Senator Lott on Health Insurance Reform

Commentary by Pete du Pont

Senate Majority Leader Trent Lott (R-MS) has given some indication of the direction he would like to take on health care reform -- and it's a good one.

Absent in his proposals are government mandates and controls; present are the principles that guide conservatism and a free market: freedom, personal responsibility and equality of opportunity. Any attempt to reform the health care system should incorporate these principles. Any proposal that does not is doomed to make the U.S. health care system worse.

If passed separately, each of the four proposals would solve some of our health care problems. If passed together, most problems would be resolved without expanding government, taxes or spending.

1. Provide for uninsured children. Senator Lott has suggested using the $500 per child tax credit -- a tax credit with wide bipartisan support -- as a funding mechanism for providing health insurance for America's 10 million uninsured children.

Congress is already considering passing such a tax credit. Lott's proposal would simply make it conditional -- parents would have to have their children insured in order to get the full credit. They could, of course, apply the credit toward the purchase of health insurance.

Some critics have said that imposing such a condition would, in effect, be a mandate to buy health insurance. That criticism misunderstands the nature of mandates and tax subsidies.

All tax subsidies are conditional. Taxpayers can get a deduction for their home mortgage interest, but only on the condition they purchase a home. No one requires people to buy a home, but they don't get the tax subsidy without one.

The same principle applies to employer-based health insurance. The vast majority of employers subsidize employee health insurance by paying some or all of the premium, often costing several thousand dollars a year. If an employee voluntarily declines the coverage -- perhaps because he or she is already covered under a spouse's policy -- the employee, in most cases, forfeits the subsidy.

In addition to the $500 per child tax credit, Congress could apply the same condition to the Earned Income Tax Credit (EITC), a refundable tax credit that provides additional income for low-income working families. Unlike the $500 per child tax credit, the EITC is already funded -- at $25 billion. Thus, in order for EITC families to receive their full credit, their children would have to be insured.

2. Expand Medical Savings Accounts. Congress made tax-free Medical Savings Accounts (MSAs) available to 750,000 policyholders through the Kassebaum-Kennedy health insurance reform bill of 1996. Under the legislation, small employers and the self-employed have the opportunity to purchase less expensive high-deductible health insurance policies and place the premium savings in a personal, tax-free MSA, where the money can be used for small and routine health care expenditures. Money not spent by year's end can be rolled over and grow with interest tax-free.

Senator Lott has suggested expanding the availability of MSAs. Doing so would benefit families in many ways, including those in job transition. President Clinton has proposed a $10 billion program to pay workers' health insurance premiums when they change jobs. Were MSAs widely available, as under the Lott proposal, most workers could use that money to pay those premiums -- and it wouldn't cost the government a thing.

3. Expand Medicaid flexibility among the states. Governors and state legislators are crying out for more flexibility in Medicaid. The Hatch-Kennedy children's health insurance bill would do just the opposite, since the federal government would be telling the states what benefits they would have to provide.

Recently, Republican Governor Michael Leavitt of Utah met with Senator Orrin Hatch (R-UT), a co-sponsor of the bill, to explain why such legislation would undermine the state's highly effective efforts to get more children insured. Senator Lott wants to give the governors exactly what they say they need: more flexibility.

4. Permit small employers to form health insurance associations. One of the biggest gaps in health insurance policy comes from the fact that small businesses, which are the life's blood of the U.S. economy, have little access to health insurance free of mandates imposed by the states. Those mandates -- which often turn an affordable, basic policy into an expensive Cadillac plan covering everything imaginable -- can drive up the price of health insurance, making it unaffordable for many small employers.

Large- and medium-size employers have an out -- they can self-insure under the Employee Retirement Income Security Act (ERISA), which permits them to avoid costly mandates.

Senator Lott has suggested a proposal, championed in the House by Rep. Harris Fawell (R-IL), that would permit small employers to band together in associations in order to self-insure under ERISA. Under this proposal, premiums would decline, more small employers could afford to offer health insurance and more workers and their families would be insured -- again, at no cost to the federal government.

If Congress is serious about expanding health insurance coverage, these four proposals would go a long way toward solving our problems with little or no government involvement. Majority Leader Lott is heading in the right direction. Will Congress follow him?