I believe I am sovereign over my own body, and that I, not the state, have the right and the responsibility to care for it. Because of this, I believe there should be no tax preference for health care spending.
Without preferential tax treatment, the individual gets to define what health care is and make his own spending choices regarding whom to consult and trust regarding his care. With no tax preference for health care spending, there would be a clear distinction between earned dollars spent on health care and “gifted” or unearned dollars.
In a free society, citizens who earn the money and pay the full cost of their care deserve to have their individual rights and freedom of choice fully protected.
More than 70 years ago, before the passage of legislation giving special tax treatment to employer-provided health care benefits, the working men and women of our country were free to choose their own doctors and insurance plans. Any insurance plan the individual owned was portable, with the available benefits clearly spelled out in language easily understood by the insured. Many contracts were guaranteed renewable under conditions known to the insured before entering the agreement.
The insurance benefit dollars provided under the contract could be spent at any doctor’s office or hospital the insured chose, without penalty. At that time, our nation was considered to have the best health care in the world, and health care consumed only 4.7 percent of our gross domestic product (GDP).
Since the passage of the aforementioned legislation, health care costs have risen at more than three times the rate of inflation. Health care now consumes more than 16 percent of GDP, with many experts predicting it could rise to 20 percent. If costs had risen at the overall rate of inflation, health care would still consume only 4.7 percent of GDP.
All the special-interest legislation passed was promoted to the public as making health care more affordable and accessible. What went wrong?
The answer is simple: Our citizens, who earn the money and thus pay the full cost of their health care, lost control over the spending of their earned health care dollars. They were no longer free to choose their own insurance plan or their own doctor. Fees and hospital costs were being determined by third-party power brokers who controlled the money, instead of by competition in the marketplace.
A competitive marketplace is the best arbiter of efficacy, quality, and price. For decades, however, insurers and doctors have not had to compete for the support of each individual, who controlled the payment. We now have a health care payment system in which those paying cash are charged more than anyone else. This is the opposite of what should be.
Cash should command the best price in any setting, since it is the most cost-effective way to conduct business. So, for health care costs to moderate for all, a truly competitive market must be established by restoring primary control to citizens over how health care dollars are spent.
Most citizens regard the elimination of the employment-based exclusion for health care highly improbable because of the huge political and psychological hurdles to overcome. The 180-Degree Theory would take the opposite approach to reform: It would expand the right to exclude health care dollars from taxation to every citizen, rather than eliminating it.
If society deems health care important enough to warrant a tax exclusion, then all citizens should be granted the opportunity to exclude money from taxation for that specific need. In addition, reason dictates there should be an annual cap on the number of dollars that can be excluded from taxation for that specific need.
Tax Benefit Cap
Setting a cap would have several corollary benefits. Defenders of the current system will say extending the right to all citizens will result in a loss of tax revenue, but a cap will counter that argument by limiting the loss of federal tax dollars and spreading excluded dollars to a much higher percentage of people.
In addition, a cap will permit a transition period from our overly expensive, first-dollar, third-party, employment-based coverage to more cost-effective methods of financing health care.
Politicians have been mute about the fact that the current tax exclusion benefits those with the best-paying jobs while denying the same opportunity to other workers. Also, as long as the cost of first-dollar, third-party benefit programs can be completely passed along to employers, employees will be reluctant to consider more cost-effective arrangements for payment.
The dollar value of any employment-based benefit program would apply against the individual cap. If the cost exceeds the cap, payroll and income tax would be paid on those dollars. If it is less, the individual can choose to exclude any amount, up to the difference from income tax, by payroll deduction, having it directly deposited into a health savings account (HSA).
A cap will establish a simple and fair way for married couples to utilize their earned benefit dollars in a more cost-effective manner. If both are earning an employment-based health care benefit, they should be permitted to choose the better of the two programs as their primary insurer. A “proof of insurance” certificate from the primary insurer would permit the spouse to direct that the dollar equivalent of his or her earned health benefit program be directly deposited into a family HSA, or divided between a tax-free contribution to the HSA and taxable income.
These dollars can be used for surcharges, deductibles, and co-pays in the primary plan, accumulate for future needs such as nursing home care, or be used to purchase an insurance product that, in the individual’s opinion, complements his primary plan.
Once a cap is set, those with the best jobs and ability to pay for their care will choose to exclude the maximum. To treat those of lesser means fairly and maximize their opportunity to provide for their own needs, the worker’s portion of the FICA tax on the capped amount should be returned to all citizens by placing it in their HSAs.
That would return earned dollars to those at the lower end of the economic spectrum so they can access a cost-effective primary care physician when the need arises, rather than presenting at the expensive local hospital emergency room.
Whether they are paid directly or with insurance dollars, health care expenses are health care expenses. The most cost-effective payment system has been and should always be cash. Passing the money through an insurance company does not increase the number of dollars available for care–it dilutes them.
If we paid our car insurer to cover oil changes and routine care maintenance, those services would become more expensive, not less. We have too much insurance and of the wrong design, rather than too little. True insurance insures against catastrophic events, not routine needs. It is a “risk sharing” arrangement providing financial security.
Hence, the requirement to have an insurance plan designed and dictated by others in order to have an HSA should be eliminated. In addition, citizens without employment-based health care benefit plans should be permitted to purchase an insurance plan of their choosing, using money from their HSA, with benefit dollars that apply equally at any doctor’s office or hospital. That would make the policy individually owned and portable.
This way, any individual gets to purchase an insurance plan with tax-excluded dollars, just as Fortune 500 company employees do, deciding how much to spend on insurance and how much to save for the direct payment of routine services.
Granting individuals primary control over their money and choice of insurance will give creative new programs, designed to fit well with HSAs, a chance to compete for citizen support.
One must remember that the only thing government can do to make health care more affordable is to refrain from taxing dollars dedicated for that use, leaving more dollars to spend for that need by those who earned them. Any government interference in how the individual spends those dollars in the health care marketplace results in higher overall costs because it decreases competition for those dollars.
The approach suggested here amounts to a uniform tax reduction for all individuals and businesses. The individual can then decide how much income to shelter from income tax for health care needs, by voluntary payroll deduction. All else is welfare, and it is those who are unwilling or unable to provide for their own needs whose care needs to be managed.
Citizens should make sure not to be misled by the latest slogan. So far the consumer-directed health care movement has been driven by employers looking to shift some of their rising health care costs to employees. Any reduction in health care costs attributed to HSAs is the result of individuals no longer overutilizing services, because the savings accrue to the individual. This is a positive effect.
However, not spending money to purchase a good or service does not mean a specific good or service will cost less when needed. It just means there is less of it being purchased. For consumer-directed health care to create more value for the dollar, consumers must control the use of all of their earned health care benefit dollars.
The health care debate has never really been about health care: It is about who is going to control the money spent on health care–those who earn it or others.
Having health care insurance does not mean a person will receive health care when needed. Countries that have adopted government-sponsored, single-payer health care delivery systems are already encountering unaffordable costs. This has resulted in rationing, with many citizens waiting many months for needed care.
Like justice, care delayed can become care denied.
The question for workers becomes: Do you want to take charge of your health care in consultation with someone you choose and trust, or do you want bureaucrats and politicians to dictate what your care will be and when it will be available?
Dr. Roger Beauchamp ([email protected]) is a founding partner and president of Doctor’s Park of Escanaba and a founding partner of Medicenter of Escanaba, a skilled care nursing facility in Michigan.