Health care urgently needs congressional attention. In an effort to highlight its health care initiatives, the Senate, and the House of Representatives later this year, will devote a part of its calendar to health care legislation. The Senate efforts should be judged by the substance of the policy. In order to make meaningful changes that would benefit individuals, the Senate should consider policies that promote personal control over health care dollars, expand consumer choice and competition, and reduce health care regulations.

Key Tests for any Health Policy

There are key tests that will determine whether or not the Senate's legislative initiatives are serious changes in health policy or simple, and largely inconsequential, tweaks to the status quo. Specifically:

• Personal control over health care dollars. The proposed legislation should call for an increase in the control that individuals and families have over the flow of health care dollars in the system. It should not leave the control of dollars in the hands of employers, managed care networks, or government officials.
• Expanded consumer choice and competition. The proposed legislation should call for an expansion in consumer choice of health plans or benefits. The legislation should also encourage direct competition among health plans and providers for the dollars of individuals and families.
• A net reduction in health care regulation. The proposed legislation should call for a net reduction in the already excessive regulation of the health care system. Legislation should not continue to expand federal regulation over health insurance markets or undermine the capacity of states to embark on innovative policy changes.  

A New Health Agenda

Several policy initiatives meet these key tests. The creation of an individual tax credit program would eliminate the current inequities in the federal tax code and enable individuals to buy and own their own health care policies.  Giving individuals and families the right to purchase a health plan of their choice, even if that plan is domiciled in another state, would expand consumer choice.  Health savings and flexible spending accounts could be improved by making their use more flexible and consumer friendly.  Defined contributions from employers to their employees' health plans should be promoted to enable individuals and families to choose the health benefit packages that best meet their personal needs. The promotion of state level experimentation in health care reform would give state officials greater flexibility and access to federal resources in expanding and improving coverage.

If senators are serious about meaningful change, proposals that take serious strides toward a patient-centered, consumer-driven health care system would make a difference.    

Major Items for a Senate Health Agenda 

Members of the Senate, as part of their commitment to change during "Health Week," should make the following federal policy changes:

• Establish an individual health care tax credit. The most important policy change for the health care system would be to reform the tax treatment of health insurance. The federal tax code shapes the health insurance markets, and a reform of the health insurance markets is not possible without making serious changes in the federal tax treatment of health insurance. The Heritage Foundation, the American Enterprise Institute, and many top health care economists, have long supported a full-scale replacement of the current employer-based "tax exclusion" for employees health benefits with a national system of individual health care tax credits. This major change would result in universal access to health care coverage, eliminate the existing distortions in a fundamentally flawed health insurance market, and create a new system based on the free market principles of consumer choice and competition.

At the very least, the Senate should create a parallel system of tax relief for individuals and families who do not, or cannot, get health insurance through the workplace. There are a variety of designs for health care tax credits.  For example, an individual health care tax credit could be a flat credit that is available to all regardless of income, or the credit could be tailored further to target lower-income working individuals and families.

 

A targeted health care tax credit, focused on lower-income working people, would not disrupt the current employer-sponsored health care system. It would give individuals who do not fit into that model a viable alternative for affordable health care coverage. In any case, the Senate should take this first step to ending the discrimination in the tax code that penalizes lower-income working families.    

• Enable individuals to purchase health care coverage from other states. Too many states have overregulated their health insurance markets and made it unattractive and unaffordable for many, particularly young working families, to obtain health care coverage.

Some Members of Congress want to resolve this problem by adding yet another layer of regulation on an already overregulated health insurance market. A better idea is free market competition. Instead of trying to standardize health care regulation among the states, Congress should spur competition among the states and allow individuals to purchase affordable health care coverage from other states. This approach has two advantages. First, it would retain the primacy of state authority over health insurance law and regulation, thus respecting the principles of federalism. Second, it would allow individuals to select from a broad assortment of health care products and choose the product that meets their financial and health care needs. Senator Jim DeMint (R-SC) has sponsored the Health Care Choice Act (S.1015), which would accomplish these objectives. This legislation focuses solely on allowing  interstate commerce in individual insurance; but it could be expanded  to allow the purchase of group health insurance across state lines.

• Make improvements to Health Savings Accounts (HSAs). A key objective of HSAs is the promotion of direct payment of health care dollars to doctors and other medical professionals without a tax penalty. This aspect of HSAs levels the playing field with tax-free payment through insurance. Ideally, the Senate should separate the savings component from the high deductible health plan requirement-a concept supported by several free market think tanks, including the National Center for Policy Analysis (NCPA) and the CATO Institute. This policy would encourage individuals to save for their health care expenses and give them full control over how best to use their health care savings, whether for premiums or deductibles, or copays.

At the very least, the Senate could make improvements to basic HSA design. There are two options. First, individuals should be allowed to use the HSA to pay for the health insurance premiums, which they cannot do today. Sen. John Ensign (R-NV) and Sen. Michael DeWine (R-OH) have proposed the Affordability in The Individual Market Act (S. 2554), which would allow individuals and families to use HSA accounts to pay health plan premiums. Second, the contribution levels in the HSAs should be increased to match total out-of-pocket expenses, not just the deductible. Senator George Allen (R-VA) has introduced S. 2424, which would increase the contribution amounts. Finally, changes should be made to better coordinate HSAs with other accounts, specifically Health Reimbursement Arrangements (HRAs).  For example, individuals and families should be able to fold HRA balances into their health savings accounts.    

• Permit employers to define contributions to employee health insurance benefits. The rules that govern employer-based health insurance system force employers to make an "all-or-nothing" decision about health insurance coverage. These rules undermine the provision of health insurance coverage for workers, particularly in small firms. Today, an employer can either offer coverage to all employees, sometimes a great cost, especially small businesses, or offer no health care assistance at all.

Senators should give employers another option by allowing them to contribute directly to a worker's personal health care plan. While some employers may not be able to afford to sponsor a full benefit package, they may be willing to provide a financial contribution to help their employees purchase their own health care plan. Legislation that clarifies that such a contribution does not qualify the individual plan as a group plan would facilitate this coverage, while avoiding costly and burdensome regulation on the business.   

• Provide new options for balances in Flexible Spending Arrangement (FSAs). The current Flexible Spending Arrangement law requires that the unused funds employees set aside in pre-tax form is returned to the employer at the end of the year. Not only does this "use-it-or-loose-it" provision discourage participation, it encourages unnecessary spending at years end to avoid the loss. While there are efforts underway to allow individuals to "carry over" some of the remaining balances, the better approach would be to allow individuals to withdraw these unused funds and pay normal taxes on them, as they would with their wages, or allow individuals to transfer the unused funds into a savings account established for health-related expenses. This would encourage greater use of the FSAs and remove the incentives to spend instead of save.

• Enact a Federalism Initiative.  Under a federalist approach, states could become laboratories of change and offer new and more effective ways to expand health insurance coverage, control costs, and improve the quality of health care. Senators should give states regulatory flexibility and some financial assistance to experiment with developing and designing health care policy solutions. Every state faces different challenges in their health care system, and an approach that encourages experimentation would give states the opportunity to focus on creating different solutions that reflect their own unique circumstances. Moreover, experimentation could provide valuable lessons to federal and other state policymakers.

Sen. George Voinovich (R-OH) and Sen. Jeff Bingaman (D-NM) are proposing  "The Health Partnership Act," which would establish a grant approach  to encourage states to carry out "a broad range of strategies" to increase coverage, improve quality and the efficiency of health care spending.   

Conclusion

The Senate's "Health Week" provides an opportunity to change federal health policy substantially. The Senate should focus on legislation that improves the lives of ordinary Americans, and consider legislation that increases personal control over health care dollars, expands consumer choice and competition in the health insurance markets, and results in a net deregulation of the health care system. Policy options include individual health care tax credits, interstate commerce in health insurance, and the promotion of state experimentation.

If Congress continues to refrain from enacting meaningful health care legislation, Americans should turn to their governors and state legislatures for help in redesigning health insurance markets to make health insurance more affordable and expand the control of individuals and families over their health care dollars.

Robert E. Moffit, Ph.D., is Director of, and Nina Owcharenko is a Senior Policy Analyst in, the Center for Health Policy Studies at The Heritage Foundation.