Comments to the Senate Finance Committe on Health Care Reform
Chairman Baucus, Minority Leader Grassley and members of the Committee, thank you for the opportunity to submit comments on this topic. Those who follow the work of the Center will recognize most of these proposals in an earlier form, as they are quite similar to recommendations I submitted to the President’s Task Force on Tax Reform in 2005, which were copied to the Committee. Given both the current state of the economy and our new President’s stated intention to pass health care reform this year, these proposals are as timely as ever.
The two key components of meeting these challenges are cost control and the use or impact of public finance, which will be addressed in order. I will also address the prospects for single-payer insurance.
Cost Savings
One of the most often proposed methods of cost control is a combination of high deductible insurance (H.D.I) and health savings accounts (H.S.A.). I am personally very much acquainted with this modality, because it is the one currently used by my family for health care. In its current form, there are a few problems.
The chief problem is that this model does not automatically assure universal coverage. Insurance providers are as averse to the coverage of pre-existing conditions in a high deductible plan as they are with a comprehensive plan. Unless pre-existing condition clauses are eliminated and community rating mandated, older and less healthy Americans will find health care coverage as elusive and as expensive as the current system.
A second, but equally important, difficulty with this model its implicit rationing function. While employer financed H.S.A. balances are building, patients must either finance health care out of pocket or delay tests and procedures. This feature limits use of this tool to only those who cannot afford comprehensive coverage, instituting an implicit class system in medical coverage. Luckily, there is an easy fix for this problem.
Assuming that health savings accounts are designed to meet half the catastrophic deductible, an employee-paid flexible spending account could be used for the other half of the difference. To meet the demand for optional care, flexible spending amounts could be set even higher, depending upon the insured’s willingness to pay. Most flexible spending accounts contain a credit feature, meaning that on day one of the coverage year, participants are entitled to use 100% of funds to be collected that year. This mitigates some, if not all, of the rationing problem cited above.
A further difficulty of both H.S.A. and F.S.A. systems are the requirement to document services and submit varying forms of payment. Smart payment technology could be used to end these documentation requirements in much the manner proposed by the Clinton Administration in 1994 with a consolidated Health Security Card. Note that to be feasible, the combined monthly cost of a HDI/HSA/FSA should be no more than Comprehensive Insurance.
Note that this modality will decrease overuse of the system, provided that Health Savings Account balances and a portion of Flexible Spending Account balances can be carried over from year to year. Having some portion sunset incentivizes preventative care. Allowing greater carryover from year to year allows participants to lower contributions in a subsequent year by limiting current use while assuring that adequate balances remain to cover required deductibles.
Finance
Comprehensive tax reform must be considered as an option to finance comprehensive health care reform. The TEA Party movement underscores public aversion toward the annual ritual where citizens disclose every financial detail to the government. Any health insurance reform which increases this annual invasion of privacy will likely be considered unacceptable as well. The most obvious reform simply shifts the annual reporting obligation from the individual taxpayer to the employer, who already provides limited information and the majority of collection. The easiest way to do this is to broaden the Corporate Income Tax to include the taxation of wages and expanding payment to all forms of business ownership - with separate forms and filings for personal and business income taxation. All payroll taxes could be included, with the exception of Old Age Insurance and the portion of Survivors Insurance which go to retirees. For both employees and employers, this amount is roughly equal to 5.2% of payroll under the income cap and 2.9% of payroll over the cap. The resulting Business Income Tax would include the funds currently collected under Corporate Income Taxes, non-retirement payroll taxes and all personal income taxes collected at or below the 25% rate, including the first 25% of the higher 28% (permanent 31%) and higher rates, leaving tax rates of 6%, 11% and 14.6% (assuming use of the rates in permanent law) for high income individuals.
This plan is similar to the Value Added Tax (VAT) proposals of Professor Michael Graetz of Yale and Len Burman of the Tax Policy Center of Brookings/Urban, except that expansion of the Business Income Tax will require no new infrastructure to implement. Inclusion of a VAT component, where the VAT tax is listed in the purchase price and the BIT is left undisclosed, allows collection of a lower BIT, allows exporters to avoid paying taxes for services which benefit domestic consumers and assuring that all citizens are aware of a tax obligation (which serves as a disincentive to demand further spending. I recommend that the VAT be set in the 5%-15% range and be dedicated to CONUS, Alaska and Hawaii military expenses, veterans affairs and non-entitlement domestic discretionary spending.
Business Income Taxes would cover the financing of comprehensive health coverage, non-retirement/retired survivors entitlement spending from payroll taxes (Medicare, Unemployment Insurance, non-retiree Survivors Insurance, Disability Insurance), the general fund (Medicaid, TANF, Food Stamps, Energy Assistance, Housing Assistance), and the majority of tax subsidies directed at families (employee sponsored insurance, the Child Tax Credit, tax exemptions, the standard deduction and itemized deductions such as mortgage insurance) and businesses (although industry specific tax breaks would only be distributed after those subsidies directed at families were exhausted). Tax subsidies for families could be distributed as an addition to wages under this tax, rather than as an offset to payroll taxes as Michael Graetz proposes. Additionally, such entitlement subsidies as Food Stamps, Section (8) and Energy Assistance could be eliminated by assuring a large enough family income subsidy. Certain tax subsidies would naturally be done away with. Efforts at harmonizing tax structures with state income and sales tax systems would eliminate the need for a separate deduction for state taxes. The tax exemption for personal income tax would be raised to $75,000 for individuals and $150,000 (correction) for families to assure that only high income individuals pay these levies.
The Child Tax Credit could be expanded and retained to more effectively supplement the income of families, replacing deductions for dependents, the Earned Income Tax Credit, and any VAT rebate. If the Administration, the pro-life movement and Catholic Democrats are really serious about reducing abortion, the Child Tax Credit could be greatly expanded to $500 per month per child or dependent spouse/parent. This would lead to an increase in pay for poorer families and a shifting of how wages are distributed between tax benefits and base pay for higher income individuals, with a slight income loss for childless workers. This income loss removes the perverse incentive to terminate workers with families and other older workers who, even though they are more productive, are much more expensive than more recently trained entry level personnel. The expanded Child Tax Credit might also a replacement for mortgage subsidies in the tax code, provided the credit is set to a high enough level to allow more people to qualify for a mortgage in this uncertain market. Finally, paid and unpaid participants in workforce development programs, university education and adult literacy programs would receive the Child Tax Credit if they have dependents – rather than having to apply for a variety of income supplement programs for food, energy and housing.
Unlike Len Burman’s proposal, funding comprehensive health care reform with a business income tax retains the deductibility of employee sponsored health insurance and health insurance purchased by individual tax filers (both sole proprietors and partners). Provided the pre-existing condition reforms above are enacted, no separate voucher system will be required to prevent the cherry picking of insurance subscribers. Also unlike Mr. Burman’s proposal, Medicaid and Medicare would continued, although employers could be given an additional tax credit to fully cover all retired former employees rather than pay a portion of the B.I.T.. Such a proposal would assist manufacturers with large legacy health care costs as well.
The final BIT. Rate will be high, even with an offset for a V.A.T. However, most of the tax rate would be offset by payments to or for employees, so the amount reaching the United States Treasury would be relatively small, which provides a rationale to use a B.I.T. rather than a V.A.T. Having a separate V.A.T. also finesses the question of an alternative minimum tax (existing AMTs on both Corporate and Personal Income Taxes should be repealed). Note that this change should also include a dramatic increase in the minimum wage, so that no worker is employed simply to collect tax benefits and not a separate income. Should the tax benefits accruing to families for health insurance and the expanded Child Tax Credit exceed obligations under the B.I.T., V.A.T. receipts collected by the firm could be used to offset the difference.
Most employee would no longer file taxes under this scheme. Rather, employers would send notices to each employee informing them of the credits taken in their names for verification. The Internal Revenue Service (either federal or state) would generate a companion notice based on the employers filing, which would also be sent to the employee so that the two may be compared. Employees will be advised to contact the I.R.S. if the amounts do not match, particularly if the employer claims more to the I.R.S. than is actually paid. The Government will then make up the difference and bill the employer, with penalties. This also provides a partial check against systematic fraud, as returned notices would be investigated, as would multiple notices going to the same address.
The BIT and VAT would raise almost all of the income required for government operations. The simplified high income personal income and inheritance tax would cover net interest, debt repayment (including to the OASDI Trust Fund), foreign aid and overseas military and naval sea operations. The only deductions would be for charitable contributions and income from assets sales to a qualified employee stock ownership program.
Inheritances could no longer be separately taxed. Rather, withdrawals from inheritances, with the exception of sales to a qualified broad based employee ownership plan (either ESOPs or Stock Grants), would be taxed as normal income. Assets which are not sold and non-cash personal use assets over a certain value (clothing, cars, jewelry) would be exempt from tax unless they are sold (to be exempt they must be registered at probate).
This tax would only be levied while there is debt outstanding and the need for the projection of American military power. Should those needs ever cease, the tax would be suspended. The possibility that this might occur will encourage both a restrained military posture and higher tax rates to more quickly exhaust the national debt.
Single Payer
The outbreak of street theater at the Round Table testify to the demand for single payer insurance. Given the current political influence of the health insurance and pharmaceutical industries, it is no surprise that this modality is not under active discussion. Additionally, the advent of single payer insurance do not answer the funding question. A single payer modality both complicates and simplifies the question of funding. The complication is that the modality would be quite a departure from the current status quo, while the simplification is that it directs the focus of payment to either a payroll tax or a business income tax. While single payer is certainly compatible with the funding model proposed here, or the use of a health care VAT as proposed by Len Burman, other delivery models can be used with these funding models as well.
The main attraction of single payer comes from the nature of commercially provided insurance to seek profit, and how that effects the delivery of service. The problem is that even with all of the consumer responsibility you can think of, the drive for greater and greater profits will have insurance companies constantly searching for ways to avoid paying for the care they promise their policy holders. Firms are less concerned about deductible levels as they are about how to avoid paying for serious chronic illness. Patients with several risk factors, such as a high BMI and advancing age, are not attractive to insurers since they detract from the bottom line due to the possibility of stroke, diabetes, heart attack et al. If insurers must cover everyone and can't charge potentially sicker people more, their ability to increase profits over time (which seems to be the goal of privately held firms) will be greatly impacted. In the end, their business model will not handle covering everyone at a market rate. This will lead to either consolidation (until they can't consolidate anymore), bail outs or the offloading of the sickest to some kind of public fund.
In other words, single-payer insurance is almost inevitable - whether by government mandate or because of the natural tendencies of the market. Does this mean Congress can pass single payer healthcare now? It would be extremely unlikely for the industry or Congress to be that forward thinking. The best thing measure at this time is to pass something now and let events develop. If and when the bottom falls out of the industry, however, Government must be ready with some kind of single payer proposal.
The two key components of meeting these challenges are cost control and the use or impact of public finance, which will be addressed in order. I will also address the prospects for single-payer insurance.
Cost Savings
One of the most often proposed methods of cost control is a combination of high deductible insurance (H.D.I) and health savings accounts (H.S.A.). I am personally very much acquainted with this modality, because it is the one currently used by my family for health care. In its current form, there are a few problems.
The chief problem is that this model does not automatically assure universal coverage. Insurance providers are as averse to the coverage of pre-existing conditions in a high deductible plan as they are with a comprehensive plan. Unless pre-existing condition clauses are eliminated and community rating mandated, older and less healthy Americans will find health care coverage as elusive and as expensive as the current system.
A second, but equally important, difficulty with this model its implicit rationing function. While employer financed H.S.A. balances are building, patients must either finance health care out of pocket or delay tests and procedures. This feature limits use of this tool to only those who cannot afford comprehensive coverage, instituting an implicit class system in medical coverage. Luckily, there is an easy fix for this problem.
Assuming that health savings accounts are designed to meet half the catastrophic deductible, an employee-paid flexible spending account could be used for the other half of the difference. To meet the demand for optional care, flexible spending amounts could be set even higher, depending upon the insured’s willingness to pay. Most flexible spending accounts contain a credit feature, meaning that on day one of the coverage year, participants are entitled to use 100% of funds to be collected that year. This mitigates some, if not all, of the rationing problem cited above.
A further difficulty of both H.S.A. and F.S.A. systems are the requirement to document services and submit varying forms of payment. Smart payment technology could be used to end these documentation requirements in much the manner proposed by the Clinton Administration in 1994 with a consolidated Health Security Card. Note that to be feasible, the combined monthly cost of a HDI/HSA/FSA should be no more than Comprehensive Insurance.
Note that this modality will decrease overuse of the system, provided that Health Savings Account balances and a portion of Flexible Spending Account balances can be carried over from year to year. Having some portion sunset incentivizes preventative care. Allowing greater carryover from year to year allows participants to lower contributions in a subsequent year by limiting current use while assuring that adequate balances remain to cover required deductibles.
Finance
Comprehensive tax reform must be considered as an option to finance comprehensive health care reform. The TEA Party movement underscores public aversion toward the annual ritual where citizens disclose every financial detail to the government. Any health insurance reform which increases this annual invasion of privacy will likely be considered unacceptable as well. The most obvious reform simply shifts the annual reporting obligation from the individual taxpayer to the employer, who already provides limited information and the majority of collection. The easiest way to do this is to broaden the Corporate Income Tax to include the taxation of wages and expanding payment to all forms of business ownership - with separate forms and filings for personal and business income taxation. All payroll taxes could be included, with the exception of Old Age Insurance and the portion of Survivors Insurance which go to retirees. For both employees and employers, this amount is roughly equal to 5.2% of payroll under the income cap and 2.9% of payroll over the cap. The resulting Business Income Tax would include the funds currently collected under Corporate Income Taxes, non-retirement payroll taxes and all personal income taxes collected at or below the 25% rate, including the first 25% of the higher 28% (permanent 31%) and higher rates, leaving tax rates of 6%, 11% and 14.6% (assuming use of the rates in permanent law) for high income individuals.
This plan is similar to the Value Added Tax (VAT) proposals of Professor Michael Graetz of Yale and Len Burman of the Tax Policy Center of Brookings/Urban, except that expansion of the Business Income Tax will require no new infrastructure to implement. Inclusion of a VAT component, where the VAT tax is listed in the purchase price and the BIT is left undisclosed, allows collection of a lower BIT, allows exporters to avoid paying taxes for services which benefit domestic consumers and assuring that all citizens are aware of a tax obligation (which serves as a disincentive to demand further spending. I recommend that the VAT be set in the 5%-15% range and be dedicated to CONUS, Alaska and Hawaii military expenses, veterans affairs and non-entitlement domestic discretionary spending.
Business Income Taxes would cover the financing of comprehensive health coverage, non-retirement/retired survivors entitlement spending from payroll taxes (Medicare, Unemployment Insurance, non-retiree Survivors Insurance, Disability Insurance), the general fund (Medicaid, TANF, Food Stamps, Energy Assistance, Housing Assistance), and the majority of tax subsidies directed at families (employee sponsored insurance, the Child Tax Credit, tax exemptions, the standard deduction and itemized deductions such as mortgage insurance) and businesses (although industry specific tax breaks would only be distributed after those subsidies directed at families were exhausted). Tax subsidies for families could be distributed as an addition to wages under this tax, rather than as an offset to payroll taxes as Michael Graetz proposes. Additionally, such entitlement subsidies as Food Stamps, Section (8) and Energy Assistance could be eliminated by assuring a large enough family income subsidy. Certain tax subsidies would naturally be done away with. Efforts at harmonizing tax structures with state income and sales tax systems would eliminate the need for a separate deduction for state taxes. The tax exemption for personal income tax would be raised to $75,000 for individuals and $150,000 (correction) for families to assure that only high income individuals pay these levies.
The Child Tax Credit could be expanded and retained to more effectively supplement the income of families, replacing deductions for dependents, the Earned Income Tax Credit, and any VAT rebate. If the Administration, the pro-life movement and Catholic Democrats are really serious about reducing abortion, the Child Tax Credit could be greatly expanded to $500 per month per child or dependent spouse/parent. This would lead to an increase in pay for poorer families and a shifting of how wages are distributed between tax benefits and base pay for higher income individuals, with a slight income loss for childless workers. This income loss removes the perverse incentive to terminate workers with families and other older workers who, even though they are more productive, are much more expensive than more recently trained entry level personnel. The expanded Child Tax Credit might also a replacement for mortgage subsidies in the tax code, provided the credit is set to a high enough level to allow more people to qualify for a mortgage in this uncertain market. Finally, paid and unpaid participants in workforce development programs, university education and adult literacy programs would receive the Child Tax Credit if they have dependents – rather than having to apply for a variety of income supplement programs for food, energy and housing.
Unlike Len Burman’s proposal, funding comprehensive health care reform with a business income tax retains the deductibility of employee sponsored health insurance and health insurance purchased by individual tax filers (both sole proprietors and partners). Provided the pre-existing condition reforms above are enacted, no separate voucher system will be required to prevent the cherry picking of insurance subscribers. Also unlike Mr. Burman’s proposal, Medicaid and Medicare would continued, although employers could be given an additional tax credit to fully cover all retired former employees rather than pay a portion of the B.I.T.. Such a proposal would assist manufacturers with large legacy health care costs as well.
The final BIT. Rate will be high, even with an offset for a V.A.T. However, most of the tax rate would be offset by payments to or for employees, so the amount reaching the United States Treasury would be relatively small, which provides a rationale to use a B.I.T. rather than a V.A.T. Having a separate V.A.T. also finesses the question of an alternative minimum tax (existing AMTs on both Corporate and Personal Income Taxes should be repealed). Note that this change should also include a dramatic increase in the minimum wage, so that no worker is employed simply to collect tax benefits and not a separate income. Should the tax benefits accruing to families for health insurance and the expanded Child Tax Credit exceed obligations under the B.I.T., V.A.T. receipts collected by the firm could be used to offset the difference.
Most employee would no longer file taxes under this scheme. Rather, employers would send notices to each employee informing them of the credits taken in their names for verification. The Internal Revenue Service (either federal or state) would generate a companion notice based on the employers filing, which would also be sent to the employee so that the two may be compared. Employees will be advised to contact the I.R.S. if the amounts do not match, particularly if the employer claims more to the I.R.S. than is actually paid. The Government will then make up the difference and bill the employer, with penalties. This also provides a partial check against systematic fraud, as returned notices would be investigated, as would multiple notices going to the same address.
The BIT and VAT would raise almost all of the income required for government operations. The simplified high income personal income and inheritance tax would cover net interest, debt repayment (including to the OASDI Trust Fund), foreign aid and overseas military and naval sea operations. The only deductions would be for charitable contributions and income from assets sales to a qualified employee stock ownership program.
Inheritances could no longer be separately taxed. Rather, withdrawals from inheritances, with the exception of sales to a qualified broad based employee ownership plan (either ESOPs or Stock Grants), would be taxed as normal income. Assets which are not sold and non-cash personal use assets over a certain value (clothing, cars, jewelry) would be exempt from tax unless they are sold (to be exempt they must be registered at probate).
This tax would only be levied while there is debt outstanding and the need for the projection of American military power. Should those needs ever cease, the tax would be suspended. The possibility that this might occur will encourage both a restrained military posture and higher tax rates to more quickly exhaust the national debt.
Single Payer
The outbreak of street theater at the Round Table testify to the demand for single payer insurance. Given the current political influence of the health insurance and pharmaceutical industries, it is no surprise that this modality is not under active discussion. Additionally, the advent of single payer insurance do not answer the funding question. A single payer modality both complicates and simplifies the question of funding. The complication is that the modality would be quite a departure from the current status quo, while the simplification is that it directs the focus of payment to either a payroll tax or a business income tax. While single payer is certainly compatible with the funding model proposed here, or the use of a health care VAT as proposed by Len Burman, other delivery models can be used with these funding models as well.
The main attraction of single payer comes from the nature of commercially provided insurance to seek profit, and how that effects the delivery of service. The problem is that even with all of the consumer responsibility you can think of, the drive for greater and greater profits will have insurance companies constantly searching for ways to avoid paying for the care they promise their policy holders. Firms are less concerned about deductible levels as they are about how to avoid paying for serious chronic illness. Patients with several risk factors, such as a high BMI and advancing age, are not attractive to insurers since they detract from the bottom line due to the possibility of stroke, diabetes, heart attack et al. If insurers must cover everyone and can't charge potentially sicker people more, their ability to increase profits over time (which seems to be the goal of privately held firms) will be greatly impacted. In the end, their business model will not handle covering everyone at a market rate. This will lead to either consolidation (until they can't consolidate anymore), bail outs or the offloading of the sickest to some kind of public fund.
In other words, single-payer insurance is almost inevitable - whether by government mandate or because of the natural tendencies of the market. Does this mean Congress can pass single payer healthcare now? It would be extremely unlikely for the industry or Congress to be that forward thinking. The best thing measure at this time is to pass something now and let events develop. If and when the bottom falls out of the industry, however, Government must be ready with some kind of single payer proposal.
posted by Michael Bindner at 4:12 PM
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