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Robert B. HelmsResident ScholarAmerican Enterprise Institute
ARIA Annual MeetingThe Capital HiltonAugust 7, 2006
Tax Policy and Health Insurance:History and Policy
2
The Health Policy Reform Debate
How we got here – some historyThe effects of tax policyTax policy options for reform
3
Health Care in the 1930s
“In the 1930s, the average physiciancould not affect the average conditionof the average patient”
4
Early History of Health Insurance
1930s: Some hospital insurance policies
1943: War Labor Board and IRS ruling that employer fringe benefits did not count as taxable wages
5
The Post-War Period
1954: Exclusion of health insurance from taxable income confirmed by the Congress
Post-war period Medical advances increased
cost of medical care and the demand for health insurance
Rapid growth in health insurance coverage
6
Post-War Economic Growth
0
100
200
300
400
500
1930 1940 1950 1960
Employment
Nat Health Exp
Disp Income
1930 = 100; Inflation Adjusted Dollars
Source: BEA, Datapedia 2005
7
Private Hospital Insurance Coverage
Group versus Individual, 1940-1970
0
40000
80000
120000
160000
Tho
usan
ds o
f P
erso
ns
Cov
ered
1940 1945 1950 1955 1960 1965 1970
Employer GroupIndividual
Note: Employer group is the total of persons covered by Blue Cross/Blue Shield plus insurance company group policies.
Source: Historical Statistics of the United States – Colonial Times to 1970, Series B401-412.
8
Health Insurance Tax Expenditures 1970 - 2006
$ Bil
lion
s
Sources: CBO 1970-1990; The Lewin Group, 2000-2006.2006 is an unpublished total estimate by John Sheils.
$0.00
$50.00
$100.00
$150.00
$200.00
$250.00
1970 1980 1990 2000 2004 2006
State
Self Empl andRetirees
Employer- PaidPremiums andPayroll Taxes
Med ExpDeduction
9
The Health Policy Reform Debate
How we got here – some historyThe effects of tax policyTax policy options for reform
10
Effects of Tax Policy on Health Insurance
Intensified the effects of increases in income, population, and medical technology
Expanded employer-based group insurance
Expanded insurance benefits – hospital, outpatient, mental health, dental, drugs
Reduced cost sharing
Induced a higher level of costs, prices, and expenditures – created winners and losers
11
Growth in Third-party Payments, 1960-2000
0
10
20
30
40
50
60
70
80
90
1960 1970 1980 1990 2000
Out-of-Pocket
Third Party
Perc
en
t of
NH
E
12
The Health Policy Reform Debate
How we got here – some historyThe effects of tax policyTax policy options for reform
13
Past Attempts to ReformHealth Policy
President Truman and National Health InsurancePresident Nixon’s offerThe Reagan eraPresident Clinton’s
Health Security Act
14
Tax Policy Options for Health Reform
Eliminate the tax exclusion Cap the tax exclusion Reduce the business tax deduction Increase the deductibility of personal health
expenditures Establish a new deduction for HSA premiums New tax credits for health insurance
To small employers To the uninsured
15
Eliminate the tax exclusionThe cost of employer-provided health insurance would be reported as taxable incomeWould force the most efficient and quickest reform of the health care systemBut, it has now been federal policy for over 60 years“. . . A notion that only a policy wonk could love, a meritorious policy idea with no natural political constituency.” [Clark Havighurst, 1994]
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Cap the tax exclusion -- 1
Like employer-provided life insurance, limit amount of employer contribution that could be excluded from taxable income
Only the amount above the cap would be reported as taxable income
Could be set at the upper range of premiums and be phased in gradually
Tax Reform Commission recommended $11,500 for family policy, $5,000 for individual policy
Could be indexed to general prices or health care prices
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Cap the tax exclusion -- 2
Rationale: Mutual interest of employees and employers to
control the cost of health insurance Reduce incentive to expand covered benefits Allows market forces to determine most
efficient way to structure health insurance and health care delivery
Tax cap proposed in FY 1984 and 1985 Recommended by the Tax Reform Comm.
2005
18
Reduce the business tax deduction
Would limit the ability of businesses to deduct the cost of health insurance
An especially bad policy idea Inconsistent with deductibility of other business
expenses, e.g., wages, raw material inputs, other costs of doing business
Strong incentive for firms to drop insurance coverage
Increases the number of the uninsured
19
Increase the deductibility of personal health expenditures
A new proposal by Cogan, Hubbard, and Kessler
Make all health expenditures paid directly by individuals deductible
Above-the-line deduction allowed
Requires at least a catastrophic plan
Applies to: Out-of-pocket expenditures Employee contributions to group premiums Premiums for individual health insurance policies
Objective is to reduce the tax bias in favor of employer coverage
20
Establish a new deduction for HSA premiums
Proposed by Bush in 2005 and 2006
Taxpayers could deduct the cost of a qualified high-deductible plan attached to an HSA
Extends a tax break to those who buy individual HSA policies
Same rationale as HSAs: Gives consumers strong incentives to seek
value in health purchases Strong incentive for consumers to save for
later health expenditures
21
Tax credits for health insurance Have been proposed by both parties Tax credits to small businesses
Kerry proposal – tax credit up to 50% of premiums Durbin/Lincoln & American Dream Initiative Bush proposal – tax credit for HSA contributions
Tax credits to low income individuals (TAA, Bush, others) Proposed by Bush earlier – modified in 2006
– Now for HSA-qualified plans only Tax credits increase with size of family Tax credits decline with income
22
Ending with Political RealityHarris Poll: “Most Important Issues for Government to Address”
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8
9
13
15
32
0 10 20 30
Education
Healthcare
Gas Prices
Immigration
The Economy
The War
The Harris Poll 57, July 20, 2006, Table 12.
%% %
