Health Credits and Drug Importation

Health Affairs this week focused on the health plans of the leading presidential candidates, but misunderstanding and even misrepresentation of Sen. John McCain's health policy proposal continues to confuse the debate.

Tom Buchmueller, Sherry Glied, Anne Royalty, and Katherine Swartz wrote a critique of selected aspects of the McCain plan but ignored key aspects of it which I believe would mitigate many of their criticisms.

Among other initiatives, Sen. McCain would provide a new health credit of $2,500 for individuals and $5,000 for families to help them buy health insurance, substituting this direct and portable credit for the current invisible, inflationary, and outmoded tax break that ties health insurance to the workplace.

You've seen the reports, I am sure, saying that Sen. McCain's plan would cause 20 million people to lose their job-based health insurance, while 21 million would pick up coverage in the individual market.

We are vested in an accurate understanding of changes to the tax treatment of health insurance since we have been writing about this issue for so many years.

The authors do not acknowledge in their paper that there are two tax breaks currently provided through the Internal Revenue Code to support employment-based health insurance — a "deduction" for employers, and an "exclusion" from taxable income for employees of the compensation they receive in the form of health insurance.


  • For employers: The McCain plan doesn't touch the employer deduction so the incentives for the employer would be the same as today: Whether the employer offers compensation in the form of health benefits or direct compensation, employers still receive a tax deduction for the amount they spend on health coverage. In addition, the payroll taxes they pay continue to be protected from corporate income taxes under the McCain plan. These provisions make providing health insurance neutral for employers in terms of financial incentives.


  • For employees: The article stresses the repeal of the current tax exclusion for employees, but it gives only passing mention to the new refundable health credit that replaces the current tax break to workers for health insurance. The McCain health credit of $5,000 would actually be worth more to the average family than the $4,200 estimated value of the current tax exclusion for job-based insurance.


  • Grossing up of wages: The paper does not make it clear that employees' wages would be grossed up to account for the value of their health insurance policy, giving them additional resources to purchase coverage.


    The value of job-based health insurance is part of the compensation package of workers. The great majority of workers would keep their coverage at work and, for them, substituting the credit for the exclusion would be merely a bookkeeping change. But for those who don't, they would demand the money they had been receiving in the form of health insurance be returned to them in the form of higher wages.

Combining the health credit, the added pay, and the amount that workers are paying now for their share of the health insurance premium can put as much or more money on the table as today.

But it would provide new incentives for more affordable, portable insurance. And the credit would provide fairness, giving people the same tax break whether they receive their health insurance through the workplace or on their own.

Workers would have more options in a health insurance market that is competing for their business. And people would find new kinds of groups to make their health coverage arrangements — churches, professional associations, labor unions, and other groups that may be a more stable force in their lives than their jobs.

The refundable health credit also would provide significant new resources for workers at the lower end of the income scale who often receive no help at all today in purchasing coverage. They would get the full value of the credit toward the purchase of insurance, even if they don't owe that much in taxes.

There is more, but I've already tested your patience with this recitation of tax law. But it is crucially important. I have spent the last 20 years studying the intersection of health and tax policy, and believe that change is vital to bring our health sector into the 21st century.

The Buchmueller article relies on studies that are not available to me online to check whether they accounted fully for current and proposed changes. But one thing is certain: They don't account for market dynamics that would give people many new options in a much more functional market and increase access to more affordable health coverage.



Joe Antos, Gail Wilensky, and Hanns Kuttner have a companion article on the Obama plan. I will review that next week, along with Mark Pauly's piece on adapting features of both plans which he says "would work better together than separately."



Drug Importation: The Reuters newswire reports today that Sens. McCain and Obama "are reviewing their support" for drug importation "in light of tainted medicines and other goods made in other countries."

They and other political leaders have been on record as backing legislative initiatives that would allow Americans to import drugs from abroad to take advantage of the price controls other countries impose on pharmaceuticals.

We have written for years that this practice threatens patient health and the safety of our pharmaceutical supply chain, but leaders and editorialists have rejected the safety argument, until now.

"[R]ecent scares involving chemical-laced batches of baby formula and the blood thinner heparin — both made in China — have raised new concerns that safely bringing in additional medical products from overseas could be tougher than expected," Reuters reports.

Advisors for both McCain and Obama spoke at a Generic Pharmaceutical Association's (GPhA) annual conference in Washington yesterday, indicating the candidates were rethinking their positions.

"Both candidates were in favor of reimportation and sort of subsequent to the heparin incident (there's) a lot less enthusiasm," said Dora Hughes, senior health policy adviser to Sen. Obama. "We have a better understanding of the challenges that go along to support the importation."

"We now realize the challenges for doing that are great
er than before," Douglas Holtz-Eakin, senior policy adviser to Sen. McCain, told reporters at the conference.

Neither adviser said their candidate has abandoned drug importation but realized it would be more difficult, Reuters reports.

If any legislation were to emerge next year on this issue, at the very least it should require the Department of Homeland Security to certify the safety of importing vast quantities of drugs from other countries.

Hippocrates' dictate to physicians to "First, do no harm" also is appropriate for politicians intervening in health care.

Grace-Marie Turner

Recent News Articles and Studies

Even in Health Care, Competition Works
Reforming Health Care to Protect Parents' Rights
J. Patrick Rooney
Health Care Reform Goes to Voters
Cost Burden of Prescription Drug Spending in Canada and the United States
Sainsbury’s Launches Britain’s First Supermarket Dentist…And It’s Open Seven Days a Week
State Health Reform: Converting Medicaid Dollars into Premium Assistance


Even in Health Care, Competition Works
Grace-Marie Turner, Galen Institute
Clearwater Gazette, 09/18/08

Competition and consumer choice are working to bring costs down for the Medicare prescription drug benefit, writes Turner. Instead of the one-size-fits-all model typical of government health insurance, the Medicare drug benefit offers a wide range of choices, with seniors typically choosing from among 20 or more plans in their regions. According to a recent report from the Centers for Medicare and Medicaid Services, the average monthly premium for the standard Medicare drug benefit will cost seniors $28 in 2009, which is 37% lower than the $44 a month legislators predicted when the program was created in 2003. CMS also reports that the total cost of the Medicare drug benefit in 2009 will be $46.4 billion — substantially less than the initial estimate of $74 billion. And the 10-year cost estimate of the program has been revised down from $634 billion to about $395 billion — saving taxpayers almost $240 billion over original estimated costs.


J. Patrick Rooney
The Wall Street Journal, 09/19/08

The nation's political lexicon didn't always include the terms "school choice" and "health savings accounts." But it does today, and that's due in no small part to J. Patrick Rooney, who died this week at the age of 80, writes The Wall Street Journal. Rooney was a successful Indianapolis insurance executive by day, but he moonlighted as a philanthropist and policy advocate. He pioneered the marketing of medical savings accounts (MSAs). Rooney successfully lobbied Congress to create MSAs, and today millions of Americans who might otherwise be priced out of the system can afford insurance through their successor Health Savings Accounts.


Reforming Health Care to Protect Parents' Rights
Daniel Patrick Moloney, Ph.D.
The Heritage Foundation, 09/15/08

Medicaid, SCHIP, Title X, and other government health care programs deny parents the right to know which medical services their children receive, even when the services include birth control, psychiatric counseling, or substance-abuse therapy. Their policies limit parents' ability to raise their children according to their own moral values, writes Moloney. This sort of problem will always occur when the government runs or controls health care. Medical decisions frequently involve moral judgments, but if the government controls these decisions, it imposes one set of moral judgments on everyone. Any health care reform must allow parents to own and control their family's health insurance. Reform based on personal choice and competition allows parents to ensure that the medical decisions that affect their families are compatible with their moral judgments.

Health Care Reform Goes to Voters
Pamela M. Prah, 09/17/08

As presidential contenders John McCain and Barack Obama push different health reform initiatives, voters in Arizona, Colorado and Montana will have the chance to make dramatic changes to their own states' health systems when they go to the polls November 4, writes Prah. In Colorado, voters will decide whether to require businesses with more than 20 workers to provide health insurance. In Arizona, the "Freedom of Choice in Health Care" initiative takes the opposite tact and would prohibit state lawmakers from passing legislation that would require Arizonans to join a government-run health care system. And in Montana, the question is whether to include more uninsured kids under the state's Children's Health Insurance Program and the Montana Medicaid Program — a move that many statehouses have done on their own.


Cost Burden of Prescription Drug Spending in Canada and the United States
Brett J. Skinner and Mark Rovere
Fraser Institute, 09/15/08

Canada's heavy government involvement in prescription drug markets offers no cost advantage for consumers compared to relatively more free-market policies in the U.S., according to a study from the Vancouver-based Fraser Institute. Consumers in Canada and the U.S. spend roughly the same proportion of their per capita gross incomes on prescription drugs — 1.5 % in Canada and 1.7% in the U.S. And as a percentage of per capita after-tax income, the cost burden of prescription drug spending is slightly higher in Canada (2.5% in Canada; 2.3% in the U.S.). The findings are explained by two facts: brand-name drugs in Canada are about 53% less expensive on average than in the U.S., but generic drugs are about 112% more expensive. High prices for generic drugs in Canada are due to Canadian government policies that shield retail pharmacies and generic drug manufacturers from competitive market forces that would put downward pressure on the prices of those drugs.

The September issue of the Fraser Forum, the Institute's monthly magazine, features several articles on health care policy.

Sainsbury’s Launches Britain’s First Supermarket Dentist…And It’s Open Seven Days a Week
Jaya Narain
Daily Mail, September 15, 2008

Retail dentistry is reaching the U.K. Patients who have been waiting for years to see a dentist in the National Health Se
rvice are flocking to new private dental clinics located in grocery stores in England. Like MinuteClinics in the U.S., services and prices are posted at the door. The clinics operate seven days a week and are booked to capacity. The government has paid dentists so little to provide care through the NHS that many have closed their practices to new patients. Some people traveled to other countries to find a dentist, but these entrepreneurial dentists and the Sainsbury's grocery chain have teamed up to offer a market-based, consumer-friendly alternative much closer to home.


State Health Reform: Converting Medicaid Dollars into Premium Assistance
Dennis G. Smith
The Heritage Foundation, 09/16/08

Premium assistance — a government contribution to health insurance — would benefit the populations currently covered under Medicaid and SCHIP, writes Smith, former Medicaid director and now a fellow at Heritage. These benefits would include a higher level of continuity of care and coverage; increased access to doctors, dentists, and other medical professionals through the superior networks of the private health insurance markets; reducing the stigma that so often accompanies dependence on public assistance; and integrating Medicaid recipients into the private health insurance markets in the way that far-reaching welfare reform initiatives are integrating low-income people into the economy. In addition, the infusion of a large cohort of relatively young and healthy people would have a positive impact on health insurance pools, broadening risk pools and lowering per-person costs.

Rather than put millions more children into a government-run insurance program, we should reform the tax treatment of health insurance to encourage and enable more families to get private coverage that is not dependent on one's place of employment, writes Steve Entin of the Institute for Research on the Economics of Taxation in a new Congressional Advisory.

Upcoming Events

Student Health Policy Briefing
The Roosevelt Institution Event
Friday, September 19, 2008, 12:30 p.m. – 2:30 p.m.
Washington, DC

Industry Support for Continuing Education of Healthcare Professionals
Center for Medicine in the Public Interest Event
Monday, September 22, 2008, 8:00 a.m. – 12:30 p.m.
Washington, DC
For more information, please contact Mario Coluccio at 212-417-9169 or

Solutions for Small Employers: Arizona and Oklahoma Blue Companies Showcase Examples of Health Insurance Coverage for Small Employers
Blue Cross and Blue Shield Association Briefing
Monday, September 22, 2008, 10:00 a.m. – 11:15 a.m.
Washington, DC
For more information, please contact Cheryl Lawrence at 202-626-4812 or

Primary Care Innovation: The Patient-Centered Medical Home
Alliance for Health Reform Briefing
Monday, September 22, 2008, 12:15 p.m. – 2:00 p.m.
Washington, DC

Innovation and Technology Adoption in Health Care Markets
American Enterprise Institute Book Forum
Monday, September 22, 2008, 3:00 p.m. – 5:00 p.m.
Washington, DC

The 2nd National Congress on the Un- and Under-Insured
September 22-24, 2008
Washington, DC
Grace-Marie Turner will speak about "The Role of Consumer-Driven Health Care in Health Reform" on Tuesday, September 23.

Policy Prescriptions: Innovations in Health Care
House Republican Policy Committee Event
Tuesday, September 23, 2008, 10:30 a.m.
Washington, DC
For more information, please contact or 202-225-6168.

Universal Health Insurance Provided by Government: Explaining Historically Why America Has Resisted This Concept
National Library of Medicine History of Medicine Division Seminar
Tuesday, September 23, 2008, 2:00 p.m.- 3:30 p.m.
Bethesda, MD

Workable Solutions for Long-Term Care
The Heritage Foundation Event
Wednesday, September 24, 2008
Washington, DC
For more information, please contact Kisa Caldwell at

How the Next President Can Deliver on Health Care Reform
Princeton University Event
Friday, September 26, 2008, 9:00 a.m.
Washington, DC
For more information, please contact Steve Barnes at 609-216-5327 or

Consumer-Driven Health Care Workshop
The Heartland Institute Event
Wednesday, October 1, 2008, 12:00 p.m. – 2:00 p.m.
Chicago, IL


Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features a commentary by Grace-Marie Turner on the major developments and issues of the week as well as summaries of writings by participants in the Health Policy Consensus Group and other articles of interest from the health policy world, plus 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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