A FAIR HEALTH INSURANCE SYSTEM

By Jack Faris

The tax structure surrounding our health care system is regressive. Just ask any small-business owner who is looking for a way to provide health benefits to his or her employees. The cost and availability of health care continues to rank as a top problem for small-business owners, standing as the number one problem in the National Federation of Independent Business's (NFIB) 1996 study Small Business Problems and Priorities. The last time that survey was conducted, in 1991, it also ranked first.

We have known about the problem for some time. What a lot of people do not know, however, is how much of a priority health care is for small business. Think about it this way: The group we want insured most of all is our family, and in the case of small-business owners, their employees are also often their family. But family considerations aside, small employers must provide health insurance in order to remain competitive, and it is a fact that healthy employees are also the most productive employees.

Despite all of this, small-business owners are the group least able to provide health insurance to their employees. Two-thirds of the working uninsured either are in firms with fewer than 500 employees or are self-employed, according to The State of Small Business, issued by the Small Business Administration in 1994.

Why have they been left out? Small businesses have created two-thirds of the net new jobs in the U.S. economy since the early 1970s; they account for about 38 percent of gross domestic product and produce 50 percent of private-sector output. Small businesses employ almost 60 percent of the workforce. Yet those businesses are literally punished by the structure of the system.

The self-employed and their employees buy other insurance (such as car and homeowner's policies) under the same set of rules as the people employed by big business. But the ground rules are very different for health insurance. Self-employed businessmen and women get a much less generous tax break if they purchase their own insurance. And the deck is further stacked against small businesses because they have no choice but to buy insurance whose costs are swollen by regulations and mandates.

This just doesn't make sense, and it must be changed.

The NFIB supports a number of reforms that would right some of these wrongs toward small business. There is one crucial reform that would improve our health care system and set our country, as a whole, on a more prosperous, healthy direction: the complete overhaul of our tax code. A seven-million-word mess, the code is confusing, complex, and costly-not just to small business, but to all Americans. Abolishing the IRS tax code and starting fresh with a simpler, fairer system that rewards work and savings would benefit almost every aspect of our lives.

Part of the debate over creating a simpler, fairer tax system involves addressing how the tax code treats the purchase of employment-based health insurance. The Galen Institute and the members of the Consensus Group are providing an important service in proposing new ideas about how to address this problem with important reforms both for the tax code and for the health care system.


The Problems That Face Small Business

Small firms' access to health insurance and quality health care is determined largely by affordability. The cost of health insurance can be the greatest non-salary cost for a small business, exceeding the combined cost of workers' compensation and liability insurance.

Even when a small employer can afford a group health care plan, many biases remain. The frustration of small-business owners struggling to provide health care is compounded by the many inequities of the current system. Benefits and breaks are given to large businesses which self-insure, while those purchasing insurance in the private or group market bear the burden of high costs and numerous state government mandates.


The Current Threat: Incremental Federalization

In a 1993 survey by the NFIB of its 600,000 small-business members, 85 percent said they opposed mandating employers to provide health insurance for their workers. In the fight against the Clinton administration's health care reform plan in 1993 and 1994, these small-business owners drew a line in the sand and warned lawmakers not to cross it. They let the president and lawmakers on Capitol Hill know that they would not accept an employer mandate on health care. Lawmakers backed down, realizing that an employer mandate would kill jobs and force many small businesses to close their doors.

Today, lawmakers have a new, similar lesson to learn: Forcing employers to increase the level of benefits or to comply with a plethora of new regulations does not work, either. This is simply a piecemeal approach to an employer mandate, and it will have the same results and force employers to make painful choices: laying off employees; ceasing to offer health benefits; passing costs on to consumers by raising prices (thereby sacrificing their competitive position in the marketplace); slower growth and, therefore, reduced job creation.

The 104th Congress passed two federal health insurance mandates on employers, the first federal health insurance mandates in history: the mental health parity provision and the 48-hour maternity stay provision. No decent person can make an argument against the need for accessible, affordable mental health care, or against allowing a mother to stay a safe length of time in the hospital after giving birth. But that does not mean the government should impose these mandates. In a freer insurance market, people who wanted policies with this coverage would be able to choose them.

The emotional arguments for insurance mandates have obscured the important issue of costs. Here again, we come to the crux of the problem with our health care system: affordability. Mandating health benefits defeats the very purpose of health care reform, which is to lower health care costs and to insure more people. Forcing business to comply with federal and state health care mandates drives up the cost of premiums and provides a disincentive both for employers to offer insurance and for employees to accept the coverage when they have to pay part of the escalating premium costs.


A Frog in the Pot

As my colleague, Herman Cain, on the National Commission on Economic Growth and Tax Reform pointed out, if you throw a frog in a pot of boiling water, he will try to jump out to save himself. But if you put a frog in a pot of cool water and turn up the heat under him one small step at a time, he won't notice the pain as much, but he also is likely to end up being boiled to death.

Incremental regulation on employers and health insurance is akin to gradually turning up the heat, and it eventually will kill small business. The Clinton health care bill showed Americans the full caldron of boiling water; the incremental reforms passed since then are just turning up the fire. Considering the fact that small businesses employ the majority of the work force, this is a dangerous approach indeed.


The Need for More Reform -- Without Mandates

Although Congress has started on a dangerous path of regulation, federal lawmakers also have enacted provisions that directly benefit small businesses. The Health Insurance Portability and Accountability Act of 1996 increased the deduction for health care cost for the self-employed to 80 percent over ten years. The tax bill of 1997 expanded this to 100 percent deductibility phased in over ten years (full deductibility in 2007). This is a significant reform that is good for small business, but it still isn't soon enough.

Congress also set up a test run for Medical Savings Accounts (MSAs), allowing 750,000 employers and self-employed individuals to try out this market-based reform. The NFIB hopes to see the availability of MSAs expanded greatly in the near future. This is a logical plan for a country that is based on individual freedom, giving more families the opportunity to have more individualized health care. Unfortunately, however, MSAs themselves were so tangled in regulation that many small businesses and even insurers find them too cumbersome. Congress should unshackle and expand MSAs to give this free-market option a chance to work.

The next Congress should begin the process of truly reforming our health care financing system by enacting provisions that provide tax benefits to individuals for purchasing their own health insurance.

On to Action

Too many of Washington's attempts to "reform" our health care system have only made it more complex, more bureaucratic, more expensive, and more hostile to patients and doctors.

Instead of passing more intrusive legislation, Congress would be wise to root out the underlying problem. The tax treatment of health insurance is seriously flawed and discriminates against small-business owners, the self-employed, and individuals who want to purchase their own health coverage.

The health care system will not be able to right itself until we address that fundamental, underlying problem. When everyone has the option to purchase and own his or her own health insurance, we will see a much more vital marketplace for health insurance that provides more choices and is more affordable.

I welcome the debate on this subject that is being launched by the Galen Institute and by the health policy experts from the market-oriented research organizations. Their ideas and research will lead the way to a much fairer, sounder system of quality, affordable health insurance.