Preserving “Private Practice” and Lowering Costs: Try Real Reform with the Common Sense Healthcare Tax Policy

August 31, 2011

By Roger G. Beauchamp, D.D.S.

Posted November 31, 2016

ABSTRACT

Under current health care  policy proposals, harmful government interference in the health care marketplace will continue. Most Republican and libertarian plans to repeal and replace Obamacare focus on health savings accounts (HSA’s). Americans should go a step further with “health financing accounts” (HFA’s).

There is a more common-sense way to run our health care business than steering people toward health savings accounts. Instead, empower people with Health Financing Accounts.

 Present Health Care Tax Policy

Our current tax code creates an advantage for employers to purchase health care for employees. Employees enjoy a tax exclusion for the money they earn that the employer uses to purchase health care benefits for the employee. An exclusion is superior to a deduction because the unpaid Federal Insurance Contributions Act (FICA) tax on the cost of the benefit plan is available to the employer to apply toward the benefit cost. This amounts to 15.3% of the benefit cost.

Individuals, providing for their own care, do not have the FICA tax on a comparable amount of earned income to apply toward their health care needs. The FICA tax of 7.65 percent is deducted from their wages and sent to the Internal Revenue Service (IRS) with the 7.65 percent employer match.

Moreover, individuals must spend 10 percent of their adjusted gross income (AGI) before being able to deduct any health care expenses. A deduction recovers only the income tax, not the FICA tax. Consequently, these individuals never have the FICA tax available to apply toward their health care needs as their employer would.

In order to restore a competitive market, legislation is needed to grant the same tax advantage to all workers that corporate employees have enjoyed for over 70 years. The Health Financing Account (HFA) is designed to accomplish that goal and create “equality of opportunity” for all workers.

The HFA is the basis of what I call The Common Sense Health Care Tax Policy. Here is how it would work.

Currently, government defines what insurance is. Government and special interests set the requirements all plans have to meet in order to qualify. It is a one-size-fits-all approach and does not encourage the development and marketing of new products that fit individual needs and financial resources.

So-called consumer-directed plans are already adding the cost of “preventive services,” showing how government is in the position of designing, directing, and dictating what insurance plans are available for individuals to choose. A truly consumer-directed marketplace would offer critical-illness policies, or those that pay subscribers according to a table of allowances. The benefit dollars from such policies could be used at any doctor’s office or hospital in the world, without penalty to the insured. The policy owner would thus control the payment over the full continuum of their care.

Economist agree that all money spent by employers that benefits the employee has been earned by the employee. This includes payroll taxes (both the employee FICA withold and the employer match), health care benefit costs, unemployment insurance and so forth.

The amount per enrollee spent by employers on their employees health care benefit plan should be fully disclosed to the employee.

This would help educate workers about the dollar value of the health care benefit program they have earned,  helping them realize that they already possess the financial capability of managing their own health care expenses at least as well as government or their employer if granted control over how those dollars are spent in the health care marketplace.

At present, a married couple is forced to choose one policy to cover both for family coverage. It is a “choose it or lose it situation”. The benefit earned by the spouse is decreased in value because it no longer has primary responsibility for payment. The value of the spouses work product is used to subsidize the overly expensive third party first dollar coverage of other workers.

Common Sense at Work

Under Common Sense, the employer- sponsored benefit would be capped, so there would be a fixed number to work with for accounting purposes. For those with no employer-sponsored benefit, the employer would transfer the 15.3 percent FICA tax on that amount of earnings into the employees HFA, instead of sending it to the IRS.

These tax excluded dollars would need to be dedicated to health care costs and not limited to insurance. If every tax-excluded dollar were required to be spent on health insurance instead of actual health care, workers would gain control of only 69 percent to 75 percent of the portion of their earnings supposedly devoted to procuring health care. Third party payers would get the rest. That’s bad sense.

For a true competitive market to exist, all suppliers in the market must compete for the support of workers who earn the money and pay the cost. Insurers, doctors and hospitals are suppliers. A competitive market is the best arbiter of efficacy, quality and price.

With the existence of a true competitive market, primary care-routine diagnostic and preventive services- would be paid directly at the time of service with money from the HFA. Insurance would cover only catastrophic events and diseases.

 

Rather than taxing  employment-based health care benefits or eliminating all health care tax preference, consider an approach that does just the opposite—that is 180 degrees different. It would extend the right to tax-free earnings for health care to all employed Americans. This 180-Degree Approach would place spending by individuals and by third parties on an equal footing. Giving responsible citizens, rather than third parties, control over health care spending will significantly reduce that spending, as citizens can benefit personally from spending prudently. It will stimulate competition, which will moderate health care prices for all. One must assume that all citizens have a responsibility to pay for their own health care to the best of their ability. Since government grants tax exclusions to help people meet this major human need, we must assume that it is especially important and thus should be a high priority item in the individual’s budget.

Under this approach, all citizens who do not have employment-based medical benefits valued at $12,000.00 or more for a single person, or $24,000 or more for a married couple, would be able to set up a Health Financing Account (HFA). The employee would set up the HFA with a bank, credit union or other qualifying financial institution. Payments from the account would be limited to qualified  expenses under Section 213-D of the Internal Revenue Code, plus any insurance the individual freely chooses to purchase that fits their needs and budget. A HFA would differ from a Health Savings Account (HSA) in that it would not require purchase of an insurance policy rigidly designed by government, with coverage, deductibles, and co-payments set by bureaucrats. All options would be available to individuals, who could purchase an individually owned and portable insurance plan that fits their needs and budget or simply save the money to pay for medical care directly or an insurance product designed to meet future needs such as long-term care.

Self-employed persons could simply place the FICA tax on the first $12,000.00 of earnings in their HFA, instead of paying it to the IRS. This would be reported to the IRS and subtracted from any FICA tax owed. Any difference between that amount and the cap could be contributed to the HFA and claimed as a deduction to escape any income tax.

There should be no direct tie between the HFA and any insurance plan the individual buys. The HFA would be tied to the individual’s Social Security number, and deposits reported annually to the Internal Revenue Service (IRS). For married couples, the HFA would be tied to both Social Security numbers so deposits can be accurately determined and reported. Payments from the account would be by check or debit card. An individual’s account could be programmed to record and send an itemized report of expenses to any insurance plan the individual designates when expenses total the amount of their plan’s calendar-year deductible. Those who pay directly would not be required to produce the functional equivalent of an insurance claim every time the HFA is accessed.

Equalizing the tax treatment helps to correct current distorted incentives to overspend on benefits instead of wages.

One of the principles underlying this approach is that the tax code should treat all health care expenses the same, whether paid directly or with insurance benefit dollars. The emphasis should not be on treating all health insurance purchases equally under the tax code, but rather on treating all qualifying costs equally. Purchasing insurance does not increase the total number of dollars available for care; it decreases them significantly. If every tax sheltered dollar has to be spent for insurance, rather than directly for care, only 69 to 75 percent gets paid to those who actually deliver the care. This means that out of a 2.9 trillion dollar annual health care economy, 725 to 899 billion is consumed by the bureaucracy. Paying for routine services directly would also benefit patients on the provider side of the equation. It decreases office overhead and delays in payment so doctors do not have to charge as much. Having  insurance does not equate to having care when needed. In countries that mandate universal insurance coverage, patients are waiting many months for the care they need.

Comparing an HSA to an HFA.

Currently, the money in health savings accounts (HSA’s) represents only about .04 of 1 percent of total health care spending, and those spending HSA dollars are being charged much more for a service than what insurers are paying.

The HFA, however, would put hundreds of billions of dollars back under the spending control of those who earned it and once again enable cash to command the best price.

First, consider how HSA’s work.

. Eligibility: In order to qualify for an HSA, one must purchase a high deductible insurance plan with at least a $1,300 deductible for an individual and $2,300 for a family.

. Contributions are limited to $3,350. per individual and $6,650 per family.

. Ownership: The individual owns the account which is placed with a bank, credit union or savings and loan.

. Rollover: Unused balances roll over to the next year.

. Taxes: Contributions are tax deductible, and plus growth and distributions for IRS- approved health care expenses are tax free.

. Account use or payment from the account: Payments are by debit card or a check drawn on the account for section 213-D IRS approved health care expenses.

. Penalty for unauthorized use: The penalty is that it is taxed at the individuals rate plus 10 percent.

Now consider how HFA’s would work.

. Eligibility: All workers would be eligible who do not have an employer-sponsored insurance plan or whose plan cost is less than the employer cap. There would be no requirement to purchase a high deductible plan designed and dictated by government and special interests to qualify for this account.

.Contributions: They would come from two sources. First, for those with no employer benefit plan, the employer would transfer the FICA tax on the capped amount of earnings directly into the employee’s HFA instead of sending it to the IRS. For instance, if the employer cap were set at $12,000 per individual, this would amount to $1836 (15.3 percent of $12,000). The individual would be free to contribute more up to the annual cap and deduct the amount from his or her taxable income to recover the income tax. So the total contribution limit for an individual per year would be $12,000 or double that for a married couple, with double the FICA tax transfer ($3672.).

.For those whose employer benefit is less than the cap, you would subtract the cost from the cap and the employer would transfer the FICA tax on the difference into their HFA.    (Example: An employer benefit cost of $8000. is subtracted from the $12,000. cap and the FICA tax on the difference, or $612. would be deposited into the employee’s HFA by his or her employer, instead of sending it to the IRS.) The employee could then contribute up to $3388 more and deduct it from their taxable income to recover the income tax.

.Ownership: Owned by the individual or jointly for a married couple.

. Rollover: Same as with an HSA.

. Taxes: Same as an HSA with the additional benefit that people would not be required to spend 10 percent of their AGI before having tax free dollars to spend for their health care.

. Account use or payment from the account: Same as with a n HSA with the exception that one may freely choose to purchase any plan across state lines that is free of onerous mandates and meets their needs and budget with money from the account.

. Penalty for unauthorized use: Unauthorized use is taxed at the individuals rate plus a 25.3 percent penalty (the 10 percent penalty that an HSA currently has plus recovering the 15.3 percent FICA tax, which is not part of an HSA).

No Burden on Business

Under the Common sense Health Care Tax Policy, HFA’s would not take away or reduce any benefit that citizens have already earned. This mutes criticism from an economic, psychological and political perspective.

During 50 working years, HFA’s would make up to $200,000 more available for health care to those who do not have an employer sponsored plan without their having to earn one more penny.

Tax-excluded dollars would be available to all workers, starting with the first dollar dedicated to their health care, just like employer-sponsored plans have been.

Common Sense places no burden on small business, our nations primary job creators, and eliminates the incentive for them to reduce workers hours.

Common sense eliminates the incentive to bargain for increased benefits instead of increased wages.

This degree of economic freedom will force price transparency among health care providers, pharmacists, and insurers and enable cash to command the best price.

Common Sense makes more money available to our retired senior citizens who are working part time jobs to pay for their health care and medications. They would qualify for an HFA just like all other workers.

To control cost by restoring individual liberty and freedom of choice, citizens must demand their United States legislators sponsor and support legislation to create health care tax plans that make sense-like the Common Sense Health Care Tax Policy.

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Restoration of a competitive market is essential. It creates better value for the health care expense dollar whenever the citizen chooses to spend it. Since government does not take any tax out of these earned dollars, there can be no wealth transfer from one economic group to another as a result of untaxed health care dollars. An untaxed dollar will purchase the same amount of goods or services, regardless of the individual earner’s tax bracket.

Regional monopolies are developing as a result of third-party control of the payment system. When states mandate specific benefits, insurers lack the ability to design and market innovative policies at affordable prices. Without a mandate, plans that have universal application and are not tied to a network of providers will emerge. Innovative providers will create products, and services will be offered outside the third-party payment system. This will create the needed market competition that will moderate total cost by eliminating unneeded overhead and overuse of services.

Harvard economist Arnold Kling, in his book The Crisis of Abundance, makes the generalized statement in his concluding remarks that in a truly cost-effective medical market, about half of all medical expenses would be paid for directly, at the time of service and about half with benefit dollars provided by insurance. This suggests that routine, diagnostic, and preventive services would be most economically purchased directly from the individual’s HFA .

Major unwanted and unanticipated  needs are what we should insure against. This is essentially how insurance worked more than 70 years ago, when what was considered to be the best health care system in the world consumed less than 4.7 percent of GDP. After those who earn the money lost control over how it is spent in the medical marketplace, medical costs started increasing at a rate that is now four times the rate of inflation. Medical expenditures now consume 19% of GDP, and that amount will soon rise to 20 percent.

Conclusion

Citizens, not the state, are sovereign over their own bodies, their rights and freedom of choice in medical care should be restored to the degree that they accept the responsibility for providing for their own needs The Common Sense Approach would restore individual rights and freedom, while reducing costly over-insurance and overutilization of services. It would treat all health care expenditures alike under the tax code, thus restoring a competitive marketplace. The health care debate has never been about health care per se. It is about who will control the money spent on health care, government, corporations or our citizens who earn the money? Restoring primary control over how responsible citizens utilize ther earned health care dollars, with an HFA, will create opportunities for “cash only” and other cost effective practice models to compete for support. This will help to preserve the “private practice” of medicine and dentistry in America!

Roger G. Beauchamp, D.D.S. has a 30-year history of advocating principled health care financing reform. He writes from Horseshoe Bay, Texas and can be contacted at: beauchamprog@live.com


The Debate on Extending the Bush Tax Cuts

December 14, 2010

The debate on extending the Bush tax cuts seems to be driven by ideology, rather than common sense! It deals with  the tax system we have presently, not what we might like to replace it with.

One argument being made is that those in the upper income bracket include small business owners who pay their taxes at the individual rate. Since they own the business, all of the profit it generates is income to the business owner. Increasing their taxes leaves less money for them to invest in the business and create jobs. However, there are no guarantees it will be reinvested in the business. The small business owner assumes all of the risk of business expansion to create growth and jobs.

Whether large or small, businesses should be permitted to have a Business Reinvestment Account. This vehicle would permit small businesses to decide how much of their profits they wish to keep for their own personal needs and pay taxes on and how much to tax shelter for reinvestment and job growth. This account would be similar to an IRA with taxes and appropriate penalties involved if not utilized for the intended purpose.

With large business we have a different situation. Most are stockholder owned and as such the decision making process regarding risk and reward is different. Under present law the CEO’s of major corporations seem to have the ability to transfer the corporate profits to their personal accounts, via large bonuses, with impunity, while not declaring a dividend for the stockholders (owners) of the corporation. Unlike the small business owner, they are not at risk personally when money is raised for expansion, it is the stockholders.  A Business Reinvestment Account would serve to protect stockholder values by keeping the money in the corporation for expansion and job creation.  More creative, common sense, approaches are needed to solve the serious problems our nation is facing!

Dr. Roger Beauchamp

Horseshoe Bay, Texas


It’s All About the Money

October 1, 2009

By Roger G. Beauchamp, D.D.S.

Note: The following was submitted as a letter to the editor of the Daily Press and an edited version was published on August 30, 2009.

For the political power brokers the debate has never been about health care, it is about who will control the money spent on health care. One party wants government control to cater to their political base and the other wants every tax favored dollar to be spent on insurance, rather than health care per se, catering to their political base.

Neither approach will lower cost and thus increase access to care. Who pays the cost of health care in the United States? Government has no money for health care until it takes it in the form of taxes from working men and women! Employers have no money for health care unless the work product of the employees (both salaried and hourly) provides the profitability needed to cover the cost. Insurers have no money for health care until the insured send in their premium payment or their employer pays the premium they have EARNED!

Currently, there is wide agreement among economists that any money spent by an employer that benefits the employee has been earned by the employee. So the answer is that responsible working men and women pay the full cost of health care. Therefore, it is their individual liberty and freedom of choice that should be restored and protected to create the competition needed to control cost. Our health care system is not broken, it is the way that we pay for or finance our health care needs that is broken.

Sixty plus years ago, individuals had the freedom to decide how to spend their earned dollars in the health care marketplace. At that time they could purchase and own their own insurance, making it portable from job to job. We were considered to have the best health care in the world and the cost consumed only 4.7 percent of the GDP (Gross Domestic Product). Since losing this individual right, health care costs have risen at over three times the rate of inflation under employer owned third party payment plans. Health care now consumes 17 percent of GDP with many experts predicting it will rise to 20 percent. The argument made 60 years ago for employment based first dollar coverage was that it would enable early diagnosis and treatment and LOWER total cost as a result! The same discredited argument is being advanced again to justify a further loss of liberty!

Our brave young men and women are fighting and dying to bring liberty to citizens in foreign lands.

We must not stand mute while we lose our liberty and freedom of choice to an ever expanding federal government!


Healthcare an Obligation a Good Society Owes to All Citizens to Degree It Can Afford

October 1, 2009

By Roger G. Beauchamp, D.D.S.

The following is a response to Mr. Bob Archambeau, whose Daily Press letter to the editor was prompted by my previous submission to the same publication.

In response to Mr. Archambeau. Representative Bart Stupak wrote me that  he regarded health care as a “right” that should be afforded to all citizens, not a privilege. I responded that I regarded health care as neither a right nor a privilege, but an obligation a good society owes to all citizens to the degree it can afford.  If health care is established as a right of birth, no one need

make sensible lifestyle choices or accept any degree of responsibility  for their own well being.

Rights are absolute! That is why our “founding fathers”, in their wisdom, referenced only life, liberty and the pursuit of happiness as inalienable rights.

If health care becomes a “right”, the overwhelming demand for services would result in rationing and long waits for needed care. Care delayed becomes care denied! So where is the right then?

Sound health care policy should encourage citizens to accept the responsibility of providing for their own needs to the greatest possible degree. Presently, neither the employee nor the employer pay the FICA tax on the money spent by the employer for a benefit program. Citizens, with the best jobs, have the FICA savings spent by their employer on their health care benefit plan. For a total benefit cost of $10,000.00, the FICA savings amount is $1530.00. This amount should be made available to all working men and women who do not have any employment based health care benefit plan to apply toward their health care needs. The employer would simply deposit it into the individuals Health Financing Account, owned by the employee, instead of paying it to the IRS on the first $10,000.00 the employee EARNS. That amount would be doubled for a married couple to $3060.00. All would be free to contribute more until the $10,000.00 ($20,000.00 for a married couple) cap is reached and escape the income tax on the amount contributed. This grants all working men and women the same opportunity.

I did check out the Soujourners website and found no useful information. It simply stated they believed in reform. So do I ! The question is what specific reforms deserve support?. People of faith believe in voluntary charity. Forced charity, which returns very little in value for the money spent, does not create the same good feeling for those paying the cost!

I do understand that there will be those who will need additional charitable help for their health care needs! Sound policy would lower overall costs, shrink the percentage needing charitable assistance, and make it easier for society to provide the help needed.


Who Is the Single Payer?

October 1, 2009

Note: The following is a response to Mr. Raymond Juneau’s letter to the editor of the Daily Press regarding discussion prompted by my August 31, 2009 and September 12, 2009 submissions on healthcare reform.

There is general agreement among modern day economists that all benefits obtained through employment have been EARNED by the employee. One is either an employee of the private sector or a public employee! I believe that every citizen should

own the benefit plan or dollars they have earned. This makes both portable from job to job.

I also believe that all retirement and benefit plans should be fully funded during the working years of the employee, whether public or private. None of these plans should contain a “cost of living adjustment” (COLA).  Future employees or taxpayers should not be burdened with  additional cost increases for those already retired.

I believe the only plan that should have a “cost of living adjustment” (COLA) is social security.

Social security is a social safety net, not a retirement plan!

I do not want to sell you insurance. Whether to purchase it or not should be your decision. Health care and health insurance are not interchangeable terms. One can receive health care without having insurance and one can have insurance and not be able to receive health care when needed! If insurance is not “mandated”, insurers will design and promote REAL insurance plans you will want to purchase and can afford, rather than the over expensive third party bill paying plans we currently have, which want to control ALL of the money dedicated to ones health care needs!  If citizens want health care to become more affordable, dollars spent directly for care should have the same tax treatment as those spent for insurance. Citizens should be free to decide how to divide the benefit dollars they have earned between direct payment for routine and preventive services and any insurance plan they choose to purchase.

All of he programs you reference are financially bankrupt or underfunded and have been run by government. Yes, we need a single payer plan and that single payer should be the responsible individual who has to earn the money and pays the full cost of health care.