Capital Commentary is the weekly current-affairs publication of CPJ, written to encourage the pursuit of public justice.

Tough choices about health care costs will not go away

Michelle Kirtley


May 28, 2010

There are some key features of the new health reform law on which Republicans and Democrats have long agreed and that will serve us well, including allowing young adults to stay on their parents’ insurance policies until age 26; prohibiting insurance companies from canceling the policies of their sick customers; and ensuring that people with pre-existing conditions have access to affordable health insurance.

But as commentators of every ideological stripe noted, missing from the new health care legislation are any serious measures to limit skyrocketing health care costs. Why? Partly because as complicated as the current health reform law is, reforms that would significantly “bend the cost curve” are exponentially more complicated—they would change the very architecture of health care financing and delivery. And partly because some of the most straightforward health reform measures are opposed by electorally decisive constituencies.

Health care economists across the spectrum have advocated modest reforms that have the potential to curb the alarming rate at which health care costs have continued to rise, including broad adoption of electronic health records; meaningful medical liability reform; and greater means-testing in Medicare. Ending the anachronistic tax advantage given to employer-sponsored health insurance may be one of the most important of these proposed reforms.

Since the end of World War II, for reasons that have little to do with health policy, employer and employee contributions to employer-sponsored health care have been tax-exempt. This has created a series of unintended consequences. First among the unintended consequences of this benefit: an over-utilization of health services. People who participate in employer group insurance are often recipients of generous health benefits for which they pay very little, which distorts their health care decision-making with consumption- and cost-increasing results.

Second, because the tax benefit is only given to employer group insurance and not to health insurance purchased by individuals, this subsidy has contributed to inequity in both costs and benefits between the group and individual markets. Also concerning is the fact that employees can feel trapped in poor work situations because they do not want to forfeit their health insurance.

In 2008, then presidential candidate John McCain proposed replacing the employer tax exclusion with an individual tax credit to purchase insurance. Senators Ron Wyden (D-OR) and Robert Bennett (R-UT) included a similar proposal in their bipartisan health reform legislation (which was never seriously considered).

Getting rid of this subsidy is politically difficult because it is a benefit that over 70% of insured Americans enjoy. The proposal has been vilified by key interest groups, including the labor unions. In the new law, a few higher-end employer sponsored plans (the so-called “Cadillac plans”) will be subject to taxation in 2018 … if Congress does not repeal the tax between now and then.

Thus, in an age of unprecedented deficits and expanding new entitlements the single largest tax subsidy in the country (which cost the Treasury $245 billion in 2007 alone) is left largely untouched.

We must find a way to liberate our politicians from the prison of short-sighted, poll-driven policy making and allow them to govern through sober, responsible decision-making. This may involve some pain in the short term. We may need to forfeit a beloved tax subsidy so that health care costs can become more sustainable over the long term.

If we fail to elect leaders capable of making these kinds of tough choices, we will soon face economic challenges similar to those endured by our friends in Britain and Greece—but with considerably more severe global repercussions.

—Michelle C. Kirtley, Ph.D.
    Science and Health Policy Analyst

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Capital Commentary is a weekly current-affairs publication of the Center for Public Justice. Published since 1996, it is written to encourage the pursuit of justice. Commentaries do not necessarily represent an official position of the Center for Public Justice but are intended to help advance discussion. Articles, with attribution, may be republished according to our publishing guidelines.”