Reforming the U.S. Health Care System

Commentary by John C Goodman

The number of Americans without health insurance is 43 million and rising. Unwise government policies are mainly to blame.

The federal government spends more than $100 billion in tax subsidies each year, encouraging people to buy private health insurance. But these subsidies are arbitrary and unfair, and are 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. This tax break can cut the cost of health insurance in half for an average family.

By contrast, individuals who don't get insurance through an employer must buy their own insurance with aftertax dollars. This means that in order to buy the same insurance, a middle-income family must earn twice as many dollars.

We get what we subsidize. Ninety percent of people who are privately insured get their insurance through an employer. The self-employed (who get a reduced subsidy), the unemployed and employees of small companies that do not offer health insurance have an incentive to remain uninsured until a family member gets sick - and then search for an employer with generous health benefits.

The current system is also self-defeating in other ways. For example, it gives the most subsidy to families who least need help. 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 family income, the more likely that a family is to be uninsured.

Clearly, this is a system in need of radical reform. Under a plan devised by the National Center for Policy Analysis, the federal government would commit a fixed sum of money for private health insurance for every American. The commitment would be the same for everyone - rich or poor, black or white, male or female.

People who must buy their own insurance would receive a tax credit: a dollar-to-dollar reduction in income taxes for health insurance cost up to a maximum amount. Under Rep. Dick Armey's bill, the tax credits would equal $800 per adult and $400 per child. That equals $2,400 for a family of four. Other bills are even more generous. Since the credit is fully refundable, even those who owe no income taxes will get the same financial help.

The plan is not designed to subsidize the full cost of health insurance for an average family. Individuals and their employers will be free to purchase more insurance with aftertax (unsubsidized) dollars. In this way, government would subsidize the core (catastrophic) insurance; people would purchase the bells and whistles with their own money.

The choice to insure would still be left up to the individual citizen. But those who fail to buy private insurance would, in effect, pay higher taxes - a "penalty" for being uninsured. Unlike the current system, however, higher taxes paid by the uninsured would not simply become part of the Treasury Department's general revenues. Instead, these "tax penalties" would be sent to state and local governments to be used as a safety net to fund health care for the indigent.

This plan is simple, fair and answers the biggest question facing health insurance reform: how to insure the greatest number of people, and at the same time treat people fairly under the tax code.