Health Care Reforming: Problem With Tax-Exempt Health Insurance

Health Care Reforming: Problem With Tax-Exempt Health Insurance. In this installment of Health Care Watch, Stuart M. Butler and Ezekiel Emanuel talk about what the candidates are saying about taxes and employer-sponsored health care coverage. Go to Mr. Butler’s post.

Ezekiel Emanuel, an oncologist, is the chairman of the department of bioethics at the Clinical Center of the National Institutes of Health. He is the author of “Health Care, Guaranteed: A Simple, Secure Solution for America.”(Full biography.)

Decisions made more than half a century ago are a large cause of today’s health care mess. During World War II, the War Labor Board ruled that fringe benefits, like health insurance, did not violate wage and price controls. Then, in the mid-1950s, employer provided health insurance was made tax exempt. Thus, $1 in health insurance, which was not taxed, became worth more than $1 in income, which was taxed. The result is that today’s health care system relies on employers to provide coverage and encourages more and more health insurance and spending.

Stuart Butler is right. Almost everyone who examines the issue — both conservative and liberal policy wonks, doctors, economists, lawyers and politicians — believes this tax exemption is a grievous error.

It is inequitable. It gives more benefit to the rich because their tax rate is higher. For instance, the Lewin consulting group estimated that for the exact same family health insurance package, an executive making more than $100,000 per year gets nearly $3,000 in tax benefits, while a blue-collar worker making less than $30,000, it is under $750. In addition, richer people tend to get bigger and more expensive health insurance packages from their employers, so they get more “freebies.”

It is also inefficient. The tax exemption provides an incentive for people to take more health insurance rather than wages, spending more on M.R.I.’s instead of other goods and services, like education or vacations.

This tax deduction is not free. Tax deductions are subsidies. This one costs more than $210 billion per year. It is the single largest tax break in the United States and dwarfs the mortgage interest deduction. Make no mistake, when the Treasury collects less taxes in one area, it must make up for it either in higher taxes somewhere else or in more debt on our children and grandchildren.

Thus, John McCain’s proposal to eliminate the tax exemption for health insurance is good policy. (About a year ago, President Bush made the same proposal.) The problem is having built the whole health care system around tax exemption, we simply can’t get rid of it without combining it with some other policies. And, as Mr. Butler acknowledges, this is where John McCain’s reform proposals — and President Bush’s proposal earlier — gets it very, very wrong.

First, every dollar collected from capping or eliminating the tax exemption on health insurance must be directly linked to providing health coverage for the 47 million uninsured Americans. I propose beginning with uninsured children and their families. The Congressional Budget Office recently estimated that if we limit the tax exemption to the average cost of a family health insurance plan, about $12,000 per year, (so anyone with insurance worth say $20,000 would pay taxes on the extra $8,000) the federal government could reap more than $25 billion. This is a great and equitable financing mechanism. A lot better than payroll taxes for instance. Mr. McCain does not propose such a mechanism.

Second, capping or eliminating the tax exemption must also be linked to improving the insurance market. As I mentioned in my previous posting, the insurance market in the United States is broken. It wastes more than $70 billion a year, and is cruel and expensive to individuals and small businesses, especially if they have had any serious medical condition. If we are going to reduce the incentive for employer-sponsored health insurance, we need a safe, secure and affordable place for people to buy insurance. Mr. McCain does not propose such insurance market reforms.

Where is the opposition to rationalizing this unfair and inefficient tax exemption?

First, rich people. They like the great tax deduction for their expensive executive physicals and platinum-plated health insurance.

Second, employers. They like to claim they are generously giving their workers gold-plated health insurance. And it seems like a great deal, because the worker gets this benefit without having to pay taxes. The problem: workers are really paying for this insurance by lower wages.

Third, unions. With the tax exemption, many unions have negotiated munificent health insurance benefits for their workers. They would hate to see these hard fought benefits taxed. Capping the tax exemption would make them focus less on health care and more on wages. Which do workers need more of now: gold-plated health insurance or wages?

This opposition does not make the tax exemption fair or good policy. For Democrats to do the right thing will mean they will have to take on their supporters in unions. This can be made politically easier by initially capping but not eliminating the tax exemption, emphasizing that the main group hit by the change will be the rich with excessive health benefits, and directly linking it to covering the uninsured. It is hard to claim that a worker needs a tax-exempt $25,000 health insurance plan instead of $12,000 coverage, while a poor child or a minimum wage full-time worker gets no health insurance.

WARNING!! As the history of employer-based health insurance shows, health policies made quickly, for political expediency, can often be disastrous and stick around for decades, compounding the problems they create. As the next administration begins the process of health care reform, it needs to avoid the temptation of just any deal to expand coverage. It must ensure the deal is sustainable — that it is not a fiscal black hole, that it does not perpetuate a broken delivery system, and that it does not provide strong incentives for ever more services, haphazard quality and marginal value. Fortunately, there is no need for seat-of-the-pants policy making. There has been a lot of deep thinking to call upon about how to restructure the health system to make it more fair and efficient.

Health Care Reforming: Problem With Tax-Exempt Health Insurance. In this installment of Health Care Watch, Stuart M. Butler and Ezekiel Emanuel talk about what the candidates are saying about taxes and employer-sponsored health care coverage. Go to Mr. Butler’s post. Editing by Chrisina White

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