End the Subsidy for High-Cost Health Care

Published in The New York Times: Room for Debate, July 20, 2009

The Congressional Budget Office has consistently said that, while health information technologies, prevention and disease management are worthwhile cost-cutting measures, the savings are miniscule in comparison to the overall price tag of health reform. And the huge tax increases on the rich that Congress is considering fall short in paying for reform by at least $240 billion.

So where to go from here? The much better solution, which the C.B.O. says can provide hundreds of billions of dollars for reform, is to modernize outdated tax law that pertains to employment-based health insurance.

The Internal Revenue Code provides a generous tax benefit to anyone who gets health insurance at work. Employer-provided health insurance is a form of non-cash compensation, but no matter how much of a worker’s income comes in the form of health insurance, the whole amount is “excluded” from income and payroll taxes.

This leads workers to demand more and more expensive health insurance, driving up the costs of policies for everyone else. The rich get the biggest tax break because they are in the highest tax brackets. Those who don’t get health insurance at work receive little or no help when they buy coverage.

Senator Max Baucus, chairman of the Senate Finance Committee, wants to cap the tax exclusion to put a lid on inflationary health insurance and restore fairness to the tax code. Workers could still keep their health insurance at work, but they would have a new incentive to stay under an annual cap of, say, $15,000 for a family policy. The company could still deduct any amount it spends on insurance, but employees would be motivated to stay under the cap.

We can avoid jobs-killing tax hikes on the rich with this more sensible policy.


Grace-Marie Turner is president of the Galen Institute, a nonprofit research organization focused on free-market ideas in the health sector.

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Published in The New York Times: Room for Debate, July 20, 2009

The Congressional Budget Office has consistently said that, while health information technologies, prevention and disease management are worthwhile cost-cutting measures, the savings are miniscule in comparison to the overall price tag of health reform. And the huge tax increases on the rich that Congress is considering fall short in paying for reform by at least $240 billion.

So where to go from here? The much better solution, which the C.B.O. says can provide hundreds of billions of dollars for reform, is to modernize outdated tax law that pertains to employment-based health insurance.

The Internal Revenue Code provides a generous tax benefit to anyone who gets health insurance at work. Employer-provided health insurance is a form of non-cash compensation, but no matter how much of a worker’s income comes in the form of health insurance, the whole amount is “excluded” from income and payroll taxes.

This leads workers to demand more and more expensive health insurance, driving up the costs of policies for everyone else. The rich get the biggest tax break because they are in the highest tax brackets. Those who don’t get health insurance at work receive little or no help when they buy coverage.

Senator Max Baucus, chairman of the Senate Finance Committee, wants to cap the tax exclusion to put a lid on inflationary health insurance and restore fairness to the tax code. Workers could still keep their health insurance at work, but they would have a new incentive to stay under an annual cap of, say, $15,000 for a family policy. The company could still deduct any amount it spends on insurance, but employees would be motivated to stay under the cap.

We can avoid jobs-killing tax hikes on the rich with this more sensible policy.


Grace-Marie Turner is president of the Galen Institute, a nonprofit research organization focused on free-market ideas in the health sector.

SHARE THIS ARTICLE

About the author