The Beginning of the End for Employee Sponsored Health Insurance

ArleneG · Feb 28, 2004

Whenever this subject comes up, invariably I hear people say regarding the strikers "well tough for them, I have to contribute towards my healthcare". I think peoples' anger is misdirected at the little guy trying to make a decent living with some decent benefits instead of these CEO's making increasingly obscene wages while they cook the books and rip off the stock holders. The more the corporations win in these fights, the more we all lose. We'll be back where we were at the turn of the last century, no benefits, no overtime, no jobs.

jnette, ASN, EMT-I · Feb 28, 2004

Whenever this subject comes up, invariably I hear people say regarding the strikers "well tough for them, I have to contribute towards my healthcare". I think peoples' anger is misdirected at the little guy trying to make a decent living with some decent benefits instead of these CEO's making increasingly obscene wages while they cook the books and rip off the stock holders. The more the corporations win in these fights, the more we all lose. We'll be back where we were at the turn of the last century, no benefits, no overtime, no jobs.

Yep. We're getting closer every day. :stone

RN-MSN-FNP · Mar 6, 2004

consensus on health reform brief analysis http://www.ncpa.org/ba/ba199.html

a consensus is emerging on the right way to reform our health care system. the consensus stems from the recognition that the tax system has shaped and molded our health care system and is responsible for many of its problems. health reform, therefore, requires tax reform. through the tax system, the federal government encourages people to spend too much of their incomes on medical care, thus contributing to spiraling health care costs. the government also encourages people to use third parties to pay medical bills they could easily pay out of pocket - a practice that encourages wasteful consumption of medical care. and tax policy increases the number of people who are uninsured by penalizing people who purchase their own health insurance rather than getting it through their employer. let's take a closer look at how these problems arise.

problem: encouraging waste. under current law, every dollar of health insurance premiums paid by an employer escapes, say, a 28 percent income tax, a 15.3 percent social security (fica) tax and a 4, 5 or 6 percent state and local income tax, depending on where the employee lives. this means the government is effectively paying half the premium - a generous subsidy that encourages employees to prefer health insurance to taxable wages even when the insurance is wasteful. for an employee in the 50 percent tax bracket, for example, $2 of nontaxed health insurance need be worth only slightly more than $1 to be preferable to $2 of taxable wages.

problem: encouraging third-party payment. a primary reason why health care spending is out of control is that most of the time when we enter the medical marketplace as patients we are spending someone else's money rather than our own. economic studies - and common sense - confirm that we are less likely to be prudent shoppers if someone else is paying the bill. the explosion in health care spending over the past three decades parallels the rapid expansion of third-party payment of medical bills. the patient's share of the bill has declined from 48 percent in 1960 to 21 percent today. the primary reason for the shift from out-of-pocket payment to third-party payment of medical bills is federal tax policy. although employer payments for health insurance are excluded from taxable income, taxes take up to half of any amount employers give employees to pay their own small medical bills.

problem: penalizing the purchase of insurance by the uninsured. the federal government currently "spends" about $84 billion a year in tax subsidies for employer-provided health insurance, and state and local governments spend another $10 billion. these subsidies arise because, as noted above, employer-paid health insurance is excluded from employees' taxable income. at the same time, the self-employed, the unemployed and employees of small companies that do not provide health insurance must pay taxes first and buy health insurance with what's left over. this can make their health insurance cost twice as much after tax as it would if provided by an employer. small wonder that almost 90 percent of nonelderly people who have health insurance are insured through an employer - and that 81 percent of uninsured workers are self-employed, unemployed or working for small companies. see figure

solution: limit tax subsidies. the tax system should be changed so that it encourages people to obtain a basic amount of health insurance without encouraging them to overinsure. beyond some minimum expenditure, people should not be able to lower their taxes by spending money on health insurance or on medical care. one way of achieving this result is through fixed-sum tax credits, described below.

solution: medical savings accounts. under traditional health insurance, people make monthly premium payments to an insurer such as blue cross, and the insurer pays medical bills as they are incurred. with medical savings accounts (msas), people can confine health insurance to catastrophic coverage (say, expenses above $3,000), reduce their monthly insurance premium payments and make deposits to a savings account instead. insurance pays for expensive treatments that occur infrequently, while individuals use their msa funds to pay small bills covering routine services. ideally, medical savings accounts should receive the same tax treatment as health insurance premiums. that way, people can make unbiased choices between self-insurance and third-party insurance. government can encourage insurance as such, while remaining neutral with respect to the type that is chosen.

solution: tax fairness. equity in taxation requires that all americans receive the same tax encouragement to purchase health insurance, regardless of employment. accordingly, the self-employed, the unemployed and people who purchase health insurance on their own should be entitled to a tax deduction or tax credit that is just as generous as the tax treatment they would have received if their policies had been provided by an employer.

fixed-sum tax credits. one way to achieve tax fairness and at the same time remove the distorting effect of tax subsidies is to give every taxpayer a tax break that (a) is conditional upon the purchase of insurance but (b) does not increase if the taxpayer chooses more expensive coverage. employers and their employees would make premium payments and msa deposits with aftertax dollars, and employees would receive a tax credit for the purchase of insurance on their personal income tax returns. unlike a tax deduction (which benefits people more if they are in higher tax brackets), a tax credit can be structured to create more benefit for lower-income taxpayers. for those with very low incomes, the credit can be refundable - with government providing most of the funds for health insurance premiums through a system of vouchers.

backended msas. under a frontended msa, deposits are made with pretax dollars and the funds not spent on medical care are taxed upon withdrawal. although these accounts are a substantial improvement over third-party payment of every medical bill, they still retain some of the current system's use-it-or-lose incentives that encourage overconsumption of medical care. funds spent on medical care are tax free. but funds withdrawn to purchase other goods are subjected to taxes and (in some versions) penalties. this problem is eliminated with a backended msa, under which deposits are made with aftertax dollars and withdrawals are made tax free. as figure i shows, this would allow people to make unbiased choices between medical care and all other uses of money, because they could withdraw the funds at any time, for any reason, without penalty. see figure

tax reform. tax credits and backended msas are consistent with a flat-tax proposal that eliminates the employee exemption for health insurance benefits. under such a tax reform plan, employee benefits would be taxed, but the federal government could integrate the fixed-sum tax credit with personal exemptions, and all savings, including msas, would grow tax free.

this brief analysis was largely taken from the journal article, mark v. pauly and john c. goodman, "tax credits for health insurance and medical savings accounts," vol. 14, no. 1, health affairs, spring 1995, pp. 125-139. available at: [color=#7c7cae]http://www.healthaffairs.org/readeragent.php?id=/usr/local/apache/sites/healthaffairs.org/htdocs/library/v14n1/s17.pdf

fiestynurse · Mar 6, 2004

The Des Moines Register

08/25/2003

Editorial: Reality check on MSAs

They're just another tax shelter, not health-care reform.

By Register Editorial Board

They're back. Every few years, medical spending (savings) accounts (MSAs)

are rolled out as an answer to problems in the health-care system. A provision to expand who can use these accounts has made its way into the Medicare reform being debated in Congress.

The concept is simple: Individuals can put money into savings accounts each year, tax free, and use that money to pay health-care bills out of pocket. If money is left over, the individual gets to keep it.

It's appealing on the surface. Advocates argue the accounts are an incentive to"save money" by using less health care because people will think twice about"spending their own money." Participants might pass on unnecessary tests. It's an opportunity to inject a free-market principle into health care by allowing individuals to select their own doctors and negotiate rates for services.

Now Back to the Real World:

*Currently insurance companies and the government leverage down doctors" fees. It's unlikely a single consumer, with no leveraging power, will be able to accomplish that. This is demonstrated over and over when the uninsured pay more than an insurance company does for the same service. People with these accounts could end up paying more.

*Medical spending accounts are another way to tax shelter money for the affluent. Low-income people will not have the extra dollars to stow away in a savings account. Yet higher-income people will be able to let this money build for years, investing it in stocks and bonds to grow tax free.

*Medical spending accounts will appeal to healthy people because they don't use many medical services and therefore would get to pocket the unspent balance in their accounts. However, the core concept of insurance is pooling the sick and healthy together to balance out the risk. Widespread use of spending accounts could leave a higher proportion of sick people in insurance pools and result in higher premiums for that group.

*Individuals skipping a checkup or opting not to go to the dentist a few times won't make even a small dent in the health-care spending of this country. The vast majority of spending on health care is done for the few sick and elderly individuals. MSAs won't change that.

A special-interest radio ad currently playing in Iowa states: "President Bush supports making MSAs available to all Americans, but Senators Ted Kennedy and Hillary Clinton are against it. They want the government to run our health-care system. But Senator Charles Grassley can make the difference. . . . Tell him to keep fighting for the uninsured by making MSAs available to all Americans."

What do "national health care" and "Hillary Clinton" have to do with spending accounts? And a tax-free account doesn't "fight for the uninsured" who likely don't have the money to invest in one of these plans anyway.

The ads are disingenuous. After all the hype is stripped away, it's clear medical spending accounts don't render people "insured." They simply disguise another tax shelter for the affluent while peddling it as something for the average person.