Tax Code Blocks Health Insurance Reform

A simple change to the tax code would empower millions of Americans who now must accept health plans selected by their employers to shop for better, lower cost coverage in an open market.  Yet Congress and the President refuse to consider it.

We all experience continuous marketing and advertising for car insurance and life insurance.  But there isn’t much marketing from health insurance companies.  In fact, if you’re not part of an employee group shopping for health insurance can be a daunting challenge.  The disadvantages of employer provided health insurance are obvious:

• The insurance company seeks to please the employer who makes the buying decision first, and the employee/consumer of medical services second.  Employees have no voice in selecting health plans.
  
• Employees  have no incentive to consider cost.  The system provides incentives for employees to act as if they have an unlimited medical care budget.  Indeed, some feel they must over-consume to receive the value they’re entitled to.
  
• Administrative costs are high because third party insurance companies must process and pay millions of small claims for low cost, routine services.  Imagine the effect on the cost of auto insurance if the company had to process and pay separate claims for millions of $15 car washes and $40 oil changes and $80 tires.  Imagine how much more often drivers would have their cars washed if the insurance company was paying all or most of the bill.

Employer-provided health insurance  feels “normal” to most Americans because it has been dominant for many decades.  But why is it dominant?  Why can’t health insurance, like car insurance, be readily available, sold directly to customers, and customized to meet the needs and desires of each individual?   Why is this system, with all its flaws, the way most of us get health insurance?

The answer is simple: financial disincentives are imposed by government via the tax code. Cash wages are subject to taxes imposed on both employer and employee, but health insurance is tax exempt IF, and only if, it is provided by the employer.

The table below illustrates the powerful and perverse tax disincentives using the following scenario as an example:

• The employer currently provides a family health plan costing $10,000 per year.
• The employee would rather shop for her own insurance than be forced to accept whatever plan the employer selects.
• The employee may be able to choose a plan that better meets her needs and maybe even saves a little money.
  
• The employer would be delighted to give up the hassle of health insurance administration and is willing to increase the employee’s salary by $10,000 in lieu of providing the $10,000 health  plan.

The solution to this problem virtually screams at anyone who looks into it:  Simply grant tax relief to individuals who purchase their own health insurance – make it exempt from payroll tax and income tax.

Yet somehow this simple change in the tax code seems incomprehensible to the Senators and Congressmen who have written thousands of pages of new government interventions, in part to overcome the inherent incentives to over-consume employer-provided health care.