Tax Initiatives Gain Strength

Several key members of Congress and a number of influential organizations are working on initiatives that would reverse the alarming growth in the number of Americans without health insurance.

House Majority Leader Dick Armey is leading the charge. He delivered a speech before the American Hospital Association recently in which he put himself squarely on record as supporting the free-market health care reform proposals long advocated by the Galen Institute and our colleagues from the market-based think tanks. Here’s what Mr. Armey said:

“I believe the time has come for a whole new approach to health care. I think we can offer better solutions for the uninsured, help end frustrations with HMOs, and preserve the high quality of American medicine – all at the same time. How? By shifting more choice and control to patients, so they can take more responsibility for their health care — and take their business elsewhere when dissatisfied. Most of today’s problems in health care can be traced back to one source: the lack of a consumer-driven market. And the main source of that problem is the tax code.”

Mr. Armey’s bill would provide tax credits or vouchers to Americans so they can provide for their own health care in the private market. Rep. Bill Thomas, (R-CA) chairman of the Health Subcommittee of the House Ways and Means Committee, is working on his own bill, which will be co-sponsored by Rep. Jim McCrery (R-LA). And Rep. John Shadegg (R-AZ) also has a bill he is ready to introduce providing tax credits for health insurance.

There is bi-partisan support for this legislation as well: Rep. Jim McDermott (D-WA) has introduced a straightforward tax credit bill. In the last Congress, Senator Barbara Boxer (D-CA) introduced legislation that would have provided tax deductions to individuals to purchase their own health insurance. She reportedly now is exploring a tax credit initiative.

Other organizations, like the American Medical Association, the National Association of Health Underwriters, and the Council for Affordable Health Insurance, are working to gain support for their own proposals on tax credits for the uninsured.

A quiet revolution is brewing in the health sector with growing anger over the bureaucratic control of health care in both the public and private sectors. With the failure in the last Congress of the wrong-headed patient’s bill of rights, some leaders are embracing the new ideas that give individuals the freedom to control their own health care arrangements. These proposals would begin to unlock a central structural defect in the health sector — namely, a tax code provision that ties health insurance to the workplace. 

Congress already has taken two small steps toward solutions — creating Medical Savings Accounts and giving the self-employed a direct tax break for purchasing health insurance. Enacting tax credits for the uninsured is the next important step in freeing patients and doctors to regain control over medical care. Individuals should be able to purchase and own their own health insurance, and providing a new system of tax credits would be an important first step in that direction.

How we got here

The Health Policy Consensus Group, which the Galen Institute coordinates, identifies the problem: 


The United States does not have a properly functioning market for health care, and the financing system needs to be reformed. The market is distorted by a tax policy that is mistargeted, miscalibrated, and open-ended. This tax policy provides generous benefits to those who have higher incomes and receive health insurance through the workplace. Yet it offers little or no assistance to those at the lower end of the income scale. Particularly at a disadvantage in the current system are those who fall between the cracks of this tax subsidy and Medicaid.

Reforming the tax treatment of health insurance is essential to creating a more efficient and equitable market for medical services and health insurance in the United States. Correcting the tax distortion would lower the costs of health insurance coverage in both the public and private sectors and thereby allow broader access to quality health care. 



A Rich but Hidden Tax Subsidy: The History

Early in the 20th Century, the link between health insurance and the workplace began to be established in the United States. During and after World War II, however, employment-based health insurance became more widespread, and the link became much stronger.

Factories were pushed to meet wartime production schedules. Competition for good workers was intense but was hampered by wartime wage controls. Employers found they could compete for scarce workers and boost compensation without running afoul of these controls by offering health insurance as a benefit in lieu of cash wages. In 1943, the Internal Revenue Service ruled that employers’ contributions to group health insurance would not count as taxable income for employees. 

That ruling, a later codification of it by Congress in 1954, rising tax rates on middle class incomes, and the rising demand for health insurance all combined to create a strong incentive for health insurance to be obtained through employment-based groups.

The generous tax preference accorded job-based health insurance is a historical accident that has increased automatically over the decades without legislative authorization or appropriations. It has percolated through the economy for 50 years to become the foundation for a system that provides subsidies and therefore strong incentives for at least 140 million Americans to get their health insurance through their jobs. The subsidy for employment-based health insurance now is worth an estimated $100 billion a year in forgone federal and state taxes. However, tens of millions Americans are locked out of this system and benefit little or not at all from this rich but hidden tax subsidy. 

The wall comes down

The current system of providing tax benefits only to people with job-based health insurance is starting to crumble. The rising number of uninsured at a time of nearly full-employment indicates something is structurally wrong.

The lack of individual control over health insurance is causing other distortions as well. In the early 1990s, as health care costs were continually rising, often by double-digits, employers needed to find ways to curtail their employees’ highly-subsidized and unrestricted access to medical services through fee-for-service plans. Managed care companies set up systems to hold down costs, often by imposing restrictions on employees’ access to care. 

Employers wanted to keep costs down while providing health insurance as a benefit, and managed care companies did the cost-savings part very well. Now, however managed care companies have become the targets of angry consumers, politicians, the media, and even Hollywood. 

The solution is not more regulation of the managed care industry, but an invigorated free market. If health insurers were catering to individual consumers, they would be forced to operate under the same rules as other industries; competition would force them to provide the best service at the best price through the greatest efficiency. If individual consumers were buying their own health coverage in an open and competitive market, insurers would provide a much broader range of choices. 

No one is expecting patients to decide on the most efficient treatment if they are wheeled on a stretcher into an emergency room. But they can make smart choices about the health plan and doctors they want to provide them with care in such a crisis.

Next steps

Those who advocate a single-payer system are planning new initiatives to leverage Medicare and Medicaid to create universal socialized medicine in the United States. Those who want to preserve the private system must provide positive prescriptions that get real control into the hands of consumers – without the dictates and terrible loss of freedom government-run programs entail. Offering tax credits for the purchase of individually-owned health insurance is the right approach.

The Galen Institute is a key player in the coming battle. We are producing conferences, studies, and commentary articles validating the free-market approach to health care reform. We continue to meet with policymakers on Capitol Hill and in statehouses around the country to help them fine-tune their policy initiatives. And we work to build support for these fresh ideas by educating the general public through forums, media appearances, and the Internet.

In addition, our book, Empowering Health Care Consumers through Tax Reform, to be published this spring by the University of Michigan Press, will demonstrate the solid support among policy experts for a free-market health care reform agenda.



Grace-Marie Arnett is president of 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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Several key members of Congress and a number of influential organizations are working on initiatives that would reverse the alarming growth in the number of Americans without health insurance.

House Majority Leader Dick Armey is leading the charge. He delivered a speech before the American Hospital Association recently in which he put himself squarely on record as supporting the free-market health care reform proposals long advocated by the Galen Institute and our colleagues from the market-based think tanks. Here’s what Mr. Armey said:

“I believe the time has come for a whole new approach to health care. I think we can offer better solutions for the uninsured, help end frustrations with HMOs, and preserve the high quality of American medicine – all at the same time. How? By shifting more choice and control to patients, so they can take more responsibility for their health care — and take their business elsewhere when dissatisfied. Most of today’s problems in health care can be traced back to one source: the lack of a consumer-driven market. And the main source of that problem is the tax code.”

Mr. Armey’s bill would provide tax credits or vouchers to Americans so they can provide for their own health care in the private market. Rep. Bill Thomas, (R-CA) chairman of the Health Subcommittee of the House Ways and Means Committee, is working on his own bill, which will be co-sponsored by Rep. Jim McCrery (R-LA). And Rep. John Shadegg (R-AZ) also has a bill he is ready to introduce providing tax credits for health insurance.

There is bi-partisan support for this legislation as well: Rep. Jim McDermott (D-WA) has introduced a straightforward tax credit bill. In the last Congress, Senator Barbara Boxer (D-CA) introduced legislation that would have provided tax deductions to individuals to purchase their own health insurance. She reportedly now is exploring a tax credit initiative.

Other organizations, like the American Medical Association, the National Association of Health Underwriters, and the Council for Affordable Health Insurance, are working to gain support for their own proposals on tax credits for the uninsured.

A quiet revolution is brewing in the health sector with growing anger over the bureaucratic control of health care in both the public and private sectors. With the failure in the last Congress of the wrong-headed patient’s bill of rights, some leaders are embracing the new ideas that give individuals the freedom to control their own health care arrangements. These proposals would begin to unlock a central structural defect in the health sector — namely, a tax code provision that ties health insurance to the workplace. 

Congress already has taken two small steps toward solutions — creating Medical Savings Accounts and giving the self-employed a direct tax break for purchasing health insurance. Enacting tax credits for the uninsured is the next important step in freeing patients and doctors to regain control over medical care. Individuals should be able to purchase and own their own health insurance, and providing a new system of tax credits would be an important first step in that direction.

How we got here

The Health Policy Consensus Group, which the Galen Institute coordinates, identifies the problem: 


The United States does not have a properly functioning market for health care, and the financing system needs to be reformed. The market is distorted by a tax policy that is mistargeted, miscalibrated, and open-ended. This tax policy provides generous benefits to those who have higher incomes and receive health insurance through the workplace. Yet it offers little or no assistance to those at the lower end of the income scale. Particularly at a disadvantage in the current system are those who fall between the cracks of this tax subsidy and Medicaid.

Reforming the tax treatment of health insurance is essential to creating a more efficient and equitable market for medical services and health insurance in the United States. Correcting the tax distortion would lower the costs of health insurance coverage in both the public and private sectors and thereby allow broader access to quality health care. 



A Rich but Hidden Tax Subsidy: The History

Early in the 20th Century, the link between health insurance and the workplace began to be established in the United States. During and after World War II, however, employment-based health insurance became more widespread, and the link became much stronger.

Factories were pushed to meet wartime production schedules. Competition for good workers was intense but was hampered by wartime wage controls. Employers found they could compete for scarce workers and boost compensation without running afoul of these controls by offering health insurance as a benefit in lieu of cash wages. In 1943, the Internal Revenue Service ruled that employers’ contributions to group health insurance would not count as taxable income for employees. 

That ruling, a later codification of it by Congress in 1954, rising tax rates on middle class incomes, and the rising demand for health insurance all combined to create a strong incentive for health insurance to be obtained through employment-based groups.

The generous tax preference accorded job-based health insurance is a historical accident that has increased automatically over the decades without legislative authorization or appropriations. It has percolated through the economy for 50 years to become the foundation for a system that provides subsidies and therefore strong incentives for at least 140 million Americans to get their health insurance through their jobs. The subsidy for employment-based health insurance now is worth an estimated $100 billion a year in forgone federal and state taxes. However, tens of millions Americans are locked out of this system and benefit little or not at all from this rich but hidden tax subsidy. 

The wall comes down

The current system of providing tax benefits only to people with job-based health insurance is starting to crumble. The rising number of uninsured at a time of nearly full-employment indicates something is structurally wrong.

The lack of individual control over health insurance is causing other distortions as well. In the early 1990s, as health care costs were continually rising, often by double-digits, employers needed to find ways to curtail their employees’ highly-subsidized and unrestricted access to medical services through fee-for-service plans. Managed care companies set up systems to hold down costs, often by imposing restrictions on employees’ access to care. 

Employers wanted to keep costs down while providing health insurance as a benefit, and managed care companies did the cost-savings part very well. Now, however managed care companies have become the targets of angry consumers, politicians, the media, and even Hollywood. 

The solution is not more regulation of the managed care industry, but an invigorated free market. If health insurers were catering to individual consumers, they would be forced to operate under the same rules as other industries; competition would force them to provide the best service at the best price through the greatest efficiency. If individual consumers were buying their own health coverage in an open and competitive market, insurers would provide a much broader range of choices. 

No one is expecting patients to decide on the most efficient treatment if they are wheeled on a stretcher into an emergency room. But they can make smart choices about the health plan and doctors they want to provide them with care in such a crisis.

Next steps

Those who advocate a single-payer system are planning new initiatives to leverage Medicare and Medicaid to create universal socialized medicine in the United States. Those who want to preserve the private system must provide positive prescriptions that get real control into the hands of consumers – without the dictates and terrible loss of freedom government-run programs entail. Offering tax credits for the purchase of individually-owned health insurance is the right approach.

The Galen Institute is a key player in the coming battle. We are producing conferences, studies, and commentary articles validating the free-market approach to health care reform. We continue to meet with policymakers on Capitol Hill and in statehouses around the country to help them fine-tune their policy initiatives. And we work to build support for these fresh ideas by educating the general public through forums, media appearances, and the Internet.

In addition, our book, Empowering Health Care Consumers through Tax Reform, to be published this spring by the University of Michigan Press, will demonstrate the solid support among policy experts for a free-market health care reform agenda.



Grace-Marie Arnett is president of 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