Improving on an Ambitious Proposal

Published May 1, 2003

The President has laid out an ambitious health care policy agenda that includes substantial revisions in the federal tax code and the federal tax treatment of health insurance. Additional reforms, however, would improve the plan.

1. Permit states to determine the level of tax credit supplement and allow employers to contribute. The Bush proposal allows states to supplement the federal tax credit. However, the plan limits the amount states may contribute and whom they may assist. States should be given the flexibility to leverage all available resources to enhance the federal tax credit as they see fit for their residents. For employees who are not receiving employer-sponsored coverage, regulatory policy should be amended to permit employers to make a contribution on behalf of their employees.

2. Provide a partial tax credit for employer-sponsored health insurance. While a number of uninsured workers do not have access to employer-sponsored coverage, some are offered employer coverage but decline it because of the cost. The Bush plan provides no assistance to low-income families who must make a financial commitment to get insurance through their employer. To promote equity, certain income-eligible individuals should be able to receive a partial tax credit that can be applied to an employer-sponsored policy. This might also encourage some small businesses to offer coverage. According to a recent survey, “75 percent of uninsured small employers said they would consider offering a health plan if the government provided tax credits to workers to help them pay for coverage.”

3. Expand the FSA carryover to include all unused funds. There should be no limit on the carryover amount of unused FSA funds. Monies contributed to an FSA are set aside from the employee’s earned wages. FSA funds are the employee’s money; any unspent dollars in FSA accounts should be carried over year to year. Workers would be able to save for future, unexpected, or uncovered services, instead of trying to guess how much they will spend on medical expenses in a given year.

4. Establish individual ownership of HRAs. Currently, employers control health reimbursement arrangements, including the accounts. While employees are able to carry over unspent funds from the account year to year, when an employee leaves his or her job, the employer controls the account funds. Some employers give their employees access to any funds remaining in the accounts after they leave. But an employer need not do so, so employees have every incentive to “spend down” the funds in the account before separating from the company. That promotes wasteful spending. A better solution would be to give employees control and ownership of these accounts so that, upon their departure, they would be able to maintain the HRA policy on their own and continue to have full access to the account.

5. Expand the use of re-employment accounts for health care-related expenditures. President Bush has proposed establishing re-employment accounts for certain unemployed workers. These would be worth up to $3,000 and could be used to purchase training and supportive services. Since most workers lose their health insurance when they lose their jobs, unemployed workers should also be allowed to use these re-employment accounts to assist with health care-related costs, including premium payments on a health insurance policy, during their period of unemployment.

Robert E. Moffit Ph.D. is director of the Center for Health Policy Studies and Nina Owcharenko is health care policy analyst at The Heritage Foundation.