Bold Moves

The tax reform panel, charged by President Bush with making bold recommendations to overhaul the federal tax code, is seriously considering a change that would cap the amount that employees can exclude from taxable income in the form of health insurance.

As you know, health policy experts and economists strongly believe that this open-ended tax break is a root cause of spiraling health insurance and medical costs. Employees have no idea how much of their income is being spent by their employers on their health insurance. So they demand more and more generous health benefits and have little appreciation for the full cost of their health care consumption. And as costs rise, more and more people at the lower end of the income scale are priced out of this dysfunctional market.

A number of us have met with tax reform panel officials to recommend a cap – or even eliminating the current invisible tax exclusion and replacing it with a direct credit to individuals.

Tax panel member Timothy J. Muris, a professor at George Mason School of Law and former head of the Federal Trade Commission, said in a panel meeting on Tuesday he believed the ceiling should be $11,000 for family coverage. According to a September survey by the Kaiser Family Foundation, the annual premium for employment-based health insurance for a family is now $10,800. A tax would be applied on the value of health benefits over that.

The Office of Management and Budget estimates that the exclusion of contributions for health insurance from employee income was worth $112 billion last year. That is the single largest tax break in the federal budget, according to the Tax Policy Center, a joint venture of the Urban Institute and Brookings.

While major employers with generous health benefits will fight this change, it is vital to modernize the tax code to fit a mobile 21st century workforce. And it’s time to end this regressive provision that provides big tax breaks to high-income workers and almost nothing to lower- and lower-middle income workers often struggling with two or three jobs to make ends meet – and still going without health insurance.

The official report is due November 1. Kudos to the commission for considering this bold and much-needed change in tax law. It could provide employers with a new tool to work with their employees as partners in staying under the cap and holding down health insurance costs.


And speaking of taxes, California was on the verge this fall of joining most other states in allowing its citizens a tax deduction for deposits to their Health Savings Accounts. The measure would have been part of a routine bill conforming California tax law to the federal code. But the liberal State Senate deleted the HSA provision at the last minute, and California citizens are the worse for it.

It is imperative that California get on the bandwagon. HSAs offer an attractive option to the uninsured – with up to 44% of new purchasers previously uninsured, according to a new Assurant Health study. With one in five Californians uninsured, the state should be looking at every opportunity to help its citizens.

As David Hogberg writes in an updated version of his new paper for us on HSAs and the States, “Of the forty-one states with an income tax, only seven still tax contributions to HSAs: Alabama, California, Maine, Massachusetts, Mississippi, New Jersey, and Wisconsin. There is little excuse for the delay.”


And speaking of delays, Health Policy Matters will skip next week’s issue – barring major breaking news on the health care front – because we will be moving the Galen Institute to newer office space. We’ll still be in Old Town Alexandria and will still use our same PO Box for snail mail. And right after the move, I head to Sundance, Utah, for the annual Health Sector Assembly meeting where about 80 health policy experts gather to focus on bi-partisan recommendations on a major issue. This year’s topic: Medicaid reform.

Grace-Marie Turner


  • Older drugs, shorter lives? An examination of the health effects of the veterans health administration formulary
  • The economic and fiscal effects of financing Medicare’s unfunded liabilities
  • Health care for hurricane victims
  • Hospital Price Reporting and Disclosure Act
  • Why medicare fails to provide access to medically necessary health care
  • The Vioxx fallout

Author: Frank R. Lichtenberg
Source: The Manhattan Institute, 10/05

Proposals in Congress “to adopt a system similar to the Veterans Administration (VA) National Formulary for purchases under the new Medicare drug benefit?could reduce life span and survival rates among the Medicare population, raising serious questions about the wisdom of these proposals,” writes Professor Frank R. Lichtenberg of Columbia University. Implemented in 1997, the VA National Formulary “discourages access to new drugs in an effort to control overall pharmaceutical costs.” For example, of the 77 priority-review drugs approved since 1997, only 22% are on the 2005 VA formulary. Lichtenberg also estimates the impact of the use of new drugs on longevity and finds that “increased use of older drugs in the VA system, as a result of the Formulary, has reduced mean age at death of its patients by 0.17 years, or 2.04 months; the value of this reduction in longevity may be nearly $25,000 per person.”
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Authors: Tracy L. Foertsch, Ph.D. and Joseph R. Antos, Ph.D.
Source: The Heritage Foundation, 10/11/05

Raising payroll and personal income taxes to finance Medicare’s promised benefits is “counterproductive” and “could have profound economic and budgetary effects,” write Tracy L. Foertsch, Ph.D. of The Heritage Foundation and Joe Antos, Ph.D. of the American Enterprise Institute. “Assuming that new tax revenues are used to fund Medicare and not to offset higher spending elsewhere in the federal budget, between 2006 and 2015, total job losses could average almost 816,000 annually, and real (inflation-adjusted) gross domestic product (GDP) could be, on average, nearly $87 billion lower per year,” write the authors. The economic costs would be even greater if payroll taxes were raised to finance Medicare over the next 75 years. “Total job losses could average almost 2.7 million, and the drop in real GDP could approach an average of $248 billion per year over the first 10 years that higher payroll tax rates are in place,” write the authors.
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Authors: Devon Herrick, Ph.D., and Pamela Villarreal
Source: National Center for Policy Analysis, 10/06/05

Expanding Medicaid to people displaced by the hurricanes along the Gulf Coast is a “solution that won’t work,” write Devon Herrick and Pamela Villarreal of the National Center for Policy Analysis. “Obviously, enrolling several hundred thousand evacuees in other state Medicaid programs will increase the demand for medical services in the areas where they have relocated,” write the authors. “Because of Medicaid’s low reimbursement rates, few physicians will want to accept new Medicaid patients and many already refuse to treat Medicaid patients altogether.” Herrick and Villarreal instead recommend removing “bureaucratic barriers” to, among other things, allow displaced physicians to practice in other states and allow affected families to use aid money to purchase high-deductible health insurance free of regulations that increase the cost of private plans. Finally, they recommend highly flexible Medical Access Accounts that “would allow patients to manage some of their own health care dollars through accounts they own and control.”
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Source: Senators Jim DeMint, Richard Durbin, and John Cornyn, 10/06/05

The Hospital Price Reporting and Disclosure Act (S. 1827), which would “require hospitals to disclose their charges for the most common procedures and drugs administered in an inpatient setting,” was introduced in the Senate last week by Senators Jim DeMint, Richard Durbin, and John Cornyn. Hospitals would be required to regularly report the price data to the Department of Health and Human Services, which would in turn post it on the Internet. “No other industry expects consumers to commit to buying before they know the true cost,” said Senator DeMint. “?Patients should have access to price information before they commit to a procedure.” A companion bill was introduced in the House in June.
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Author: Brett J. Skinner
Source: Fraser Forum, 10/05

Canada’s universal health care program, medicare, is “simply not delivering what insurance should: guaranteed access to and protection from the unexpected financial burden of expensive but necessary medical services,” writes Brett Skinner of the Vancouver-based Fraser Institute. “Instead, the programs pay for affordable basic services for all Canadians, and reduce access to the catastrophically expensive life-saving and life-improving treatments that they should cover.” Skinner writes that a better approach “would be to focus public financial assistance only on those few people who are truly in need, either by supplementing their incomes so they can afford to buy private health insurance, or retroactively reimbursing them for necessary medical expenses on the basis of an income means test.”

Other articles in this month’s Fraser Forum focus on how much Canadians pay for their health care system, the dangers of government-run record keeping systems, and how Canada can learn from British reform of the National Health Service.
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Author: John E. Calfee
Source: American Enterprise Institute, September/October 2005

Jack Calfee of the American Enterprise Institute provides a detailed review of the Vioxx case, including a history of the drug, the events that led to its withdrawal from the market, litigation against Merck, and recent findings by the Food and Drug Administration. “Both Vioxx and the other drugs in its subclass, known as Cox-2 inhibitors, are now viewed with very great suspicion,” writes Calfee. “The irony is that the past year has also seen important new research findings and a thorough reassessment of older research, indicating that these drugs have many important benefits and great potential for addressing serious problems including cancer–without posing undue risks to patients.”
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Kaiser Conversations on Health with Aetna CEO Dr. John Rowe
Kaiser Family Foundation Event
Thursday, October 20, 2005, Noon – 1 p.m. E.T.
Washington, DC and via Webcast

The event will take place in the Foundation’s Barbara Jordan Conference Center and will be open to the public. If you wish to attend, please RSVP to Tiffany Ford at or (202) 347-5270.A link to the live webcast of the event will be available online at: starting at noon E.T.

Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at

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