Tax Fairness

The Tax Reform Commission heard testimony yesterday from star witnesses Gene Steuerle of the Urban Institute and Mark Pauly of the Wharton School about the essential importance of addressing the tax treatment of health insurance.

The hearing in New Orleans focused on tax fairness and how the tax system affects families. The $150 billion-plus annual subsidy for job-based insurance fails the test of fairness and has a big impact on families. It is the single largest tax preference in tax law, larger than the mortgage interest deduction, and clearly an important subject for the commission’s review.

But it is “mistargeted,” Pauly said. It provides an incentive for high-income workers to buy excessive amounts of health insurance, thereby inflating health costs and increasing the ranks of the uninsured. “By most definitions of fairness, [it] would be regarded as highly unfair and inequitable.”

“It’s one of the worst subsidies that we could possibly imagine,” Steuerle said bluntly.

Pauly’s recommendation: Cap the open-ended tax break for job-based health insurance and replace it with a new refundable credit to help lower-income people purchase coverage, a solution broadly supported by the Health Policy Consensus Group.

Dan Mitchell of The Heritage Foundation and I are circulating a petition among the health and tax policy communities to bring attention to this issue. Click here to read it and join us as a signatory!


To reinforce the need to address this issue, there was a spate of newspaper articles this week about the continuing difficulty that employers have in providing health benefits for their workers.

Labor unions were the last bastion of first-dollar health coverage, but now Chrysler has struck a deal with the United Auto Workers to require deductibles of $100 to $1,000 a year before health insurance takes over and to charge workers a $12.50 copayment for vision care.

Workers at the other auto plants expect their companies will follow. “They’re losing money, saying they’ve got to make changes, and I think everybody expects that it’s going to come,” a General Motors worker told The New York Times.


The Center for American Progress has fired the starting gun for major health reform proposals for the next debate cycle. The proposal by George Washington University Prof. Jeanne Lambrew and John Podesta at the Center for American Progress is a step forward in that it would not rely on an employer mandate to get to universal coverage. Instead, it would require individuals to purchase health insurance or pay “an income-related assessment to contribute to the cost of care that they will inevitably use.”

This carrot or stick approach to an individual mandate is gaining attention, with support from the California Medical Association and even libertarian Reason magazine editors.

An individual mandate will not work until individuals have access to better purchasing options for health insurance. The Lambrew-Podesta plan would provide access to a new national health insurance pool mirrored after the Federal Employees Health Benefits Program and would impose a new Value Added Tax to pay the added $100 to $160 billion a year the plan would cost, primarily through expansion of Medicaid.


We lost a dear friend and colleague last week with the death of Conrad Meier, a scholar with the Illinois-based Heartland Institute and founding editor of Health Care News.

Conrad suffered a stroke and hit his head while falling. He is survived by his wife, Zoe Smith, and three adult children.

Joe Bast, president of the Heartland Institute, said it best: “His was a strong voice raised in opposition to politicians and special interest groups he felt were destroying much of what was good about America’s health care system?he devoted countless hours to battling for change.”

Conrad, who died at the all-too-young age of 70, was an inspiration to all of us for his dedication, his conviction, and his tireless energy. We will miss him greatly.

Grace-Marie Turner


  • Hospitals to be allowed to advertise for patients
  • Aging, the world economy and the coming generational storm
  • The digital hospital
  • Cedars-Sinai doctors cling to pen and paper
  • Guaranteed future pain and suffering: The recent research on drug price controls
  • D.C.’s drug problem

Author: John Carvel
Source: The Guardian, 03/18/05

The British National Health Service is bringing competition into the health sector, allowing hospitals “to advertise to attract patients in a competitive market,” writes John Carvel, social affairs editor for The Guardian. The new NHS system, which will develop over the next three years, will allow patients “to choose to be treated at any hospital – public, voluntary or private – which can meet NHS quality and cost standards.” In addition, “A target to give private hospitals 8% of NHS work will be dropped and they will compete for all they can get.” Patient choice, not hospital contracts with local NHS trusts or general practitioners, will determine how many non-emergency operations are performed in any given year.
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Full text of NHS report:

Authors: Laurence Kotlikoff, Hans Fehr, and Sabine Jokisch
Source: National Center for Policy Analysis, 02/04/05

Boston University economics professor Laurence Kotlikoff and Hans Fehr and Sabine Jokish of the University of Wuerzburg use a new computer simulation to analyze the economic impact of population aging on promised government entitlements. “The results are alarming,” write the authors. “The shift to a much older population will severely damage the macro economies of the developed world.” Simulations show that “paying the elderly their promised benefits” will cause the total tax on wages to rise “from 24% to 38% by 2030 and to 40% by mid-century.” The authors write, “Less disposable income means less saving; less saving means less capital formation; less capital formation means lower labor productivity; and lower productivity means lower real wages.” The future for Europe, however, will be “substantially worse” as “the tax burden will rise to 60% by 2030 and approach a staggering 70% by mid-century.” The authors’ proposed solution is pension privatization reform, which would eliminate payroll tax contributions and finance transitional benefits through a new consumption tax, like the Value-Added Tax or a general national sales tax.
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Authors: Timothy J. Mullaney and Arlene Weintraub
Source: BusinessWeek, 03/28/05

Hackensack University Medical Center in New Jersey is “one of the nation’s most aggressive tech adopters,” write Timothy Mullaney and Arlene Weintraub for BusinessWeek. Hackensack has spent at least $72 million on information technology projects since 1998, including an online drug system, an internal website that allows doctors to view x-rays from any computer, and a life-size robot that doctors can direct from their homes. Hackensack has seen productivity and quality of care improve and patient mortality drop 16% over the past four years. “While hospitals have always been devoted to saving lives, they’re turning to tech now because of a fundamental change in U.S. health care,” write the authors. Pay for performance is taking hold in health care, with Medicare in the forefront. “We’re trying to create the business case for more coordinated, efficient care, and inevitably that means more investment in tech,” says CMS Administrator Dr. Mark McClellan. There are also several additional articles that accompany this cover story.
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Author: Ceci Connolly
Source: The Washington Post, 03/21/05

But introducing new technologies into the health sector is not always this successful. Ceci Connolly, a reporter for The Washington Post, describes the failure of Cedars-Sinai Medical Center to adopt a $34 million computer system it developed in-house. “Even well-financed, sophisticated hospitals face enormous hurdles moving from the Marcus Welby era of pen and paper to one in which doctors spend precious minutes entering data into a machine that never went to medical school and does not have the flexibility to make nuanced judgment calls,” Connolly writes. Problems including inadequate training and slow technology caused Cedars-Sinai to stop using the system after only three months. “The important lesson of the Cedars-Sinai case is that electronic health record implementation is risky,” said David J. Brailer, national coordinator for health information technology. “Up to 30 percent fail.”
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Author: Derek Hunter
Source: The Heritage Foundation WebMemo #680

Price controls on prescription drugs would cause the “quality of care available to both present and future generations of patients [to] decline, and the costs in personal pain and suffering ? to increase,” writes Derek Hunter of The Heritage Foundation. Hunter cites a study from the AEI-Brookings Joint Center for Regulatory Studies which found that if a price control “had been in place in the general health care economy from 1980 to 2000?of the 520 new chemical entities approved for the U.S. market during those years, 198 drugs would have been lost.” Hunter also cites a study from researchers at The Manhattan Institute which warns against government interference in pricing. According to the study, nearly 60% of all prescription drugs in the U.S. will be purchased by the federal government when the Medicare Modernization Act is implemented in 2006. “With control over such a large proportion of the drug market, instituting price controls?would have serious consequences for the development of new drugs,” concludes Hunter.
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Author: Doug Bandow
Source: The Washington Times, 03/23/04

“Washington is a hothouse for nutty ideas,” writes Cato Institute scholar Doug Bandow. And here’s the latest: District of Columbia Councilmember David Catania is proposing a plan to exert eminent domain over patents for pharmaceuticals. “Big drug companies are pricing our residents out of the market for potentially lifesaving pharmaceuticals,” Mr. Catania says. His solution is to “steal the drugmakers’ patents,” Bandow says, by making it legal for generic manufacturers to make cheap copies of patented drugs. “With high prices a concern, we should await with trepidation Mr. Catania’s legislation to nationalize energy companies and seize control of the private housing market. City owned supermarkets won’t be far behind,” Bandow says. Oh, and there is that minor item of bare shelves at the pharmacy where tomorrow’s new medicines would otherwise be.
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Time for Change? The Outlook for Medicare and Social Security
AEI Health Policy Discussion
Friday, March 25, 2005, 8:30 a.m. – 1:45 p.m.
Washington, DC

For additional details and registration information, go to:

Is There a Crisis in Medical Malpractice? New Evidence from Texas
AEI Health Policy Discussion
Thursday, March 31, 2005, 9:15 a.m. – 11:30 a.m.
Washington, DC
For additional details and registration information, go to:

Short vs. Long Term Thinking: Incorporating the Long-Term Fiscal Outlook into the Myopic Budget Process
Cato Institute Capitol Hill Conference
Wednesday, April 6, 2005, 8:30 a.m. – 12:30 p.m.
Washington, DC
For additional details and registration information, go to:

9 Million Fewer Uninsured?
AEI Health Policy Seminar
Friday, April 8, 2005, 9:00 a.m. – 11:15 a.m.
Washington, DC
For additional details and registration information, go to:

A How-To Workshop on Health Savings Accounts for Employers and Individuals
Hosted by The Flint Hills Center for Public Policy
Monday, April 18, 2005, 12:00 p.m. – 3:00 p.m.
Wichita, KS
For additional details and registration information, go to:

Leadership Development Breakfast (including a session on Medicaid and other state-level health care crises)
State Policy Network Event
Thursday, April 28, 2005, 8:00 a.m. – 11:45 a.m.
Miami, FL

For additional details and online registration, go to:

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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