1. Robert B. Helms Resident Scholar American Enterprise Institute ARIA Annual Meeting The Capital Hilton August 7, 2006 Tax Policy and Health Insurance: History and Policy

2. 2 The Health Policy Reform Debate How we got here – some history The effects of tax policy Tax policy options for reform

3. 3 Health Care in the 1930s “In the 1930s, the average physician could not affect the average condition of the average patient”

4. 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. 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. 6 Post-War Economic Growth 1930 = 100; Inflation Adjusted Dollars Source: BEA, Datapedia 2005

7. 7 Private Hospital Insurance Coverage Group versus Individual, 1940-1970 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. 8 Health Insurance Tax Expenditures 1970 - 2006 $ Billions Sources: CBO 1970-1990; The Lewin Group, 2000-2006. 2006 is an unpublished total estimate by John Sheils.

9. 9 The Health Policy Reform Debate How we got here – some history The effects of tax policy Tax policy options for reform

10. 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. 11 Growth in Third-party Payments, 1960- 2000 Percent of NHE

12. 12 The Health Policy Reform Debate How we got here – some history The effects of tax policy Tax policy options for reform

13. 13 Past Attempts to Reform Health Policy President Truman and National Health Insurance President Nixon’s offer The Reagan era President Clinton’s Health Security Act

14. 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. 15 Eliminate the tax exclusion The cost of employer-provided health insurance would be reported as taxable income Would force the most efficient and quickest reform of the health care system But, 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]

16. 16 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

17. 17 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. 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. 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. 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. 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. 22 Ending with Political Reality Harris Poll: “Most Important Issues for Government to Address” The Harris Poll 57, July 20, 2006, Table 12. % % %