Another reason to remember Pearl Harbor – tax-free employer-sponsored health insurance – The State of Health Care in America – Column
Robert Emmet Moffit
The author, a longtime observer of the Washington scene, is the deputy director of domestic policy at the Heritage Foundation and was a member of the Reagan administration in the Department of Health and Human Services.
The first step in serious health care reform in the 1990s is to recognize a simple historical fact: The United States won World War 1I. This simple fact is of singular importance. The reason: The current tax treatment of health insurance is a product of the exigencies of a wartime economy, particularly the Roosevelt administration’s imposition of wage and price controls in the 1940s. With 14 million men under arms, combined with a strong demand for labor, Congress and the IRS gave business and labor partial relief from the constraints of the federal government’s wage and price restrictions by making compensation, in the form of health care benefits, tax-free.
This tax treatment has driven and shaped the health insurance market as we know it today. The current federal tax system supports private-employer-based insurance with huge “tax subsidies” or “tax expenditures.” But tiffs was a compensation decision, not a health policy decision, and it was made under the extraordinary conditions of a wartime economy. While the United States defeated Hitler and Tojo, the wartime tax policy has remained virtually unchanged. So the first principle of health care reform is quite simple: The tax policies of the 1940s should be updated to meet the new conditions of the 1990s.
Under the 1940s-style-health care model the free market principle of consumer choice is frustrated and real, not “managed,” competition is restricted. For example, there is no portability in the system. If you are an American citizen and you lose or change your job, you do not lose your life insurance, or your auto insurance or your homeowner insurance. You only lose your health insurance, Your most important insurance, the insurance that protects you and your family from serious illness and financial catastrophe.
This makes no sense for the work-force of the 1990s. With the entry of women into the workforce in unprecedented numbers, with high mobility in careers, this is absurd public policy. Americans are treated, for all practical purposes, as if they were all factory workers in a company town. But there is a reason for it. If you are an American citizen, you get federal, and often state, tax relief for the purchase of health insurance on only one condition: that you get your insurance through your employer. If you are employed in a large corporation with a large benefits package, you do very well, with big tax benefits and a big chunk of tax-free income. If you are middle income or low income, employed in a smaller company, the tax breaks are modest. If your employer offers you no insurance, your only option is to purchase individual policies, which are prohibitively expensive, with after-tax dollars, which makes them even more prohibitively expensive. For low-income Americans and most middle-income Americans, these kinds of options are not financially realistic. We can expect even more uninsurance.
In spite of these systemic deficiencies, we have become so used to the current system that we normally do not imagine–some of us cannot ever imagine–what it would be like if we did not do things this way. Seemingly, we can imagine only that pushing millions of American workers and their families into employer-sponsored managed care plans, while limiting their choice of physicians, will contain costs–hoping against hope that the temporary dip in corporate insurance premiums will continue into the foreseeable future.
But there is a way to grasp how irrational the 1940s federal tax policy is by a simple act of imagination. Imagine for a moment what the markets would be like today if we applied this way of doing business to any other complex purchase of services or commodities. Imagine that the Congress provided exclusive and unlimited tax relief for auto insurance if, and only if, your employer purchased that auto insurance. That would have some superficial attractiveness to many of us; it would be “free,” or we would tend to think of it as “free.” We’d be able to top off the gas tank, have our windshields wiped, our oil checked, our tires inflated, our carburetors adjusted, and all of these services charged to our handy auto insurance card. Labor would bargain with management for more comprehensive care, weighing the care benefit with other compensation, including health, wages and retirement.
It is likely under such a scenario that auto insurance costs would increase dramatically; that policymakers in Washington would talk somberly about the growing auto insurance “crisis,” the inability of too many Americans to get access to auto insurance and its skyrocketing costs. And the public policy solutions would likely sound familiar: Establish an auto insurance commission with broad regulatory powers, “manage access” to auto insurance services to cut back on “unnecessary services” or set up a government-style fee schedule for auto care “providers,” a kind of DRG system for auto mechanics and service stations. To make the analogy complete, under such a strange federal tax policy, your auto insurance might be terrific at tune-ups, but of course, might not cover car-totaling collisions. And, of course, if you lost your job or changed your job, you couldn’t drive–at least without greater legal or financial risk–on the public highways.
At some point, of course, some bright auto policy wonk would champion the creation of a government monopoly for auto insurance, promising that such a new federal program would simultaneously guarantee universal auto insurance and cut auto insurance costs. Likewise, imagine what the American housing market might be like if you could deduct your home mortgage from federal taxation only on the condition that your employer selected the realtor or bought you your home. If you were to say to yourself, such an arrangement would be crazy, you would be right. And of course, even in health care policy, it is.
On health care policy, we can change the current costly system and open up the health care markets, allowing people more personal freedom of choice and forcing insurance companies into more genuine competition. The Heritage Foundation has outlined a comprehensive and cost-effective plan to do just that by giving Americans individual tax relief, either in the form of a tax credit or a voucher, regardless of where they work. Adjusting these credits or vouchers for family income or health care needs, Congress could allow American families to use such tax relief for the purchase of a basic package of health insurance (at least catastrophic coverage), out-of-pocket expenses or the opening of medical savings accounts, tax-free accounts that can be rolled over each year, tax-free, and from which patients can pay doctors directly for routine medical services.
If America’s business leaders wish to preserve a largely private health care system and avoid a British- or Canadian-style health care system, they should forget simply building upon the World War II model. The reason: Underlying that model are major market distortions created by the federal tax policies of the 1940s that undermine market principles of consumer choices and competition. These distortions have contributed to higher health care costs while accelerating the rate of uninsurance.
To build upon the World War II model means, inescapably, that we must dose it up even more to compensate for these distortions, and increase the role of government bureaucracy and its regulatory regime over both the medical profession and the insurance industry. This means, in effect, reducing doctors and hospitals to the status of even more highly regulated public utilities. Patients, denied easy access to physicians of their choice, will pay the price in a broken market, even as they marvel over the latest achievement of German automotive engineering or buy the latest electronic wizardry from Sony.
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