Taxes and Health Care

Taxes and health care clearly are hot issues, as evidenced by the standing-room-only audience that turned out for our briefing on Monday on “Tax Reform as the Road to Health Reform.” Bob Moffit and Dan Mitchell of Heritage joined John Berthoud of the National Taxpayers Union and me in explaining why the coming debate over tax reform provides a prime opportunity to begin to fix tax policy that creates so many distortions in the health sector.

We apologize to the 15 or so people who had to be turned away because the briefing room on Capitol Hill was just too jammed. As consolation to them and for you, here is a briefing package, including our joint statement and impressive list of signatories, my PowerPoint presentation, and two papers, including one by Bob Helms of AEI that clearly explains why change is needed and what the options are.

I know we are scaring a lot of people by talking about change to the single largest tax preference allowed by law that is the driver for more than 150 million Americans to get health insurance through the workplace. But students of health policy from all parts of the ideological spectrum agree that change is needed.

If we don’t address this fundamental issue, American companies, as well as the federal and state governments, will continue to be frustrated in their heroic efforts to get a handle on health care costs that rise faster than inflation year after year. Without change, we will be facing even worse problems 10 years down the road.

Employees get health benefits as part of their compensation package. What they take home in cash wages is subject to tax, but what they get in the form of health insurance is tax free. This generous tax policy causes employees to demand more and more expensive health policies because the total cost of the coverage is hidden from them. This creates a dysfunctional marketplace that no amount of regulation will ever fix.

In our statement, developed by a dozen smart analysts and signed by 59 colleagues, we say that “Congress could begin by capping the amount of income that employees can shelter from taxes, allowing only a fixed dollar amount of health insurance to be tax exempt.”

I listed four benefits:

  • Employers would gain a new tool to engage their employees as partners in economizing on health costs to stay under the cap.
  • All employers would be under the same cap so there wouldn’t be a competitive disadvantage.
  • Employers would be more likely to continue to provide coverage if health costs were to moderate.
  • And the uninsured would benefit as coverage would become more affordable for them as well.

We have an historic opportunity to address a key element that drives the dysfunctional market for health care and health insurance in the United States. The time is now.


Canada’s Victory: Galen and Heritage were honored to host Canadian hero, Dr. Jacques Chaoulli, at a briefing in Washington on Tuesday. Here is the transcript of Dr. Chaoulli’s talk describing his successful court challenge to Canada’s socialized health care program.

He quoted the Chief Justice of the Canadian Supreme Court as saying in the judgment, “?there is unchallenged evidence that in some serious cases, patients die as a result of waiting lists for public health care.”

Chaoulli said, “The elite was astonished” and still in shock over the long-awaited verdict saying that private health care and private health insurance must be legal. He said it is not clear where the leadership is going to come from to begin the transformation of the Canadian health care system.

(My bet is that it will start with the Canadian market-based think tanks. I joined Brian Lee Crowley of the Atlantic Institute for Market Studies and other Canadian health policy experts on Wednesday for a meeting in Toronto via conference call. These groups are charged up and will help their country to see the wisdom of private competition and consumer choice in health care.)

Even though the Supreme Court test was in the Quebec province, Chaoulli said that he believes the ruling applies throughout the country and “there is no reason for further challenges.”

Chaoulli was astonished that some in the United States persist in calling for single-payer health care systems, including the states of Vermont and California. “People will suffer and die and regret such a health care system,” he warned.


Health Care Week: Merrill Matthews, director of the Council for Affordable Health Insurance, hosted a dynamite roundtable discussion on Capitol Hill on Thursday, with six members of Congress speaking to policy analysts and industry leaders about their pending health care bills. The big news of the day: Speaker Hastert is going to set aside a week before the August recess as “Health Care Week.” Stay tuned. The long, hot summer of health care debate is yet ahead.


Seeking candidates: The Galen Institute is beginning our search for a health policy analyst, and our newsletter seemed the perfect place to reach the best group of policy enthusiasts in the country. Here is the job description. If you have a passion for policy ideas that will create a vibrant, competitive, consumer-centered marketplace in the health sector, give us a call. We have a lot of work to do!

Grace-Marie Turner


  • A road map for Medicaid reform
  • State laws get in way of health savings accounts
  • What’s next for HSAs?
  • Health-care reform gets a fair shake
  • Tracking health care costs: Declining growth trend pauses in 2004
  • Addressing the cost and benefits of prescription drugs

Author: Nina Owcharenko
Source: The Heritage Foundation, 06/21/05

Nina Owcharenko of The Heritage Foundation proposes using welfare reform as a model for reforming Medicaid to “restore integrity to Medicaid by encouraging personal responsibility and mainstreaming working families into private coverage.” She says Congress can encourage long-term reform of the program by streamlining the federal waiver process, restructuring the management and budget of long-term care financing, and enacting other health policy initiatives which would help low and middle-income families purchase private health insurance. “The best Medicaid policy would mainstream as many individuals and families as possible into private coverage and encourage self-direction for those the Medicaid safety net was intended to help,” concludes Owcharenko.
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If you would like to learn more about Medicaid, Diane Rowland of the Kaiser Commission on Medicaid and the Uninsured has created an excellent tutorial offering a comprehensive overview of the program.
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Author: Sarah Lueck
Source: Pittsburgh Post-Gazette, 06/20/05

While Health Savings Accounts are growing in popularity, there are still “kinks” in the fledgling product, including “state insurance laws [that] hinder insurers’ ability to offer HSA-compatible policies to individuals,” writes Sarah Lueck, a reporter for The Wall Street Journal. In New York, for example, HMO’s are the only plans currently offered to individuals, and laws prohibit the plans from charging deductibles for services delivered by in-network providers. A temporary exemption from the Treasury Department has allowed some consumers to set up HSAs despite state regulations, and “the insurance industry has been lobbying state legislatures to make the changes necessary for HSAs to continue unimpeded,” writes Lueck. Consumers have also found that several states, including California and Wisconsin, do not allow deductions for HSAs to be taken from state income taxes, and some customers report trouble finding a financial institution to set up their HSAs, reports Lueck.
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Authors: Victoria Craig Bunce and Merrill Matthews
Source: Council for Affordable Health Insurance, 06/05

Public sector programs offered by the states could benefit from the “HSA revolution” currently underway in the private sector, write Victoria Craig Bunce and Merrill Matthews of the Council for Affordable Health Insurance. Many health insurance high-risk pools, operating in 33 states, already offer high-deductible health plans which “have proven to be very popular” and several states, including Minnesota, New Hampshire, Washington, and Texas, are considering HSAs as an option in their health benefit programs for state employees. States could see significant savings by moving to HSAs, but Bunce and Matthews caution that there are several questions states should consider when implementing them, including: Are insurance plans governed by a union board or can the governor authorize an HSA option? Would basic HSA requirements clash with state restrictions on prescription drug coverage, out-of-pocket maximums, and deductibles? And if HSAs were to become an option for state Medicaid recipients, what would become of the HSA balances when a beneficiary leaves the program?
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Author: Mitt Romney
Source: Boston Herald, 06/21/05

In a Boston Herald commentary, Massachusetts Gov. Mitt Romney has called for compulsory health insurance as part of a comprehensive plan to cover the state’s uninsured residents. “[E]veryone has a responsibility to have health insurance; for those who cannot afford it, government will help, but only to the extent needed – not as an entitlement.” Romney, who has hinted at a 2008 presidential run, would also prohibit employers from dropping workers from health coverage. He would create a “Safety Net Care” program for 150,000 low-income residents and a “Commonwealth Care” program for 200,000 middle-income residents. The Safety Net Care program would provide partial subsidies for low-income individuals to buy commercial coverage. The Commonwealth Care plan “opens the market to much lower-cost insurance” for middle-income residents. Romney writes that there would be “no need for new or increased taxes.” Costs would be offset by funds currently used on care for the uninsured, savings from Medicaid reforms, and savings as the newly insured use preventative care instead of emergency care.
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Reaction to the plan:

Authors: Bradley C. Strunk, Paul B. Ginsburg, and John P. Cookson
Source: Health Affairs Web Exclusive, 06/21/05

“Health care spending increased 8.2% in 2004 ? virtually unchanged compared to 2003, reflecting stable trends in each of the major health service categories except prescription drugs, which decelerated for the fifth year in a row,” write Bradley C. Strunk and Paul Ginsburg of the Center for Studying Health System Change and John P. Cookson of the consulting firm Milliman Inc. According to the study, the only double-digit increase in health spending was in the hospital outpatient category, which rose 11.3% last year.

Meanwhile, overall prescription drug spending dropped from 8.9% in 2003 to 7.2% in 2004. The decline “is largely the result of slower growth in drug prices rather than a change in use. Prescription drug prices increased just 3.3 percent in 2004 compared with 5.2 percent in both 2002 and 2003.” The report shows that prescription drug prices have not risen by more than 5.7 percent a year in a decade; virtually all of the increased spending is due to increased demand and use of pharmaceuticals.
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Source: National Association of Attorneys General, 06/20/05

The National Association of Attorneys General released a report this week to help its members gain an “understanding of pharmaceutical pricing issues.” The report provides background information about the pharmaceutical industry, transcripts of eight presentations made by scholars with contrasting views at a conference held in Chicago in January of this year, and an examination of state responses to this issue, including importation of drugs from Canada, pharmaceutical benefit manager regulation, and preferred drug lists.
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Joseph Bast, president of the Heartland Institute, provides his reaction to this report in a news release that can be read at:


The Ownership Society and Health Care
Sponsored by The Heritage Foundation
Wednesday, June 29, 2005, 12:00 noon
385 Russell Senate Office Building
Washington, DC

For additional details and registration information, go to:

Webcast – Ask the Experts: Health Information Technology
A program
Thursday, June 30 at 2:00 p.m. ET
Experts will include: Dr. David Brailer, National Coordinator for Health Information Technology at HHS; Dr. Winston Price, president of the National Medical Association; and Dean A. Rosen, Director of Health Policy, Office of Senate Majority Leader William H. Frist, M.D. Watch the live webcast on at:

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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