INTRODUCTION
Members of Congress are poised to make the problems of America's health care system worse. With the enactment of some version of the "patients' bill of rights" legislation (S. 1052, H.R. 2563, or H.R. 2315), creating new avenues for litigation combined with broad layers of federal regulation, it is certain that health care costs and thus the number of the uninsured would increase. The only question is how much.
Access to affordable health insurance should be Congress's top health care policy priority. Clearly, it is not. Nonetheless, there is some discernible uneasiness in Congress on this point. Therefore, both House bills (H.R. 2563 and H.R. 2315) attempt to expand access to health insurance coverage while expanding both federal regulation and new opportunities for litigation in the health care system. The so-called access provisions of the competing bills vary. These provisions, mostly changes in federal tax law, are designed to increase access to health insurance and medical services. Members of Congress should recognize that access provisions that distort an already distorted and damaged health insurance market will only make the system worse. The key issues in the current access debate:
- A Basic MSA
Consensus.
On one issue alone, there is a limited House consensus: the expansion of opportunities for Americans to get medical savings accounts (MSAs) if they want them. This is good policy. While both bills have MSA provisions, they are different and would have profoundly different consequences. - Tax Credits for Individuals
and Families.
A key objective of health insurance market reform should be the promotion of patient choice, expanding the personal control of individuals and families over sensitive health care decisions. Individual tax credits can be the best means to accomplish that end for the largest number of persons. Neither bill, however, contains provisions for refundable tax credits targeted to individuals and families to purchase health insurance. But there is a growing consensus in Congress behind this policy. - An Employer Tax
Credit.
The Ganske-Dingell bill has a limited role for tax credits, but only for employers. These credits would be available for employers under certain prescribed conditions; they would not be available for individuals and families to purchase the health care they want. Empowering third-party administrators or employers is clearly not the same as empowering individuals and families. Tying tax credits to the ability or willingness of an employer to participate in the program, or some other third-party player, is not the same as giving individuals and families the financial wherewithal to purchase a package of benefits that fits their needs.
Badly designed tax credits will not help those who need health insurance; worse, badly targeted or poorly designed tax credits will only reinforce the most undesirable features of the current employment-based health insurance market. Targeting yet another set of tax breaks to employers to provide new coverage for employees is the latest example of badly designed tax credit policy. Large corporations do a good job of providing health insurance, pooling risks and reducing administrative costs. Small businesses do not have the same advantages and are thus not an ideal vehicle for delivering health insurance.
A More Effective Access
Policy
Congress should provide
individual tax relief directly to individuals and families for the
purchase of health insurance. There is a growing bipartisan
consensus on this policy. For example, Representatives Richard
Armey (R-TX) and William Lipinski (D-IL) have sponsored the Fair
Care for the Uninsured Act (H.R. 1331), which would provide
refundable tax credits for the purchase of health insurance in
amounts equal to $1,000 for an individual, $2,000 for a couple, and
up to $3,000 for a family. Moreover, Members of Congress could
easily make some technical adjustment in the State Children's
Health Insurance Program to facilitate the use of SCHIP funds for
refundable tax credits.
In health care policy, there is indeed a mature consensus on health care tax credit policy. Experts ranging from the Urban Institute and the Progressive Policy Institute on the left to the American Enterprise Institute and The Heritage Foundation on the right, plus a growing number of private-sector associations and companies, are in agreement on the pressing need to address the tax treatment of health insurance. They are also in agreement that tax credits should be refundable, easily available, and generous enough to significantly increase access to insurance.[1] But the key point of agreement is that tax credits should be targeted to individuals and families, and not employers or other third-party administrators.
Beyond the provision of tax credits, the elimination of economically absurd restrictions on medical savings accounts, lifting restrictions on the tax free roll-over of flexible spending accounts (FSAs), and the promotion of defined contribution options would enhance patient freedom. In that way, sound tax policy will advance, and not retard, the movement toward greater personal freedom in the health care system, foster rational economic choices, and unleash genuine market competition.
THE RANGE OF ACCESS PROVISIONS IN THE HOUSE VERSIONS OF THE PATIENTS' BILL OF RIGHTS
Both H.R. 2563 (Ganske-Dingell )[2] and H.R. 2315 (Fletcher -Peterson)[3] include provisions intended to expand access to health insurance.
Limited Consensus on
MSAs
Under current law, there are strict limitations on the number of
persons who get MSAs and the time available for persons to get
them. The program ceases to be authorized in 2002.
Under Title VI of H.R. 2315, the sponsors provide for an expansion of the availability of medical savings accounts. Under Title V, Subtitle B, of H.R. 2563, the sponsors also provide for an expansion of medical savings accounts (Section 511). While the establishment of MSAs, thus promoting direct payment for medical services to physicians on a tax-free basis, constitutes solid health care policy, the MSA provisions in the bills, as noted, are quite different.
Fletcher-Peterson
Under Section 601 of Title VI of H.R. 2315, the sponsors repeal the
limitations on the number of medical savings accounts; eliminate
the restrictions on the kinds of firms that can offer MSAs, thus
allowing large and mid-size firms to offer their employees this
option; allow an increase in the deduction allowed for
contributions to MSAs; allow both employers and employees to
contribute to MSAs; and reduce the permitted deductibles under
high-deductible health plans. H.R. 2315 also makes technical
adjustments to the MSA law that would make the option attractive
for employees and employers, such as providing a cost-of-living
adjustment for MSA contributions; providing incentives for
preferred provider organizations (PPOs) to offer MSAs; and allowing
MSAs to be offered under company cafeteria plans, the program
governed by Section 125 of the Internal Revenue Code.
The MSA provisions of Fletcher-Peterson are a dramatic improvement over current law. They remove artificial barriers to consumer demand for medical savings accounts, and the eliminate arbitrary caps on the numbers of persons and the size of the firms that can offer them. This opens up new opportunities for insurance carriers to market such products. The Fletcher-Peterson bill thus establishes a level playing field for market competition.
Ganske-Dingell
Under Section 511 of Title V of H.R. 2563, the sponsors of the bill
would extend the current authorization of the medical savings
account program until 2004. In terms of the size of the firm
that could take advantage of the MSA option, the bill would change
the limitation from small firms with 50 or fewer employees to firms
with 100 or fewer employees. The bill would also provide for a
small expansion in the number of persons ( 1 million) eligible to
have an MSA. .
The MSA provisions of Ganske-Dingell are, at best, a marginal improvement over current law. Under the Health Insurance Portability and Accountability Act of 1996 (the Kennedy-Kassebaum bill), which established a limited MSA program, Congress and the Clinton Administration agreed to impose a cap on the number of policies( 750,000) that would be available to employees. . The law also specified that the MSA option would be confined to firms with between 2 and 50 employees. Worse, the 1996 MSA law contained dozens of statutory and regulatory restrictions, making the widespread marketing of MSA products particularly difficult and rendering the MSA option less attractive to small firms already wrestling with an overabundance of government generated paperwork.
The limitations on time and the number of policies both restrict market entry and discourage investment, as well as impose a pre-ordained cap on consumer demand. The 1996 law, in other words, is a deliberate distortion of the market. The Ganske-Dingell proposal is in effect, a statutory continuation of this deliberate market distortion.
Expanding Access to Health
Insurance Options
Under H.R. 2563, the sponsors provide for a deduction of 100
percent of health insurance costs for self-employed individuals
(Section 512). For self-employed taxpayers, this is good policy
because it reduces some of the inequity in the federal tax
treatment of health insurance. The 100 percent tax deduction,
however, would have only limited impact on reducing the number of
uninsured, who are mostly younger, lower-income working persons,
often employees in small businesses and particularly service
industries.
Under H.R. 2315, the sponsors include significant provisions for the promotion of association health plans. The promotion of association health plans, broadening pooling arrangements and health care options for individuals and families, is also solid health care policy.
The Conspicuous Absence of
Tax Credits for Individuals and Families
Neither the Fletcher-Peterson bill nor the Ganske-Dingell bill
includes individual tax credit provisions to help individuals and
families purchase health insurance. When individuals purchase and
own an insurance policy, they not only have the right to switch
plans when they are dissatisfied with coverage or service, but also
have the right to sue for breach of contract, enjoy portability in
their health insurance, and can choose plans and options that
protect their medical privacy.
An Employer Tax Credit
Combined with Greater Government Control
Under H.R. 2563, the sponsors set up a new tax credit scheme for
employers, combined with the creation of new purchasing
cooperatives subject to both federal regulation and state licensing
requirements. It is one thing to promote additional distortions in
the federal tax treatment of health insurance as an unintended
consequence, or simple inertia in the face of a tradition based on
an historical accident. It is another thing to create distortion in
the health insurance market as a matter of deliberate policy. This,
then, is a remarkable provision.
Under Section 513 of the bill, the sponsors provide a tax credit for small businesses that offer "new" health plans for employees. A "new" health plan would be any health plan that has covered those employees for two previous years and is available to at least 70 percent of the "qualified" employees of the firm. The small employer's tax credit would be 30 percent if the employer bought the health insurance product from a "qualified health benefit purchasing coalition" and 20 percent in the case of a health insurance plan that is not purchased from such a "purchasing coalition." A "qualified health benefit purchasing coalition" is defined in the bill as a "private not for profit" corporation that meets state licensure requirements and requirements set forth by the federal government. The credit would be available to employers who had "qualified" employees who earned more than $10,000 per annum. The credit would also be subject to a dollar limit: $2,000 in the case of self-only coverage and $5,000 in the case of family coverage. It would sunset on or after January 1, 2010.
This is a curious provision. The employer tax credit would amount to a government-backed incentive for small businesses to enroll their employees in these newly created cooperatives. It would thus compound existing distortions in the tax treatment of health insurance, deliberately creating an uneven playing field and further undermining genuine market competition. A straightforward, genuine tax credit would be neutral; the federal tax code would not be biased toward any one type of insurance or style of health care delivery. State-based, federally regulated health insurance cooperatives benefiting from favorable federal tax treatment are eerily reminiscent of the "regional alliances" of the failed Clinton health plan of 1993.
Concentrating Political
Power
Free markets diffuse power. In a consumer choice system in which
persons make the crucial decisions about goods and services in an
open, dynamic, and competitive market, the key decision points are
as numerous as the number of consumers who make the decisions. Such
a system is inherently resistant to politicization or regulatory
overkill.
Restricted markets lend themselves to political manipulation and tend to increase political power. For politicians who favor government control of the health care system, the temporary preservation or even expansion of highly restrictive employment-based health care arrangements serves a crucial regulatory purpose: The central decision point is the contractual relationship between the employer and the insurer, and it is more or less clearly defined and easy to regulate and control. In the provisions outlined in H.R. 2563, the level of third-party (and political) control is sharply increased. Individuals and their families would henceforth be subject not only to employer-insurer decisions on health care, but also to those of the officials of the new government-sponsored purchasing cooperatives favored exclusively by the tax credit system. That layer of authority would be overlaid, of course, by new federal regulatory authorities as well as existing state regulatory authorities. From the standpoint of patients' personal freedom, this is not progress.
Nonetheless, it is easy to see why those who favor either restricted or highly regulated health care markets or direct government control would want to avoid a diffusion of decision-making power in the system. The proposed business tax credit for expanding access is broadly similar, at least in spirit, to the so-called Common Ground proposal set forth by the Health Insurance Association of America, the large health insurance trade association, and Families USA, a liberal grassroots organization that routinely campaigns for greater government control of the health care system. (For a detailed examination of the Common Ground proposal, see Robert E. Moffit, "Why Adopting the Common Ground Health Care Proposal Would Be a Costly Mistake," Heritage Foundation Backgrounder No. 1445, June 1, 2001, available at www.heritage.org/library/backgrounder/bg1445.html.)
HEALTH CARE TAX CREDITS FOR INDIVIDUALS AND FAMILIES: THE RIGHT SOLUTION
On one crucial point, there is a broad consensus among health care economists: The health insurance market does not work like other insurance markets.
The health insurance market is a distorted market, and it is distorted primarily by the federal tax treatment of health insurance. Under the current law, employees get unlimited tax relief for the purchase of health insuranceif, and only if, they get their health insurance through their employer; thus, the federal tax code has created a monopoly of employer-based health insurance. This has related consequences: There is no normal interaction of supply and demand; there is no normal consumer demand, because there is no consumer choice, or only limited consumer choice, in the system; there is no portability in insurance; and there is no normal market pressure to control health care costs, because employees are superficially insulated from costs that are "paid" by their employers.
If policymakers want to repair America's health insurance markets, they need to repair the tax treatment of health insurance. Tax deductions are good as far as they go, but they do not go far enough. Tax credits are the best way to expand choice, private insurance, and market competition to include the largest number of persons. But tax credit policy requires close attention to detail. The crucial issue is not simply the provision of health care tax credits; it is how the tax credits are provided, and to whom they will be given. Tax credits should empower persons to make crucial decisions in the system: Who is being empowered? Another crucial issue in tax credit policy is how the tax credits are designed: What kind of credits are available? What are their limitations? How are they to be administered?
There are many ways to enhance the reach and effectiveness of tax credits:
-
Make them refundable.
This means, for the large number of lower-income working Americans who do not have health insurance, that they will get a voucher or direct subsidy. - Be
generous.
Tax credits should provide "meaningful" assistance to help individuals purchase health insurance. More help should go to lower-income persons or persons with higher health care costs. The Armey-Lipinski bill, as noted, provides for a tax credit of up to $3,000 per family. In a recent national survey of Hispanic adults, who have the highest rates of uninsurance among minority groups in the United States, the Latino Coalition found that 85 percent were in favor of a subsidy of up to $3,000 per year to help them buy private insurance; only 9 percent were opposed to the proposal.[4] -
Make them easily and readily available.
Unemployed persons should be able to access refundable tax credit assistance through the unemployment compensation system. In other cases, credits could be advanced or assigned to the health insurance plan a person chooses. Working people could get access credits through the place of work. For example, the Progressive Policy Institute, the research arm of the Democratic Leadership Council, has suggested that persons could sign up for (or affirmatively decline) the available tax credit and health insurance coverage at the place of work. Moreover, employers could act as a clearinghouse for health insurance options, just as employers today serve as a clearinghouse for 401(k) plans in pension programs. There is no reason why employers could not play a significant role in a new health care tax credit system for employees and their families. (For a discussion of the potential role of employers in an individual tax credit system, see Stuart M. Butler, "How Health Tax Credits for families Would Supplement Employment-Based Coverage," Heritage Foundation Backgrounder No. 1420, March 16, 2001, available at www.heritage.org/library/backgrounder/bg1420.html.) -
Use existing funds from other state and federal health care programs.
Families and children eligible for assistance under the State Children Health Insurance Program (SCHIP) should be able to use SCHIP funds, combined with a federal tax credit, to buy health plans of their choice. States could also supplement a federal tax credit program. -
Establish consistent policies.
Policymakers should reverse federal policies governing employer participation in the purchase of private health insurance in the individual market. Today, for example, if a consumer were to use a tax credit for the purchase of an individual policy and wanted the employer to contribute to the purchase of this policy, she would have a problem. The source of the problem: the former Health Care Financing Administration (HCFA), now called the Centers for Medicare and Medicaid Services (CMS). This HHS bureaucracy issued a memorandum, in the final days of the Clinton Administration, that holds that if an employer makes any financial contribution at all to the purchase of an individual health care plan, that employer's very act means that the policy will be deemed a "group plan" for the purposes of federal regulation and all of the regulatory requirements that go with group plans. Under such a rule, health insurance carriers in the individual market will have an incentive to reject the person's application for coverage. This rule thus undermines the efforts of an employer who wants to help his employees to get private health insurance coverage. -
Supplement health plan choice with personal choice of doctors and medical services.
Today, every dollar that passes through the bureaucratic claims processing apparatus of an insurance company is tax free; every dollar that is paid to a doctor directly, outside of the insurance system, is not. From an economic standpoint, this is absurd public policy. It promotes waste and inefficiency in the financing and delivery of routine medical services and is the flash point that has given rise to the patients' bill of rights legislation. The remedy is simple: Extend to direct cash payment for routine medical services the same favorable tax treatment now available only to employer-based health insurance. Two ways to accomplish this would be (1) to eliminate the regulatory restrictions on medical savings accounts (MSAs) and (2) to allow employers and employees to roll over unused flexible spending accounts (FSAs), under Section 125 of the Internal Revenue Code, tax free for the routine purchases of medical services. Direct payment avoids the insurance bureaucracy, and thus overrides the disputes.
CONCLUSION
Members of Congress and the Bush Administration should step back and look at the big picture. The object of federal health care policy should be to expand patient choice and market competition. Policies should be crafted to open up the health insurance markets, loosen up the costly, top-heavy regulatory system imposed on those markets, and give individuals and families more personal control over their health care decisions.
There are several ways to accomplish this. Medical savings accounts (if liberated from the regulatory restrictions imposed by Congress and the Clinton Administration that are deliberately to inhibit their growth) would give patients direct control over their health care spending. It would enable them and their doctors to bypass the maddening interference of third-party insurance administrators into the doctor-patient relationship. A rollover of flexible spending accounts, or Section 125 plans, would largely accomplish the same thing. Health association plans would likewise broaden the opportunities for individuals and families to get new health insurance options outside of the traditional system. And a system of individual tax credits would expand access and choice to millions of Americans who cannot afford health insurance and enable them to buy the plan they want rather than what some third party decides they must have. The combined effect of these measures would be profound.
Once again, a tax credit, if not properly designed, can be counterproductive. A tax credit policy that targets tax relief to third parties, such as employers (in H.R. 2653), does not accomplish the goal of patient choice; it only frustrates it. Worse, it reinforces all of the worst features of the current third-party reimbursement system that has generated support for a patients' bill of rights in the first place. Finally, it imposes an undesirable program on small businesses and would have only a limited impact on the large number of Americans who are without health insurance.
The health care policy embodied in the patients' rights legislation is unbalanced. A few persons who might not otherwise get relief through the courts would doubtless get relief under the proposed House versions of the legislation. But the problem of a large number of Americans without health insurance is likely to be exacerbated. From a general policy standpoint, the most significant result of both the House and Senate legislation would be to impose a formidable federal regulatory framework, making it even harder for already highly regulated private insurance companies to operate; make the offering of health insurance benefits even more costly and less attractive to employers; further weaken the private health insurance market; and lay the political and economic groundwork for the next, and inevitable, left-wing campaign for national health insurance.
[1] For a compilation of the analyses of these disparate health policy analysts on tax credit policy, see Grace-Marie Arnett, ed., Empowering Health Care Consumers Through Tax Reform (Ann Arbor: University of Michigan Press, 1999).
[2] For purposes of this report, the Ganske-Dingell bill language cited is the rewrite of the legislation available as of July 18, 2001, at 8:12 p.m.
[3] For purposes of this report, the Fletcher-Peterson language cited is H.R. 2315, as introduced in the House of Representatives on June 26, 2001.
[4] The Latino Coalition, "National Survey of Hispanic Adults," Executive Summary, July 24, 2001, p. 1.
