The State of Health Care

Report Health Care Reform

The State of Health Care

January 21, 2004 4 min read

Authors: Nina Owcharenko, Derek Hunter and Robert Moffit

In his State of the Union address, President George W. Bush declared, "A government run health care system is the wrong prescription. By keeping costs under control, expanding access, and helping more Americans afford coverage, we will preserve the system of private medicine that makes America's health care system the best in the world." In furtherance of this agenda, the President outlined a series of health policy measures: tax free insurance premiums for the new Health Savings Accounts, refundable tax credits for the uninsured, the creation of association health plans, and $100 million for demonstrations in health care information technology.

Health Savings Accounts

With the recent enactment of a provision of the Medicare law, Health Savings Accounts are available to the under-65 population, an estimated 250 million Americans. Under the terms of the law, individuals can contribute up to $2600 and families up to $5,150 in a health savings account, accompanied by an insurance policy with a deductible of at least $1000 for an individual and $2000 for a family policy. The account can earn interest tax free, and any unused funds can be rolled over year to year and accumulate tax-free. The funds can be used for out of pocket medical expenses, insurance premiums during spells of unemployment, and medical expenses in retirement.

Martin Feldstein, professor of economics at Harvard University, says that the HSA provision may well be "the most important legislation" of 2003. It dramatically reforms the tax treatment of medical expenses, establishes portability of coverage, creates powerful incentives for doctors and patients to avoid wasteful spending, and restores a doctor-patient relationship free of third party interference in the financing and delivery of medical care. While the President's proposal to allow full deduction for the catastrophic insurance accompanying HSAs will help solidify their attractiveness, it also highlights the pressing need for further reform of the tax treatment of health insurance and the regulation of insurance products.

Health Care Tax Credits

To tackle the challenges of the uninsured, the President offers a tax credit to individuals without access to employer-based coverage. The President's proposal, similar to previous years, would be income-based and on a sliding scale, providing tax credits of up to $1000 per individual and $3000 per family. The credit should be refundable, meaning even those that owe no taxes would qualify for assistance, and advance-able, so that the credit can be applied directly to health care premiums.

Health care tax credits can be an effective and efficient way to help lower-income individuals and families to purchase and own private health care policies. As recent research has shown, Americans already spend an estimated $35 billion in uncompensated care for the uninsured. Furthermore, a universal tax credit approach could help create a seamless health care system for individuals. So that, regardless of one's work or work status, an individual could receive a tax break, similar to the one they receive through the employer-based system, for purchasing and maintaining their own health care policy. In addition to tax credits, the federal government should encourage states to develop affordable, private coverage options to which individuals can apply the credit.

Association Health Plans (AHPs)

To address the pressures small businesses face in growing health care costs, the President proposes the establishment of Association Health Plans.

This initiative would allow individuals and groups to purchase health insurance from an association of which they are a member. These associations, meeting solvency and other administrative requirements, would be able to leverage volume through their memberships and offer health insurance that is federally regulated, similar to how large employers operate their health benefits programs.

The proposal is focused on offering small employers an alternative to costly, state-regulated health care policies. While AHPs would provide relief to small businesses, the federal government should also encourage states to undo costly regulations and establish a more market friendly environment for small businesses and individuals. Furthermore, recognizing that employer-based health care does not work for everyone, the federal government should also emphasize non-employment based opportunities under AHPs that could lead to more choices, individual ownership, and real portability of health care policies.

Medical Malpractice Reform

The President correctly highlights the issue of medical malpractice reform again for 2004. Medical malpractice premiums are skyrocketing, contributing to the rising cost of health care and forcing many physicians to give up treating patients, or driving them out of their practices altogether, thus limiting patients access to medical treatment. As the President acknowledged, the lawsuit crisis in many states has little or nothing to do with increases in bad medical practices, but often results from exotic theories of legal liability, runaway juries, and absurd state tort rulings.

States are the best laboratories for tort reform, particularly for medical malpractice claims that involve parties from only one state. Congress can play a crucial role in passing the class action reform legislation that has been pending for several years, but there are legitimate Constitutional concerns with some malpractice reforms that would impose uniform federal solutions to large areas of state tort law. The asserted congressional power to overrule bad state tort laws presupposes the power (at a later date) to overrule the state tort reform laws that are good. Nonetheless, Congress should strongly encourage states to reform their destructive medical malpractice system in ways that are consistent with the Constitutional principle of federalism.


The President celebrated the enactment of the new Medicare law, and directly issued a veto threat against any Congressional proposal that would "attempt to limit the choices of our seniors, or to take away their prescription drug coverage under Medicare."

While the new Medicare law contains certain desirable features, including the provision of a drug discount card, help for low income seniors and an improvement of private plan competition under the "Medicare Advantage" system in 2006, Congress cannot ignore the coming explosion in Medicare costs and un-funded liabilities, sharply aggravated by the creation of a massive drug entitlement. Nor can Congress ignore the displacement of existing private drug coverage or the acceleration of the loss of employer-based retiree drug coverage. Moreover, the final version of the Medicare law scuttled the crucial House reform, scheduled to take effect in 2010, that would have created a strong competitive system modeled on the superior federal employees' program, and substituted instead a weak and vulnerable "premium support" demonstration project confined to six metropolitan areas.

Members of Congress are profoundly mistaken if they believe that the new Medicare law enables them to escape the coming Medicare crisis, particularly when the baby boom generation starts retiring in just seven years.


Nina Owcharenko

Former Director, Center for Health Policy Studies

Derek Hunter

Former Research Assistant

Robert Moffit

Senior Fellow