Empowering Health Care Consumers through Tax Reform

FOR DECADES, POLICY MAKERS at all levels of government have been searching for ways to help Americans gain greater access to affordable health care. As costs and the number of uninsured continue to rise, a different approach clearly is needed. In Empowering Health Care Consumers through Tax Reform, policy experts, known as the Health Policy Consensus Group, explore the intersection of health and tax policy for solutions. These economists and other health policy advisors, business group and union representatives, physicians, and political leaders describe the distortions to the health care system caused by a 50-year-old provision in the tax code, and they paint their vision of a revived free-market system.

According to the U.S. Bureau of the Census, more than 43 million Americans lacked health insurance at some point in 1998. Those with insurance fear they will lose it if they lose their jobs and are increasingly angry over managed care restrictions negotiated by their employers. Health care and health insurance costs continue to price millions of people out of the market. Those without health insurance are primarily working Americans and their dependents who do not get coverage through their jobs and who make too much to qualify for public programs and too little to buy their own expensive health polices.

In their “Vision for Reform,” the Consensus Group charts a clear objective: “Rather than replace the current structure with a government-driven system, we propose a mechanism to achieve genuine reform by creating a competitive, consumer-driven marketplace.”

And, to accomplish this goal, the following are core principles—identified by the Consensus Group after intense debate—to guide policymakers and the public in making key decisions about creating a true consumer-driven health care system.

Consumer choice: Individuals should have choices in the medical care and health coverage they obtain, whether they secure coverage as individuals or through their employers or other groups. Government policies should expand the opportunities for individual choice without dictating or distorting these choices.

Competition: Consumers of medical services will receive the best value when providers are competing to offer the best price, quality, and services. Therefore, the system should rely on market competition, not government regulation or price controls, to promote efficiency, quality, and value.

Responsible budgeting: Government incentives to help targeted populations obtain private health coverage should be explicit, on budget, and reviewable.

Fixed and limited incentive: Individuals and families with the same incomes should receive the same benefit when purchasing health insurance, regardless of their employment status or whether their employers offer health insurance. Individuals should not be able to increase their claim on taxpayer revenues by purchasing more health coverage.

Expanded access: In a market based upon consumer choice, a more attractive range of options for health coverage would be available to a wider range of people, including those currently without health insurance. Once the market is functioning more efficiently, it will be clear whether further legislation is needed to enhance people’s ability to secure health coverage.

Responsible insurance: Health coverage should provide, at a minimum, protection against catastrophic loss—namely, high-cost, low-probability medical events. The tax system has encouraged movement away from the basic principles of insurance; instead, health coverage has become a way to pre-pay routine medical bills. A first step toward reducing the number of Americans without health insurance is through insurance that provides access to medical care and protection against large expenses in the event of catastrophic medical events.

Public-sector choice: Given the rapidly rising costs in federal health care programs, especially Medicare and Medicaid, the federal government should make full use of private-sector competition to control costs by giving beneficiaries more options to participate in the private market.

Cost awareness: Programs that enhance individual purchasing power will be more efficient because costs will be more visible to consumers. Programs and plans that make payments directly to providers insulate consumers from costs, artificially increase demand, and distort the health care marketplace.

Full information: Employers who provide health insurance should periodically inform their employees about how much of their compensation is being spent on health benefits and that this spending has reduced their cash wages by a commensurate amount.

Community versatility: The strength, diversity, and vitality of private-sector community organizations are an important resource in the health sector. Communities should experiment with public-private partnerships and other solutions for providing health care to low-income citizens, utilizing local resources to solve unique community problems.

Group purchasing: Tax and regulatory barriers to creating competitive private health care purchasing groups should be eliminated. Barriers to the creation of innovative provider groups should also be eliminated.

Value: As a result of implementing these principles, consumers will obtain better value for their health care dollars. The price system will convey consumers’ needs and demands. Competition will facilitate more efficient use of technology and continued innovation in products and service delivery, and will reduce waste and duplication.

The key to reform of the health care system is giving individuals freedom of choice in an open and competitive marketplace. Whoever controls the money also controls the choices. Will it continue to be private-sector bureaucracies through employers, health insurance companies, and managed care organizations? Will it be through expansion of government bureaucracies? Or will the resources be controlled by individuals with the resources and the authority to transform the health care system into one that caters to millions of individuals’ needs?

It is no coincidence that the United States offers the highest quality health care in the world and that, during the twentieth century, it repeatedly has turned its back on socialized medicine. The challenge for the twenty-first century is to modernize tax policy decisions made more than 50 years ago so that this high-quality health care is accessible and affordable for all Americans. That will come not through the collective solutions that have been attempted again and again this century, but through solutions that focus on individual authority, competition, diversity, and freedom of choice that will drive the rest of the economy in the twenty-first century.

Ultimately, the road to health care reform will run through tax reform. The invisible and regressive tax break for health insurance will be brought to light when the country debates a major overhaul of the tax code. As a result, the route to the health care reform that has eluded policymakers for decades may very well be through a simpler, fairer, and flatter tax system.

Ms. Arnett is President of the Galen Institute, a public policy research organization based in Alexandria, Va., that focuses on health and tax policy and coordinates and facilitates the work of the Consensus Group.