Health Reform Debate in Congress Takes a Free Market Turn

The most unexpected of debates is brewing in Washington – a debate over the best way to help uninsured Americans obtain private health insurance. Congress is considering a number of bills that would offer tax credits directly to individuals to purchase their own health coverage in the private marketplace. 

The measures have diverse bi-partisan support, from liberal California Democrat Pete Stark to conservative Texas Republican Dick Armey. Why would this self-described congressional odd couple be supporting the same idea? “We seldom agree on anything, but on this we do agree,” Armey and Stark wrote in a recent Washington Post commentary they co-authored. “Congress should act now to help the 43 million Americans who have no health insurance?[and] create a new refundable tax credit to enable all Americans to buy decent health coverage.” 

Both sides see the number of uninsured rising during the healthiest economic climate in decades, and both realize that action is needed. Liberals say they aren’t optimistic about creating another new federal health program for the uninsured in this Congress. The $48 billion State Children’s Health Insurance Program – the largest government health insurance expansion since Medicare and Medicaid – was enacted in 1997, and President Clinton admitted last week that he is disappointed with its results. Conservatives have tired of the incessant battles of fighting back liberal proposals to pull more Americans into government-run health systems and are energized by an idea that offers private-sector solutions. 

Health reform now registers as the number one issue that voters who responded to a Pew Research Center poll in mid-July say they want discussed in the 2000 elections. Already, the congressional docket is dominated this summer by health care issues, from Medicare reform and prescription drug coverage, to medical privacy, and managed care regulation. 

For decades, policy makers at all levels of government have been searching for ways to help Americans gain greater access to affordable health care. As costs and the number of uninsured continue to rise, a different approach clearly is needed. Liberals and conservatives see tax credits for the uninsured as a first step that both can agree would help. 

A number of tax credit bills either have been introduced or soon will be. Besides Mr. Armey and Mr. Stark, other sponsors include representatives Jim McDermott (D-WA), Nancy Johnson (R-CT), Charlie Norwood (R-GA), John Shadegg (R-AZ), and Gene Green (D-TX); plus senators Jim Jeffords (R-VT), Barbara Boxer (D-CA), Richard Durbin (D-IL), John Breaux (D-LA), John Kerrey (D-NE), and Joe Lieberman (D-CT). In addition, proposals based on tax credits for the uninsured have been offered by the American Medical Association, the Health Insurance Association of America, the American College of Physicians/Society of Internal Medicine, the National Association of Health Underwriters, and Blue Cross and Blue Shield Association. 

All differ in the size of the credit and the targeted populations: Armey would offer credits of up to $3,000 a year to families who cannot get health insurance through an employer, and Stark offers $3,600 a year per family, with an income phase-out, for those not participating in an employer plan. Under both bills, those at lower incomes would qualify to have the amount of the credit “refunded” to them for the purchase of health insurance if the amount of the credit is more than they owe in taxes. 

The Health Policy Consensus Group, made up of 18 health policy experts from the leading market-oriented think tanks, held a news conference in June in which they recommended directing credits to individuals and families to help them obtain private health insurance. They believe that many of the problems in the health sector are rooted in the tax code, particularly the tax treatment of health insurance that is antiquated, regressive, inflationary, and discriminatory. 

Tax credits, therefore, are not only a good idea politically, but wise policy as well. Economists have been arguing for decades that the structure of tax subsidies for health insurance benefits taxpayers in upper incomes who have jobs that offer health insurance and does little to provide help for people who work for companies that don’t offer insurance and who have lower incomes. For them, the tax benefit is worth little or nothing and they are the most likely to be uninsured. 

Economist John Sheils of the Lewin Group in Fairfax, Virginia, estimates that federal and state tax preferences for health insurance were worth $125 billion in 1998. Those at the lower end of the income scale, the young, minorities, and those working for small firms that don’t provide health insurance receive virtually none of these tax breaks. Sheils estimates that a family with an income of $100,000 or over receives a tax benefit worth $2,357 for health insurance while a family making less than $15,000 gets only $71 in tax benefits. 

But the system that ties health insurance to the workplace is breaking down and is one of the reasons the number of uninsured is rising when the economy is strong. The Labor Department estimates that 13 million Americans change their employment status every month, and that 40 percent of the workforce, or roughly 50 million workers, change jobs within a year. The young change jobs most rapidly and, not coincidentally, younger Americans aged 18-24 are the most likely to be without health insurance. With this kind of job mobility, having industrial-age federal policies dating to before World War II that tie health insurance to the workplace clearly are not suited for a highly mobile 21st century economy. 

For their part, employers are having second thought about being the only vehicle for private health insurance. Costs are beginning to rise again, and companies are nervous about potential legal liabilities under legislative proposals that would make them responsible for bad medical decisions made by the health plans that they sponsor for their employees. 

In considering individually-based tax credits, Congress is taking the first halting steps to consider policies that would break the lock between health insurance and the workplace and allow more individuals to purchase health insurance on their own. There are a number of problems, including the thousands of health insurance regulations and mandates that have been imposed by the states that are crippling the market for individual and small group insurance. 

But given enough incentive, the vitality and creativity of the marketplace can overcome even this obstacle. For example, a 110-year-old insurance company, Provident American Corp of Pennsylvania, severed ties with 20,000 shoe-leather agents and moved into cyberspace. Now called HealthAxis.com Inc., the company is selling a variety of health insurance products on-line in what it believes is a largely untapped $73 billion annual market of individual consumers and small businesses. 

In the arcane tax policy debate in Washington, the main point of contention is whether to offer tax credits or tax deductions. Unfortunately, both chairmen of the tax writing committees of Congress – House Ways and Means Chairman Bill Archer of Texas and Senate Finance Committee Chairman Bill Roth – support tax deductions. Deductions are worth more to those who have higher incomes, are in higher marginal tax brackets, and who itemize their taxes. Tax credits are a more efficient way to subsidize the purchase of health insurance for middle and lower-income taxpayers. In addition, by making tax credits refundable, it is possible to use the tax system to subsidize those people who do not currently pay income taxes. When the Senate considers tax legislation on the floor this week, Senator Jeffords plans to introduce a bill that would move the debate front and center by offering a refundable tax credit targeted to low and moderate income Americans. 

Providing credits or other fixed incentives to individuals and families would mean millions of Americans not eligible for the current tax subsidy would receive help in purchasing health insurance. This would expand choice, give individuals the opportunity and responsibility to choose and own their own health insurance, and it would make costs both more visible and predictable to consumers. Health care costs could be contained, quality enhanced, and access to care greatly expanded by creating a new and more equitable set of incentives so individuals can choose and own their own health insurance and make their own health care arrangements in an open and competitive marketplace. 

This is a far cry from the dark days of the Clinton health reform debate five years ago when it seemed the slide toward socialism was inevitable. For the first time, the terrain of the debate has shifted toward free markets. 




Grace-Marie Arnett is president of the Galen Institute, a public policy research organization based in Alexandria, Virginia. She is the editor of Empowering Health Care Consumers through Tax Reform, published in 1999 by the University of Michigan Press.

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The most unexpected of debates is brewing in Washington – a debate over the best way to help uninsured Americans obtain private health insurance. Congress is considering a number of bills that would offer tax credits directly to individuals to purchase their own health coverage in the private marketplace. 

The measures have diverse bi-partisan support, from liberal California Democrat Pete Stark to conservative Texas Republican Dick Armey. Why would this self-described congressional odd couple be supporting the same idea? “We seldom agree on anything, but on this we do agree,” Armey and Stark wrote in a recent Washington Post commentary they co-authored. “Congress should act now to help the 43 million Americans who have no health insurance?[and] create a new refundable tax credit to enable all Americans to buy decent health coverage.” 

Both sides see the number of uninsured rising during the healthiest economic climate in decades, and both realize that action is needed. Liberals say they aren’t optimistic about creating another new federal health program for the uninsured in this Congress. The $48 billion State Children’s Health Insurance Program – the largest government health insurance expansion since Medicare and Medicaid – was enacted in 1997, and President Clinton admitted last week that he is disappointed with its results. Conservatives have tired of the incessant battles of fighting back liberal proposals to pull more Americans into government-run health systems and are energized by an idea that offers private-sector solutions. 

Health reform now registers as the number one issue that voters who responded to a Pew Research Center poll in mid-July say they want discussed in the 2000 elections. Already, the congressional docket is dominated this summer by health care issues, from Medicare reform and prescription drug coverage, to medical privacy, and managed care regulation. 

For decades, policy makers at all levels of government have been searching for ways to help Americans gain greater access to affordable health care. As costs and the number of uninsured continue to rise, a different approach clearly is needed. Liberals and conservatives see tax credits for the uninsured as a first step that both can agree would help. 

A number of tax credit bills either have been introduced or soon will be. Besides Mr. Armey and Mr. Stark, other sponsors include representatives Jim McDermott (D-WA), Nancy Johnson (R-CT), Charlie Norwood (R-GA), John Shadegg (R-AZ), and Gene Green (D-TX); plus senators Jim Jeffords (R-VT), Barbara Boxer (D-CA), Richard Durbin (D-IL), John Breaux (D-LA), John Kerrey (D-NE), and Joe Lieberman (D-CT). In addition, proposals based on tax credits for the uninsured have been offered by the American Medical Association, the Health Insurance Association of America, the American College of Physicians/Society of Internal Medicine, the National Association of Health Underwriters, and Blue Cross and Blue Shield Association. 

All differ in the size of the credit and the targeted populations: Armey would offer credits of up to $3,000 a year to families who cannot get health insurance through an employer, and Stark offers $3,600 a year per family, with an income phase-out, for those not participating in an employer plan. Under both bills, those at lower incomes would qualify to have the amount of the credit “refunded” to them for the purchase of health insurance if the amount of the credit is more than they owe in taxes. 

The Health Policy Consensus Group, made up of 18 health policy experts from the leading market-oriented think tanks, held a news conference in June in which they recommended directing credits to individuals and families to help them obtain private health insurance. They believe that many of the problems in the health sector are rooted in the tax code, particularly the tax treatment of health insurance that is antiquated, regressive, inflationary, and discriminatory. 

Tax credits, therefore, are not only a good idea politically, but wise policy as well. Economists have been arguing for decades that the structure of tax subsidies for health insurance benefits taxpayers in upper incomes who have jobs that offer health insurance and does little to provide help for people who work for companies that don’t offer insurance and who have lower incomes. For them, the tax benefit is worth little or nothing and they are the most likely to be uninsured. 

Economist John Sheils of the Lewin Group in Fairfax, Virginia, estimates that federal and state tax preferences for health insurance were worth $125 billion in 1998. Those at the lower end of the income scale, the young, minorities, and those working for small firms that don’t provide health insurance receive virtually none of these tax breaks. Sheils estimates that a family with an income of $100,000 or over receives a tax benefit worth $2,357 for health insurance while a family making less than $15,000 gets only $71 in tax benefits. 

But the system that ties health insurance to the workplace is breaking down and is one of the reasons the number of uninsured is rising when the economy is strong. The Labor Department estimates that 13 million Americans change their employment status every month, and that 40 percent of the workforce, or roughly 50 million workers, change jobs within a year. The young change jobs most rapidly and, not coincidentally, younger Americans aged 18-24 are the most likely to be without health insurance. With this kind of job mobility, having industrial-age federal policies dating to before World War II that tie health insurance to the workplace clearly are not suited for a highly mobile 21st century economy. 

For their part, employers are having second thought about being the only vehicle for private health insurance. Costs are beginning to rise again, and companies are nervous about potential legal liabilities under legislative proposals that would make them responsible for bad medical decisions made by the health plans that they sponsor for their employees. 

In considering individually-based tax credits, Congress is taking the first halting steps to consider policies that would break the lock between health insurance and the workplace and allow more individuals to purchase health insurance on their own. There are a number of problems, including the thousands of health insurance regulations and mandates that have been imposed by the states that are crippling the market for individual and small group insurance. 

But given enough incentive, the vitality and creativity of the marketplace can overcome even this obstacle. For example, a 110-year-old insurance company, Provident American Corp of Pennsylvania, severed ties with 20,000 shoe-leather agents and moved into cyberspace. Now called HealthAxis.com Inc., the company is selling a variety of health insurance products on-line in what it believes is a largely untapped $73 billion annual market of individual consumers and small businesses. 

In the arcane tax policy debate in Washington, the main point of contention is whether to offer tax credits or tax deductions. Unfortunately, both chairmen of the tax writing committees of Congress – House Ways and Means Chairman Bill Archer of Texas and Senate Finance Committee Chairman Bill Roth – support tax deductions. Deductions are worth more to those who have higher incomes, are in higher marginal tax brackets, and who itemize their taxes. Tax credits are a more efficient way to subsidize the purchase of health insurance for middle and lower-income taxpayers. In addition, by making tax credits refundable, it is possible to use the tax system to subsidize those people who do not currently pay income taxes. When the Senate considers tax legislation on the floor this week, Senator Jeffords plans to introduce a bill that would move the debate front and center by offering a refundable tax credit targeted to low and moderate income Americans. 

Providing credits or other fixed incentives to individuals and families would mean millions of Americans not eligible for the current tax subsidy would receive help in purchasing health insurance. This would expand choice, give individuals the opportunity and responsibility to choose and own their own health insurance, and it would make costs both more visible and predictable to consumers. Health care costs could be contained, quality enhanced, and access to care greatly expanded by creating a new and more equitable set of incentives so individuals can choose and own their own health insurance and make their own health care arrangements in an open and competitive marketplace. 

This is a far cry from the dark days of the Clinton health reform debate five years ago when it seemed the slide toward socialism was inevitable. For the first time, the terrain of the debate has shifted toward free markets. 




Grace-Marie Arnett is president of the Galen Institute, a public policy research organization based in Alexandria, Virginia. She is the editor of Empowering Health Care Consumers through Tax Reform, published in 1999 by the University of Michigan Press.

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About the author