By Roger G. Beauchamp, D.D.S.
Posted November 31, 2016
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.
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.
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: email@example.com