Level the Playing Field for U.S. Health Insurance

Commentary by John C Goodman

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 has reached 44 million and continues to grow. Why? Because the way in which these subsidies are targeted is arbitrary and unfair, and is actually causing more people to become uninsured.

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.

We get what we subsidize. Ninety percent of people who have insurance, get it through an employer. Millions of those who don't figure that if a family member becomes seriously ill, they can always find work from an employer who will pay the medical bills. In this way, bad government policy actually encourages people to be uninsured.

The current system is also self-defeating in other ways. For example, it gives the most subsidy to families who least need help and probably would have purchased insurance in any event. Families in the top fifth of the income distribution get six times as much help from the federal government as the bottom fifth. Small wonder that the lower the family income, the more likely that a family is to be uninsured.

Fortunately, there is a better way. Tax relief for health insurance should be the same, regardless of who writes the check. Individually purchased insurance should qualify for just as much tax subsidy as employer-purchased insurance. This would level the playing field between those who get coverage as a benefit of employment, and those who purchase insurance on their own. What would happen if federal policy toward the purchase of private insurance were neutral? Some argue that employers have a unique contribution to make - lowering costs through economies of scale and superior bargaining power. Others say individuals will do just fine on their own. Only by creating a level playing field and allowing the market to work will we find out who is right.

We should also equalize the amount of tax relief we make available to those who have insurance. Instead of a system that mainly rewards people in high tax brackets, the federal government should commit a fixed sum of money for private health insurance for every American. The commitment should be the same for everyone - rich or poor, black or white, male or female. Under one proposal, people would receive a refundable tax credit: a dollar-to-dollar reduction in income taxes for health insurance cost up to a maximum amount. Since the credit would be fully refundable, even those who owe no income taxes would get the same financial help

This proposal would replace the current policy of subsidizing employer-provided health insurance with a policy that treats all citizens the same. It is simple and fair. And it would result in more people with health insurance.