A Health Care Reform Agenda: Desirable Federal Changes

Published February 1, 2003

John McClaughry is president of the Ethan Allen Institute, a nonprofit research and education organization based in Vermont. This Agenda was produced with financial support and input from the members of State Policy Network, a national support organization for free-market think tanks.

Reprinted below are the group’s recommendations for changes to be made at the federal level to improve health care in the United States. In the second installment of this two-part series, which will appear in the March 2003 issue, we will present the group’s recommendations for state-level reforms.

1. Congress should enact a federal income tax credit for health care expenses.

Consumers, especially those who do not enjoy employer-provided coverage, often lack the means to obtain affordable health insurance. That can be remedied by a federal income tax credit for the purchase of insurance. The credit should be refundable (paid in cash if the credit amount exceeds the consumer’s tax liability); advanceable (made accessible to taxpayers in advance of income tax filing); and inversely proportional to income.

President Bush’s proposal (2002) for a sliding scale credit up to $3,000 for a family of four would dramatically reduce the number of families now without insurance by making it possible for them to afford coverage in a competitive marketplace. It would also dramatically reduce any need for states to expand Medicaid into ever-higher income groups, and reduce state expenditures for that purpose.

2. Congress should encourage individuals and families to create tax-favored Medical Savings Accounts.

Tax-deductible MSAs are available under federal tax law for the self-employed and employees in firms with no more than 50 employees. MSAs are usually coupled with a relatively inexpensive high-deductible major medical insurance policy. Individuals and families can use funds deposited in an MSA to pay for such routine expenses as physical examinations, immunizations, vision care, prescription drugs, dental work, and other medical costs incurred before the insurance policy’s annual deductible is reached.

MSAs give families a financial incentive to use preventive care to maintain wellness. As balances in their MSAs increase, they can switch to higher deductible coverage and pay lower premiums without giving up major medical protection. In addition, many doctors will give up to a 50 percent discount for patients who pay for treatment at the time of service, a practice that an MSA makes easy.

Unfortunately, the restrictions enacted by Congress in 1996 have discouraged MSA use. The federal law should be changed to allow any individual or family to create an MSA regardless of income or employment status; allow employee and third-party contributions; allow carryover of unspent balances to a new year; allow more flexibility in the policy deductible; and make the authorizing legislation permanent.

Similar to MSAs are health care benefits provided by a tax-favored employer-funded Flexible Spending Account (“cafeteria plan”). Through their FSA employees can purchase a number of benefits, including health coverage. However, unspent FSA balances cannot be rolled over into a succeeding year; they revert to the employer. Setting up an FSA plan to meet the detailed IRS requirements involves considerable expertise and cost.

Internal Revenue Service Revenue Ruling 2002-41 in June 2002 authorized a new product similar to an MSA but without some of the MSA restrictions. The ruling allows employers to deduct contributions to employer-owned “Health Reimbursement Arrangements” (HRAs), from which employees are reimbursed for their qualified health expenses. The year-end balance in an HRA can carry over to the ensuing year.

The federal government should rationalize these three similar plans into one unambiguous, simple, flexible plan, readily available to all persons regardless of income or employment status, and allowing carryover of unspent balances for future use for the approved purposes. The operative principle is that all persons in the workforce ought to enjoy tax equity, whether self-employed, retired, employed by a company that provides health benefits, or employed by a company that does not.

3. Congress should enact legislation to create a national legal framework for individuals and families to enroll in Association Health Plans and Individual Membership Association plans.

AHPs are health insurance plans created for associations of small businesses in a number of states. They would be regulated for financial solvency and truthful representation under one federal law instead of the diverse benefit-laden insurance laws of the several states. Each plan would offer various coverage choices to members. AHPs could purchase insurance for their members or be self-funded (liable for payment of claims from their own reserves, bolstered by stop loss insurance to protect against catastrophic claims.)

IMAs would be similar interstate associations created to insure individuals who are members of professional societies, churches, fraternal societies, etc. Both of these multi-state plans would expand affordable choices for consumers and avoid costly state mandates.

4. Congress should enact legislation to override state laws to allow employers to purchase a variety of insurance polices for employees, rather than requiring one group policy covering all employees.

Sec. 106 of the Internal Revenue Code allows employees to choose their health insurance from different carriers, a practice known as “list billing,” and still retain the tax exclusion for the money their employers spend on the insurance. However, most states have passed legislation prohibiting employers from doing so. By ending this practice, employers could allocate a defined contribution for each employee, who then selects a suitable policy from a menu of choices. If the policy costs more than the employer’s defined contribution, the employee pays the difference. The employer serves as the intermediary to manage employee enrollment, bill employees for their share, and remit payments to insurers.

The key to making this policy work is to allow insurers to underwrite each applicant. Those who are medically uninsurable at the time of application should be allowed to enter the state’s high-risk pool, with the employer’s contribution directed to the pool.

5. The federal government should make block grants to the states in lieu of other funding.

Block grants should be used in place of complex Medicaid, SCHIP (state children health insurance program), and DSH (disproportionate share hospital) payments. This would allow states maximum flexibility to design their own programs to assist lower income families, just as the landmark TANF welfare reform act of 1996 did for income support.

6. Congress should pay health care providers the full cost of services provided to Medicare patients.

Cost accounting for health care services is admittedly complicated and involves numerous arbitrary cost allocations. However, it is widely acknowledged that both Medicare and Medicaid reimbursements to providers are well below the market cost of services rendered. This underpayment requires providers to shift costs to other patients who have private-sector insurance. This in turn results in a premium cost increase–in effect an unlegislated tax on private health insurance to subsidize government health care programs.

In addition, chronic and severe underpayment by government programs, coupled with complicated, demanding, and often arbitrary reporting requirements, has become an increasing incentive for health care professionals to simply refuse to treat patients in those programs. Higher levels of government reimbursement to providers should be coupled with substantial simplification of reporting requirements, a reduction in aggressive prosecution for relatively minor and unintentional technical violations, and an end to completely unreasonable “health crime” penalties.

7. Congress should expand Medicare+Choice options within the Medicare program.

Allowing more seniors to apply an average Medicare payment to the purchase of private insurance would give them a range of choices and expand insurance markets.

8. Congress should enact a Medicare prescription drug benefit.

Such a benefit should be designed as an income-based subsidy deposited in the beneficiary’s prescription drug security account, coupled with private insurance for extraordinary costs. The availability of such a benefit would directly reduce state Medicaid costs with respect to dual-eligible patients (principally poor and disabled seniors who benefit from both programs) and beneficiaries of state-financed drug purchase assistance programs. Federal block grants to the states would be adjusted to reflect such reduced spending.

9. Congress should enact medical malpractice reform.

Soaring malpractice judgment awards have seriously raised the costs of medical care (especially for obstetrics-gynecology) and insurance premium costs in many states, and have even driven professionals out of medicine. Corrective federal legislation would include imposing a limit on non-economic and punitive damages and attorney’s fees; ending joint and several liability (where every contributory party is at risk for the entire judgment, regardless of its contribution to the injury); adopting a high tort standard of “gross and willful negligence” in medical malpractice cases, in place of a standard that allows plaintiff victories where the doctor makes a well-informed, rational judgment call that leads to harmful results (especially important for charitable and humanitarian care); and (as in Nebraska) assigning punitive damage awards to state high-risk pools, health information system support, or other public programs instead of to the plaintiff’s attorney. (These steps could also be taken in individual states, but usually fail due to concentrated opposition from the trial bar.)

10. Congress should cap and eventually phase out sec. 105 income tax deductions for employer-sponsored health insurance plans.

This would leave employers to organize a menu of plans, provide information, aggregate employee portfolio groups, and perform administrative duties, but not pay for premiums. Employees would earn higher wages and salaries, make their choice of plans, and pay for the premiums out of their MSAs or other similar tax-favored accounts. Depending on their income levels, employees would have a choice of tax deductibility or a tax credit. This would allow the tax deductibility and credit to vest with the individual employee, and remove the regressive deductibility of employer health care contributions for high-income employees. Employees would own their plans. The plans would be fully portable when the employee changed employers or retired. Balances in the MSA could be assigned to others via gift or bequest.

This proposal is obviously a very fundamental change that will not come easily, as employer-provided health insurance has for 60 years been a major feature of American life. It should, however, be discussed in connection with any comprehensive program of federal tax reform.

For more information …

on the Ethan Allen Institute, visit its Web site at http://www.ethanallen.org or contact John McClaughry by email at [email protected]. For more information on State Policy Network, visit its Web site at http://www.spn.org.