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Follow the Money: How Tax Policy Shapes Health Care

Paragon Newsletter
Brian Blase
President at Paragon Health Institute

Brian Blase, Ph.D., is the President of Paragon Health Institute. Brian was Special Assistant to the President for Economic Policy at the White House’s National Economic Council (NEC) from 2017-2019, where he coordinated the development and execution of numerous health policies and advised the President, NEC director, and senior officials. After leaving the White House, Brian founded Blase Policy Strategies and serves as its CEO.

Today, Paragon is releasing a new paper that I coauthored with Theo Merkel, Follow the Money: How Tax Policy Shapes Health CareThe executive summary of the paper appears at the bottom of the newsletter, and Theo and I are doing an event on the paper on Capitol Hill on June 11, 2024, at 1pm, which you can register for here.

Since many key provisions of the Tax Cuts and Jobs Act expire after next year, tax reform will be at the top of next year’s congressional agenda regardless of the outcome of November’s elections. Tax policy significantly affects health care and health coverage, and the size of health care tax provisions dwarf those affecting every other economic sector — as this week’s Paragon Pic (taken from our paper) demonstrates.

Health Care Tax Preferences Compared with Other Major Tax Preferences, 2023

This paper is probably the most comprehensive health tax policy review ever released by a think tank, and Theo deserves enormous credit for thoroughly reviewing health tax policy proposals—both those that succeeded and those that failed—over the last 75 years. Based on the legislative and administrative histories and the experience that Theo and I have had working at the White House and in Congress, this paper should serve as a guide for Congress as it considers if and how to tackle tax policies that affect health care and coverage next year—both the principles to guide reform efforts as well as specific recommendations.

While this paper contains recommendations for improving health savings accounts and individual coverage health reimbursement arrangements among other health tax provisions, the two most significant policy issues in this space are the rapidly escalating cost of the Affordable Care Act’s premium tax credits (PTCs) and the exclusion of employer health insurance premiums from federal income and payroll taxes.

Our paper outlines numerous problems with the expanded PTCs that have led to declining quality of plans and a large amount of wasteful spending. While we do not propose ending the PTC, we recommend that Congress not extend the expanded subsidies after they expire next year and place a limit on how high insurers can inflate subsidy amounts. Relatedly, we recommend that Congress appropriate the ACA cost-sharing reduction program and permit enrollees to receive their benefit as a deposit in a tax-advantaged health account.

With respect to the exclusion, while on a per-enrollee basis the exclusion has a lower budgetary cost than government programs and the PTC, the tax preference for employer plans is regressive and inflationary. We recommend that Congress reform the exclusion, but only in the context of health reform that reduces reliance on public programs or comprehensive tax reform that reduces carve-outs and lowers rates. Under such scenarios, we propose capping the exclusion at 125 percent of the national value of employer plans, adjusted for the age of the employer’s workforce.

The executive summary of Follow the Money: How Tax Policy Shapes Health Care is below.

What This Research Paper Covers

The power to tax is one of the most powerful tools in the toolbox of federal policymakers, and few areas of American life have been more fundamentally shaped by taxation than health care.

This paper takes an in-depth look at 10 significant tax provisions that apply to health care and health coverage. In addition to an evaluation of the impact of each, it provides a history of how each came to be and major attempts at change that failed. Finally, the paper provides recommendations on how to modify tax provisions to improve health sector efficiency, empower consumers, and minimize distortions by the current code that lead to wasteful health care expenditures.

What We Found

Some health care tax provisions are the result of concerted efforts, informed by evidence, to improve the health of the population and the efficiency in which care is delivered. Other rules were developed in an ad hoc and haphazard manner, relics of a political coalition that existed when the constellation forcing or enabling change aligned, now preserved by inertia and the special interests that benefit. Often, it can be difficult to discern one such effort from the other.

Targeted reforms to tax advantaged health accounts, the premium tax credit, and the tax exclusion for employer-sponsored insurance would help Americans get more value from the health care system. When considering reforms, policymakers should follow these guiding principles:

  1. Do not (further) advantage health care expenditures over other types of expenditures.
  2. Treat direct payment for health care by individuals no worse than third-party payment.
  3. Expand opportunities for individuals to spend their compensation and resources on the coverage and care they choose.
  4. Limit regressive impacts.
  5. Limit geographic distortions.
  6. Do not use reforms as a tool to increase the overall burden of taxation. (Any additional revenue from limiting tax breaks for health care should be used for more economically efficient tax relief.)

What We Recommend

  1. Create a more flexible definition for health-savings-account-eligible plans.
  2. Remove barriers to individual coverage health reimbursement arrangements.
  3. Stop penalizing flexible spending arrangement holders.
  4. Place limits on distortionary subsides, including:
    • Ending the enhanced premium tax credit (PTC);
    • Capping PTC benchmarks at 125 percent of the national average;
    • Appropriating cost-sharing reduction payments;
    • Capping the tax exclusion for employer-sponsored health insurance at 125 percent of the national average, adjusted for the age of the workforce; and
    • Applying the self-employed health insurance deduction to the self-employment tax and capping it at 125 percent of the national average.
  5. Eliminate rarely used provisions with high administrative burdens.

Why It Matters

Many know that health care is the largest component of federal spending, but the sheer size of the revenue impact of health care tax provisions is also unrivaled anywhere else in the American economy. This has a significant impact not only on federal finances but also on the shape and form of health care and coverage. Any policymaker seeking to improve the value of health care provided to Americans today would find a target-rich environment in the tax code.

All the best,

Brian Blase
Paragon Health Institute

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