By introducing the Healthy Americans Act (S. 334), Senator Ron
Wyden (D-OR) and his chief co-sponsor, Senator Robert Bennett
(R-UT), have courageously challenged the status quo on the federal
tax treatment of health insurance and public health programs for
the poor. The bill correctly targets the inequitable tax treatment
of health care that favors coverage obtained through the place of
work. It also recognizes the weakness of the existing public health
programs, Medicaid and the State Children's Health Insurance
Program (SCHIP). The bipartisan bill has attracted a dozen
co-sponsors, drawn equally from both parties.
Still, as the chief sponsors point out, the bill is a work in
progress, intended to stimulate discussion. And despite many
attractive tax reform aspects, a troubling feature of the bill is
that it would replace the current health system with one that is
heavily regulated by the federal government: Individuals would have
access only to plans permitted by the government and would be
required to purchase such a plan.
Instead of adopting features of the bill that turn to government
regulation in an effort to squeeze out efficiencies in the system,
lawmakers attracted to tax features of the Wyden-Bennett bill
should look at a better way of achieving efficient and affordable
insurance. Specifically, Congress should replace the existing
system of public and private third-party arrangements with a robust
consumer-based system in which individuals and families, not the
government, are the key decision-makers and change is driven by the
free-market principles of personal choice and genuine
S. 334 would overhaul the American health care system in a
number of ways.
Reforming the Tax Treatment of Insurance. S. 334 tackles
the central flaw in America's health care financing: the
inequitable tax treatment of health insurance. Current law provides
unlimited tax relief for coverage obtained through an employer but
no comparable relief for those who purchase coverage outside their
places of work. A growing number of experts, both liberal and
conservative, recognize that this is a major problem.
S. 334 would replace the current tax preference for
employer-based health coverage with a new individual-based system.
The bill would end the tax exclusion in the personal income tax for
employer-based health insurance benefits and instead use a
combination of subsidies and tax deductions for health insurance.
Individuals and families earning at or below 100 percent of the
federal poverty level (FPL) would receive a subsidy to offset the
full cost of coverage. Individuals and families earning up to 400
percent of the FPL would receive a partial subsidy based on a
sliding scale. In addition, the bill establishes an "above the
line" tax deduction for health care. The deduction begins to phase
out for individuals earning above $62,500 and families earning
above $125,000. It is fully phased out for individuals earning
$125,000 and families earning $250,000.
Comment: The tax reform repealing the unlimited tax
exclusion for employer-based coverage is a bold step in the right
direction, but the new tax structure would replace one inequitable
structure (the exclusion) with another. As noted, only individuals
earning below $125,000 and families earning below $250,000 would
receive relief for health insurance under this plan. Ideally, the
current employer-based tax structure should be replaced with a fair
and equitable universal tax credit. An across-the-board,
fixed-dollar health care tax credit, for example, would offer
every American federal tax relief for health care.
Reforming Public Health Programs. S. 334 would do away
with the current structure of public programs for the poor and the
indigent that segregate low-income Americans into financially
troubled programs. These programs generally deliver lower quality
health care and struggle to meet their obligations. S. 334 would
eliminate Medicaid and SCHIP and mainstream these populations into
the same new system designed for the rest of their fellow
The bill would also extend special protections for these
populations by limiting expenses and providing them with additional
benefits and services.
Comment: In principle, this is good health care policy,
but the legislation should be further refined. Financial assistance
for low-income populations should be direct and transparent, and
any additional services should be based on a specific health need,
not merely on income. Ideally, the Medicaid and SCHIP programs
should be replaced with a system of direct subsidies (vouchers)
that supplement a federal tax credit. Moreover, any additional
benefits and services should be focused only on those in need, such
as the chronically ill or disabled.
Regulating Health Insurance. S. 334 would have the
federal government standardize the entire insurance market. The
federal government would decide, for example, which health plans
are permitted for purchase. The bill would set as its standard
benefits package the dominant health plan in the Federal Employees
Health Benefits Program (FEHBP), the BlueCross BlueShield Plan. In
2007, the plan's estimated annual premium was $4,282 for an
individual and $10,546 for a family.
Comment: S. 334 would increase the role of individuals in
the health care system by replacing the patchwork structure of
public and employer-based coverage with a system of individual
coverage, but it would do so in a way that would actually reduce
personal choice and weaken real competition. Instead of fostering a
consumer-based market driven by the forces of supply and demand in
which where suppliers develop products based on the demands of
their customers, the bill would put in place a regulatory regime to
control the supply of health insurance products.
Many Americans, particularly the young and the uninsured, would
consider the federally designated standard plan to be overly
expensive and comprehensive, for it is marketed to a federal
workforce and retiree population that are comparatively older and
financially better off.
While S. 334 would permit an "actuarial equivalent" option for
the standard benefits package, the federal government would still
be in the unprecedented position of dictating the overall value of
the health plan available to Americans in every part of the
country. In other words, no private health plan could offer a
benefit package that would not meet the average cost of the
BlueCross BlueShield Plan.
The dependence on standardization as a means to drive down costs
completely rejects the fundamental market principle that open
competition produces better quality at lower prices. Moreover, such
standardization undermines personal choice and market innovation. A
better policy would enable insurers to design and develop products
that meet the demands of the consumer and compete directly for
customers based on the quality and price of those products.
Imposing Federal Mandates. S. 334 establishes a series of
"shared responsibility" provisions. These new responsibilities are
best described as mandates. First, the bill would put in place a
requirement for individuals to purchase coverage under this new
system. The coverage, as described earlier, is set and controlled
by the federal government and offers no real choice for individuals
to pick a plan that best suits their needs. The purchase of this
coverage is enforced through the Internal Revenue Service (IRS).
Under the bill, the IRS would automatically deduct an individual's
share of the premium.
S. 334 would also require employers to pay into this new system.
Currently, employers voluntarily decide to provide and contribute
to their employees' health insurance. The bill would set in place
an employer payment schedule based on the number of employees,
employer revenue, and an average plan premium. This amounts to a
tax on employers to fund this new heath structure.
In addition to standardizing insurance products, the bill would
put in place a series of new benefit and regulatory requirements on
insurers. These changes would further standardize insurance
products, leaving little if any distinction between plan options,
and would require insurers to meet new federal rules and
definitions. Essentially, it would transfer authority over the
regulation of health insurance from the states to the federal
After defining, designing, and dictating the structure of a new
health care system, the bill would pass the implementation and
operation of this federal structure on to the states. Although
there is a federal default mechanism, the assumption is that states
would be the primary administrators for much of the bill. This
would undermine state authority over health insurance.
Comment. Instead of having the federal government force
participation among stakeholders, a better approach would be to
craft policies that directly empower individuals, employers,
insurers, and states to help fix the health care system. A broader
range of private coverage options and a fairer tax code would
create the right incentives for individuals to purchase their own
coverage, give employers more flexibility in funding coverage for
their employees, offer insurers the ability to design innovative
products, and encourage states to reform their health insurance
markets in a market-oriented direction that reflects the unique
circumstances and distinct differences of individual states.
Senators Wyden and Bennett and their co-sponsors should be
commended for their willingness to put forth a comprehensive
proposal to address the shortfalls in the current system, but the
legislation needs significant changes if it is to be successful.
The proposal's major problems are rooted in its sweeping and
heavy-handed federal control over the insurance markets and its
replacement of one tax inequity with another. Beyond these
shortcomings are other unpleasant policy surprises such as the
establishment of Medicare pricing over prescription drugs,
permitting prescription drug reimportation, and even mandating that
health insurers must cover abortion services.
Senators Wyden and Bennett are not alone in recognizing that the
status quo is unacceptable. Other lawmakers, such as Senator Tom
Coburn (R-OK) and Representative Tom Price (R-GA), have also
introduced legislation that would reform the tax treatment of
health insurance but without many of the problematic features of
the Wyden-Bennett bill.
Congress should seize this opportunity to engage in a bipartisan
fashion to improve the health care system. Members should forge a
coalition based on shared principles to push the debate forward on
comprehensive health care reform.
Nina Owcharenko is
Senior Policy Analyst for Health Care in the Center for Health
Policy Studies at The Heritage Foundation.