Using Taxes to Reform Health Insurance

Using Taxes to Reform Health Insurance: Pitfalls and Promises

Henry J. Aaron
Leonard E. Burman
Copyright Date: 2008
Pages: 282
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  • Book Info
    Using Taxes to Reform Health Insurance
    Book Description:

    Few people realize that one of the nation's largest health programs runs through the tax system. Reformers of all stripes propose to modify current tax rules as part of larger programs to increase coverage and control costs. Is the current system working? Will tax-based reforms achieve their goals? Several of the nation's foremost experts on taxation and health policy address these questions in Using Taxes to Reform Health Insurance, a joint product of the Urban-Brookings Tax Policy Center and the American Tax Policy Institute. Led by respected economists Henry Aaron of the Brookings Institution and Leonard Burman of the Urban Institute, contributors examine the role taxes currently play, the likely effects of recently introduced health savings accounts, the challenges of administering major subsidies for health insurance through the tax system, and options for using the tax system to expand health insurance coverage. No taxpayer or consumer of health care services can afford to ignore these issues.

    eISBN: 978-0-8157-0197-2
    Subjects: Political Science, Health Sciences

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Acknowledgments
    (pp. vii-x)
  4. 1 Introduction
    (pp. 1-12)

    Following the collapse of President Bill Clinton’s health reform proposal in 1994, most elected officials became unwilling to talk about major government action to change private health insurance arrangements. Democrats were shell-shocked by the political fallout from the Clinton debacle, to which some attributed the loss of control of both houses of Congress in 1994. Most Republicans were ideologically unsympathetic to federal tinkering with private health insurance decisions. And so for years both parties shunned the issue. No longer. Health system reform has once again become politically salient, consistently ranking among the top three issues in public opinion polls, along...

  5. 2 Tax Policy and the History of the Health Insurance Industry
    (pp. 13-35)

    For the last six decades, health insurance coverage has been provided primarily through policies offered to workers at their place of employment. In 2006 employer-based insurance covered 161.7 million people, approximately 62.2 percent of the nonelderly population.² Individually purchased policies covered an additional 6.8 percent of the nonelderly, while public programs covered 17.5 percent. Approximately 18 percent had no health coverage.³ By contrast, in 1940 before World War II, only 9 percent (12.3 million) of the population had any form of coverage for medical expenses.⁴ By any definition, the dominance of employer-based health insurance coverage has strongly influenced the economic...

  6. 3 The Tax Code, Employer-Sponsored Insurance, and the Distribution of Tax Subsidies
    (pp. 36-66)

    About 46 million Americans under age sixty-five, including 9 million children, lack health insurance. They receive less preventive care when healthy and poorer care when sick than do the insured. Furthermore, the public ultimately shoulders much of the burden of paying for the medical treatment of the uninsured, either through higher taxes or higher health care costs.

    The fact that many people cannot afford or choose not to obtain health insurance is not necessarily a cause for public intervention in the health insurance market. Poor people cannot afford many things. The best solution to the problems of poverty may be...

  7. 4 Health Savings Accounts: Recent Trends and Potential Effects on Coverage and Health Insurance Markets
    (pp. 67-91)

    In 2003 the Medicare Prescription Drug, Improvement, and Modernization Act (also called the Medicare Modernization Act or MMA) established health savings accounts (HSAs), which allow tax benefits for out-of-pocket health spending when paired with a high-deductible health insurance plan (HDHP).¹ This may be the most significant tax law change affecting health insurance coverage since the exclusion of employer-sponsored insurance (ESI) was codified in 1954. HSA advocates argue that the high deductibles will encourage health consumers to pay more attention to the costs and benefits of health care options, putting downward pressure on health spending. Critics worry that the combination of...

  8. 5 What’s in a Name? Are Health Savings Accounts Really Health Savings Accounts?
    (pp. 92-118)

    Health savings accounts (HSAs) are tax-sheltered savings instruments available to people under the age of 65 who buy high-deductible (HD) health insurance. Chapter 4, by Lisa Clemans-Cope, describes the origin of and rules governing HSAs. Together with high-deductible health insurance, HSAs composeconsumer-directed health care, a strategy for revamping payment for financing medical services. The principal purpose of HSAs is to encourage and enable people to switch from low-deductible health insurance to plans that cover only large or catastrophic expenditures. Advocates also hope that reduced premiums as well as the tax advantages of HSAs will encourage the previously uninsured to...

  9. 6 Tax Subsidies for Out-of-Pocket Health Care Costs
    (pp. 119-146)

    Each year, around the time employers have open enrollment for their benefits plans, newspapers publish stories headlining that employer-provided health insurance is becoming less generous. A 2003New York Timesstory observed that ”employers are shifting a growing share (of costs) onto people who make the heaviest use of medical services.” A 2005 story in the same paper said companies are ”shifting more costs to consumers, in the form of much higher deductibles, co-payments, or premiums.” And last year theLos Angeles Timeswrote that ”95 percent of covered workers are now responsible for copayments and shared costs.”¹

    These trends...

  10. 7 Administrative Issues: Challenges of the Current System
    (pp. 147-170)

    Many of the major health care reform proposals would assign a key administrative role to the IRS. To those who would rely heavily on IRS involvement, we say: Beware! The IRS’s track record in administering the existing, relatively simple tax rules governing health care is not heartening.

    Much of the challenge in reforming America’s health care delivery system relates to the difficulty of administering the tax rules regarding employer-provided and individually purchased health care. The current rules are, for the most part, comparatively simple. However, they permit employer-provided coverage to be denied to part-time employees, who in turn are ineligible...

  11. 8 The Challenges of Implementing Health Reform through the Tax System
    (pp. 171-210)

    Designers of fundamental health reform proposals often use the income tax system to achieve their goals. These goals include expanding health insurance coverage while containing the growth of medical costs. Health reform proposals may use the Internal Revenue Service (IRS) to enforce mandates requiring individuals to obtain health insurance, provide new tax-based subsidies for health insurance, or cap or eliminate the current exclusion for employer-provided health insurance

    Using the IRS to achieve health reform goals relies on strengths of the income tax system. First, the current income tax already provides substantial subsidies for health care through the exclusion for employer-provided...

  12. 9 Reforming the Tax Treatment of Health Care: Right Ways and Wrong Ways
    (pp. 211-229)

    Health care in America faces three fundamental problems. First, according to census estimates 47 million Americans are uninsured.¹ Second, America spends an enormous amount on health care for the insured while often getting little or no benefit at the margin.² And third, health care is the largest source of the long-run fiscal gap.³ An ideal reform proposal would make progress on all three dimensions. A good reform proposal would make a worth-while trade-off among the three dimensions. An unacceptable reform proposal would move in the wrong direction in some or all dimensions.

    Evaluation of reform proposals is complicated by the...

  13. 10 Simple Humans, Complex Insurance, Subtle Subsidies
    (pp. 230-262)

    The behavioral revolution in economics tells us that human beings often have difficulty making wise choices. The most widely chronicled difficulties in decisionmaking occur in conjunction with decisions made under conditions of uncertainty, decisions that involve significant elements of time, and decisions in complex environments. Unfortunately, these are precisely the factors involved when individuals choose a health insurance policy or choose whether and when to consume health care.

    Historically, U.S. consumers have been shielded from many choices about their health care. For most workers under the age of sixty-five, employers have been responsible for designing health insurance plans and have...

  14. 11 Taxes and Health Insurance
    (pp. 263-270)

    The single most important factor influencing the federal government’s long-term fiscal balance is the rate of growth in health care costs. Without any changes in federal law, the Congressional Budget Office projects that total spending on health care will rise from 16 percent of the GDP in 2007 to 25 percent in 2025 and 49 percent in 2082 and that net federal spending on Medicare and Medicaid will rise from 4.5 percent of GDP to almost 20 percent of GDP over the same period.¹ Many of the other issues central to the debate on future fiscal conditions, from the actuarial...

  15. Contributors
    (pp. 271-272)
  16. Index
    (pp. 273-282)
  17. Back Matter
    (pp. 283-283)