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Controlling Health Care Costs With Medical Savings Accounts
How the Tax Law Encourages Third-Party Insurance and Penalizes Individual Self-Insurance
One strange feature of the tax code is that a physician's fee paid by an
employer (or an employer's insurance carrier) is paid with pretax dollars,
whereas fees paid out-of-pocket by employees must be paid with aftertax
dollars. As a result, the tax law encourages (subsidizes) 100 percent health
insurance coverage (with no deductibles and no copayments) for all medical
expenses.
Federal tax law has an enormous impact on employee benefit plans because
individual marginal tax rates are so high. Even a moderate wage earner in
the U.S. economy gets to keep less than 70 cents out of each additional
dollar earned. As Table I shows:
The total tax deduction for employer-provided health insurance is about
$60 billion per year - roughly $600 for every American family. Although
this system may appear to benefit large companies with more generous employee
benefits, in many cases these companies are trapped by benefit plans that
are eating into company profits, raising production costs and keeping wages
lower than they otherwise would be. The current system not only encourages
and subsidizes rising health care costs, it also harms the very industries
and companies which are subsidized the most.
The results are even worse for employees in higher tax brackets:
Because wages are taxed and health insurance benefits are not, health insurance
is more valuable to employees than additional wages. As Table II shows: 6
Table II also shows how much waste can be present in the purchase of health
insurance and still allow health insurance to be preferable to wages. [See
Figure II.] For example, if an employer attempted to give the higher-paid
employee $1.97 in wages, the employee's take-home pay would be only $1.00
after taxes are paid. As a result:
This is why employees tend to prefer generous (and wasteful) health insurance
coverage - coverage that they would not buy out-of-pocket without tax subsidies.
Note also that the higher the tax bracket, the greater the economic incentive
to purchase more health insurance. Higher-paid workers tend to dictate the
contents of employee benefit plans and impose their choices on all other
workers. Moreover, many current employee benefit plans were shaped decades
ago, when marginal tax rates were much higher and the incentives for waste
even greater.
