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m July 20,1990 INTRODUCI'ION De mands are growing for reform of America's health care system.To be sure, the quality of care available in the United States surpasses that of any other nation. Still, as many as 37 million Americans are without health insur z~llce during at least part of any year. Millions more have insurance that pays for routine care, but would not cover the catastrophic financial impact of a prolonged, serious illness. Even those with adequate insurance provided through their place of work face increases in out-of-pocke t charges, or cutbacks in coverage for family members, as employers try to contain surging insurance costs. Insurance com panies complain that physicians persistently order unnecessary tests and pro cedures. Physicians complain that insurance company offi cials are interfering with the practice of good medical care.The result a $600 billion health care system with which nobody, it seems, is happy. Disenchantment with the system has spawned several high level-govem ment task forces and commissions charged wi th finding ways to improve U.S health care.The ideas being considered by these bodies are in three broad categories Social insurance programs, based on the Canadian system.These would provide every American with universal access to a comprehensive package of health senrices, dictated and paid for by government and financed through taxation Employer mandates.?hese would require all employers either to pro vide at least a standard package of health insurance to employees and theirfamilies, or to pay into a f u nd to finance insurance for families not covered at the place of work. This often is referred to as the play or pay approach Consumer-based systems. In these, changes in the tax treatment of health care purchases would provide families with the funds to b u y adequate insurance and medical care directly, rather than depending on their em ployer or a government program. Such a consumer-based proposal was un veiled-last year-by The Heritage Foundation In the vigorous debate between proponents of these rival pr o posals, ques tions are raised about each approach. Close examination of the Canadian sys tem, for example, reveals not only that it holds down health costs by systemat ically rationing care, but also that costs have been controlled far less than commonly believed? Similarly, the mandated employer benefits proposal has encountered strong opposition from businesses, who claim that it rapidly will escalate company health costs, prompting layoffs and undercutting U.S global competitiveness. Concerns also have been raised regarding the Heritage Foundation pro posal. Examples Are families typically capable of making informed decisions when purchasing health insurance or medical services? Would not insurance companies tend to compete only for healthy families nee ding fewer services leaving higher risk families with enormous premiums to pay? Would Ameri cans accept such a seemingly radical change in their health care financing sys tem? While these and others are legitimate concerns, they are fully addressed in the Heritage proposal. Indeed, the Heritage proposal is the only one ad vanced to date that would assure affordable access to health care for all Americans with little or no additional cost to the federal Treasury and with built-in, market-driven incentives t o keep costs under control THE GOALS OF HEALTH CARE REFORM While there are differences of opinion on the details of what an ideal health care system would achieve, four features are broadly accepted as goals of such a system 1) The system should assure aff o rdable access to adequate health care for all Americans 1 Stuart M. Butler and Edmund F. Haislmaier (editors A National Health System forAmerica (Washington D.C The Heritage Foundation, 1989 see also Butler, Assuring Health Care for AU Americans, Henuge L ectures No. 218, October 2,1989 2 Michael Walker, Why Canadas Health Care System Is No Cure for Americas Ills, Heritage Foundation International Briejing No. 19, November 13,1989. I 2 The notion that all citizens should be able to obtain adequate health ca re services at reasonable cost to the family budget is the central feature of most Americans picture of an ideal system 2) The system should contain incentives to economize The rapidly rising cost of todays health system has led lawmakers to insist that a n y serious reform must contain strong incentives to economize and keep costs under control -without cost becoming-a barrier to necessary care 3) Government help should go mainly to those who need it most, as mea sured by income or medical condition Many so c ialist countries base their health systems on the doctrine that gov ernment should provide the same quality and quantity of care to rich and poor alike. In the U.S however, it is generally accepted that the more needy a family is, in terms of the cost of n ecessary medical care compared with the familys income, the more governmental help that family should receive 4) As far as possible, crucial medical decisions should be made by the pa tient and his or her physician In addressing such basic medical questio n s as whether a major operation shall be performed, or who shall perform that operation, or how much shall be done to save a baby born prematurely, most Americans feel that these de cisions should be made as much as possible by the individuals directly con cerned. It is they, it is broadly believed, who should have the right to weigh the benefits and the risks, with proper medical advice and with some atten tion to the costs involved.These decisions are not to be left to some distant of ficial whose life is not on the line Why the Current System Does Not Reach These Goals The current health care system does not achieve these or many other goals. Most of the uninsured, and even many of those with basic insurance, find they cannot afford certain necessary heal th services Few would contend, more over, that the current system promotes efficient use of medical services. It seems unfair to many Americans that affluent workers and top executives enjoy unlimited tax-free medical services through their companies, whi le low paid workers in other firms have no company insurance, and get no help from the tax code to offset the cost of buying the most basic services or insurance. And there is growing anxiety that basic medical decisions are being made by distant governmen t or insurance company officials, or in response to rules de termined by such officials. Thus elderly Americans, for instance, fear they may be dumped by a hospital because the hospital considers the Medicare reimbursement rate to be too low; unionized wo r kers strike against the at tempts of company health benefits managers to limit coverage for families mothers of newborn babies grumble that insurance companies refuse to cover more than three days in hospital after the birth 3 These shortcomings of the sy s tem have a common root: the powerful, per verse incentives created by the tax treatment of health care spending. Under the federal tax code, company-provided health services and insurance plans are excludable from each workers taxable income. For example, if a workers compensation is an mual cash salary of $25,000 plus $3,000 in the form of a company-paid health plan, for a total of 28,000, that worker pays income and payroll taxes on only 25,000 of incorne.This makes the health plan, in ef fect, tax-deduc t ible at the workers marginal rate of tax. If the firm does not provide a health plan, however, the worker can only obtain tax relief to the ex tent that his familys health expenses exceed 7.5 percent of adjusted gross in come, and then only if the family itemizes its tax return. Most self-employed individuals can claim tax relief on just 25 percent of their health insurance Costs. This tax treatment means that the lions share of tax relief goes to higher paid employees with generous health plans. Meanwhile , casual workers or those in small firms without plans, who tend to incur relatively high medical costs compared with their income, typically receive no tax relief at all. When these latter workers buy health insurance they must do so with after-tax dol l ars, and normally they must pay relatively high premiums for individual cov erage. It is little wonder that so many of these workers and their families lack insurance boost total health costs, encourages inefficiency, and provokes labor disputes. Company p lans, for example, have grown rapidly in recent decades for under standable reasons: both management and labor have favored contracts that offer more compensation in the form of tax-free health insurance than in the form of taxable cash. This means that f o r most Americans, in terms of after tax dollars, it costs less to buy health care than to buy other goods and services even if both carry exactly the same price tag. The result: workers tend to de mand far more, often non-essential, health services than t h ey would choose were they to pay for them in after-tax dollars. In addition, many workers and their unions have pressed employers to include routine, minor services in health plans because that allows these services to be paid for with pre-tax dol lars. B y contrast, workers tend to be less inclined to press for insurance cover ing highly unlikely, but financially crippling, medical situations. Thus many American workers have very generous and expensive health plans, yet lack catastrophic insurance In the m i nds of most workers, these company-paid plans, like other fringe benefits, seem to be free even though an employer rightly treats health in surance as part of the overall compensation.Thus there is little or no incen tive for workers to curb their demands for health services or to question hos pital or physician prices, especially if deductibles and copayments in the plans are small. This has several effects. A lack of any real incentive to economize is, of course, a recipe for health care cost inflation, and indeed the cost of medical Free Fringe Benefit. The tax treatment of health spending also helps I 4 care for years has been rising at roughly double the average inflation rate This means, of course, higher prices for those who do not have company-pro v ided insurance and consequently reduces their ability to obtain medical care. Meanwhile, corporate efforts to constrain rising health costs by increas ing the employees share of costs normally are strongly resisted by workers who see these direct payments as a cut in pay, forcing them to pay in after-tax dollars for care that previously was free. Bitter strikes over company at tempts to.scale back health benefits are.an increasingly common feature of labor disputes Why Mandated Benefits or a Canadian Syste m Is No Answer to These Problems Neither a mandate on all employers to play or pay, nor a Canadian-style universal social insurance program would solve all these problems, or achieve the four basic objectives of an ideal health system. Moreover, in many im por tant ways, each would be less attractive than Americas current system. Under employer mandates or a Canadian system the government would legislate a right of access to a certain level of health care, through the private sector in the first &e and the p ublic sector in the second. But to control total costs, various regulations would be imposed by bureaucrats to restrict that supposed right of access. Such regulation would be necessary because the illu sion of virtually free care would encourage far more demand for services than companies or the government would be willing to pay. Shortages and Rationing. Economists recognize that when services are free of change, or nearly so, and controls are placed on the total costs of pro viding the service, the result invariably is shortages and rationing. Recent studies of the Canadian syste m reveal that government cost control leads to rationing by waiting list and a pervasive system of physician price controls. This policy has limited significantly the availability of procedures and technol ogy and has encouraged a rising number of Canadians to seek health care ser vices in the U.S. An employer mandate simply would shift the tab to business without cor recting the underlying incentives that lead to the problems of the current sys tem. Corporate health benefits managers would become the relu ctant regula tors of a business-financed national health service, caught between stockhold ers determined to check costs and employees with the legal right to demand low the lead of some of todays business leaders who argue that corporations should not be expected to manage and finance a national health system, and that the job should be turned over entirely to government servicesXexf likely-th% majoiitj of fmstrated-employers-eventually would fol 5 Last year,The Heritage Foundatiyn published a proposal to achieve univer sal access to affordable health care. This proposal, unlike the Canadian sys tem or mandated benefits, seeks to cool health care inflation and assure ac cess by strengthening market incentives in health care and restructuring the tax treatm ent of health care spending. Specifically, the proposal calls for two major steps 1) End the link between health care tax breaks and the place of work. Under the Heritage proposal, the unlimited tax exclusion for company-pro vided health benefits would be phased out over several years.Thus, while companies could continue to provide benefits and count them as tax-deduct ible labor costs, the value of such benefits now would be included in the employees taxable compensation. If the employer chose to reduce o r elimi nate the health benefits provided, he would be required by law to add the sav ings to each employees paycheck so that the workers total compensation would be unaffected. Offsetting this change in the tax code, a new system of personal tax credits f or family health spending would be introduced. Under this new arrange ment, a family could claim a credit when filing its 1040 tax form.The credit would be available for both insurance and out-of-pocket costs. It also would be an above-the-line credit, so the family would not have to itemize its re turn to claim the credit. It would be refundable, meaning that if the credit ex ceeded the familys total tax liability, the taxpayer would receive a check for the difference from the IRS. The credit would be bas ed on the familys health and insurance spending compared with its income. Thus a 20 percent credit might be available in most instances, but may rise to 30 percent of medical and health insurance ex penses if these costs exceeded, say, 5 percent of family income in a year; a 50 percent credit if spending reached 10 percent of family income, and so on. For very affluent families spending only a small proportion of their income on health, the percentage credit would be less than 20 percent, and perhaps phased out completely for those above a certain income 2) Establish a Health Care Social Contract. The second central element-in the Heritage proposal is a two-way commit ment between government and citizen. Under this social contract, the fed eral government would agree to make it financially possible, through refund able tax benefits or in some cases by providing access to public-sector health programs, for every American family to purchase at least a basic package of 3 Butler and Haislmaier, op. cit 6 medic a l care, including catastrophic insurance. In return, government would require, by law every head of household to acquire at least a basic health plan for his or her family.Thus there would be mandated coverage under the Heritage proposal, but the mandate w ould apply to the family head, who is the appropriate person to shoulder the primary responsibility for the familys health needs, rather than employers, who are not EFFECTS OF THE HERlTAGE.PROPOSAL By no longer restricting tax relief for medical care to e m ployer-provided plans, and by restructuring tax assistance to help those Americans most in need, the Heritage proposal significantly would improve the American health system. Among the most important effects 1)Good health care not dependent on employers. E mployees would be able to acquire health coverage for their families, and obtain government tax help to pay for it, wherever they happen to work. Casual or part-time workers, em ployees of small firms, or dependents of workers those who comprise a major s h are of the uninsured -would receive a refundable tax credit based on health costs compared with income exactly the same form of govern ment assistance to buy health services as Americans working in large firms Thus the Heritage proposal would solve much o f the current uninsurance problem. The Heritage proposal also would allow complete portability of a workers health coverage, since it would no longer be tied to the place of em ployment If a worker changes jobs, or has a spell of unemployment, he or she wo uld not lose the insurance or have to change coverage, nor would his or her family face the possibility of exclusions for pre-existing conditions and similar insurance restrictions common today when a worker changes jobs health benefits, if an employee de c ides to make sensible economies in his or her use of a health plan, the employer saves. Under the Heritage proposal the employee pockets the savings.Thus Americans would have the incentive to shop around for the most economical health plan to meet their l egal obli gation and their other health care preferences. This would reduce the rate of medical cost inflation by encouraging cost consciousness-and discouraging over-use-of medical services A family may choose a more restrictive Health Maintenance Organiz ation (HMO), for in stance, rather than a plan with an unlimited choice of physician and hospital to save money for other things. Healthy families would have the incentive to buy coverage with a larger deductible than is typical today and pay directly for routine minor medical bills. Healthy families today have the incentive to press employers to provide first-dollar coverage and then to overuse the free benefits 2)Incentives to economize. Under the current system of employer-provided 7 3)Budget neutrality . For most Americans, the way in which government currently provides financial help to obtain health care is by exfuding the cost of company-based plans from the employees taxable income This means the government foregoes tax revenue. The Heritage Foundati on proposal would reallocate these revenue losses as refundable inmme tax credits. De pending on the design of the credits, the proposal could be budget neutral, or decrease tax revenues only slightly. The Congressional Budget Office, in its annual review of possible budget savings, calculates that if the current tax exclusion for company-based plans were ended, and a 20 percent tax credit introduced into the individual tax code for health insurance costs up to 250 per month for a family 100 for an individ u al in 1990 dollars the government would collect an extra $89.4 bil lion in tax revenue over the next five years, or an average of $17.9 billion per year? Thus if budget neutrality is a goal, the CBO figures suggest that this sum would be available to prov ide a refundable credit to those not now cov ered, and to give a more generous credit for those Americans facing high medical costs compared with their incomes. The table that follows compares the implications for individual workers and their families of t he Heritage plan, compared with current law, the man dated benefits proposal, and the Canadian system CONCERNS ABOUT THE HERITAGE PROPOSAL While many lawmakers, physicians, and workers see the attraction of indi vidual credits for health insurance, they a lso imagine there are various practi cal problems with such an approach. But these concerns either misunder stand the nature of the Heritage proposal, or they can be dealt with through small modifications of the basic approach. Among the most common concerns 1)Since medical care is such a complex product, can average Americans re ally be expected to make sensible purchasing decisions regarding medical care and insurance? This concern overlooks the way in which competition and consumer choices actually would work in a reformed health care system. If out-of pocket medical.costs were given the same tax breaks as insurance premiums more Americans would pay directly for routin e minor services now often cov 4 For the very poor, the state and federal government pays directly for approved care, veterans are covered under the Veterans Affairs health system, while most hospital care for the elderly is reimbursed through Medicare 5 C ongressional Budget Office, Reducing the Deficit: Spending and Revenue Options Washington, D.C U.S. Government Printing Office, lW pp. 145,146 8 w s z B 0 X 4 W X 5 s 0 X L 8 Q) 0 'E 2 c, c E Ll 3 0 2 F3 2 Q m i m i Q 9 c I 5 3 E 0 d 91 w 8 2 v d Q GI I er ed by insurance, such as dental work, annual physical, eyeglasses, and treat ment for minor injuries. In these cases the required medical knowledge is small, and consumer decisions would tend to be based on such issues as cost waiting time, choice of doct or and other important, but non-technical factors. Consumer choice would work just as well in buying insurance. Knowledge able consumers carefully would select the plan providing the features they want at the most competitive price Less knowledgeable Ameri cans either would take the advice of an expert in whom they had confidence, such as their family physician or a consumer organization, or they could join a pur chasing group that they felt would represent their interests 2)Wouldnt individuaI insurance be m ore expensive than company-based group insurance Individual health insurance policies today generally are more expensive than company-based plans This is mainly because administrative and market ing costs tend to be high when the market is small and poten t ial buyers widely dispersed as with todays individual insurance. But if individual buyers were the largest segment of the market, these overhead costs would fall, making in dividual coverage more competitive. It is likely under the Heritage proposal howev e r, that group insurance would continue to be the typical form of health coverage because groups could bargain most effectively with physi cians, hospitals, and insurers. What would be different is that the group prob ably would not be composed of the empl oyees of a particular company. Todays tax laws make the place of work virtually the only group that Americans can join to have the bargaining power and the economies of scale to obtain affordable insurance. Under the Heritage proposal, by contrast families could join other groups as the basis for insurance, with the group ad ministrators perhaps charging a management fee Forming Groups. The group presumably would be an organization that the family felt would act in its interest, such as a union, a church, a group repre senting minority workers, or women business owners. It could also be a group of individuals with special medical needs, such as diabetics, needing plans with particular services. In each case the individual would gain the economies of scale a n d bargaining power of the larger group, and he or she could choose a group that arranged the desired package of insurance and services at the best price.Today a worker and his family normally must accept the plan ser vices selected by the employer, whethe r or not they are ideal. It is almost certain that a wide range of groups would emerge. One reason for confidence is that non-employer groups exist today even with only very limited tax breaks available. Examples: various state farm bureaus offer group pla ns for agricultural workers; in Washington D.C TANS/MED mar kets low cost plans for young workers without company insurance, such as full time babysitters; and a number of labor unions sponsor plans. Indeed unions very likely would become major group mana g ers under the Heritage pro posal, offering good rates as a membership inducement 10 The shift to a system encouraging consumer-driven choice and competition would reduce the general cost of insurance. Todays company-based insur ance necessarily involves a considerable amount of costly paperwork because insurers and health benefits managers must try to regulate or restrict the use of medical care by families who have no natural reason to economize, given the nature of company-based plans. Under a market-bas ed system, however the user has strong incentives to economize, since he or she keeps the savings. Thus the bureaucratic controls of the current system would be replaced in large part by the controls of the market, reducing administrative costs 3)But if su ch groups did form, wouldnt insurers compete for the lowest risk families? Wouldnt such adverse selection leave many Americans with prohibitively high premiums The problem of adverse selection is seen by many as a fatal flaw of a system based on individua l selection, even if groups did form to buy insurance or bar gain with providers for good rates. It is true that many insurers would com Pete for healthy families, leaving other families to choose from more expen sive plans under the Heritage proposal. Yet this is not a problem; it is actu ally a benefit of the proposal. There may be an initial tendency for insurance companies to compete for groups of healthy families, to reduce their benefit payouts. But of course that competition, with wide consumer choic e, would drive down premiums and profit margins for insurers So the low-risk portion of the market might not in fact be particularly attractive for insurers. The conventional wisdom is that in surers would not be interested in high-risk families, because h igh benefit pay outs would mean high premiums that families would not be able to pay.This certainly is the case today, given the tax treatment of individual and non-com pany group insurance. But under the Heritage proposal, the government would give gener o us refundable tax credits to families facing high premiums or out-of-pocket expenses. And since the higher-risk family thus would be able to afford the higher premiums needed to provide extra services, that part of the insurance market would be just as at t ractive to insurers as the low-risk but low premium) family Specialized Plans. It is also very likely that insurers and hospitals under the Heritage proposal would develop special health plans, including insurance and specialized medical services, for Ame r icans with chronic medical prob lems, such as diabetics,-the handicapped, the mentally ill and cancer3uffer ers. These plans would be far better products for these special-needs Ameri cans than the typical one-size-fits-all-employees company plans. Most s u ch plans no doubt would be expensive, but some would be able to keep costs down by substituting special services in place of other services not used by most of the group. Example: older diabetics probably would have a plan with out pregnancy benefits. Pat ients under such plans would have tax credits to offset the extra costs If a family today has to obtain special services not pro vided under the employers plan, it must usually do so without any tax relief. Consumer-driven competition would be just as stro ng among these high-cost 11 plans as among low-benefit plans for the healthy, assuring good value for money todays health care system, virtually the only way that Americans needing medical care are subsidized is through equal premiums for all workers in a company group. Healthy families subsidize less healthy families because all pay thesame premium while-using very different quantities of medical ser vices. One problem with this is that employers, particularly small firms, are under standably unenthusiast ic about hiring a new worker who may incur unusually high medical bills, since the companys insurer eventually will raise the groups premium if usage increases. Under the Heritage proposal, most cross subsidization would occur through the tax system, not t hrough premiums, so the problems now facing insurers and less healthy Americans seeking work would disappear. Moreover, subsidizing through the tax code is a far more precise and efficient method than the imprecise cross-subsidization achieved through equ a l premiums in company plans 4)But if the government provides generous credits for expensive insurance and treatment, wouldnt that increase the tax revenue losses to government and encourage Americans to buy extra, but unnecessary coverage Tax revenue loss e s would indeed be relatively high for credits provided to an unhealthy family needing expensive insurance. On the other hand, the losses would be sharply reduced on insurance and medical care purchases by healthy Americans posal than under current tax law for three reasons. First, the increased con sumer sensitivity to cost would slow general medical costs, and hence tax losses on medical insurance purchases. Second, healthy families no longer would have the incentive to overuse medical services, again red u cing tax losses. Although the Heritage proposal does not envision a cap on the total amount of insurance or services eligible for credit, families would still have to contribute toward the cost. Although the credit would encourage a certain amount of over use, it would almost certainly be a less than is common today under company-paid plans. And third, even though millions of additional fam ilies would be eligible for tax relief, or refunds, this would cost the govern ment less than it does today when most of these families turn to Medicaid or receive uncompensated medical care with the cost usually added to the medi cal bills of patients with tax-free company insurance 5)Most Americans today have their medical insurance premiums paid di rectly by their emp l oyer, and they do not have to worry about claiming back tax relief. Wouldnt the Heritage proposal lead to many Americans not buy ing insurance, or missing premium payments, and wouldnt lower-paid work ers be unable to wait until the end of the tax year fo r their credits Cross-subsidization thus would occur under the Heritage proposal. Under But total revenue losses on average would be lower under the Heritage pro 12 Under the Heritage proposal, it would be illegal not to buy basic cata strophic insurance, a nd credits would be available only for actual purchases of insurance or medical care during the tax year. When tax returns were filed the family would receive a proof of insurance form from its health insur ance company, much like a W-2 form, and this wou ld have to be appended to the return.This form would indicate the cost of insurance, and certi that at least the legal minimum is bought. If the proof of insurance forms were not at tached, or did not indicate hat. the family was insured throughout the ye ar, a financial penalty would be imposed ing themselves unable to make payments, would be eliminated in most cases through a modest book-keeping requirement for employers. The tax credit available under the Heritage plan would be blended into the tax with h olding system for employees Thus a worker would claim adjustments based on his familys anticipated insurance and out-of pocket expenses (just as he does today, based on such factors as the size of his family, and his mortgage inter est payments), and with h olding would be adjusted accordingly If medical and insurance costs begin to run higher than expected, the withholding amount could be changed. Similarly, if the worker is entitled to a refundable credit meaning that the credit exceeded his or her normal t ax liability, a monthly amount would be added to the paycheck by the employer, and deducted from the total tax withholdings sent by the employer to the IRS. At the end of the year, of course, the family would complete a 1040 tax form, including actual med i cal expenses that year, and the taxes would be adjusted In addition, employers could be required to take a deduction from each employees paycheck to pay for health insurance, and send a check to the health insurance company of the workers choice much as m a ny employers today deduct voluntary contributions for 401(k) pension plans.The amount of the check would depend on the insurance package chosen by the worker Thus the employer would not pay the premium, but would assure that it was paid 6)Why would a work e r with a generous company health benefits package have any reason to support the Heritage proposal Workers in some industries have very generous health benefits. For in stance, automobile workers typically have approximately 3,000 in tax-free employer-pai d health benefits!They, however, would accept.3 credit pro posal that probably would give them less total tax relief for several reasons. First, if they had the choice, many workers would accept less in benefits if they could have more in cash, even taxabl e cash.The Heritage proposal al lows them to make that choice. Second, they could choose the benefits they The problem of workers avoiding this requirement in the first place, or find 6 Aldona Robbins and Gary Robbins, what a Ganadian-Style Health Core Sy s tem Would Cost US. Employers and Employees (Dallas, Texas: National Center for Policy Analysis, 1990 p. 5 13 want, rather than the cdmpany-provided benefits; Under the Heritage pro posal, workers could increase coverage or spending for certain services th e y want or need, such as better coverage for a child, while perhaps reducing oth ers, and obtain the same tax relief.Third, if a worker moves to another job his coverage would not have to change. And fourth, the worker would not have to face pressure to re d uce benefits by financially-strapped employers, a common problem in some industries today 7)What does theHeritage proposal do for the very poor The Heritage proposals incentives to reduce medical cost inflation through more active consumer choice would be n efit the poor by tapering general medical costs. In addition, the proposal would grant refundable tax credits for health insurance and services to workers in those firms unable to offer health insurance. This would be particularly beneficial to low-paid w o rkers in small firms. It would also make employment more attractive to many Americans now on welfare who are reluctant to leave the rolls because their Medicaid benefits are phased out and often they do not have health insurance provided by their new empl oyer. Medicaid for the very poor would be retained under the Heritage ro osal and the plan contains recommendations for reforming the program. Besides these reforms, aimed at encouraging more state experimentation in alterna tive delivery arrangements and promoting state-subsidized risk pools for diffi cult-to-insure Americans, the proposal would permit states to enroll welfare recipients in the competitively-priced private health plans emerging under the new tax incentives for working Americans.That would enable states and the federal government to achieve savings that could be used for new services or for deficit reduction Qp 8)Isnt the Heritage proposal too radical to be adopted by Congress The Heritage proposal would lead to a radical change in Americas health care system. But so would the introduction of a Canadian-style system, or a system in which employers operated a nationwide comprehensive system. Lawmakers and policymakers now recognize the need for radical reform An understandable worry about the Heritage proposal is that it has never been tried on a large scale although modest individual deductions are avail able under the tax code for some Americans. But an advantage of the pro posal is that it could -be introduced gradually so that it could be tested and so that Americans would have the opportunity to become familiar with its key el ements before a complete transition.Thus although the proposal would con stitute a major reform of Americas health care system and only fundamen 7 Terree P. Wasley, Health Care Forme Poor, Unemployed, and High Risk, in Butler and Haislmaier, op cit pp. 91-119 14 tal reform will address the system deep problems it could be introduced in stages Beginning Step. Moreover, Congress is poised to take the first step in crea t ing a system of credits for health purchases. A provisiop in the Senate-passed version of the child care legislation SS in fact, would be a significant step toward enacting the Heritage plan. Authored by Senator Lloyd Bentsen, the TexasDemocrat who chair s the Finance Committee,.the measure would grant a 50 percent tax credit to low-income families for the purchase of insur ance for children not covered under a company plan If this becomes law, it would introduce the concept of an individual tax credit for health care. The next step would be to establish a refundable credit for all dependents not covered under company plans, not just children, recouping the revenue lo ss by placing a ceiling on the value of a company-based plan that would be free of tax. The third step would be legislation to phase out entirely the tax ex clusion for company plans and to introduce the full individual credit. Senator William Cohen, the Maine Republican, has introduced a bill S 2032) that would accomplish some of these steps. The bipartisan bill is co sponsored by such Democrats as David Boren of Oklahoma and Sam Nunn of Georgia. The Cohen legislation would establish a refundable credit o f up to 60 percent of yearly health insurance expenses for low- and moderate-in come families without company-provided plans. The legislation would not however, reform the tax treatment of employer-provided insurance CONCLUSION Americans are less satisfie d with their health care system than are the citi zens of most major industrialized countries. Their dissatisfaction is under standable. The American system may deliver the worlds best medicine, but millions lack adequate coverage, the cost of care is skyr ocketing, and even those with good insurance often are anxious about many features of their cov erage. The Heritage proposal addresses the central deficiencies of the current sys tem. By changing the tax treatment of health care spending, it would intro du ce powerful incentives to control costs and make it possible for those cur rently without adequate insurance to afford protection. It would create a con the heavy regulation or explosive costs of the other major proposals now being examined by Congress su mer-driven-and-market-based -national health-system-for- America, without Stuart M. Butler, Ph. D. Director of Domestic Policy Studies 15
m July 20,1990 INTRODUCI'ION De mands are growing for reform of America's health care system.To be sure, the quality of care available in the United States surpasses that of any other nation. Still, as many as 37 million Americans are without health insur z~llce during at least part of any year. Millions more have insurance that pays for routine care, but would not cover the catastrophic financial impact of a prolonged, serious illness. Even those with adequate insurance provided through their place of work face increases in out-of-pocke t charges, or cutbacks in coverage for family members, as employers try to contain surging insurance costs. Insurance com panies complain that physicians persistently order unnecessary tests and pro cedures. Physicians complain that insurance company offi cials are interfering with the practice of good medical care.The result a $600 billion health care system with which nobody, it seems, is happy. Disenchantment with the system has spawned several high level-govem ment task forces and commissions charged wi th finding ways to improve U.S health care.The ideas being considered by these bodies are in three broad categories Social insurance programs, based on the Canadian system.These would provide every American with universal access to a comprehensive package of health senrices, dictated and paid for by government and financed through taxation Employer mandates.?hese would require all employers either to pro vide at least a standard package of health insurance to employees and theirfamilies, or to pay into a f u nd to finance insurance for families not covered at the place of work. This often is referred to as the play or pay approach Consumer-based systems. In these, changes in the tax treatment of health care purchases would provide families with the funds to b u y adequate insurance and medical care directly, rather than depending on their em ployer or a government program. Such a consumer-based proposal was un veiled-last year-by The Heritage Foundation In the vigorous debate between proponents of these rival pr o posals, ques tions are raised about each approach. Close examination of the Canadian sys tem, for example, reveals not only that it holds down health costs by systemat ically rationing care, but also that costs have been controlled far less than commonly believed? Similarly, the mandated employer benefits proposal has encountered strong opposition from businesses, who claim that it rapidly will escalate company health costs, prompting layoffs and undercutting U.S global competitiveness. Concerns also have been raised regarding the Heritage Foundation pro posal. Examples Are families typically capable of making informed decisions when purchasing health insurance or medical services? Would not insurance companies tend to compete only for healthy families nee ding fewer services leaving higher risk families with enormous premiums to pay? Would Ameri cans accept such a seemingly radical change in their health care financing sys tem? While these and others are legitimate concerns, they are fully addressed in the Heritage proposal. Indeed, the Heritage proposal is the only one ad vanced to date that would assure affordable access to health care for all Americans with little or no additional cost to the federal Treasury and with built-in, market-driven incentives t o keep costs under control THE GOALS OF HEALTH CARE REFORM While there are differences of opinion on the details of what an ideal health care system would achieve, four features are broadly accepted as goals of such a system 1) The system should assure aff o rdable access to adequate health care for all Americans 1 Stuart M. Butler and Edmund F. Haislmaier (editors A National Health System forAmerica (Washington D.C The Heritage Foundation, 1989 see also Butler, Assuring Health Care for AU Americans, Henuge L ectures No. 218, October 2,1989 2 Michael Walker, Why Canadas Health Care System Is No Cure for Americas Ills, Heritage Foundation International Briejing No. 19, November 13,1989. I 2 The notion that all citizens should be able to obtain adequate health ca re services at reasonable cost to the family budget is the central feature of most Americans picture of an ideal system 2) The system should contain incentives to economize The rapidly rising cost of todays health system has led lawmakers to insist that a n y serious reform must contain strong incentives to economize and keep costs under control -without cost becoming-a barrier to necessary care 3) Government help should go mainly to those who need it most, as mea sured by income or medical condition Many so c ialist countries base their health systems on the doctrine that gov ernment should provide the same quality and quantity of care to rich and poor alike. In the U.S however, it is generally accepted that the more needy a family is, in terms of the cost of n ecessary medical care compared with the familys income, the more governmental help that family should receive 4) As far as possible, crucial medical decisions should be made by the pa tient and his or her physician In addressing such basic medical questio n s as whether a major operation shall be performed, or who shall perform that operation, or how much shall be done to save a baby born prematurely, most Americans feel that these de cisions should be made as much as possible by the individuals directly con cerned. It is they, it is broadly believed, who should have the right to weigh the benefits and the risks, with proper medical advice and with some atten tion to the costs involved.These decisions are not to be left to some distant of ficial whose life is not on the line Why the Current System Does Not Reach These Goals The current health care system does not achieve these or many other goals. Most of the uninsured, and even many of those with basic insurance, find they cannot afford certain necessary heal th services Few would contend, more over, that the current system promotes efficient use of medical services. It seems unfair to many Americans that affluent workers and top executives enjoy unlimited tax-free medical services through their companies, whi le low paid workers in other firms have no company insurance, and get no help from the tax code to offset the cost of buying the most basic services or insurance. And there is growing anxiety that basic medical decisions are being made by distant governmen t or insurance company officials, or in response to rules de termined by such officials. Thus elderly Americans, for instance, fear they may be dumped by a hospital because the hospital considers the Medicare reimbursement rate to be too low; unionized wo r kers strike against the at tempts of company health benefits managers to limit coverage for families mothers of newborn babies grumble that insurance companies refuse to cover more than three days in hospital after the birth 3 These shortcomings of the sy s tem have a common root: the powerful, per verse incentives created by the tax treatment of health care spending. Under the federal tax code, company-provided health services and insurance plans are excludable from each workers taxable income. For example, if a workers compensation is an mual cash salary of $25,000 plus $3,000 in the form of a company-paid health plan, for a total of 28,000, that worker pays income and payroll taxes on only 25,000 of incorne.This makes the health plan, in ef fect, tax-deduc t ible at the workers marginal rate of tax. If the firm does not provide a health plan, however, the worker can only obtain tax relief to the ex tent that his familys health expenses exceed 7.5 percent of adjusted gross in come, and then only if the family itemizes its tax return. Most self-employed individuals can claim tax relief on just 25 percent of their health insurance Costs. This tax treatment means that the lions share of tax relief goes to higher paid employees with generous health plans. Meanwhile , casual workers or those in small firms without plans, who tend to incur relatively high medical costs compared with their income, typically receive no tax relief at all. When these latter workers buy health insurance they must do so with after-tax dol l ars, and normally they must pay relatively high premiums for individual cov erage. It is little wonder that so many of these workers and their families lack insurance boost total health costs, encourages inefficiency, and provokes labor disputes. Company p lans, for example, have grown rapidly in recent decades for under standable reasons: both management and labor have favored contracts that offer more compensation in the form of tax-free health insurance than in the form of taxable cash. This means that f o r most Americans, in terms of after tax dollars, it costs less to buy health care than to buy other goods and services even if both carry exactly the same price tag. The result: workers tend to de mand far more, often non-essential, health services than t h ey would choose were they to pay for them in after-tax dollars. In addition, many workers and their unions have pressed employers to include routine, minor services in health plans because that allows these services to be paid for with pre-tax dol lars. B y contrast, workers tend to be less inclined to press for insurance cover ing highly unlikely, but financially crippling, medical situations. Thus many American workers have very generous and expensive health plans, yet lack catastrophic insurance In the m i nds of most workers, these company-paid plans, like other fringe benefits, seem to be free even though an employer rightly treats health in surance as part of the overall compensation.Thus there is little or no incen tive for workers to curb their demands for health services or to question hos pital or physician prices, especially if deductibles and copayments in the plans are small. This has several effects. A lack of any real incentive to economize is, of course, a recipe for health care cost inflation, and indeed the cost of medical Free Fringe Benefit. The tax treatment of health spending also helps I 4 care for years has been rising at roughly double the average inflation rate This means, of course, higher prices for those who do not have company-pro v ided insurance and consequently reduces their ability to obtain medical care. Meanwhile, corporate efforts to constrain rising health costs by increas ing the employees share of costs normally are strongly resisted by workers who see these direct payments as a cut in pay, forcing them to pay in after-tax dollars for care that previously was free. Bitter strikes over company at tempts to.scale back health benefits are.an increasingly common feature of labor disputes Why Mandated Benefits or a Canadian Syste m Is No Answer to These Problems Neither a mandate on all employers to play or pay, nor a Canadian-style universal social insurance program would solve all these problems, or achieve the four basic objectives of an ideal health system. Moreover, in many im por tant ways, each would be less attractive than Americas current system. Under employer mandates or a Canadian system the government would legislate a right of access to a certain level of health care, through the private sector in the first &e and the p ublic sector in the second. But to control total costs, various regulations would be imposed by bureaucrats to restrict that supposed right of access. Such regulation would be necessary because the illu sion of virtually free care would encourage far more demand for services than companies or the government would be willing to pay. Shortages and Rationing. Economists recognize that when services are free of change, or nearly so, and controls are placed on the total costs of pro viding the service, the result invariably is shortages and rationing. Recent studies of the Canadian syste m reveal that government cost control leads to rationing by waiting list and a pervasive system of physician price controls. This policy has limited significantly the availability of procedures and technol ogy and has encouraged a rising number of Canadians to seek health care ser vices in the U.S. An employer mandate simply would shift the tab to business without cor recting the underlying incentives that lead to the problems of the current sys tem. Corporate health benefits managers would become the relu ctant regula tors of a business-financed national health service, caught between stockhold ers determined to check costs and employees with the legal right to demand low the lead of some of todays business leaders who argue that corporations should not be expected to manage and finance a national health system, and that the job should be turned over entirely to government servicesXexf likely-th% majoiitj of fmstrated-employers-eventually would fol 5 Last year,The Heritage Foundatiyn published a proposal to achieve univer sal access to affordable health care. This proposal, unlike the Canadian sys tem or mandated benefits, seeks to cool health care inflation and assure ac cess by strengthening market incentives in health care and restructuring the tax treatm ent of health care spending. Specifically, the proposal calls for two major steps 1) End the link between health care tax breaks and the place of work. Under the Heritage proposal, the unlimited tax exclusion for company-pro vided health benefits would be phased out over several years.Thus, while companies could continue to provide benefits and count them as tax-deduct ible labor costs, the value of such benefits now would be included in the employees taxable compensation. If the employer chose to reduce o r elimi nate the health benefits provided, he would be required by law to add the sav ings to each employees paycheck so that the workers total compensation would be unaffected. Offsetting this change in the tax code, a new system of personal tax credits f or family health spending would be introduced. Under this new arrange ment, a family could claim a credit when filing its 1040 tax form.The credit would be available for both insurance and out-of-pocket costs. It also would be an above-the-line credit, so the family would not have to itemize its re turn to claim the credit. It would be refundable, meaning that if the credit ex ceeded the familys total tax liability, the taxpayer would receive a check for the difference from the IRS. The credit would be bas ed on the familys health and insurance spending compared with its income. Thus a 20 percent credit might be available in most instances, but may rise to 30 percent of medical and health insurance ex penses if these costs exceeded, say, 5 percent of family income in a year; a 50 percent credit if spending reached 10 percent of family income, and so on. For very affluent families spending only a small proportion of their income on health, the percentage credit would be less than 20 percent, and perhaps phased out completely for those above a certain income 2) Establish a Health Care Social Contract. The second central element-in the Heritage proposal is a two-way commit ment between government and citizen. Under this social contract, the fed eral government would agree to make it financially possible, through refund able tax benefits or in some cases by providing access to public-sector health programs, for every American family to purchase at least a basic package of 3 Butler and Haislmaier, op. cit 6 medic a l care, including catastrophic insurance. In return, government would require, by law every head of household to acquire at least a basic health plan for his or her family.Thus there would be mandated coverage under the Heritage proposal, but the mandate w ould apply to the family head, who is the appropriate person to shoulder the primary responsibility for the familys health needs, rather than employers, who are not EFFECTS OF THE HERlTAGE.PROPOSAL By no longer restricting tax relief for medical care to e m ployer-provided plans, and by restructuring tax assistance to help those Americans most in need, the Heritage proposal significantly would improve the American health system. Among the most important effects 1)Good health care not dependent on employers. E mployees would be able to acquire health coverage for their families, and obtain government tax help to pay for it, wherever they happen to work. Casual or part-time workers, em ployees of small firms, or dependents of workers those who comprise a major s h are of the uninsured -would receive a refundable tax credit based on health costs compared with income exactly the same form of govern ment assistance to buy health services as Americans working in large firms Thus the Heritage proposal would solve much o f the current uninsurance problem. The Heritage proposal also would allow complete portability of a workers health coverage, since it would no longer be tied to the place of em ployment If a worker changes jobs, or has a spell of unemployment, he or she wo uld not lose the insurance or have to change coverage, nor would his or her family face the possibility of exclusions for pre-existing conditions and similar insurance restrictions common today when a worker changes jobs health benefits, if an employee de c ides to make sensible economies in his or her use of a health plan, the employer saves. Under the Heritage proposal the employee pockets the savings.Thus Americans would have the incentive to shop around for the most economical health plan to meet their l egal obli gation and their other health care preferences. This would reduce the rate of medical cost inflation by encouraging cost consciousness-and discouraging over-use-of medical services A family may choose a more restrictive Health Maintenance Organiz ation (HMO), for in stance, rather than a plan with an unlimited choice of physician and hospital to save money for other things. Healthy families would have the incentive to buy coverage with a larger deductible than is typical today and pay directly for routine minor medical bills. Healthy families today have the incentive to press employers to provide first-dollar coverage and then to overuse the free benefits 2)Incentives to economize. Under the current system of employer-provided 7 3)Budget neutrality . For most Americans, the way in which government currently provides financial help to obtain health care is by exfuding the cost of company-based plans from the employees taxable income This means the government foregoes tax revenue. The Heritage Foundati on proposal would reallocate these revenue losses as refundable inmme tax credits. De pending on the design of the credits, the proposal could be budget neutral, or decrease tax revenues only slightly. The Congressional Budget Office, in its annual review of possible budget savings, calculates that if the current tax exclusion for company-based plans were ended, and a 20 percent tax credit introduced into the individual tax code for health insurance costs up to 250 per month for a family 100 for an individ u al in 1990 dollars the government would collect an extra $89.4 bil lion in tax revenue over the next five years, or an average of $17.9 billion per year? Thus if budget neutrality is a goal, the CBO figures suggest that this sum would be available to prov ide a refundable credit to those not now cov ered, and to give a more generous credit for those Americans facing high medical costs compared with their incomes. The table that follows compares the implications for individual workers and their families of t he Heritage plan, compared with current law, the man dated benefits proposal, and the Canadian system CONCERNS ABOUT THE HERITAGE PROPOSAL While many lawmakers, physicians, and workers see the attraction of indi vidual credits for health insurance, they a lso imagine there are various practi cal problems with such an approach. But these concerns either misunder stand the nature of the Heritage proposal, or they can be dealt with through small modifications of the basic approach. Among the most common concerns 1)Since medical care is such a complex product, can average Americans re ally be expected to make sensible purchasing decisions regarding medical care and insurance? This concern overlooks the way in which competition and consumer choices actually would work in a reformed health care system. If out-of pocket medical.costs were given the same tax breaks as insurance premiums more Americans would pay directly for routin e minor services now often cov 4 For the very poor, the state and federal government pays directly for approved care, veterans are covered under the Veterans Affairs health system, while most hospital care for the elderly is reimbursed through Medicare 5 C ongressional Budget Office, Reducing the Deficit: Spending and Revenue Options Washington, D.C U.S. Government Printing Office, lW pp. 145,146 8 w s z B 0 X 4 W X 5 s 0 X L 8 Q) 0 'E 2 c, c E Ll 3 0 2 F3 2 Q m i m i Q 9 c I 5 3 E 0 d 91 w 8 2 v d Q GI I er ed by insurance, such as dental work, annual physical, eyeglasses, and treat ment for minor injuries. In these cases the required medical knowledge is small, and consumer decisions would tend to be based on such issues as cost waiting time, choice of doct or and other important, but non-technical factors. Consumer choice would work just as well in buying insurance. Knowledge able consumers carefully would select the plan providing the features they want at the most competitive price Less knowledgeable Ameri cans either would take the advice of an expert in whom they had confidence, such as their family physician or a consumer organization, or they could join a pur chasing group that they felt would represent their interests 2)Wouldnt individuaI insurance be m ore expensive than company-based group insurance Individual health insurance policies today generally are more expensive than company-based plans This is mainly because administrative and market ing costs tend to be high when the market is small and poten t ial buyers widely dispersed as with todays individual insurance. But if individual buyers were the largest segment of the market, these overhead costs would fall, making in dividual coverage more competitive. It is likely under the Heritage proposal howev e r, that group insurance would continue to be the typical form of health coverage because groups could bargain most effectively with physi cians, hospitals, and insurers. What would be different is that the group prob ably would not be composed of the empl oyees of a particular company. Todays tax laws make the place of work virtually the only group that Americans can join to have the bargaining power and the economies of scale to obtain affordable insurance. Under the Heritage proposal, by contrast families could join other groups as the basis for insurance, with the group ad ministrators perhaps charging a management fee Forming Groups. The group presumably would be an organization that the family felt would act in its interest, such as a union, a church, a group repre senting minority workers, or women business owners. It could also be a group of individuals with special medical needs, such as diabetics, needing plans with particular services. In each case the individual would gain the economies of scale a n d bargaining power of the larger group, and he or she could choose a group that arranged the desired package of insurance and services at the best price.Today a worker and his family normally must accept the plan ser vices selected by the employer, whethe r or not they are ideal. It is almost certain that a wide range of groups would emerge. One reason for confidence is that non-employer groups exist today even with only very limited tax breaks available. Examples: various state farm bureaus offer group pla ns for agricultural workers; in Washington D.C TANS/MED mar kets low cost plans for young workers without company insurance, such as full time babysitters; and a number of labor unions sponsor plans. Indeed unions very likely would become major group mana g ers under the Heritage pro posal, offering good rates as a membership inducement 10 The shift to a system encouraging consumer-driven choice and competition would reduce the general cost of insurance. Todays company-based insur ance necessarily involves a considerable amount of costly paperwork because insurers and health benefits managers must try to regulate or restrict the use of medical care by families who have no natural reason to economize, given the nature of company-based plans. Under a market-bas ed system, however the user has strong incentives to economize, since he or she keeps the savings. Thus the bureaucratic controls of the current system would be replaced in large part by the controls of the market, reducing administrative costs 3)But if su ch groups did form, wouldnt insurers compete for the lowest risk families? Wouldnt such adverse selection leave many Americans with prohibitively high premiums The problem of adverse selection is seen by many as a fatal flaw of a system based on individua l selection, even if groups did form to buy insurance or bar gain with providers for good rates. It is true that many insurers would com Pete for healthy families, leaving other families to choose from more expen sive plans under the Heritage proposal. Yet this is not a problem; it is actu ally a benefit of the proposal. There may be an initial tendency for insurance companies to compete for groups of healthy families, to reduce their benefit payouts. But of course that competition, with wide consumer choic e, would drive down premiums and profit margins for insurers So the low-risk portion of the market might not in fact be particularly attractive for insurers. The conventional wisdom is that in surers would not be interested in high-risk families, because h igh benefit pay outs would mean high premiums that families would not be able to pay.This certainly is the case today, given the tax treatment of individual and non-com pany group insurance. But under the Heritage proposal, the government would give gener o us refundable tax credits to families facing high premiums or out-of-pocket expenses. And since the higher-risk family thus would be able to afford the higher premiums needed to provide extra services, that part of the insurance market would be just as at t ractive to insurers as the low-risk but low premium) family Specialized Plans. It is also very likely that insurers and hospitals under the Heritage proposal would develop special health plans, including insurance and specialized medical services, for Ame r icans with chronic medical prob lems, such as diabetics,-the handicapped, the mentally ill and cancer3uffer ers. These plans would be far better products for these special-needs Ameri cans than the typical one-size-fits-all-employees company plans. Most s u ch plans no doubt would be expensive, but some would be able to keep costs down by substituting special services in place of other services not used by most of the group. Example: older diabetics probably would have a plan with out pregnancy benefits. Pat ients under such plans would have tax credits to offset the extra costs If a family today has to obtain special services not pro vided under the employers plan, it must usually do so without any tax relief. Consumer-driven competition would be just as stro ng among these high-cost 11 plans as among low-benefit plans for the healthy, assuring good value for money todays health care system, virtually the only way that Americans needing medical care are subsidized is through equal premiums for all workers in a company group. Healthy families subsidize less healthy families because all pay thesame premium while-using very different quantities of medical ser vices. One problem with this is that employers, particularly small firms, are under standably unenthusiast ic about hiring a new worker who may incur unusually high medical bills, since the companys insurer eventually will raise the groups premium if usage increases. Under the Heritage proposal, most cross subsidization would occur through the tax system, not t hrough premiums, so the problems now facing insurers and less healthy Americans seeking work would disappear. Moreover, subsidizing through the tax code is a far more precise and efficient method than the imprecise cross-subsidization achieved through equ a l premiums in company plans 4)But if the government provides generous credits for expensive insurance and treatment, wouldnt that increase the tax revenue losses to government and encourage Americans to buy extra, but unnecessary coverage Tax revenue loss e s would indeed be relatively high for credits provided to an unhealthy family needing expensive insurance. On the other hand, the losses would be sharply reduced on insurance and medical care purchases by healthy Americans posal than under current tax law for three reasons. First, the increased con sumer sensitivity to cost would slow general medical costs, and hence tax losses on medical insurance purchases. Second, healthy families no longer would have the incentive to overuse medical services, again red u cing tax losses. Although the Heritage proposal does not envision a cap on the total amount of insurance or services eligible for credit, families would still have to contribute toward the cost. Although the credit would encourage a certain amount of over use, it would almost certainly be a less than is common today under company-paid plans. And third, even though millions of additional fam ilies would be eligible for tax relief, or refunds, this would cost the govern ment less than it does today when most of these families turn to Medicaid or receive uncompensated medical care with the cost usually added to the medi cal bills of patients with tax-free company insurance 5)Most Americans today have their medical insurance premiums paid di rectly by their emp l oyer, and they do not have to worry about claiming back tax relief. Wouldnt the Heritage proposal lead to many Americans not buy ing insurance, or missing premium payments, and wouldnt lower-paid work ers be unable to wait until the end of the tax year fo r their credits Cross-subsidization thus would occur under the Heritage proposal. Under But total revenue losses on average would be lower under the Heritage pro 12 Under the Heritage proposal, it would be illegal not to buy basic cata strophic insurance, a nd credits would be available only for actual purchases of insurance or medical care during the tax year. When tax returns were filed the family would receive a proof of insurance form from its health insur ance company, much like a W-2 form, and this wou ld have to be appended to the return.This form would indicate the cost of insurance, and certi that at least the legal minimum is bought. If the proof of insurance forms were not at tached, or did not indicate hat. the family was insured throughout the ye ar, a financial penalty would be imposed ing themselves unable to make payments, would be eliminated in most cases through a modest book-keeping requirement for employers. The tax credit available under the Heritage plan would be blended into the tax with h olding system for employees Thus a worker would claim adjustments based on his familys anticipated insurance and out-of pocket expenses (just as he does today, based on such factors as the size of his family, and his mortgage inter est payments), and with h olding would be adjusted accordingly If medical and insurance costs begin to run higher than expected, the withholding amount could be changed. Similarly, if the worker is entitled to a refundable credit meaning that the credit exceeded his or her normal t ax liability, a monthly amount would be added to the paycheck by the employer, and deducted from the total tax withholdings sent by the employer to the IRS. At the end of the year, of course, the family would complete a 1040 tax form, including actual med i cal expenses that year, and the taxes would be adjusted In addition, employers could be required to take a deduction from each employees paycheck to pay for health insurance, and send a check to the health insurance company of the workers choice much as m a ny employers today deduct voluntary contributions for 401(k) pension plans.The amount of the check would depend on the insurance package chosen by the worker Thus the employer would not pay the premium, but would assure that it was paid 6)Why would a work e r with a generous company health benefits package have any reason to support the Heritage proposal Workers in some industries have very generous health benefits. For in stance, automobile workers typically have approximately 3,000 in tax-free employer-pai d health benefits!They, however, would accept.3 credit pro posal that probably would give them less total tax relief for several reasons. First, if they had the choice, many workers would accept less in benefits if they could have more in cash, even taxabl e cash.The Heritage proposal al lows them to make that choice. Second, they could choose the benefits they The problem of workers avoiding this requirement in the first place, or find 6 Aldona Robbins and Gary Robbins, what a Ganadian-Style Health Core Sy s tem Would Cost US. Employers and Employees (Dallas, Texas: National Center for Policy Analysis, 1990 p. 5 13 want, rather than the cdmpany-provided benefits; Under the Heritage pro posal, workers could increase coverage or spending for certain services th e y want or need, such as better coverage for a child, while perhaps reducing oth ers, and obtain the same tax relief.Third, if a worker moves to another job his coverage would not have to change. And fourth, the worker would not have to face pressure to re d uce benefits by financially-strapped employers, a common problem in some industries today 7)What does theHeritage proposal do for the very poor The Heritage proposals incentives to reduce medical cost inflation through more active consumer choice would be n efit the poor by tapering general medical costs. In addition, the proposal would grant refundable tax credits for health insurance and services to workers in those firms unable to offer health insurance. This would be particularly beneficial to low-paid w o rkers in small firms. It would also make employment more attractive to many Americans now on welfare who are reluctant to leave the rolls because their Medicaid benefits are phased out and often they do not have health insurance provided by their new empl oyer. Medicaid for the very poor would be retained under the Heritage ro osal and the plan contains recommendations for reforming the program. Besides these reforms, aimed at encouraging more state experimentation in alterna tive delivery arrangements and promoting state-subsidized risk pools for diffi cult-to-insure Americans, the proposal would permit states to enroll welfare recipients in the competitively-priced private health plans emerging under the new tax incentives for working Americans.That would enable states and the federal government to achieve savings that could be used for new services or for deficit reduction Qp 8)Isnt the Heritage proposal too radical to be adopted by Congress The Heritage proposal would lead to a radical change in Americas health care system. But so would the introduction of a Canadian-style system, or a system in which employers operated a nationwide comprehensive system. Lawmakers and policymakers now recognize the need for radical reform An understandable worry about the Heritage proposal is that it has never been tried on a large scale although modest individual deductions are avail able under the tax code for some Americans. But an advantage of the pro posal is that it could -be introduced gradually so that it could be tested and so that Americans would have the opportunity to become familiar with its key el ements before a complete transition.Thus although the proposal would con stitute a major reform of Americas health care system and only fundamen 7 Terree P. Wasley, Health Care Forme Poor, Unemployed, and High Risk, in Butler and Haislmaier, op cit pp. 91-119 14 tal reform will address the system deep problems it could be introduced in stages Beginning Step. Moreover, Congress is poised to take the first step in crea t ing a system of credits for health purchases. A provisiop in the Senate-passed version of the child care legislation SS in fact, would be a significant step toward enacting the Heritage plan. Authored by Senator Lloyd Bentsen, the TexasDemocrat who chair s the Finance Committee,.the measure would grant a 50 percent tax credit to low-income families for the purchase of insur ance for children not covered under a company plan If this becomes law, it would introduce the concept of an individual tax credit for health care. The next step would be to establish a refundable credit for all dependents not covered under company plans, not just children, recouping the revenue lo ss by placing a ceiling on the value of a company-based plan that would be free of tax. The third step would be legislation to phase out entirely the tax ex clusion for company plans and to introduce the full individual credit. Senator William Cohen, the Maine Republican, has introduced a bill S 2032) that would accomplish some of these steps. The bipartisan bill is co sponsored by such Democrats as David Boren of Oklahoma and Sam Nunn of Georgia. The Cohen legislation would establish a refundable credit o f up to 60 percent of yearly health insurance expenses for low- and moderate-in come families without company-provided plans. The legislation would not however, reform the tax treatment of employer-provided insurance CONCLUSION Americans are less satisfie d with their health care system than are the citi zens of most major industrialized countries. Their dissatisfaction is under standable. The American system may deliver the worlds best medicine, but millions lack adequate coverage, the cost of care is skyr ocketing, and even those with good insurance often are anxious about many features of their cov erage. The Heritage proposal addresses the central deficiencies of the current sys tem. By changing the tax treatment of health care spending, it would intro du ce powerful incentives to control costs and make it possible for those cur rently without adequate insurance to afford protection. It would create a con the heavy regulation or explosive costs of the other major proposals now being examined by Congress su mer-driven-and-market-based -national health-system-for- America, without Stuart M. Butler, Ph. D. Director of Domestic Policy Studies 15
