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Perspectives in Biology and Medicine 44.1 (2001) 155-157

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Book Review

Empowering Health Care Consumers through Tax Reform

Empowering Health Care Consumers through Tax Reform. Edited by Grace-Marie Arnett. Ann Arbor: Univ. of Michigan Press, 1999. Pp. vii + 263. $39.50.

Health policy analysts are in near unanimous agreement that the single least defensible feature of U.S. health policy is an obscure provision of the tax code that dates back, in one form or another, to the beginnings of the income tax in 1913. This provision says simply that employer contributions to employee health insurance plans are not part of an employee's taxable income. That means that an employee who receives a $1,000 wage bonus must pay income, Social Security, and Medicare on that added compensation. If that same employee receives that $1,000 in the form of an employer health plan instead, no taxes are due on that compensation. In effect, the employee receives a discount of about 30 percent on the purchase of health insurance.

Doesn't sound like much, does it? But analysts agree that that obscure tax provision cost the U.S. government at least $100 billion last year--about as much as the federal government contributed to the Medicaid program. Then there are the distortions those $100 billion introduce. By discounting the price of health plans, the tax provision leads employees to buy more generous health plans which, in turn, led the nation to spend much more on health care than it otherwise would have. It discourages the use of plans with large deductibles, and related forms such as medical savings accounts (MSAs), because the tax discount applies only to insurance premiums.

The provision is available only to those who obtain coverage through their employers, buttressing our employer-based insurance system. Some people who would be better off buying individual insurance coverage are induced by the tax subsidy to obtain coverage through employment, while others might prefer a different plan than the one that their employer offers. Furthermore, the link between jobs and insurance may keep some workers locked in their current jobs and coverage, unable to respond to better opportunities, and it puts small firms, who find it harder to offer coverage, at a costly disadvantage in the labor market. Finally, the size of the tax benefit from taking compensation in the form of health insurance depends on two factors: marginal tax rates and the cost of insurance plans purchased. Higher marginal tax rates and richer plans translate into bigger dollar discounts. As a result, most of those $100 billion in benefits went to higher income employees with Cadillac health plans--most of which employees would have bought health insurance even without the subsidy. [End Page 155]

Empowering Health Care Consumers through Tax Reform is a compendium of essays by both conservative and liberal analysts decrying the current tax treatment of coverage and proposing other, market-based, alternatives. The series of short, accessible essays explains the faults of the existing system and focuses on how the funds currently devoted to this distortionary and regressive subsidy could be redeployed toward a fairer, more efficient system. Transforming the current open-ended subsidy into a fixed-dollar tax credit, for example, would give every American family not currently receiving public insurance benefits a sum roughly equal to 1/4 the cost of a family health insurance policy. In so doing, it would reduce significantly (though by no means completely) the number currently uninsured and it would lead to more judicious insurance purchases by those currently holding employer-sponsored insurance.

The structure of our private health insurance system--its reliance on employer-sponsored coverage, limited use of catastrophic coverage, and shift to managed care--are undoubtedly influenced by the tax system. Still, it is extremely unlikely that a straightforward change from an open-ended tax subsidy to a fixed tax credit would lead to a deep transformation of that structure. No redeployment of tax subsidy funds would lead to a wholesale shift toward individual coverage and medical savings accounts and away from...


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