Using Tax Reform to Drive Health Care Reform

Abstract

INCREMENTAL CHANGE AND POLICY MAKING BY INACTION have left US health care finance in disarray. Aaron has called existing health care finance arrangements “an administrative monstrosity, a truly bizarre melange of thousands of payers with payment systems that differ for no socially beneficial reason.” The ever-growing roster of health care funding sources now includes employer-paid and employee-paid insurance premiums; patient co-pays and deductibles; federal and state income and payroll tax subsidies; the itemized deduction for medical expenses; tax subsidies for health savings accounts, Archer medical savings accounts and section 125 “cafeteria” plans; the Medicare Part A payroll tax; Medicare Part A, B, C, and D premiums; and federal, state, and local general revenues. Even this is only a partial list. Directly and indirectly, tax financing now covers more than 60% of US health care costs. In the abstract, it is possible to distinguish between public and private health care funding, but in operation the 2 are inextricably entangled. It is difficult to say where one ends and the other begins. It is time to consider a thorough overhaul of this nonsystem. The goal would be not only to strengthen health care finance for its own sake, but also to achieve fundamental reform of health care. In other words, along with a small but increasing number of other commentators, we contend that comprehensive tax reform could be a powerful driver of health care reform. Much of the health policy literature takes the polar opposite approach. Taxes are assigned a passive role, regarded merely as a source of revenues, and not a direct instrument of policy. For example, proponents of singlepayer plans support broad-based taxes to pay for universal health insurance but seldom provide much detail. This relegates the tax component of such proposals to secondary status by default. Another well-known means of achieving universal coverage, evident in the 2008 presidential campaign, attempts to sidestep tax issues by using health insurance mandates. Mandates serve the important purpose of minimizing disruption to patients’ relationships with insurers and clinicians, but a perceived political advantage is reduced reliance on taxes. Economically, this is an illusion, as mandates function much as a highly regressive tax. Mandates have also fared poorly thus far as a national political strategy. The Congressional Budget Office’s pronouncement that the mandates in the Clinton administration’s Health Security Act were “taxes” for official budget purposes was a watershed event in that legislation’s demise. One tax issue that has played a more prominent role in health policy discussions concerns the exclusion of the value of employer-provided health insurance from taxable income. Proposals to modify this tax subsidy, such as Republican presidential candidate John McCain’s plan to replace it with a refundable tax credit, would constitute a major revision of the personal income and payroll taxes. These proposals would, however, leave the overall structure of the tax system unchanged, including the relative share of health care spending implicitly paid for by income, payroll, corporate, and other taxes. Comprehensive tax reform, by contrast, would mean reexamining and reengineering the entire structure. The 60% of US health care costs financed by taxes equals 10% of US gross national product or more than one-third of federal and state tax revenues. That is, de facto US tax and health policy already devotes more than one-third of all US taxes to health care. For decades, the composition of this enormous revenue base has been determined by historical accident and political stasis. The purpose of tax reform would be instead to harness these revenues to serve explicit, consciously chosen health, tax, and budget policy goals. Such an approach would result in 3 fundamental changes. First, rather than relying on a confusing welter of finance sources, it would use taxes and other funding that are as simple and transparent as possible. This would result in significantly increased accountability of government policy mak-