-based health
insurance became more widespread, and the link became much
stronger.
Factories were pushed to meet wartime production
schedules. Competition for good workers was intense but was hampered by
wartime wage controls. Employers found they could compete for scarce
workers and boost compensation without running afoul of these controls
by offering health insurance as a benefit in lieu of cash wages. In
1943, the Internal Revenue Service ruled that employers' contributions
to group health insurance would not count as taxable income for
employees.
That ruling, a later codification of it by
Congress in 1954, rising tax rates on middle class incomes, and the
rising demand for health insurance all combined to create a strong
incentive for health insurance to be obtained through employment-based
groups.
The generous tax preference accorded job-based health
insurance is a historical accident that has increased automatically over
the decades without legislative authorization or appropriations. It has
percolated through the economy for 50 years to become the foundation for
a system that provides subsidies and therefore strong incentives for at
least 140 million Americans to get their health insurance through their
jobs. The subsidy for employment-based health insurance now is worth an
estimated $100 billion a year in forgone federal and state taxes.
However, tens of millions Americans are locked out of this system and
benefit little or not at all from this rich but hidden tax
subsidy.
The wall comes down
The current
system of providing tax benefits only to people with job-based health
insurance is starting to crumble. The rising number of uninsured at a
time of nearly full-employment indicates something is structurally
wrong.
The lack of individual control over health insurance is
causing other distortions as well. In the early 1990s, as health care
costs were continually rising, often by double-digits, employers needed
to find ways to curtail their employees' highly-subsidized and
unrestricted access to medical services through fee-for-service plans.
Managed care companies set up systems to hold down costs, often by
imposing restrictions on employees' access to
care.
Employers wanted to keep costs down while providing
health insurance as a benefit, and managed care companies did the
cost-savings part very well. Now, however managed care companies have
become the targets of angry consumers, politicians, the media, and even
Hollywood.
The solution is not more regulation of the
managed care industry, but an invigorated free market. If health
insurers were catering to individual consumers, they would be forced to
operate under the same rules as other industries; competition would
force them to provide the best service at the best price through the
greatest efficiency. If individual consumers were buying their own
health coverage in an open and competitive market, insurers would
provide a much broader range of choices.
No one is
expecting patients to decide on the most efficient treatment if they are
wheeled on a stretcher into an emergency room. But they can make smart
choices about the health plan and doctors they want to provide them with
care in such a crisis.
Next steps
Those who
advocate a single-payer system are planning new initiatives to leverage
Medicare and Medicaid to create universal socialized medicine in the
United States. Those who want to preserve the private system must
provide positive prescriptions that get real control into the hands of
consumers - without the dictates and terrible loss of freedom
government-run programs entail. Offering tax credits for the purchase of
individually-owned health insurance is the right approach.
The
Galen Institute is a key player in the coming battle. We are producing
conferences, studies, and commentary articles validating the free-market
approach to health care reform. We continue to meet with policymakers on
Capitol Hill and in statehouses around the country to help them
fine-tune their policy initiatives. And we work to build support for
these fresh ideas by educating the general public through forums, media
appearances, and the Internet.
In addition, our book, Empowering Health Care
Consumers through Tax Reform, to be published this spring by the
University of Michigan Press, will demonstrate the solid support among
policy experts for a free-market health care reform
agenda.
Grace-Marie Arnett is president of Galen
Institute, a public policy research organization based in Alexandria,
Virginia. She is the editor of Empowering Health Care
Consumers through Tax Reform, published in 1999 by the University of
Michigan Press.