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Health Care Costs

PERSPECTIVE

Right Diagnosis, Wrong Prescription

Problems of the tax break. Most of the tax expenditure arises because any part of an employee’s compensation provided in the form of employer-sponsored health insurance is free of all taxes. This is known as a "tax exclusion." As the authors explain, the tax benefit is huge both in the aggregate and for upper-income employees (with high marginal tax rates). Meanwhile, lower-income working Americans get little or no tax benefit.

The annual value of this benefit also increases automatically and generally unnoticed as premiums and spending rise. According to John Sheils of the Lewin Group, the Lewin Health Benefits Simulation Model indicates that the total tax expenditure (including income tax, FICA exclusions, and the other tax breaks mentioned by the authors) will increase in 2002 by nearly $14 billion at the federal level, with another $1 billion in state tax expenditures.¹ That figure is far larger than any major congressional proposal to finance coverage for the uninsured.

The effects of the tax break actually are more perverse than the authors state. Besides the problems they cite, most employees can receive the tax break only for insurance, not for out-of-pocket costs (unless they qualify for flexible spending accounts or other minor tax breaks on direct health spending). So the incentive is to press for much health spending to be processed inappropriately as "insurance." The result: many inefficient claims for small, routine, and predictable expenses for which the hidden administrative cost of processing the claim is far higher than its payment.

To obtain the large tax break, working Americans must put major health insurance decisions into the hands of their employers. It should be no surprise, then, that uninsurance is concentrated among employees in small businesses, where the owners are least inclined to take on the burden of organizing coverage.

So what is the solution? The authors say to take away the current federal tax break—now valued at almost $140 billion a year—and use the money to finance national health insurance. Many of us on the conservative side of the spectrum would go along with that if it meant redirecting the tax expenditures to achieve universal coverage in an equitable and efficient manner. But Woolhandler and Himmelstein argue for reaching that goal through a single-payer, government-run system. This is not the place to debate that solution. Suffice it to say that working Americans have vigorously opposed the two central parts of their approach: eliminating a tax break worth more than $1,000 to the average family; and handing over control of health coverage to the government.

Another route. Another route to universal coverage, however, would be gradually to convert the tax exclusion and other tax breaks into a refundable tax credit for health expenses. This is consistent with bipartisan proposals in Congress, although ultimately more sweeping. Converting the exclusion to a refundable credit would do several things. Among these, it would provide a far larger subsidy to lower-income families while reducing the subsidy for upper-income people—something the authors would no doubt find agreeable. Furthermore, the credit could be used for employer-sponsored coverage, as today, yet it would also be available to families without such coverage, enabling them to obtain coverage of their choice. No longer would financial assistance always mean handing over control of one’s health coverage to someone else.

These features of the tax-reform approach to national health insurance make it far more politically palatable than the approach advocated by Woolhandler and Himmelstein, as well as more likely to achieve the range and quality of care expected by working Americans. An attractive feature of this approach for most Americans is that things would not seem to change much, even though they would obtain a tax break in a slightly different manner. Americans with insurance may grumble about the current system, but they oppose radical change. Yet for those left out of the current system, the change would be profound and very welcome, enabling them at last to afford coverage. And for every working family there would be a subtle but profound change: a gradual shift away from a subsidy system that is indeed privately controlled but controlled largely by employers rather than by patients. But the shift would not be toward control by the government, as Woolhandler and Himmelstein desire, but toward control by families.

Editor's Notes

 
Stuart Butler is vice-president for domestic and economic policy studies at the Heritage Foundation in Washington, D.C.

NOTE

Top NOTE

 

1. John Sheils, vice-president, Lewin Group, personal communication, 4 April 2002.

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