Rethinking Health Care Policy: The Case for Retargeting Tax Subsidies

Although President Clinton's health care plan was defeated in Congress, the problems precipitating the plan's introduction still exist or have worsened: medical costs continue to grow faster than the overall economy, more individuals are not covered by insurance, and fiscal austerity threatens coverage by Medicare and Medicaid. The nature of managed care, which tends to ration care according to price, raises concerns about quality of care and access to coverage. The near elimination of cross subsidies means the poor and those with a history of illness are far less likely to receive or retain health coverage. Hospitals are feeling increasing financial stress as a result of excess capacity, the inability to shift costs to private payers, and the decline in revenues brought on by managed care. The passage of legislation enabling those who are insured to remain insured should they loose or switch jobs provides access to a limited number of workers, but the legislation does not address the problem faced by over 40 million Americans (about 75 percent of whom are low-wage workers and their families) who have no access to health care for reasons of income. Moreover, plans enacted or discussed at the state level to cover the uninsured face problems of cost and quality of service as well as the question of "who pays" for such programs. According to Senior Fellow Walter M. Cadette, solving the problem of access requires a new method of financing health care. In this working paper he argues for a change from the current method of financing health care—employment-based health insurance with tax-excluded premiums. This method has tended to increase the comprehensiveness and use of health care benefits. Moreover, this form of exclusion is not vertically or horizontally equitable because its tax benefits rise with the comprehensiveness of the insurance plan, the share paid by the employer, and the tax bracket and because the exclusion is less for those who are self-employed than for those who are covered by an employer-paid plan (30 percent versus 100 percent).