The House of Representatives will soon consider a menu of proposals to address some of the problems facing America's health care system. While these proposals are well-intentioned, they only make minor structural modifications to the status quo and fail to address the root problem in the system: the continued absence of personal choice and control of health care options. Congress should instead consider a more aggressive and comprehensive approach to reforming America's troubled health care system, including the adoption of a generous system of health care tax credits.
The piecemeal approach to health care reform, often portrayed as eminently practical, is in reality often bereft of long-term goals or vision. Unquestionably, the three policy initiatives before the House of Representatives would offer some relief for individuals and families, but they fall short of the necessary structural reforms that would change what many American families have today into a robust system of consumer choice and free-market competition.
Changes in Flexible Spending Accounts (FSAs)
The most promising of the three House proposals would change Flexible Spending Accounts. The proposed modifications in the "use-it-or-loose-it" restrictions would offer individuals the ability to carry over up to $500 in their FSAs each year. These tax-advantaged account options, offered through an employer, allow employees to set aside pre-tax dollars through salary reduction. The funds in these accounts can be used for medical and dental expense that are not covered by insurance.
However, current regulatory restrictions require that any funds left over at the end of the year must be forfeited to the employer. The forfeiture requirement wrongly implies that these set-aside funds are not the employee's. In addition, the "use-it-or-lose-it" rules create a disincentive for individuals to save for future health care expenses.
While, ideally, employees should be able to carry over all unused funds and/or be allowed to withdraw and pay taxes on the funds, the FSA policy changes in the House proposal are long overdue and would offer greater personal control over health care spending. In this sense, the FSA changes are a welcome injection of the free-market principle of consumer choice and consumer decision-making into the existing structure of employer-sponsored health care coverage.
Medical Malpractice Relief
Medical malpractice is a major and multifaceted problem. The proposed changes in existing medical malpractice laws are well-intentioned and highlight the very serious problems facing doctors and patients in many states. Skyrocketing medical malpractice premiums are contributing to the rising cost of health care and forcing many physicians either to give up treating patients or to exit practice altogether, thus limiting patient access to medical treatment.
The lawsuit crisis in many states has little or nothing to do with increases in bad medical practices but instead results from exotic theories of legal liability, runaway juries, and absurd state tort rulings. Congressional efforts pose legitimate constitutional concerns with malpractice reform efforts that would impose uniform federal solutions to large areas of state tort law. Moreover, efforts by Congress to assert congressional power to overrule bad state tort laws allow that power (at a later date) to overrule good state tort reform laws.
Since the problems of medical malpractice are problems of state law, solutions must rest ultimately in changes in state law. The states remain the best laboratories for tort reform, particularly for medical malpractice claims that involve parties only from within a given state. Congress should strongly encourage states to reform their destructive medical malpractice system in ways that are consistent with the constitutional principle of federalism.
Association Health Plans (AHPs)
The creation of Association Health Plans is designed to expand coverage options for small businesses by allowing them to pool themselves together and to be regulated by the same federal laws as large employers. This, too, is a well-intentioned proposal that attempts to address a major shortcoming of the existing health insurance market. Small businesses are struggling to provide affordable health care coverage options to their employees, if they do so at all. Administrative costs, as well as the over-regulated and mandated state insurance laws, have forced many small businesses to reconsider health insurance altogether.
However, building on the very weaknesses of the status quo only perpetuates the limitations and shortfalls of the current system, in particular the reliance on place of employment or work status as the condition for access to affordable health care coverage. In many cases, locking employees into a system of company-based health insurance denies individuals and families real choices of health plans, benefits, and providers. Moreover, under the current system of employment-based health insurance, persons are deprived of true portability of coverage and individual ownership of their health care policies.
A far better policy for Congress is to focus on enabling small businesses to provide a fixed amount for each employee for individual and family coverage, directly assisting employees in purchasing their own health care coverage. This "defined contribution" approach is a better way to enhance choice. Policymakers could also encourage states to reduce unnecessary mandates and regulations while designing a reliable and consumer-friendly marketplace based on consumer choice and free-market competition.
A Vision for Comprehensive Change
Faced with the burgeoning numbers of uninsured, policymakers must recognize that the current health care system often fails individuals and families, particularly those who work for small businesses and are without insurance. Patchwork proposals based on the status quo offer only marginal assistance.
Instead, policymakers should consider a more fundamental reform of the health care system by fixing the inequitable and inefficient tax treatment of health insurance and encouraging states to design consumer-friendly marketplaces that incorporate a variety of health care options.
Fix the tax treatment of health care. The current federal tax code provides unlimited tax relief for the purchase of health insurance, but only through the place of work. As it turns out, lower-wage workers, particularly those who work in small firms, , who need help the most, get less tax relief than high-wage workers. Moreover, if workers in small firms go outside of the place of work to buy a health plan, they must do so with after-tax dollars, which often makes the cost of a plan prohibitive.
In the short term, offering low-income individuals and families a refundable, advanceable tax credit, as proposed by the President and several Members of Congress from both parties, would enable individuals to obtain their own health care coverage and further promote the efforts to allow businesses, especially small businesses, to provide financial assistance through a defined contribution approach.
In the long term, replacing the employer-based tax exclusion with a national system of refundable health care tax credits, with more help going to individuals and families with higher health care costs and/or lower income, is the better policy option. It would be more effective way to allocate scarce federal resources and undertake fundamental reform the health care system.
Encourage the states to adopt consumer-friendly health insurance markets. Policymakers should also consider ways to encourage states to design a consumer-friendly marketplace. Since states currently regulate the individual and small group insurance market, it is a practical option for states to establish these markets where consumers can shop for coverage that best suits their needs.
Members of the House of Representatives are putting forth a proactive health-related agenda. But while these efforts are praiseworthy, they do not go far enough, either in making substantive changes in the health care system or in offering a clear vision for future health care reform.
Policymakers must recognize that patchwork policies do little to achieve the fundamental restructuring of America's current health care system that is so badly needed. Major changes in the system should not be based on the status quo, but should represent real changes based on personal freedom and free markets. In practice, that means promoting individual choice, true portability of health insurance coverage, and personal ownership of health insurance policies.
Nina Owcharenko is Senior Health Policy Analyst in the Center for Health Policy Studies at The Heritage Foundation.