High Stakes

Small businesses would get refundable tax credits to offset 50% of the amount they pay for health insurance for their workers and have the government take over a portion of the catastrophic costs of high-cost employees.

What's wrong with that? Several things.

• It would build on today's regressive, discriminatory subsidies for employment-based health insurance that have been driving up costs for decades.

  Health insurance is part of the compensation package for workers. But Section 106 of the Internal Revenue Code says that whatever amount of compensation that employees receive in the form of health insurance is exempt from all taxes. It's a big deal. The tax break is worth much more to Americans -- at least $200 billion a year -- than the mortgage interest deduction, but they don't even know they get it.

  By creating a new tax credit for small businesses, rather than for workers themselves, Sen. Obama would perpetuate the fiction that employers pay for health insurance, rob workers of control over that part of their salary, continue to tie health insurance to the workplace, and drive up health costs because a proper competitive market is not engaged.

• Having the federal government take over health expenses for high-cost workers is a back door to price controls and would create a paperwork nightmare for companies.

  Sen. John Kerry proposed a similar plan when he ran for president in 2004. It would mean that government would have to set out a schedule for payments for all medical expenses to make sure all companies reached the threshold at the same pace. You couldn't have one company paying $600 for an MRI and other paying $1,000 because the second company would reach the trigger point for government payment sooner. And the company would need to document that every penny it spent was legitimate. Hello government auditors!

  And then what about the patients? Rather than being covered by their private health plan, they would more likely be thrown into a program with government determination of allowed benefits and services, with all of the ancillary restrictions and distorting price controls.

Sen. Obama also would heavily regulate health insurance companies and how they do business to the point that they would become little more than functionaries in a new federal government regulatory regime. He would, for example, require forms of guaranteed issue for health insurance and community rating of premiums that have driven up health costs in state after state experimenting with the regulations. Many of the provisions, in fact, seem borrowed from the SHOP Act (Small Business Health Options Program of 2008, S.2795) and from ideas offered by Sen. Hillary Clinton that open large new portals for a much bigger role for government in our health sector.

More government or a properly functioning market in the health sector? That really is what the national debate over health reform is all about.

The results of this fall's election will be decisive in determining the direction of our nation. Sen. Obama sees a much bigger role for government in trying to solve the problems in the health sector while Sen. McCain believes in unleashing incentives to create more competition in the private health sector that will give people more choices of more affordable care and coverage.

The next president will be determined to do something on health care and will be directed by a vision that will have a great impact on the direction Congress takes in shaping legislation. The stakes are enormous for the future of this one-sixth of our economy represented by the health sector.

We see many of the problems with the U.S. health sector as rooted in the encroachment of regulation and bureaucracy that are stifling its ability to call on the genius of our economy to create a health sector that is more responsive to demands for lower costs and higher quality.

Instead of tax credits to small businesses, credits could be offered to individuals to help them purchase health insurance, as Senator McCain proposes. People eligible for the credits could purchase the health coverage of their choice, either through their places of work, on their own, or through new groups that would emerge in a market where health insurance and subsidies are more portable. Purchasing reforms would make the insurance market more competitive and policies more affordable.

Taking the idea a step further, credits also could be a vehicle to move toward much-expanded or even universal health insurance coverage.  If people don't take specific action to purchase a policy directly, their credit could be assigned to one of several insurers offering coverage in their state or region to buy a policy that offers the best coverage the credit can provide.  It may be a higher-deductible policy or a plan with more limited benefits, but it would protect them -- and taxpayers -- against catastrophic costs.

Making insurance more affordable and accessible would dramatically increase the number of Americans with coverage. Making the subsidies assignable to an insurer even if people don't take action to buy coverage would further boost coverage. And other reforms could assure that people currently shut out of the market can get coverage. These actions together would likely get us as close to universal coverage as any of the other more onerous proposals being offered, including and especially, imposition of an individual and/or employer mandate.

Grace-Marie Turner

Recent News Articles and Studies

How to Fix Medicare: Let's Pay Patients, Not Physicians
As Arizona Goes, So Goes the Nation: How Medicaid Ruins the States' Fiscal Health
Patients Curb Prescription Spending
Making a Killing: The Deadly Implications of the Counterfeit Drug Trade
Patent Gridlock Suppresses Innovation
HSAs' Reign Among Consumer-Driven Plans May Come to an End
Tax Subsidies for Health Insurance

How to Fix Medicare: Let's Pay Patients, Not Physicians

Roger Feldman, University of Minnesota
American Enterprise Institute, 06/17/08

Medicare's current method of paying physicians sets fees for more than 8,000 separate procedures and services. Health economist Roger Feldman argues that a radical shift in Medicare policy is not only possible but imperative. Under Feldman's "medical indemnity" proposal, Medicare would pay each patient a fixed amount of money, reserving larger subsidies for sicker people. Patients, in turn, would select their own medical services from providers who would set their own competitive rates. A medical indemnity system would do away with the distortion in patients' incentives wrought by conventional Medicare coverage. Given a fixed amount of money to spend on medical care, patients would have strong incentives to shop for the combination of services, providers, and prices that most closely meet their needs. Feldman's indemnity system protects patients whose conditions are much costlier than average while avoiding the proliferation of costly individual indemnities.

As Arizona Goes, So Goes the Nation: How Medicaid Ruins the States' Fiscal Health

Michael S. Greve, AEI and Philip Wallach, Princeton University
American Enterprise Institute, 07/17/08

The fiscal balances of state and local governments will rapidly deteriorate in less than a decade and Medicaid spending is the principal culprit, according to a new AEI report based upon a Government Accountability Office study. Measured as a percentage of the state's fiscal year 2008 general fund, Arizona's projected FY 2009 deficit was the most serious shortfall of any state, due chiefly to the state's expansion of its Medicaid program and the perverse incentives created by Medicaid's inordinately generous transfers to the states, write Greve and Wallach. By making program expansions look cheap and making cuts look outrageously expensive, federal matching grants ratchet up spending and taxes and tend to exacerbate the states' boom-and-bust budget cycles. With a Medicaid matching rate of 66.2%, for each dollar Arizona spends on Medicaid, the federal government sends the state $1.96. Medicaid spending in Arizona now exceeds the average spending level and has increased from roughly 8% of general fund spending to a projected 14.4% in FY 2009.

Patients Curb Prescription Spending

Shirley S. Wang and Avery Johnson
The Wall Street Journal, 07/16/08

In an ominous sign for drug makers, the number of prescriptions dispensed by pharmacies in the U.S. is growing at its lowest rate in at least a decade, writes The Wall Street Journal. Data from IMS Health show growth in prescription volume for the first five months of this year slowed to 1.5%. By comparison, annual volume growth averaged 3% from 2003 to 2007. Flagging prescription growth comes at a period of particular vulnerability for the drug industry. Several blockbuster products have lost patent protection in the past two years, the main reason industry sales growth is at its lowest level since the 1960s, and more patent expirations loom. Further, there are few new drugs in late-state development to take up the slack, the Journal reports.

Making a Killing: The Deadly Implications of the Counterfeit Drug Trade

Roger Bate
American Enterprise Institute, 05/08

Roger Bate traces pharmaceutical counterfeiting around the world in his new book, from developed nations, where counterfeits often target "lifestyle" drugs such as Viagra, to developing countries, where counterfeiters favor therapeutic medicines such as antimalarials and antibiotics. Enforcement in developing nations is hampered by inadequate education, feeble regulation, and sluggish policing of existing laws, writes Bate. And the U.S. is struggling to thwart an insidious Internet market. Bate champions greater cooperation between wealthy and poor nations to quash the trade in counterfeit pharmaceuticals. He calls for fortified policing resources, harsher penalties for counterfeiters, widespread public education, and commonsense consumer vigilance against this danger. Western policymakers must act immediately to quell the deadly counterfeit market in developing countries -- and to ensure the integrity of their products at home.

CMPI's Peter Pitts writes that California's recent decision to delay implementation of a controversial law to create an electronic chain of custody for pharmaceuticals is welcome news. The law's aim was noble -- beat back the rising tide of counterfeit drugs -- but it would have imposed back-breaking costs on pharmaceutical manufacturers and dramatically inflated drug prices for consumers while doing little to undermine counterfeiters.

Patent Gridlock Suppresses Innovation

L. Gordon Crovitz
The Wall Street Journal, 07/14/08

For the third year in a row, Congress has just given up on passing a law reforming how patents are awarded and litigated, writes columnist Crovitz. This despite growing evidence that for most industries, today's patent system causes more harm than good. Litigation costs, driven by uncertainty about who owns what rights, now are so huge that they outweigh the profits earned from patents. New empirical research by Boston University law professors found that the value of pharmaceutical patents outweighed the costs of pharmaceutical-patent litigation. But for all other industries combined, they estimate that since the mid-1990s, the cost of U.S. patent litigation to alleged infringers ($12 billion in legal and business costs in 1999) is greater than the global profits that companies earn from patents (less than $4 billion in 1999). These are shocking findings, but they point to a solution, writes Crovitz. New drugs require great specificity to earn a patent, whereas patents are often granted to broad but vague innovations in software, communications and other technologies. It's true that defining intellectual property is hard at a time when new technologies upset the traditional ways of protecting rights, but our patent system is a disincentive at a time when we expect software and other technology companies to be the growth engine of the economy, concludes Crovitz.

HSAs' Reign Among Consumer-Driven Plans May Come to an End

Jerry Geisel
Business Insurance, 07/14/08

There are signs that Washington's five-year honeymoon with health savings accounts may be coming to an end among lawmakers and, depending on the outcome of the November presidential election, the White House, writes Geisel. One sign came in April when the House passed legislation to require banks and other financial institutions that administer HSAs to substantiate that account distributions are for health-care related expenses, such as prescription drug copayments. And Sen. Barack Obama, the presumptive Democratic presidential candidate, is at best lukewarm about HSAs. By contrast, Sen. John McCain, the presumptive Republican presidential candidate, has been more supportive, saying he would work to encourage and expand HSAs if elected. The contrasting views mean the future of HSAs could depend on the outcome of the November elections, said Galen's Grace-Marie Turner.

Tax Subsidies for Health Insurance

Kaiser Family Foundation, 07/10/08

Today almost 160 million people in the United States obtain health insurance through an employer in large part because the tax system subsidizes the purchase of employer-sponsored coverage. The current subsidy costs the U.S. Treasury more than $200 billion in lost revenue since premiums for employer-provided health coverage are excluded from income taxes and from payroll taxes. This issue brief uses examples of workers with different earnings to illustrate how the current tax code affects families depending on whether they have health coverage, and whether that coverage is provided through their employer. By excluding the value of employer-sponsored health benefits from taxable income, the current law generally provides a larger subsidy to higher-income families, since higher-income workers pay federal and state income taxes at a higher marginal tax rate than lower-income workers. The brief also looks at several other tax provisions that affect the treatment of insurance, including the itemized deduction for medical expenses, which can help offset the cost of individually purchased (non-group) health insurance, and the special tax deduction for health insurance premiums for self-employed taxpayers. The analysis compares the tax treatment of premiums under these scenarios and concludes that they are generally less generous than the treatment of premiums for employer-sponsored coverage.

Upcoming Events

Making Medicare Sustainable: Transforming Our Health Program for America's Seniors
New America Foundation Event
Wednesday, July 23, 2008, 8:15 a.m. - 4:30 p.m. (Lunch included)
Washington, DC

Beyond More Health Insurance Coverage, toward Better Health Outcomes
American Enterprise Institute Event
Wednesday, July 23, 2008, 10:00 a.m. - 3:30 p.m. (Lunch included)
Washington, DC

IRS HSA Grab Bag Webinar
HSAEd Event
Wednesday, July 23, 2008, Noon ET

Emerging Issues Roundtable: Meeting Today's Challenges through Innovation and IP Rights
U.S. Chamber of Commerce Event
Wednesday, July 23, 2008, 2:00 p.m.
Washington, DC
For more information, please contact Natalie Ethridge at nethridge@uschamber.com or 202-463-5884.

Health Care Reform Task Force Meeting
Oklahoma House of Representatives Event
Thursday, July 24, 2008
Oklahoma City, OK
Grace-Marie will speak at the first meeting of the Oklahoma Health Care Reform Task Force.

Small Market Drugs, Big Price Tags: Are Drug Companies Exploiting People with Rare Diseases?
Joint Economic Committee Hearing
Thursday, July 24, 2008, 10:00 a.m.
Washington, DC

Grace-Marie Turner speaking on the In The Booth Show
KFTM-AM Radio Broadcast
Monday, July 28, 2008, 6:30 p.m. ET
Ft. Morgan, CO

Grace-Marie Turner speaking on the Morning News Watch Show
KZIM-AM Radio Broadcast
Tuesday, July 29, 2008, 9:40 a.m. ET
Cape Girardeau, MO

Can Consumers Save Medicare?
American Enterprise Institute Event
Wednesday, July 30, 2008, 10:00 a.m. - 2:00 p.m. (Lunch included)
Washington, DC

Rising Rates of Chronic Health Conditions: What Can Be Done?
Center for Studying Health System Change Conference
Thursday, July 31, 2008, 8:30 a.m. - Noon (Breakfast included)
Washington, DC

Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features a commentary by Grace-Marie Turner on the major developments and issues of the week as well as summaries of writings by participants in the Health Policy Consensus Group and other articles of interest from the health policy world, plus announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at www.galen.org.

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The views expressed in this newsletter are the opinions of the authors and do not necessarily reflect the views of the Galen Institute or its directors.