The Heritage Foundation

Executive Summary #1189es on Health Care

June 8, 1998

June 8, 1998 | Executive Summary on Health Care

BG1189es:Why Tax Reform is the Key to Health Care Reform

After the passage of a spate of new federal benefit and regulatory requirements on health plans and the expansion of Medicaid through the new State Child Health Insurance Program (S-CHIP), House Speaker Newt Gingrich (R-GA) recently challenged Members of Congress to go back to the drawing board. In a conversation with the members of the health care task force he appointed last January to respond to efforts to regulate the health insurance market further, Speaker Gingrich asked them to develop a health care proposal that was positive, bold, and embraced "21st-century thinking." Encouragingly, there is growing sentiment among some Members of Congress and the public that consumer choice, rather than new regulation, should characterize America's health care delivery system.

One sign of this growing support is the number of recent proposals--from legislators as diverse as Senator Barbara Boxer (D-CA) and House Ways and Means Chairman Bill Archer (R-TX)--to allow individuals without employment-based health coverage to deduct all or a portion of their health insurance premiums from their annual tax bills. Senate Finance Committee chairman William Roth (R-DE) has indicated his intention to offer a similar amendment to the tobacco legislation under consideration by the full Senate. This deduction would give Americans far more choice by making it financially possible to enroll in non-employment based plans.

Obviously, positive and bold health care reform is necessary. Consider the problems plaguing the health care system: (1) Employer-based coverage erodes steadily; (2) employers pass increased health costs on to their employees more often; (3) the number of uninsured continues to grow; (4) consumers increasingly are becoming concerned about the "quality" of their health care; and (5) health care providers have become frustrated with bureaucratic controls.

These problems can be linked directly or indirectly to one antagonist--the tax code. Because current law treats employer-purchased health coverage as a tax-free benefit for employees, a vast majority of Americans receive private health insurance coverage through their employers. Coverage obtained outside the place of employment normally is fully taxed. Such tax policy denies families offered employment-based insurance the ability to choose an alternative and own their health coverage. Current tax law also imposes a huge disadvantage on workers whose employers do not offer employment-based health coverage: They are unable to enjoy the advantages of purchasing health coverage through a larger group. And if they choose to purchase individual coverage for their family, they must do so with their after-tax, take-home pay.

If legislators are serious about enacting reforms to address these problems, they must combine meaningful tax reform with efforts to create a true marketplace for consumers. To that end, Congress should:

  • Start leveling the playing field for families without employer-provided health coverage by allowing them to deduct the cost of health coverage they purchase on their own. The tax consequences of purchasing $3,000 worth of health insurance can vary, as Chart 1 illustrates.

  • Give families the ability to choose from a variety of competing health plans, with different benefits at different prices. Consumers have few affordable options in the health care marketplace. To create a competitive market, less regulation--not more--is needed. Members of Congress, their families, and their staffs enjoy the benefits of a consumer choice health care market in the Federal Employees Health Benefit Plan (FEHBP). The FEHBP's success in holding down costs and maintaining consumer satisfaction is rooted in its simplicity. House Commerce Committee chairman Thomas J. Bliley (R-VA) wants workers in private firms, particularly small businesses, to have choices similar to those that federal employees enjoy in the FEHBP. He has proposed "HealthMarts," voluntary purchasing cooperatives that would contract with a variety of different health plans preempted from state-mandated benefit laws, and that allow employees to choose from those plans based on price and benefit packages.

If the terms of the current health care debate continue to be defined by those who believe there are objective government-prescribed criteria for determining "quality," and that "consumer choice" means mandating certain benefits, then this debate will prove futile. Congress should not miss the opportunity to take up Speaker Gingrich's challenge and make bold and positive reforms of the health care system. Allowing individuals who lack access to employer-provided health coverage to deduct their health care costs from their income taxes and creating a more consumer-friendly health insurance marketplace is a good start.

Carrie J. Gavora is the former Health Care Policy Analyst at The Heritage Foundation.

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