The prices of health services in the United States are high compared to the rest of the world. For example, a simple MRI which costs $ 1,430 in the US costs about $ 450 in the UK, $ 750 in New Zealand and $ 310 in Switzerland. High prices in the United States have been the main cause of high health insurance premiums in the United States for several years. Ultimately, the burden of high prices and premiums is borne by American workers in the form of high employee contributions, lower wages, and less generous benefits.
A simple change in federal tax policy can lower high health care prices, while increasing government revenues and reducing inequalities: Make insurance coverage of expensive health care providers a taxable benefit for the employees.
To see this, you need a bit of history. In 1954, the IRS has made employer-sponsored health insurance deductible for the employer, but non-taxable for the employee. Research by myself and others shows that one of the effects of the tax exemption has been to reduce the sensitivity of employers and employees to increases in health insurance premiums. This makes sense: the response of employers and employees to a premium increase that is tax-exempt will be less than the response to an increase that must be paid with taxable (more valuable) dollars.
However, insensitivity to health insurance premiums creates a big problem: it weakens the ability of competition among providers to keep prices low. This also makes sense. Why should doctors or hospitals compete vigorously when they know their high prices can be passed on to insurers without much hindsight?
The tax exemption problems do not end there. Tax exemption is the most significant âtax expenditureâ – a loss of income attributable to a special exclusion, exemption or deduction from gross income. According to The U.S. Treasury’s Office of Tax Analysis, in 2020, the health benefit exemption cost the federal treasury $ 215 billion in 2021. By comparison, all retirement savings exemptions (including those for pensions) cost $ 210 billion, lower rates on capital gains cost $ 99 billion, and mortgage interest deductibility cost $ 30 billion.
Finally, the tax exemption is regressive: high-income taxpayers benefit more than low-income taxpayers. High income taxpayers face higher marginal tax rates than low income taxpayers, so the value of a $ 1 exemption increases with income. Additionally, higher income taxpayers tend to spend more on health insurance than low income taxpayers, so the exemption benefits higher income taxpayers more regardless of their tax rate.
Presidents George W. Bush and Barack Obama have both attempted to cap unlimited tax exemption. President Bush offers replace it with a fixed amount accessible to anyone receiving employer-sponsored health benefits; president obamaBarack Hussein Obama Nuclear Policy Top Fired at Pentagon: Report Prosecutors face obstruction lawsuits in Capitol Hill riot cases Biden makes early gains eroding Trump’s environmental legacy MORE, under the Affordable Care Act, sought to impose a excise tax on high premium health insurance plans that would effectively nullify the exemption from these plans. Neither has succeeded. President Bush’s proposal was never adopted; President Obama’s proposal was passed, but later repealed with bipartite agreement.
The best solution, of course, would be to abolish the tax exemption altogether, putting health insurance spending on par with all other property. However, as the experiences of Presidents Bush and Obama have shown, abolishing the tax exemption is politically highly unpopular, as it would raise taxes for a large part of the middle class, thereby increasing taxes. especially those who receive generous social benefits.
A compromise position would abolish the tax exemption only for spending on high-priced providers, perhaps those priced above a specified multiple of Medicare rates. Employers who wish to preserve access to high-priced suppliers could still do so, but they would have to pay for it with premiums that would be taxable to their employees. Expenses for high priced suppliers would become a taxable benefit.
This solution has several merits. It directly targets high prices due to competitive failures induced by tax policy. It is flexible: Congress could set the threshold at a very high level (affecting relatively few suppliers) and gradually reduce it. This avoids the dangers of direct government price regulation: some proposals would make it illegal to charge health plans more than a specified multiple of Medicare. While this may seem satisfying at first, it risks inadvertently banning a product or service that people value.
Other proposals (like those from Presidents Bush and Obama) increased taxes on plans with high insurance premiums, resulting in not only plans with high prices per unit of service, but also plans with high insurance premiums. high service volumes. Although plans that provide high volumes of services can also be cost inefficient, evidence that consumers get low value from services with high unit prices is stronger than evidence that consumers get low value from services. services with high volumes.
Finally, abolishing the exemption for high-priced providers is achievable: health plans could track the share of payments to high-priced providers at the plan level, and then report it to individuals, employers and the government. IRS on the existing form. 1095.
As with most tax policy changes, there will be losers and winners. The losers will be the high-priced vendors, such as academic medical centers, who will need to provide a clearer value proposition in order to justify their pricing. Higher income people, union members and others with plans that do not differentiate providers on the basis of price will also see effective premium increases. The winners will be the rest of us, who will reap the rewards of increased competition in health services markets, some additional tax revenues, and a modest increase in the progressivity of the tax system.
If it sounds too good to be true, it isn’t. Tax exemption is a historic accident that no one ever intended to become so big and destructive. Who knows? It might even have become a problem big enough to attract a bipartisan coalition for its reform.
Daniel Kessler is the Keith and Jan Hurlbut Principal Investigator and Research Director at the Hoover Institution and Professor at the Graduate School of Business at Stanford University.