Bipartisan Health Reform Brewing

Commentary by Pete du Pont

Lost amongst the "Goldie Locks" talk about President Bush's tax cut proposal - "is it too big, too small or just right" - is another tax proposal that is built on a bipartisan foundation.

While partisan divisions grow over the across-the-board rate reductions, this other tax reform concept aimed at health care is generating support from Republicans like House Majority Leader Dick Armey (R-TX) and Ways & Means Health subcommittee chairwoman Rep. Nancy Johnson (R-CT), and even leading House liberals like Reps. Jim McDermott (D-WA) and Pete Stark (D-CA).

What am I talking about? The growing consensus that the federal government should offer some sort of tax credit for the purchase of health insurance - an idea that could go along way towards reducing the number of uninsured from its current high of over 44 million. In other words: health reform is tax reform.

The federal government "spends" about $125 billion in tax subsidies each year encouraging people to buy private health insurance. Yet the number of people without insurance continues to grow because the way in which these subsidies are targeted is arbitrary and unfair.

Under the current system, employer payments for health insurance are excluded from an employee's taxable income. Unlike wages, this employee benefit avoids payroll taxes and federal, state and local income taxes. By means of this generous subsidy, government is effectively paying half the cost of insurance for many middle-income families.

By contrast, individuals who don't get insurance through an employer must earn the income, pay the taxes and then purchase the insurance with what's left over. This means that in order to buy the same insurance, many middle-income families must earn twice as many dollars.

Adding to the problem, the government heavily subsidizes a safety net system of "free care" that - while well intentioned - has the perverse affect of convincing many uninsured individuals to stay uninsured. There are more than 40 federal programs that fund health services for the uninsured. The largest single program - spending more than $1.5 billion dollars a year - is the "disproportionate share hospital" payment program, designed to compensate hospitals that serve an above average number of indigent patients. There are also health care grants for residents of public housing, seasonal farm workers, legal immigrants and even undocumented immigrants.

In Texas, for example, the Comptroller's office estimates that the state is spending about $1,000 per year on each of its uninsured residents, or $4,000 for a family of four. This is a conservative estimate. The real numbers may be $1,500 and $6,000. By contrast, most of the Texas uninsured receive little or no help if they choose to buy private insurance instead of relying on the free care safety net. It is only fair then, to have the government subsidize private insurance just as much if not more than it subsidizes free care.

Ideally the credit would be uniform because the government's interest in encouraging the purchase of private insurance does not change depending on where one where the person lives or how much he or she earns. An uninsured family at four times the poverty level can incur unpaid medical bills almost as easily as a family at two times the poverty level - so the social interest in encouraging coverage is largely independent of income. It should also be refundable, providing a subsidy even to those who owe no taxes, because the government's interest in encouraging the purchase of private health insurance does not vanish just because people earn low incomes.

This is not to say we should completely do away with the government's safety net. It is a fact of life that some people, regardless of what type of tax subsidy the government offers them, will remain uninsured. It is also a fact that these people will undoubtedly get sick at some point in their lives. Therefore unclaimed tax credits should be refundable to the states and localities in which the person lives, allowing local authorities to care for them in a local safety net.

While there are many details to be worked out yet, with the general approval of the administration and a bipartisan collection in the Congress, the tax credit movement offers the potential of providing a reasonable form of universal coverage.