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Learning from the Past to Improve Health Policy Moving Forward

Paragon Newsletter
Theo Merkel
Director Private Health Reform Initiative at Paragon Health Institute

Theo Merkel is the Director of the Private Health Reform Initiative and a Senior Research Fellow for the Paragon Institute and a Senior Fellow at the Manhattan Institute.

Brian is swimming with the dolphins in Hawaii this week, and in his absence has allowed me to share a few more tidbits from our recent paper Follow the Money: How Tax Policy Shapes Health Care. As a reminder we will be on Capitol Hill next week for an event on the paper at 1 PM on June 11, and you can register here.

Tax Credit Design and Premium Variation

The Paragon Pic this week shows the substantial variation in premiums for Affordable Care Act (ACA) benchmark plans across states in comparison to the variation in premiums for employer sponsored insurance (ESI) and actual per capita health expenditures for those in commercial insurance (in both ESI and the individual market).

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

The design of the ACA premium tax credit (PTC) contributes to this variation by tying the value of the subsidy to the benchmark plan premium and capping the premium contribution as a percentage of household income – insulating the vast majority of enrollees (79 percent of individual market enrollees received a PTC in 2022) from premium increases. This gives substantial power to insurance companies, especially in regions with limited competition, permitting them to increase premiums and see a corresponding increase in federal payments while the premium contribution for most enrollees stays flat. Last year the Urban Institute estimated that ACA insurance markets with only one insurer had benchmark premiums 28 percent higher than those with five or more.

Often missed is the power the credit design provides states. States can make a multitude of decisions that impact the form and amount of federal assistance including whether or how to participate in the Basic Health Plan or Section 1332 waivers, shield higher-cost insurers from competition, load the value of “cost-sharing reduction” payments onto benchmark premiums, offer modified benefits, and impose more restrictive community rating, among others.

Allowing the decisions of insurers and states to directly influence the amount of federal spending is a dangerous inflationary road, one where consumers ineligible for PTC – who thus must pay the benchmark premium in full – can be collateral damage. In our paper, Brian and I suggest capping PTC benchmarks at 125 percent of the national average. This would allow for reasonable regional variation but dampen incentives to inflate benchmark premiums to obtain higher federal subsidies.

The Journey From Idea to Law

In the second section of the paper, we trace the major health care tax provisions from their origin to today.

Some, like the tax exclusion for employer sponsored insurance, developed in an ad hoc manner as a reaction to only the most tenuously linked circumstances. During World War II, the nation experienced massive upheaval. The exemption of fringe benefits such as health insurance from wartime wage and price controls, the rapidly expanding scope of the income tax (the number of covered workers jumped from 7 to 72 percent), and a 1948 National Labor Review Board ruling subjecting the benefits to collective bargaining all magnified the importance of the tax treatment of employer sponsored insurance. The creation of cafeteria plans in 1978, which was not focused on providing a tax benefit for employer sponsored insurance, nevertheless further solidified the exclusion as a feature in American health care.

Compare that to the calculated, but slow development of health savings accounts (HSAs). The idea was originally hatched by eggheads (a term used with affection) in the Nixon administration who were concerned with all the downsides of insurance design. They wanted to enlarge the role of consumers in determining the value of care, force the health care industry to be more responsive to patient needs, and diminish incentives to spend on low-value care rather than save for the future. A decade later, Singapore moved on the idea—before the United States.

Health Savings Accounts Timeline

Eventually, a coalition of lawmakers like Senators Bob Dole and William Roth, Representative Bill Archer, policy experts like John Goodman, and industry advocates like the Golden Rule Health Insurance Company achieved “half a loaf”—a capped and time limited demonstration for small businesses as part of Health Insurance Portability and Accountability Act in 1996. This laid the groundwork for the adoption of HSAs as part of the Medicare Modernization Act in 2003. Efforts to learn and update these accounts continue to this day.

It is easy to get discouraged in public policy, where so many good ideas seem to languish whereas expedient, often counterproductive policies are adopted seemingly every other day.

However, as anyone savvy enough to sign up for this newsletter can appreciate, the stakes are high. Hopefully, we can learn from the persistence and opportunism (and some of the failures too) of those efforts chronicled in the Follow the Money to improve health policy.


Theo Merkel
Director, Private Health Reform Initiative
Paragon Health Institute

Recent Newsletters

Follow the Money: How Tax Policy Shapes Health Care
Restraining the Administrative State and Making Government Better


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