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

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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.

Drew Gonshorowski
Senior Research Fellow at Paragon Health Institute

Drew Gonshorowski is a Senior Research Fellow at Paragon Health Institute. He brings a decade of experience conducting quantitative research and building models examining health policy and entitlement programs.

Many know that health care is the largest component of federal spending, but as this week’s Paragon Pic shows – the sheer size of the revenue impact of health care tax provisions is also unrivaled anywhere else in the American economy.

The goal of these health tax provisions is to make health care and the financial protections provided by insurance more affordable. Together, they are utilized by close to 200 million Americans. However, as detailed in a new report I authored with Brian Blase, the design of these provisions shapes care in ways both intended and unintended.

The most obvious is that by preferencing health care relative to other ways Americans can spend their money, these provisions increase spending overall and put upward pressure on prices. By giving larger advantages to prepaid health care through insurers and employers than individuals at the time of care, the tax code further encourages utilization and alleviates much of the pressure on patients to determine the value of care relative to price charged. But the insurers and employers the decision is outsourced to may have a very different view as to what constitutes value.

Where the premium tax credit is concerned, the federal government plays an outsized role in determining value for the consumer by micromanaging the insurance products the credits can be used on. Alternative approaches such as health savings accounts focus on empowering individuals and don’t disadvantage saving for the future but have strict limits on eligibility.

The efficacy of all these must be viewed in the context of alternatives like Medicaid and the Children’s Health Insurance Program where the government plays an even more active role in dictating prices and coverage. Read more in Follow the Money: How Tax Policy Shapes Care.

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