By Roger G. Beauchamp, D.D.S.
Under current health care policy proposals, harmful government interference in the health care marketplace will continue. Present policy does not tie the tax benefit to the degree that the individual accepts the responsibility of providing for their own health care needs. An alternate proposal would abolish tax favoritism for third-party expenditures and restore a true competitive marketplace.
Present Health Care Tax Policy
At present, employment based health care benefit programs are purchased with “excluded” dollars. This means that neither the employer nor the employee pay any tax on the cost of the benefit. The employer does not pay the matching 7.65% FICA tax nor does the employee. This means that employers have a total of 15.3% more to spend on benefit programs than an individual would. The individual also does not pay any income tax on the money spent for their benefit plan by their employer, giving employer purchase an even greater advantage.
Working men and women, who do not have an employment based benefit plan, do not have the use of the FICA savings to apply toward their health care needs. In order to save any money for future needs they must purchase an HSA qualified insurance plan.
This means that 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 payments 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, 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 spouse loses any benefit they have earned. The value of their work product is used to subsidize the overly expensive third party coverage of other workers.
The 180-Degree Approach to Health Care Benefits Policy Reform
If the employer provides the money as wages, instead of benefits, the cost is greater to the employer by the 7.65% “employer’s share” of the payroll tax, and the amount received by the employee is less by both the 7.65% payroll tax and the employee’s income tax. The exclusion for benefits is presently unlimited! This means that those with the best paying jobs and ability to pay for their own health care needs can spend any amount that the corporation can afford and escape all tax on the purchase. This cost is making our corporations uncompetitive in the world market. The exclusion needs to be capped! The cap would be tied to the CPI for all goods and services. In order to treat all citizens fairly, all should have the funds now taken by payroll tax on income below the capped amount available to apply to their health care expenses.
Rather than taxing all 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 abilities. 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 $10,000.00 or more for a single person, or $20,000 or more for a married couple, would be able to set up a Universal Health Account (UHA). The employee would set up the UHA 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 medical and dental insurance premium payments. A UHA 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, buy an HMO or PPO offering, buy a plan to supplement their employer-owned plan, 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 $10,000.00 of earnings in their UHA, 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 and claimed as a deduction to escape any income tax.
There should be no direct tie between the UHA and any insurance plan the individual buys. The UHA would be tied to the individual’s Social Security number, and deposits reported annually to the Internal Revenue Service (IRS). For married couples, the UHA 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 UHA is accessed.
Equalizing the tax treatment helps to correct current distorted incentives to overspend on benefits instead of wages. The total payroll tax, 15.3%, on the difference between the value of any employer-paid benefit and the cap, would be added by the employer to the couple’s UHA, instead of paying it to the IRS. The couple could add dollars up to the cap and obtain a refund of the income tax on those dollars at the time of tax filing, as explained in Example 1. This permits working men and women to maximize the number of tax-free dollars available for their health carel needs, and also permits them to decide how to allocate their funds between health care and other uses. Responsible citizens will not go without purchasing an insurance product that fits their needs and budget. Lower-income persons might prudently decide to use the savings to pay reasonable fees directly to their doctor so they have access to health care when needed instead of having to go to the expensive hospital emergency room. They may also purchase an insurance product that fits their needs and budget.
Currently, money placed in an Health Savings Account can be deducted from ones taxable income. The FICA tax has already been paid on those dollars. HSA withdrawals for other than health care needs incur a 10% penalty With a Universal Health Account, money placed in the account escapes BOTH the FICA tax and the individual income tax. The full FICA tax savings on the capped amount of earnings has been made available to all citizens to apply toward their health care expenses. Therefore, the withdrawal penalty for non health care use, with the UHA, would be repayment of the full FICA tax (Currently 15.3%) on the amount plus the 10% penalty, currently carried by an HSA, for a total penalty of 25.3%. The balance would be taxable income at the individuals rate. In order to mute the charge that it will be used as a “tax shelter for the rich” the tax free savings in the UHA will be capped at $250,000.00 per individual or $500,000.00 per couple. If that figure is reached, the individual would no longer be permited to make individual contributions to the account. The account would still be used to accept the FICA tax savings contribution and earnings income. Out of pocket health care expenses, up to the yearly cap, could still be deducted from taxable income. For inheritance purposes, money in the UHA could be transferred into the UHA of designated heirs, not to exceed the individual cap completely tax free. This preserves the original intent of increasing health care security for our citizens. For all other purposes, the full penalty would apply. Sound policy should encourage all citizens to provide for their own lifetime needs to the greatest possible degree.
One of the principles underlying this approach is that all medical and dental expenses should be treated the same, whether paid directly or with insurance benefit dollars. The emphasis should not be on treating all medical or dental insurance purchases equally under the tax code, but rather on treating all qualifyi ng 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 75% gets paid to those who actually deliver the care. This means that out of a 2.3 trillion dollar annual health care economy, 575 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 needed care. Care delayed becomes care denied!
We present below two accounting examples to illustrate that the 180-Degree Approach grants all citizens the same opportunity to provide for their health care needs. Employment-based medical and dental plans are a benefit in addition to salary. Since citizens with the best-paying jobs, and thus the best ability to pay for their own medical needs, have the payroll and income tax savings spent for their benefit programs, we believe tax policy should grant all citizens the same advantage when they provide for themselves.
This example concerns working persons whose employment-based benefit program has an employer cost of $4,000, in addition to salary, completely tax free. All tax savings (payroll and income tax) are part of the $4,000. This cost is reported to the IRS and tied to the individual employees social security number. The amount is subtracted from the yearly cap to determine the amount that may be contributed to the UHA for that calendar year. One simply has to substitute the cost of their insurance or benefit plan for the amount used in the example to see what their options would be.
For a single person, the payroll tax on the difference between the benefit cost of $4,000 and the cap of $10,000.00 (15.3% of $6000, or $918.00) would be deposited into the individual’s UHA by the employer, instead of paying it to the IRS, for a total benefit of $4,918.00. The worker could then contribute up to $5,082.00 ($10,000.00 minus $4,918.00) to his or her UHA in after-tax dollars, and deduct this contribution from taxable income to recover the income tax.
For a married couple, the $4,000 cost of their employment-based program would be subtracted from $20,000, leaving $16,000. The payroll tax on the difference (15.3% of $16,000, or $2448.00) would be deposited into the couple’s UHA by the employer, instead of paying it to the IRS, for a total of $6448.00. The couple may contribute any amount up to $13,552 ($20,000 minus $6,448) in after-tax dollars to the UHA and deduct the contribution from their taxable income to recover the income tax.
This concerns workers with no employment-based health care benefit program. The premium cost of any and all medical and dental insurance purchased by the individual would be reported to the IRS and tied to the individuals social security number. This amount would be subtracted from the yearly cap and claimed as a deduction when filing their income tax.
The employer pays the payroll tax on the first $10,000 of earnings into the employee’s UHA ($1,530.00 for a single person or $3,060.00 for a married couple) instead of paying it to the IRS.
A single person may contribute up to an additional $8470.00 ($10,000.00 minus $1,530.0) to his or her UHA, or deduct up to $8470.00 in health care premium payments and direct payments for care, claiming the amount as a deduction from taxable income. If premiums are less than the cap, the difference may be contributed to their UHA and claimed as a deduction.
A married couple may contribute up to $16,940.00 in after-tax dollars ($20,000 minus $3,060.00) to their UHA and deduct the amount contributed from taxable income.
The net result is that all earned dollars dedicated to medical and dental costs are tax-free up to the cap of $10,000 per individual or $20,000.00 for a married couple.
Those self employed would have exactly the same opportunity as outlined above.
Restoring a Competitive Market
In a competitive market, the most important thing government can do to make medical care more affordable is to not tax dollars dedicated to that need, thereby leaving more dollars in the hands of the citizen, who earned them, to spend for that need. Government interference in how the money earner uses it in the health care marketplace adds to the total cost, because it decreases competition among those competing for support in that market. To restore market competition, insurers must compete for the economic support of our citizens as well as doctors, hospitals, and others in the health care industry.
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 and require coverage for specific providers, 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.
Retired citizens would be permitted to deduct from their taxable income the difference between the dollar value of their medical retirement benefit plan and the established cap any out of pocket expenses.
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, and about half with benefit dollars provided by insurance. This suggests that routine, diagnostic, and preventive services are most economically purchased directly from the individual’s UHA when a competitive market exists.
Major unwanted and unanticipated needs are what we should insure against. This is essentially how insurance worked more than 50 years ago, when what was considered to be the best health care system in the world consumed only 4.7% 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 more than three times the rate of inflation. Medical expenditures now consume 17% of GDP, and many experts predict that the amount could rise to 20%.
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 180-Degree 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 UHA, will create opportunities for “cash only” practices, the most cost effective model for delivering needed services, 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.