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 through the cracks between 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.
This article, part 2 in a two-part series, picks up on last month’s description of the Consensus Group’s vision for consumer-driven health care reform based upon tax reform. The principles and recommendations outlined in part 1 are integral to the market-based proposals for health care reform outlined here, in part 2. The group is in unanimous agreement on the nature of the problem, and consensus on direction indicated by the recommendations for reform.
RECOMMENDATIONS FOR CHANGE
The following are policy recommendations of the Consensus Group. These recommendations and the principles upon which they are based can provide a powerful guide for the policymaking process in achieving important goals of health care reform. They are not intended to provide a complete blueprint for reform, and reasonable men and women may differ over the details of how they should be implemented.
We believe that following these recommendations will lead to a system in which costs will be restrained, private insurance coverage will expand rather than continue to contract, and quality will be enhanced primarily through additional competition and better consumer incentives.
The Basic Goal
Every American should be able to obtain needed medical care. Reforming the tax treatment of health insurance is central to achieving this goal. Congress could begin by providing a new set of incentives for people who do not have health insurance. These incentives should be properly structured to create an opportunity for everyone to purchase his or her own health coverage in an open and competitive market.
The Principled, Responsible Alternative
We recommend providing credits or other comparable fixed incentives, explicitly determined by legislation, to assist people in obtaining private health insurance. The size of the incentives will depend on how much taxpayer money lawmakers deem to be available. it can be structured in different ways.
Options
Credits or other fixed incentives could be used to purchase private group or individual health coverage, in combination with medical savings accounts for those who choose them.
If tax credits are provided, they could be refundable, over and above the Earned Income Tax Credit.
The size of the credit or alternate financial incentive could be adjusted to reflect risk or need, or it could be used to buy into a high-risk pool. These adjustments should be made while minimizing their effect on marginal tax rates.
To expand access to coverage, state mandated benefit laws could be preempted for insurance purchased with federal assistance, thus allowing a broader range of more affordable insurance products.
Benefits of this Approach
- Millions of Americans not eligible for the current tax subsidy would receive help in purchasing health insurance.
- Assistance can be targeted to those who do not have health insurance.
- It can be targeted to those in specific age, income, or other categories which legislators deem most worthy of the assistance.
- It gives individuals more choice as to where they obtain health insurance.
- It allows individuals the opportunity to select the kind of health coverage that best suits their needs.
- It helps to minimize distortions in the marketplace.
- It is more equitable across income groups.
- The subsidy does not expand when an individual purchases more expensive insurance.
- It is available whether an individual’s insurance is organized through employment-based groups or elsewhere. The role of employers in assisting employees to obtain health insurance could be maintained by each employer, if the company so desired.
Key Decisions
Some of the many questions that must be addressed: How much money should the federal government spend on the incentive?
- How much will it be worth, to individuals and families?
- Who will be eligible?
- Does the amount vary with income?
- How will risk adjustments be structured to keep policies affordable?
- How does one define what level of coverage must be purchased to qualify for the assistance?
- How will compliance be monitored and enforced?
GUIDELINES FOR A MORE EFFICIENT AND EQUITABLE SYSTEM
The following guidelines will help lawmakers in making policy decisions about reforming the tax treatment of employment-based health insurance to promote a more efficient market in the health sector. Incentives for purchasing health insurance should be provided directly to individuals and families.
This assistance could be in the form of credits or other incentives to be used to purchase medical services or health coverage. Employer groups are efficient mechanisms for the pooling of risk, and some proposals would have employers offer plans on which the individual credit could be spent. However, the money also could be used to obtain coverage in a variety of other ways, either individually or through participation in groups, such as health plans sponsored by unions, trade or fraternal organizations, schools, or churches.
Incentives for purchasing health coverage or medical services should not be provided through open-ended tax preferences or defined in terms of covered services, but rather should be limited to a fixed dollar amount, which could be adjusted over time through legislation and also adjusted by an individual’s income and risk factors.
To eliminate the distortions in the current system and to provide even broader access to coverage, policymakers should consider capping or eliminating the tax exclusion for employment-based health benefits. By simultaneously providing offsetting assistance to individuals, the changes we recommend need not result in an increase in the tax burden for the American people and could even reduce taxes.
In view of concerns about the complexity of the income tax system, it should be noted that there are alternative administrative options available and that there is no necessary conflict in theory or in practice between the provision of a health care incentive and simplification of the income tax. The incentive could take many forms: direct assistance which is administered through a standalone outlay program or as part of other incentive programs; in conjunction with the payroll tax; or, as now, via the income tax.
Health insurers and health plans should have the flexibility to offer rewards and incentives for healthy lifestyles.
Reform of the Medicare system should expand private-sector options for beneficiaries. Medicare benefits should be defined in terms of a risk-adjusted dollar amounts, not in terms of an open entitlement to covered services.
Beneficiaries should be able to elect to participate in traditional Medicare or to privately purchase health coverage or medical services of their choice.
Medicaid beneficiaries should be incorporated into the private health care system envisioned by these principles. Beneficiaries also should be able to purchase health coverage through the private sector. just as with Medicare, Medicaid benefits should be defined in terms of a dollar amount, not an open entitlement to covered services.
