Seizing the Initiative on Health Reform

One of the more remarkable outcomes of the economic stimulus debate in Congress was seeing Republican leaders hold the high ground with their position on health coverage for displaced workers.

This is not familiar territory for them. Conservatives have been on the defensive on health care for years, trying with mixed success to curb the expansion of government-run programs. But this latest debate signals the beginning of a new phase in which free-market ideas actually could prevail.

Ways and Means Chairman Bill Thomas and President Bush each offered plans for refundable tax credits to help displaced workers buy or keep health insurance. The stimulus plan passed by the House would provide a credit worth 60 percent of the cost of a policy.

“It frees up individuals to pick the kinds of insurance they believe they need,” Thomas said.

Democratic leaders cried foul, saying that providing money to individuals to buy their own health insurance would throw people into the unfettered marketplace. They wanted instead to provide money to employers to keep displaced workers on their health insurance rolls through Cobra and to allow others to sign up for Medicaid, the government program designed to provide health coverage to the poor.

But Cobra coverage is expensive, even with a subsidy, and millions of displaced workers aren’t eligible. And Medicaid is a welfare program – an option that would be less than attractive to middle-income Americans.

Providing tax credits to individuals and families clearly is the egalitarian high ground. The credits would be refundable if taxpayers owed few or no taxes, and they could be advanceable – meaning people wouldn’t have to wait until they file their taxes to get coverage.

Wharton economist Mark Pauly has produced several studies showing that credits would provide a powerful incentive for the uninsured to purchase health coverage. One study showed that 75 percent of the uninsured would buy a policy if they received a credit worth 66 percent of the premium cost. He also found that the market for individually-purchased health insurance is more vibrant and more affordable than conventional wisdom perceives.

The information economy also is providing new options for people to obtain coverage. For example, eHealthInsurance, an on-line health insurance brokerage, produced a study last summer showing that the average premium for individual and family policies purchased through the company ranged from $1,200 to $1,500 a year per person – about half the average costs of Cobra. And it wasn’t just bare-bone coverage; 88 percent of the individual policies could be considered comprehensive. If tax credits were enacted, the market would be transformed with new ways for individuals to buy coverage.

It’s time for change. Linking health insurance to the workplace is a relic of World War II when employers needed a way to boost workers’ pay without running afoul of wage controls. The Internal Revenue Service ruled that an employer’s contribution to employee health policies would not be counted as taxable income to employees.

This worked tolerably well for an Industrial Age economy when workers stayed with the same company for years or even decades. But workers in the Information Age economy are highly mobile. The Bureau of Labor Statistics has reported that 13 million Americans typically change their job status every month, and millions lose their health insurance as they move from job to job, go back to school, and start new businesses.

Holding fast to a political position that would either tether health insurance to the workplace or push more and more people into expensive, centralized government programs is a difficult position to sustain.

Tax credits would help to equalize the current system so millions who are shut out would have access to coverage. The idea has bi-partisan backing. Louisiana Democrat John Breaux worked hard to gain support among his colleagues alongside Vermont Independent James Jeffords and others who have introduced their own bills, including House Majority Leader Dick Armey and Senator Bill Frist, a physician.

The Health Policy Consensus Group, comprised of analysts from the major market-oriented think tanks and other health policy experts, have supported for years the idea of providing tax credits for the uninsured as sound policy that would allow broader access to affordable health coverage.

Senate Finance Committee Chairman Max Baucus said, “We believe there’s an ulterior motive here” to give individuals more control over their health care spending and loosen the lock between health coverage and the workplace.

But tax credits would give consumers transformative power to reshape the health sector to be more responsive to their needs and more efficient in providing value for their money. These forces need to be engaged in the health sector, and providing tax credits to individuals to purchase their own health coverage would begin this process.

Giving individuals control over their health spending through private health insurance is not just the right answer for the uninsured, but also for Medicaid recipients and Medicare beneficiaries. Tax credits could be the beginning of important consumer-driven changes in the health sector.

In this case, good policy is also good politics.

Grace-Marie Turner is president of the Galen Institute, a not-for-profit organization focusing on free-market health reform. She is the editor of Empowering Health Care Consumers through Tax Reform, University of Michigan Press, 1999.

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