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Follow the Money

How Tax Policy Shapes Health Care

Paragon Health Institute

The Paper

This paper analyzes key tax provisions in health care, assesses their impacts and histories, and recommends reforms to enhance efficiency and consumer empowerment.

Executive Summary

What This 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
    1. Ending the enhanced premium tax credit (PTC),
    2. Capping PTC benchmarks at 125 percent of the national average,
    3. Appropriating cost-sharing reduction payments,
    4. Capping the tax exclusion for employer sponsored health insurance at 125 percent of the national average, adjusted for the age of the workforce, and
    5. Applying the self-employed health insurance deduction to the self-employment tax and capping 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 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.


The power to tax is one of the most powerful—and most frequently used—tools in the toolbox of federal policymakers. While a primary objective of taxation is to generate revenue to fund the many functions of the modern state, it is also one of the main methods by which policymakers encourage favored goods, services, or activities or discourage those that are disfavored.

When policymakers levy a tax on a specific good, service, or activity, the result is to discourage it relative to alternatives. Similarly, when policymakers exclude from taxation a specific good, service, or activity, they encourage it relative to alternatives. As the Internal Revenue Code has grown to over 2,500 pages (with another 70,000 pages of implementing regulations), and aggregate federal revenues have recently reached near an all-time high of 19 percent of the U.S. economy ($4.4 trillion of revenue in 2022), taxes have an enormous impact on Americans’ decisions.

Over the years, the executive branch and Congress have exempted significant amounts of health coverage and health care purchases from taxation. In doing so, certain types of health care spending—such as those done by employers, third-party insurers, and nonprofit entities—have been encouraged, and other types of health spending—such as that done by individuals and over-the-counter care—have been discouraged.

Some 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.

This paper has four objectives—to describe:

  1. Where we are—an overview of the taxation of health care and coverage,
  2. How we got here—a history of the major health tax provisions,
  3. What could have been—a summary of over 20 major proposals for change over the past several decades, and
  4. What should we do—a series of recommendations that would improve the efficiency of the U.S. health care system and the value Americans receive from it.

Where We Are: An Overview of the Taxation of Health Care and Coverage1

Merkel Follow The Money Table1v2

The Tax Exclusion for Employer Sponsored Insurance

Description: The oldest tax preference for health care is also the largest and one of the most straightforward: Generally, premiums for employer-sponsored health insurance (ESI) for individuals and their dependents are not counted as taxable income for employers or employees.

Unlike some other credits and deductions, the ESI exemption is from federal payroll taxes as well as income taxes. Additionally, many states and localities exempt expenditures for ESI from taxation.

Magnitude: There is no health-related tax provision that impacts a broader group of Americans. According to Congressional Budget Office (CBO) projections, 161.3 million were enrolled in ESI in 2023,2 with a net deficit impact of $345 billion ($5.3 trillion over 2023-2032).

Impact: Health insurance is a benefit that helps employers acquire talent, and there is value in using employment as a pooling mechanism to spread risk. Thus, even in the absence of the exclusion, most large employers would likely offer health coverage. Estimates on how many more employees obtain insurance through their employers due to the tax preference range from 10 percent3 to 17 percent4 —although these estimates were calculated prior to passage of the Patient Protection and Affordable Care Act (ACA) in 2010 (P.L. 111-148 and P.L. 111-152), which requires employers with over 50 employees to provide full-time employees health insurance or pay a tax.5 The exclusion also leads employers to offer more generous coverage. Herring and Trish estimated that without the exclusion, employees on average would prefer plans with 78 percent actuarial value, but with the exclusion, that preference increases to 83-84 percent actuarial value depending on income.6

Analysis: First and foremost, by reducing taxes on health coverage relative to wages, the tax exclusion for ESI incentivizes more spending on health care broadly—and insurance coverage in particular—than would happen in its absence. Experts7 and policymakers have acknowledged this for many decades. In 1983, it was President Ronald Reagan who sent the following succinct message to Congress:

Elaborate health benefits funded with tax-free, employer-paid contributions are inflationary—they insulate consumers, providers, and insurers from the cost consequences of health care decisions. By doing so, they contribute both to the persistence of inefficient forms of health care financing and delivery and to overuse of health services.8

Because the federal income tax code is highly progressive, the exclusion—similar to all other deductions—is regressive. As employees earn more income and enter higher tax brackets, the value of the exclusion grows. This means that, as wages grow, it becomes more advantageous to dedicate more pre-tax income to more generous plans rather than to wages that are impacted by higher marginal tax rates. This is illustrated in Table 2, which shows the benefit that accompanies a health plan of the average value in 2023 obtained through an employer to three hypothetical families with different incomes.

Merkel Follow The Money Table2v2

The tax exclusion is not afforded to those seeking to purchase care on their own. This inherently promotes payment of health care services by a third party—either the employer or the entity hired to administer the plan—instead of by the end user of care. Third-party payers make different value judgments than employees using their own money do. Additionally, as is true with all health insurance, once employees have made their premium payments, they have an incentive to get as much out of the benefit as they can regardless of the cost to the payer—a scenario that increases utilization and is commonly referred to as moral hazard.9

Tying health insurance coverage to employment also creates challenges for people switching jobs, people employed at small firms, and those who are unemployed. Job lock is a term that refers to a situation where employees would make alternative decisions about employment except for their desire to stay in their ESI plans. While the relative generosity of employer-sponsored benefits is just one factor in a multitude of reasons (such as wages, type of employment, location, and family situation) that could “lock” people into jobs they would otherwise not maintain, the exclusion certainly contributes.10

Because the amount of the deduction typically corresponds to the value of the health plan, there is an inherent and automatic adjustment for employers with an older or higher-risk workforce or that primarily operate in regions with higher insurance costs. For instance, according to KFF, the average premium for single coverage for ESI in 2022 was $7,590 nationwide but varied from $6,713 (12 percent below the average) in Oklahoma to $8,650 (14 percent above the national average) in the District of Columbia.11 From the perspective of insuring as many Americans as possible through ESI by increasing the tax benefit in higher-cost areas, this may be a feature, but from the perspective of designing federal policy that is efficient and equitable across regions in the long term, it may be considered a flaw and inhibit reform.

Employers attract employees by providing compensation packages that include wages and benefits such as retirement funds and health insurance. Empirical studies show that the employer contributions are not gifts but instead mainly come out of the wages and other benefits employees receive.12 Thus, although the employer contribution may be less visible to the employee, the employee still bears the cost. The average family premium in 2023 was about $24,000 for employer coverage, and the employer share exceeded $17,000.13 In effect, the average employee with a family gave $24,000 of wages to his or her employer to control.

There are also beneficial aspects of ESI. As noted above, depending on the size of the employer, employees can be a natural pooling mechanism across which financial risk can be spread.14 Further, per enrollee, the federal budgetary cost of the tax exclusion is only one-third that of other sources of coverage including Medicaid, the Children’s Health Insurance Program, and ACA plans eligible for the premium tax credit.15 One could also view the distortions created by incentivizing ESI as relative to potentially even more profound distortions by other segments of the market—such as Medicare and Medicaid—that have government-set prices and rules.

Self-Employed Health Insurance Deduction

Description: The self-employed may deduct premiums for health insurance coverage for themselves, their spouses, and dependents.

However, the deduction cannot be taken if a spouse is separately offered ESI, and the amount cannot exceed federal income tax liability. The deduction does not apply to the self-employment tax, which is effectively equivalent to the combined payroll tax for both the employer and employee.

Magnitude: Roughly 10 percent of the American workforce (16.2 million people) are self-employed. According to the Internal Revenue Service (IRS), 3.7 million tax filers were anticipated to take the deduction in 2021. For that year, the Department of the Treasury Office of Tax Analysis projected that the provision would decrease revenue by $7.7 billion16 ($143 billion from 2024 to 2033).17

Impact: When it was first created in 1986, the deduction was only 25 percent of the value of health insurance premiums for the self-employed. Still, the percentage of the self-employed with private health insurance jumped from 69 percent in 1985 to 76 percent in 1987.18 However, that percentage eroded over time despite the value of the deduction increasing to 100 percent through subsequent acts of Congress.

Analysis: Independently, this provision has all the same downsides as the broader tax exclusion for ESI. However, when viewed in the context of a tax code that already included the exclusion, this deduction reduces what would be an implicit penalty on being self-employed.

The penalty still exists, though to a lesser extent, because the deduction for the self-employed applies only to the income tax and not the self-employment tax, whereas the exclusion applies to both income and payroll taxes. This means that even before taking into account the advantages of scale a large employer enjoys in offering health insurance, someone who is self-employed faces an after-tax cost that is typically higher than that borne by someone enrolled in ESI.

Medical Expense Deduction

Description: Taxpayers who itemize their returns may deduct from their taxable income out-of-pocket eligible medical expenses and long-term care expenses if they exceed 7.5 percent of adjusted gross income.

Eligible expenses are detailed under Section 213(d) of the Internal Revenue Code. Premiums for qualified long-term care insurance are eligible up to a limit that increases with age.19

Magnitude: According to the IRS, 3.7 million tax filers claimed the medical expense deduction in 2021. The Treasury Department projected that the provision would reduce revenue by $8.4 billion that year20 ($243 billion from 2024 to 2033).21

Impact: In 2017, the average medical expense deduction was $10,081. Among those taking the deduction, 65 percent had incomes under $75,000, and just 3 percent had incomes over $200,000. In 2017, the Tax Cuts and Jobs Act (TCJA; P.L. 115-97) almost doubled the standard deduction, dramatically reducing the number of tax filers who itemize their deductions and thus reducing the number of filers who took the medical expense deduction by about two-thirds. In 2021, the average medical expense deduction was $20,546. Among those taking the deduction, 51 percent had incomes under $75,000, and 8 percent had incomes over $200,000.

Merkel Follow The Money Figure1v2

Analysis: The deduction for medical expenses has some of the same downsides as the exclusion for ESI, notably advantaging health care spending over non-health-care spending. However, it has several attributes that limit the distortion.

First, it is not exclusively tied to third-party payment, as it can go to out-of-pocket expenses for items and services as well as insurance coverage. Second, it is also not tied to employment. Perhaps most significantly, the medical expense deduction is limited to those who itemize their deductions and features a threshold based on income, which limits it to those facing relatively high levels of health expenditures.

In these ways, the medical expense deduction mitigates the cost of very expensive health care occurrences (such as certain long-term care expenses) as opposed to incentivizing third-party payment or broadly encouraging medical spending. Additionally, the TCJA reduced the number of filers who take this deduction by nearly 70 percent.

Flexible Spending Arrangements (Also Known as Flexible Spending Accounts)

Description: Employers may offer employees tax-exempt accounts for qualified out-of-pocket health care expenses called flexible spending arrangements (FSAs).

Annual contributions are capped ($3,200 in 2024), and the funds within the account are generally subject to a “use it or lose it” rule that requires any remaining balance at the end of the year to be returned to the employer. An employer may offer limited exceptions to this policy to allow remaining funds to be expended within two-and-a-half months from the end of a plan year or a portion of the remaining balance to be rolled over to the next year ($640 in 2024) without it counting toward the contribution limit for the next year.

Magnitude: According to the financial research firm Aite-Novarica, approximately 21.6 million Americans had FSAs in 2021.22

Impact: Researchers have found that FSA take-up was associated with less generous ESI coverage but that any negative effect from higher copayments was offset by the value of the FSA. Further, FSAs “partially offset the distortionary effect of the tax subsidy” for ESI by encouraging direct pay rather than third-party pay.23

Analysis: Like each of the other tax preferences for health care, FSAs incentivize spending on health care relative to other spending. However, like the medical expense deduction, it is not tied to third-party payment. When people make purchasing decisions using their own resources, they are more likely to seek out items or services that they value at least as much as the cost. Contributions are also capped, limiting FSAs from being a vehicle for excessive health care spending.

A significant downside to the FSA is the “use it or lose it” provision. This limitation puts a lot of pressure on account holders to accurately predict how much out-of-pocket spending they will have in a given year. In one way, this provision could be seen as an attribute, as it limits the willingness of account holders to be excessive with contributions, because if they overestimate, they will likely end up forgoing compensation. However, if they do overestimate, they have an incentive to spend the remaining funds at the end of the year whether the purchase is of low value or high value. Hence the rush of December advertising along the lines of “10 surprising ways to spend funds before time runs out,” including on items such as colorful band aids, sunscreen, and earwax removers.24

According to the Employee Benefit Research Institute, more than 40 percent of FSA users forfeit money due to the “use it or lose it” provision. On average, those losing money forfeited between $339 and $409 per year, totaling up to $3 billion in the aggregate annually.25

Health Savings Accounts

Description: A health savings account (HSA) is a tax advantaged account that can be used for qualified medical expenses, which include most out-of-pocket health care expenses as well as primary care, behavioral health, dental, and optometric services. Funds deposited into the account become the private property of the owner and do not need to be used before the end of the year. Most importantly, it is the only account that has a triple tax advantage—meaning deposits into the account are not taxed, growth of the assets (which can be invested) are not taxed, and withdrawals are not taxed if used for qualified expenditures. However, the significant value of the account is accompanied by numerous restrictions.

First and foremost, taxpayers are eligible to make deposits into HSAs only if they are also enrolled in qualified health coverage that includes a minimum deductible that applies to all covered benefits received from in-network providers (at least $1,600 for self-only coverage and $3,200 for family coverage in 2024), limits coverage before the deductible to a list of permissible preventive services, and has a maximum out-of-pocket threshold (at most $8,050 for self-only and $16,100 for a family). These amounts are increased each year to account for inflation. The health plan cannot be limited to vision, dental, disability, workers’ compensation, or other specified types of limited coverage.

Annual deposits into an HSA are capped at $4,150 for individuals and $8,300 for families in 2024, with future permissible deposits increased to account for inflation. Any withdrawals from an HSA for use on nonqualified expenses are subject to an additional 20 percent tax penalty unless the person is over 65 years old—in which case such withdrawals are just considered as taxable income.

People generally cannot use HSAs for health coverage premiums unless they are receiving unemployment benefits. HSA funds are permitted to pay for COBRA continuation coverage,26 Medicaid, and long-term care insurance (up to the annual limits based on age).27

Employers may contribute to HSAs of their employees. The contributions are excluded from income and payroll taxes for workers, and employer contributions are deductible as a business expense.

Merkel Follow The Money Figure2v2

Magnitude: According to the HSA consulting firm Devenir, there were 35.5 million HSAs covering 72 million Americans in 2022. These accounts held around $104 billion by the end of 2022.28 This represents steady and consistent growth since their inception. The projected impact of HSA tax advantages on federal revenues for that year was a reduction of $13 billion29 ($181 billion from 2024 to 2033).30

According to KFF, roughly 24 percent of firms in 2023 offered employees the option of an HSA eligible health plan, with 54 percent of firms from 200 to 999 employees and 69 percent of firms with more than 1,000 employees doing so.31 Roughly 25 percent of funds each year are contributed by employers, with the vast majority of the rest by account holders.

Impact: HSAs are associated with lower health care spending, largely through less utilization of services. One study found that the introduction of HSA-qualified plans and HSAs was associated with a 15 percent reduction in total health care spending, with the spending reductions driven by decreases in outpatient care and pharmaceuticals.32 A second study found that families that switched to HSA-qualified plans spent an average of 21 percent less on health care in the first year after switching, with two-thirds of the savings from fewer episodes of care and one-third from less spending per episode.33

Analysis: Another tax preference, another incentive to spend more money on health care relative to most other goods and services. However, the HSA in many ways was designed to mitigate the other distortions created by the tax code while encouraging people to save for future health care needs.

HSA funds are owned and controlled on the individual level, motivating people to be cost-conscious consumers and maximize the value they receive from their health care expenditures. Because any funds not used in the present year can be invested and are available in the future, the HSA couples cost consciousness with an incentive to save for the future instead of just increasing pressure to spend current resources on health care. This is a significant improvement when compared to the moral hazard associated with third-party payment and pre-payment of medical services through insurance. As consumers of care have greater incentives to shop for value, medical providers will face greater pressure to lower prices and become more cost efficient.

Critics note that, historically, high-deductible health plans make it less likely for an individual to receive both unnecessary care and care deemed by some researchers and health care providers to be necessary. Because many Americans have chronic conditions with known and routine costs that will far exceed plan deductibles, the deductible is also less likely to incentivize them to shop for the best value and more likely to be a nuisance at the beginning of each year. However, these criticisms should be significantly mitigated by the 2019 IRS guidance that allows coverage of certain items associated with chronic conditions—such as insulin and inhalers—to be covered pre-deductible.

Another common criticism of HSAs is the claim that they are a tax shelter for wealthier Americans.34 While studies have noted that individuals with higher incomes are more likely to have HSAs, the same studies find that substantial numbers of lower-income Americans benefit from HSAs. Additionally, Devenir indicates that over 75 percent of HSA holders reside in zip codes where the median income is under $100,000.

One disappointing development over time has been that almost one-third of Americans enrolled in health plans with high-enough deductibles for HSA-qualified plans are not enrolled in HSAs. This is a much larger problem in the ACA exchange, where research has shown that 70 percent of enrollees in plans with deductibles above the qualifying threshold do not have HSAs.35 According to Kullgren et al., “although the mean deductible for a federal health insurance Marketplace individual plan was $5,316 during the 2020 open enrollment period, just 7 percent of Marketplace plans chosen for 2020 were qualified for linkage to an HSA.”36 Given that those enrolling through the ACA are largely lower-income individuals who receive substantial taxpayer subsidies, this may be exacerbating any potential disparities in use of HSAs between low- and high-income households.

Medicare Medical Savings Accounts

Description: A Medicare medical savings account (MSA) is a tax-advantaged account that can be used for out-of-pocket health expenses for Medicare beneficiaries enrolled in MSA-eligible Medicare Advantage plans.

Similar to an HSA, to be eligible for a Medicare MSA the accompanying Medicare Advantage plan must feature a high deductible. Any money left in the account at the end of the year will also roll over for use in future years.

However, there are other characteristics that make the Medicare MSA distinct and have likely contributed to a lack of popularity. While most Medicare Advantage carriers offer plans integrated with prescription drug coverage, MSA-eligible Medicare Advantage plans cannot cover prescription drugs. Furthermore, contributions into the Medicare MSA are made only by Medicare and are a factor of the level of reimbursement the plan receives from Medicare and the premium the plan charges the enrollee—individuals cannot make additional contributions of their own. Another quirk of the current law is that these plans cannot have provider networks. Finally, unlike HSA-eligible plans in the commercial market, Medicare MSA-eligible plans cannot cover certain preventive care services prior to the deductible.

Magnitude: Currently there is very little participation in Medicare MSA plans, with only two plans that have about 8,000 enrollees combined.

Impact: The potential impact of the Medicare MSA has never been realized due to its limited adoption.

Analysis: The Medicare MSA has the potential to have many of the upsides associated with the HSA. Plans can be more economical, enrollees are able to retain the benefits of cost-conscious decision-making during the year, and providers and suppliers must more proactively compete for the business of the actual patient through delivery of efficient care. However, the restrictions imposed on MSA plans likely prevent any meaningful uptake that may demonstrate the applicability of these incentives to the Medicare population.

Health Coverage Tax Credit

Description: Until recently, certain individuals and their families have had eligibility for a refundable and advanceable tax credit of 72.5 percent of the premium of qualified health insurance. Those eligible included anyone also eligible for Trade Adjustment Assistance (TAA) or between the ages of 55 and 64 with pension obligations assumed by the Pension Benefit Guarantee Corporation.

There was a distinct definition of qualified health coverage for the purpose of the health coverage tax credit (HCTC). It included COBRA, spousal coverage (if the spouse pays more than 50 percent of the cost with after-tax dollars), and voluntary employee beneficiary association coverage created by a former employer’s bankruptcy.

Also eligible were “state-qualified health plans” that were verified by the state to have guaranteed issue, community rating for similarly situated enrollees, no preexisting conditions exclusions, and substantially similar benefits for all enrollees.

Taxpayers who utilized the HCTC were ineligible to use the premium tax credit under the ACA. At differing times since 2002, the authorization of the HCTC has lapsed, most recently on January 1, 2022. It remains lapsed today.

Magnitude: Utilization of the HCTC has fluctuated from under 10,000 returns in 2008 to almost 50,000 in 2020. In 2021, the number of returns utilizing the HCTC dipped back down to 26,000. The average value of the actual credit has also varied over time, with a high of $3,800 in 2013 to a low of $956 in 2020.

Impact: A 2020 analysis of the TAA program, including the HCTC, found that any increase in insurance coverage due to the credit was not enough to offset the loss in coverage due to the “negative impacts on employment” of the TAA program at large.37

Analysis: In some ways, the HCTC can be viewed as a quirk—it was created as part of a compromise to pave the way for free trade agreements. Since its implementation, it has been characterized by low uptake and relatively high administrative costs.38

The credit is tied to health insurance and calculated as a percentage of premiums with no cap on the value of the plan. Therefore, it is designed in a way that incentivizes both third-party payment and higher premiums. That said, these concerns are largely theoretical as participation has never been on a scale where these characteristics would impact health care spending broadly.

The reliance on states to discern qualified plans and encourage participation from insurance companies has reinforced their ability to serve as partners enforcing federal regulations on health insurance.

Premium Tax Credit

Description: The ACA created premium tax credits (PTCs) to reduce out-of-pocket premiums in the exchanges for lower-income and lower-middle-income individuals who purchase coverage that meets federal standards. Relative to most other parts of the tax code covered in this paper, the PTC is exceptionally complicated.

The amount of the credit is a factor of the household income of the recipient and the value of a “benchmark” plan in the region. The benchmark plan is the second-lowest-cost qualified health plan with 70 percent actuarial value (AV)—meaning the plan is expected to pay 70 percent of covered health care expenses for a typical enrollee.

Qualified health plans eligible for the credit must meet certain federal standards. These include guaranteed issue,39 modified community rating,40 a prohibition on preexisting condition exclusions and lifetime coverage caps, coverage of 10 “essential health benefits,” and an annual out-of-pocket maximum. For most enrollees, enrollment is limited to one open enrollment period throughout the year, outside of which individuals can sign up for eligible plans and receive tax credits only under certain limited circumstances. States can have additional insurance regulations, but the additional value of any added benefits are not supposed to factor into benchmarks for the purpose of calculating the federal PTC.

To be eligible for the credit, the ACA required an enrollee to have an income between 100 and 400 percent of the federal poverty level (FPL), not be eligible for a government health care program or an affordable employer plan, and contribute a specified percentage of his or her income toward the premium. The federal government makes up the difference between that amount determined by the specified percentage and the cost of the benchmark plan by sending a monthly payment to the insurance company. If enrollees choose plans that are more expensive than the second-lowest 70 percent AV plan, they must make up the difference in premiums, which are paid for with after-tax income. Conversely, if they choose plans that are less expensive, they will pay less or (in some cases) no premium.

Since 2021, with the passage of the American Rescue Plan Act (ARPA; P.L. 117-2) and the subsequent Inflation Reduction Act (P.L. 117-169), the cap at 400 percent of FPL was removed, and the amount of income eligible individuals must pay toward the premium was reduced. The enhanced subsidies are in place only through December 31, 2025.

Because enrollee household income is a factor in the amount of the PTC, annual adjusted gross income must be estimated in advance—an imprecise process given that income can fluctuate throughout the year. If enrollees overestimate their income, the additional amounts they paid in premiums throughout the year will be returned to them in their annual tax returns. However, if enrollees underestimate their income, the amount they must pay back to the IRS is capped at $350 for anyone under 200 percent of FPL, $900 for those between 200 and 300 percent of FPL, and $1,500 for those over 300 percent of FPL. Because of these recapture limits, many enrollees have an incentive to underestimate their income, although some low-income enrollees—people with income below 100 percent of FPL in non-Medicaid expansion states—have a significant incentive to overestimate their income to qualify for a large PTC, most of which they would not need to pay back.

In addition to the legislative expansion of the PTCs, the Biden administration has pursued an aggressive strategy to increase ACA exchange enrollment—often in extralegal ways—and the cost of the PTC. Three such actions significantly increased the PTC cost: the fix to the so-called family glitch, a perpetual open enrollment period for people with income below 150 percent of FPL, and the loosening of income verification for PTC eligibility. Figure 3 demonstrates the tremendous cost of the Biden administration actions by showing CBO’s projection of subsidy cost in the fall of 2020 to its most recent projection. Even after the increased subsidies from ARPA expire after 2025, the subsidy cost remains nearly $30 billion a year higher than CBO’s 2020 projection.

Prior to the administrative change related to the so-called family glitch, an employee’s dependents would not be eligible for a PTC if the employee was offered an affordable self-only plan. That meant that employers were incentivized to offer dependent coverage. The change defined affordability based on family coverage, in essence extending PTCs to dependents if the family plan offered by the employer did not meet affordability guidelines. The Biden administration also created a special enrollment period for people below 150 percent of FPL where they could enroll for coverage any time during the year. Because these enrollees qualify for fully-taxpayer-subsidized plans, they are nearly half of enrollees. And the combination of lax income verification and low penalties on people who get excessive PTCs has resulted in many people receiving PTCs who are not eligible.

When the ACA was enacted, several provisions were included to comply with Senate budgetary rules as well as to make the law appear “paid for.” One such measure was a “failsafe” provision that caps aggregate PTC payments and cost-sharing reduction subsidies at 0.504 percent of gross domestic product (GDP).41 However, given that enrollment has been far under expectations, that threshold has never been close to being breached.

Merkel Follow The Money Figure3v2

Magnitude: CBO projected that 14.2 million people would receive a PTC at a cost of $92 billion in 2023. Following the expiration of the enhanced credits in 2025, CBO anticipates PTC enrollment subsiding and settling at just over 11 million through the 10-year budget window.

Impact: As health care actuaries Daniel Cruz and Greg Fann found, the PTC and related provisions increased enrollment in private health insurance by only 1.6 million on net as of 2021.42

In a study done prior to the enhanced subsidies under ARPA, Goldman et al. found that on average the new standards for health insurance reduced out-of-pocket spending in the nongroup market across all incomes. However, for those with incomes over 250 percent of FPL, the reduction in out-of-pocket spending was outweighed by a much larger increase in spending on insurance premiums.43

Analysis: There are several key impacts of the PTC. First, the PTCs finance the ACA’s regulatory structure. Without the large PTCs that induce healthier, lower-income people into the exchanges, the exchanges would collapse through adverse selection.44

Second, the PTCs are inflationary, a problem made worse by the enhanced PTCs since 2021. By limiting the enrollee share of the premium to a percentage of income, premium increases over time are almost entirely borne by taxpayers. Insurers, particularly those in less competitive markets, set prices knowing that the enrollee is virtually insensitive to the total premium. As such, the basic design encourages higher premiums and less plan efficiency. Using data from the Massachusetts law that was the precursor to the ACA, Jaffe and Shepard estimate that the price-linked credit increased premiums by 6 percent.45 As Peter Nelson of the American Experiment notes, this is likely a floor on the impact given that Massachusetts has more insurance competition than most markets do.46

The inflationary structure of the PTC and variation in insurer competition also leads to wide swings in the amount of the subsidy from region to region and state to state. Variation is highly correlated to insurer competition rather than factors related to underlying costs. The Urban Institute recently estimated that ACA insurance markets with only one insurer had benchmark premiums 28 percent higher than those with five or more.47

Third, the enhanced subsidies have largely crowded out private spending and, as mentioned above, further fuel the inflationary structure, both by increasing the taxpayer share of the premium and by bringing more people into the structure. According to initial estimates from CBO analyzed by Blase in a 2021 study, nearly 75 percent of the new spending goes to people who have coverage, simply allowing them to replace private spending with government subsidies.48 More people are brought into this inflationary structure from lifting the cap at 400 percent of FPL and as more small employers drop coverage because of the expanded benefit.49

Fourth, the subsidies—particularly after the enhancement and the Biden administration’s fix to the so-called family glitch—discourage employers from offering ESI, as they can increase wages and their workers can qualify for PTCs to buy plans on the exchanges. As such, the fix incentivizes employers to not offer dependent coverage or to offer extremely expensive dependent coverage that would be determined unaffordable, which further crowds out private expenditures with government ones.

Fifth, the enhanced subsidies crowd out other alternatives by providing so much government money toward the purchase of ACA-compliant plans on the exchange. For example, innovative plan designs that tend to be lower cost and promote consumerism—such as the no-network, reference-based pricing coverage offered in some markets, short-term limited-duration insurance, and Farm Bureau plans—are severely disadvantaged in the marketplace with the expanded subsidies.

Finally, as described by University of Chicago economist Casey Mulligan in his book Side Effects and Complications, the sliding scale used to determine the amount of the subsidy contains a large implicit income tax:

By earning more, a family pays more for the same benefits. The extra payments are economically equivalent to an income tax, because tax payments and the extra health benefits are not resulting in any extra goods or services for the family that pays them.50

Consider the example in Table 3 that shows the level of earnings retained for pay increases in $10,000 increments. This is another implicit tax on income on top of income, payroll, state, and local taxes.

Merkel Follow The Money Table3v2

Small Business Health Care Tax Credit

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Description: Certain small businesses have been eligible for a time-limited ACA credit to help them offer health insurance to their employees.
The full credit is available to businesses with fewer than 10 full-time employees with average taxable wages of $25,400 or less. It is phased out on a sliding scale for businesses with up to 25 employees with average taxable wages of up to $50,100.

The full credit is up to 50 percent for a for-profit employer’s and 35 percent for a nonprofit employer’s contributions to qualified health insurance. The credit for for-profit businesses is not refundable, but if it exceeds the tax liability, it can be carried forward to future years. The credit for nonprofit businesses—which do not pay federal corporate income taxes—can be applied only to the payroll taxes owed by the employer.

An employer could claim the credit for up to six years. This includes an initial four-year period from 2010 to 2013 and any two consecutive years after that. However, starting in 2014, only plans meeting the ACA requirements for qualified health insurance purchased on a Small Business Health Options Program exchange could qualify for the credit.

Magnitude: Estimates of the number of small businesses that might be eligible for the credit ranged from 4 million by the Council of Economic Advisers to 2.6 million by the Small Business Administration to 1.4 million by the National Federation of Independent Businesses. However, the number of those actually claiming the credit was substantially lower.

The IRS reported the number of employers claiming the small business health care tax credit from 2010 to 2016. In 2010, almost 190,000 small businesses with around 770,000 employees claimed $520 million in credits. The number increased slightly in 2011 but fell off a cliff in 2014. As of 2016 (the last year the IRS even bothered to publish this data), only 6,952 small businesses were claiming the credit.

The Joint Committee on Taxation (JCT) stopped providing numerical estimates on the impact of the credit on revenues in 2019 and finally completely removed it from its annual report on tax expenditures in 2023.

Merkel Follow The Money Figure5v2

Impact: If the credit had any impact on the number of small businesses willing to provide health insurance to their employees, it was temporary. The KFF Employer Health Benefits Survey shows a noticeable increase in 2010, though it notes that there was also a change in methodology and all gains were lost the subsequent year.

There was no substantial change in trend following the large drop-off of small businesses claiming the credit in 2014. Recently, with the increased ACA PTCs, the percentage of small businesses offering health insurance to their employees hit all-time lows in 2022 and 2023.

Analysis: Small businesses are able to benefit from the tax exclusion for ESI but still face higher costs per enrollee than do large firms when seeking to offer health insurance for their employees.51 The small business health care tax credit was a complicated and almost completely ineffective attempt to mitigate some of these additional costs.

Health Reimbursement Arrangements

Description: Health reimbursement arrangements (HRAs) are commitments from employers to reimburse the health care expenses of their employees and their employees’ dependents. The most common type of HRA is a group plan HRA, which is available to employees enrolled in a group health plan. An employer can offer this HRA only if it also offers a group health plan and the employee enrolls in the group plan. Group health plan HRAs can be used only to pay for qualified medical expenses under Section 213(d) of the Internal Revenue Code that are not reimbursed by the plan. Employers can, however, further restrict the use of the HRA. Unused HRA balances may be carried forward, subject to the way the employer designs the arrangement.

Starting in 2020, all employers could use HRAs to reimburse the premiums of individual market plans selected by their employees—a subset referred to as Individual Coverage HRAs (ICHRAs)—subject to certain rules. Small businesses are also able to use Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) to reimburse individual market premiums, although QSEHRAs lack several of the advantages of ICHRAs. Unlike QSEHRAs, ICHRAS can be used by employers of any size, contribution amounts are unlimited, and employers can design employee classes to offer different arrangements to different groups of employees.

Magnitude: There has been sizeable year-over-year growth, but ICHRAs and QSEHRAs likely currently amount to less than 1 percent of employer coverage.

Impact: In essence, ICHRAs equalize the tax treatment between employer-selected health plans and employer contributions for workers to choose individual coverage that works best for them. Economists have estimated that increasing plans available to employees has significant value, equal to a 3 percent premium reduction.52

The uptake of ICHRAs and QSEHRAs is below initial expectations, likely for several reasons. First, ICHRAs launched during a very tight labor market during the pandemic, when employers were likely very resistant to change health coverage. Second, in many parts of the country, the individual insurance market overwhelmingly consists of high-premium, narrow-network health maintenance organizations (HMOs), which are not that appealing for many workers. Third, health insurance brokers likely have greater challenges in selling individual market coverage, and many of them look to protect their group business.

Analysis: ICHRAs are a step toward defined contribution health insurance, where workers rather than employers have greater control over their health insurance. ICHRAs removed a distortion in the tax code that advantaged employer-selected group plans and outlawed defined contribution arrangements for individual plans. The main limitation of ICHRAs is that the individual market for health insurance does not offer a variety of attractive plans in many parts of the country. Improving the individual market for health insurance should make ICHRAs and QSEHRAs more appealing.

How We Got Here: A History of the Major Health Tax Provisions

The taxation of health care has developed in an ad hoc and sometimes haphazard manner over the years. This section summarizes the history behind each of the tax provisions described above.

Tax Exclusion for Employer Sponsored Insurance

As deftly chronicled by Michael Cannon of the Cato Institute53 and Doug Badger for the Galen Institute,54 employer contributions toward employee health insurance have essentially been excluded from the federal income tax since its inception in 1913. However, the limited scope of the initial federal income tax (which in the first years applied to only around 2 percent of the population)55 and the relative rarity of health insurance products at the time meant its impact was modest for the first few decades.

However, it was the exemption of health insurance benefits from wage and price controls imposed by President Franklin Roosevelt and Congress during World War II in 1942 that magnified this feature of the tax code by enhancing the value of health benefits as a tool to attract and retain workers ineligible for wage increases.56 The percentage of Americans with private health insurance would more than double from 1940 to 1945—from 9.0 percent to 22.6 percent.57 In 1948, the National Labor Relations Board ruled that health insurance was a fringe benefit subject to collective bargaining. Congress officially codified the exclusion into the tax code during a substantial overhaul of the Internal Revenue Code in 1954.

The employee share of premiums became deductible from income with the creation of “cafeteria plans” under Section 125 of the Internal Revenue Code by the Revenue Act of 1978 (P.L. 95-600).58 Under the law, employers may offer their employees a choice between receiving taxable wages or having their wages reduced by the equivalent amount and converted to a nontaxable benefit. As of 2010, 80 percent of employees were offered “premium conversion” cafeteria plans. On paper, employers paid on average approximately 83 percent of the value of single coverage and 71 percent of the cost of a family plan in 2023.59 As discussed earlier, the employer share of the premium is ultimately borne by the worker in the form of lower wages.

Self-Employed Health Insurance Deduction

There was no tax break resembling the tax exclusion for ESI for the self-employed until the landmark tax reform in 1986 initiated by President Reagan. However, the Tax Reform Act (P.L. 99-514) did not create tax parity for the self-employed; instead, it established a deduction of 25 percent of qualified expenditures with a sunset in 1989.60 The limited deduction would be extended five times before it lapsed at the end of 1993. In April 1995, it was permanently authorized retroactively to 1994 and increased to 30 percent beginning in tax year 1995.

The Health Insurance Portability and Accountability Act (HIPAA) of 1996 (P.L. 104-91) gradually increased the deduction from 30 percent to 80 percent over 10 years. Before that schedule could be fully executed, Congress revisited the deduction in the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999 (P.L. 105-277) and set it to increase to 100 percent starting in 2003.

Starting in 2014, the self-employed also became eligible for the PTC created by the ACA. It is possible to benefit from both the PTC and the deduction so long as the combined amount of the PTC and the deduction does not exceed total eligible premiums.

Medical Expense Deduction

As with much of the tax code, the history of the medical expense deduction is one of congressional tinkering. The origin begins with the United States Revenue Act of 1942 (P.L. 77-753), which made the progressive income tax the main source of federal revenue instead of a mere supplement and increased the number of federal taxpayers from around 4 million to over 40 million.61 To partially mitigate capturing those lower on the income scale, Congress created a deduction for medical expenses up to $1,250 for an individual ($2,500 for a family) that were in excess of 5 percent of net income.62 Two years later the threshold was changed to adjusted gross income in attempt to simplify the tax code rather than achieve any health-related policy objective. The Revenue Act of 1951 (P.L. 82-183) removed the income threshold for anyone over the age of 65,63 beginning a reoccurring theme of Congress treating medical expenses of the elderly differently.

In the same 1954 law that codified the ESI exclusion, the medical deduction threshold was lowered to 3 percent of adjusted gross income, and the cap on eligible expenses was doubled to $2,500 for an individual ($5,000 for a head of household).64 However, Congress also created a separate qualification for medicine and drugs, which could be counted only if that category of spending by itself totaled more than 1 percent of adjusted gross income. In 1958, the limitation of the deduction amount was raised but only for those over 65 ($15,000) and further still for people both over 65 and disabled ($30,000).

The Revenue Act of 1964 (P.L. 88-272) removed the separate qualification for medicine and drugs for those over 65. However, the Social Security Amendments of 1965 (P.L. 89-97)—the same legislation that created Medicare and Medicaid—eliminated the limit on the maximum deduction for all taxpayers starting in 1966 and the repeal of all special rules for the elderly once Medicare was expected to be fully implemented in 1967.

The second reconciliation bill passed during the Reagan administration, the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248), increased the income threshold back to 5 percent of gross income.65 In 1984, the separate criteria for drug expenses was dropped, and the tax overhaul in Reagan’s second term increased the income threshold to 7.5 percent.

In addition to ceilings and floors on the deduction, another common issue that has changed over time—often through the regulatory or sub-regulatory process—is what counts as a medical expense. For instance, in 1950 the IRS clarified that the value of an oil furnace could not qualify for the deduction even if a doctor wrote a prescription for an asthmatic patient struggling with a coal-fired furnace.66 Following Roe v. Wade, a revenue ruling clarified that abortion would be treated as deductible.67 Much more recently, Congress went out of its way to clarify that qualified long-term care insurance premiums were deductible up to an annual limit that ranged from $200 for those under 40 to $2,500 for those over 70—indexed to medical inflation in future years.68

The last round of changes occurred in conjunction with the passage of the ACA in 2010, which created substantial new federal subsidies for health coverage through both Medicaid and the PTC. These new expenditures were to be partially offset by changes impacting the medical expense deduction, including an increase in the threshold for the medical expense deduction to 10 percent of adjusted gross income starting in tax year 2013 for those under 65 and starting in 2017 for taxpayers over 65. These changes alone were projected to save $15.2 billion over seven years.69 Congress also changed the definition of qualified medical expense to exclude over-the-counter medications even if prescribed by a physician—a change that would have a broader impact on tax-advantaged accounts—and was projected to increase revenue by $5 billion over nine years.

Congress intervened to prevent the higher income threshold for older Americans from ever being implemented, but the 10 percent threshold for those under 65 was law from 2013 to 2016 until the Tax Cuts and Jobs Act of 2017 temporarily reduced it back down to 7.5 percent. This temporary floor was extended twice before being made permanent at 7.5 percent of adjusted gross income by the Consolidated Appropriations Act (P.L. 117-260) passed in December 2020.

Flexible Spending Arrangements

FSAs also originate with the Revenue Act of 1978 and the codification of tax-advantaged “cafeteria plans.” In addition to the “premium conversion” cafeteria plans discussed in relation to the ESI exclusion, employers were permitted to offer other cafeteria plans such as those for life insurance, day care services, or out-of-pocket medical expenditures. Critically, however, the law stated that a cafeteria plan could not defer compensation to a subsequent tax year, a distinction that would have significant implications for FSAs and HRAs, severely limiting the ability of amounts to be carried over from one year to the next.

Initially, the IRS did not promulgate regulations, and a variety of FSAs emerged, such as those that allowed unused funds to be cashed out and changed back into taxable income, rolled over into a 401(k), or rolled over to the following year.70 Concerned that these plans may have violated the statutory prohibition on deferred compensation, the IRS proposed regulations to allow only FSAs that specified the amount of benefits at the beginning of the plan year, were unable to be altered throughout that year, and required the forfeiture of any unused funds.71 Although the rule was never finalized, it stood as the official IRS interpretation of the law.72

In 2004, then-chairman of the Senate Finance Committee Chuck Grassley (R-IA) pushed the IRS to end the “use it or lose it” rule through administrative action.73 The IRS asserted that it did not have the authority to do so but, as a result of the review, acknowledged other areas in tax law that allowed for compensation for services paid within two-and-a-half months after the end of the tax year without being categorized as deferred compensation. Thus, the IRS began to allow for a similar “grace period” for FSA distributions.74

To help offset new expenditures in the ACA, Congress capped the amount that could be contributed to an FSA at $2,500 starting in 2013 and indexed it to general (not medical) inflation. The provision was projected to increase revenue by $13 billion over seven years. To coincide with this new limit, the IRS permitted a new option for employers to offer FSAs that allowed up to $500 of unused funds to be rolled over to the next plan year without counting against the contribution limit.75 In 2020, the IRS indexed the rollover amount to inflation.76

Health Savings Accounts

Victoria Craig Bunce, then of the Cato Institute, traces the idea of the HSA back to a proposal for health banks developed by Jesse Hixson and Paul Worthington in 1974 while the two were political appointees at the predecessor of the Centers for Medicare and Medicaid Services (CMS), which was at the time a division within the Social Security Administration.77

Their proposal called for employers to deposit money into specialized health banks (or credit unions) where their employees would have individual accounts.78 The employees would be able to use their accounts for health care expenses and, if necessary, take out loans. The role of commercial insurance would be covering excessive loan debts. Upon retirement or other termination of employment, the balance of funds in the account would become the private property of the former employee.

As expanded upon by Worthington in 1978, the motivation was to incentivize individuals to purchase care directly and thereby promote price and quality competition among health care providers. This was contrasted to the common Blue Cross Blue Shield coverage of the day, plans that were originally designed by hospitals to enhance the solvency of providers. As such, the typical coverage was constructed in a way that did not prioritize cost containment. That model of a prepaid health plan created moral hazard as the employee, once having paid the premium, was incentivized to consume as much care as possible. This problem continues to the present day. The Blue Cross Blue Shield model also used cost-based reimbursement, which created an incentive for hospitals to compete on frills rather than on value (price and quality).

The concept of a tax-advantaged health account received a boost from an unexpected place when Singapore underwent a major overhaul of its health care system. The small Asian nation sought reforms that would give the average Singaporean the “maximum incentive to stay healthy, save for his medical expenses, and avoid using more medical services than he absolutely needs.”79 The centerpiece of the 1983 reform was mandatory “Medisave” accounts into which all workers must dedicate a portion of their income,80 supplemented by government deposits for those with low incomes and, in good budgetary times, “top up” deposits for other segments of the population in an ad hoc manner.81 Curious policy experts from around the world watched in awe as Singapore was transformed from a system dominated by government payment to one where individuals took an active role in discerning the value of care accompanied by a modest government safety net.

Hixson went on to become an economist for the American Medical Association, where he would collaborate with John Goodman at the National Center for Policy Analysis (NCPA) to further refine and promote accounts for health spending. In the Wall Street Journal in 1984, Goodman and Richard Rahn, the chief economist of the U.S. Chamber of Commerce, married the idea with the increasingly popular tax-advantaged individual retirement account (IRA).82 Starting in 1990, NCPA helped organize a coalition of “more than 40 think tanks, universities, and other organizations” to refine and support the concept of the medical IRA.83

The 1990s also saw a number of U.S. businesses begin to provide their employees high-deductible health plans tied to medical savings accounts (MSAs) into which the employers would deposit money. Prominently, the Golden Rule Insurance Company of Lawrenceville, Illinois, sold these policies and had an influential chairman, J. Patrick Rooney, who advocated the idea on the national stage. Top selling points were reduced costs on administration, lower utilization of low-value services, and the ability of employees to retain deposits into the MSAs they did not use in a year—money that would never have been seen again had it been in the form of premiums to insurance companies or contributions to FSAs. However, the deposits into the MSA were still subject to income taxation.

With heightened focus on health care early in the Clinton administration, MSAs became the centerpiece of Republican alternatives to the broad, complicated, and ultimately doomed overhaul of the health care system advanced by the administration (see the next section for more information on “Clintoncare”). Starting with Missouri in 1993, several states passed laws to establish MSAs, in some cases exempting contributions from state taxation.84

Supporters suffered a setback, then achieved an incremental success, in the debate over HIPAA in 1996. In the Senate, opponents defeated an MSA proposal by Majority Leader Bob Dole (R-KS) and Finance Committee Chairman William Roth (R-DE) by a vote of 52-46. These opponents claimed that the accounts would primarily benefit the wealthy and quoted concerns from Blue Cross Blue Shield of Ohio and the Society of Actuaries over adverse selection and market segmentation. However, at the insistence of Ways and Means Chairman Bill Archer (R-TX), the final legislation included a limited pilot program for MSAs.

Under HIPAA, participation in the “Archer MSA” was capped at 750,000 accounts and limited to the self-employed and small employers with fewer than 50 employees. Plans were required to have high deductibles and out-of-pocket limits, and contributions were limited to 65 percent of the deductible for individuals or 75 percent for a family. Deposits were exempt from taxation, but expenditures using account funds were limited to qualified medical expenses under Section 213(d) of the Internal Revenue Code. The demonstration would sunset after four years.

Almost 30 years after Hixson and Worthington first proposed health banks, almost 20 years after Goodman and Rahn proposed the medical IRA in the Wall Street Journal, and seven years after the creation of Archer MSAs, the HSA became law as part of the Medicare Modernization Act of 2003 (P.L. 108-173). The new law dropped the enrollment caps and limitations to small businesses that had accompanied the Archer MSA. The minimum deductible was set at $1,000 for an individual and $2,000 for a family, and contributions were capped at the deductible, not to exceed $2,600 for an individual and $5,150 for a family. There was an additional “catch-up” increase in the contribution limit by $1,000 for those over 55 years of age. These thresholds were indexed to the “chained consumer price index (CPI)”—a measure of general inflation that better accounts for consumer behavior and is somewhat lower than “headline” CPI. At the time, JCT projected that the new HSA provisions would reduce revenues by approximately $7 billion over 10 years.85

A less restrictive version, named a “health savings security account (HSSA),” passed the House of Representatives but was dropped in the final Medicare Modernization Act legislation. The proposed HSSA could be used by the uninsured or those on health plans that met a lower minimum deductible requirement ($500 for single coverage and $1,000 for a family). Contributions were limited to $2,000 for an individual or $4,000 for a family, were not capped at the deductible, but phased out over an income range of $75,000-$85,000 ($150,000-$170,000 for a family). The impact on revenues was projected to be much higher—a $174 billion reduction over 10 years.86

In 2006, Congress changed the law to allow all HSA holders to contribute up to the statutory cap (as opposed to being limited to the deductible) and to permit one-time transfers from FSAs, HRAs, and retirement accounts into HSAs.87

One of the long-standing criticisms of HSA-eligible health plans was that the strict limitations on coverage pre-deductible made them inconvenient for individuals with chronic conditions that have known and repeated expenses. In 2019, the authors of this paper in their capacities at the White House National Economic Council oversaw the initiative to expand the list of preventive care that could be covered with no or reduced cost-sharing, pre-deductible, to include certain items and services for chronic conditions such as diabetes, asthma, and hypertension.88

Medicare Medical Savings Accounts

The origin of the Medicare MSA was the intersection of two distinct but related movements. One was the momentum of tax-advantaged accounts for health care described above. The other was the evolution of the privately managed alternative to traditional fee-for-service Medicare, which prior to 1997 had been limited to HMO plans.

The Balanced Budget Act of 1997 (P.L. 105-33) included a series of new private plan options for Medicare beneficiaries in the newly rebranded Medicare + Choice program. In addition to the creation of preferred provider organization, provider-sponsored organization, and private fee-for-service plan options, the law included a demonstration project for high-deductible plans tied to a new Medicare savings account. While the demonstration was made permanent in the Medicare Modernization Act of 2003, it would maintain the strict rules (see previous section) that limit the popularity of the program to the current day.

Health Coverage Tax Credit

The original HCTC was created by the Trade Act of 2002 (P.L. 107-210)—a law focused on renewing trade promotion authority for the first time since 1994. This authority enables an administration to receive a simple majority vote on trade agreements submitted to the Senate. Since 1962 it has been paired with programs to provide assistance to workers that may be displaced by any resulting new trade. In 2002, the HCTC was seen as a way to enhance that safety net, covering the value of 65 percent of qualified health insurance for workers eligible for the broader TAA program.89 The HCTC has always been authorized on a temporary basis and has been extended numerous times—usually in tandem with the broader trade assistance programs. Repeated renewals have afforded Congress numerous opportunities to modify or refine the program.

The American Recovery and Revitalization Act of 2009 (P.L. 111-5) temporarily expanded the HCTC to 80 percent of the value of a qualified health plan through February 2011. In October 2011, Congress renewed the credit retroactively back to February of that year and prospectively through January 1, 2014, but at a new rate of 72.5 percent.

The Trade Preferences Extension Act (P.L. 114-27) renewed the HCTC through January 1, 2020, but with new provisions to account for interaction with the new ACA PTC. Specifically, it allowed the HCTC to be used for health insurance purchased through an ACA exchange in 2014 and 2015 but prohibited it after December of that year to prevent any further overlap. The HCTC was extended two more times but sunset as of January 1, 2022. Figure 6 below shows the take-up of the HCTC over time and the size of the average credit.

Merkel Follow The Money Figure6v2

Premium Tax Credit

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The concept of using tax credits to assist in the purchase of health insurance goes back over half a century, best exemplified by the Medicredit proposed by the American Medical Association (AMA) in 1969 (see next section). However, the most immediate predecessor of the ACA PTC was the health care reform signed into law by Governor Mitt Romney in Massachusetts in 2006.

Massachusetts used subsidies as opposed to tax credits—but with a structure that would be recognizable to those familiar with the functioning of the PTC. Premium contributions were set as a percentage of income according to an “affordability scale” established by a governmental board. Subsidies made up the difference between the premium for a benchmark plan and the contribution required by individuals between 150 percent and 300 percent of FPL. The benchmark plan was the lowest cost of up to four Medicaid managed care plans participating in a region. Enrollees had the option of choosing higher-cost plans but were required to make up the difference in the premium payment.

In January 2007, Senators Ron Wyden (D-OR) and Bob Bennett (R-UT) introduced the Healthy Americans Act, which relied on a similar framework to the Massachusetts reform. The legislation received a considerable amount of attention given the bipartisan support, and a public CBO and JCT analysis that projected it would be budget neutral once all of the provisions—including replacing the uncapped ESI tax exclusion with a fixed deduction that phased out at incomes above $62,500 for single filers—were fully implemented. The amount of their proposed subsidy to assist those obtaining private health insurance in the nongroup market would have been determined as a factor of the plan premium and income for individuals up to 400 percent of FPL. Those earning at FPL would have received full subsidies of 100 percent of the average premium of the two lowest-cost qualified plans. This percentage would have decreased with increasing income on a linear scale to reach 50 percent for those at 250 percent of FPL and 0 percent for those at 400 percent of FPL. Thus, premium contributions would not have been capped as a percentage of income though income was a factor in the generosity of the subsidy.90

During the Democratic presidential primary in 2008, then-Senator Hillary Clinton (D-NY) put forth a plan that would have capped premiums for private health insurance at between 5 percent and 10 percent of income.91 The general concept was embraced by her primary opponents, then-Senators Barack Obama (D-IL) and John Edwards (D-NC), but candidate Obama did not specify the exact percentage of income premiums that would be capped at under his proposal. However, the Tax Policy Center of the Urban Institute and the Brookings Institution estimated that in order to meet the revenue targets outlined by the Obama campaign, the premium contribution percentage would have to be 12 percent of income for those at 300 percent of FPL, 16 percent for those at 350 percent of FPL, and 20 percent for those at 400 percent of FPL.92

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When Congress began to debate federal health care reform in earnest in 2009, the various committees each adopted a cap on premiums as a percentage of income. However, there was variation among committees on how to determine the benchmark plan and the percentage of income enrollees would be required to contribute toward premiums. There was less variation on the structure or design of the credit. Some key differences are highlighted in Tables 4 and 5.

As passed, the ACA also contained a Cost Sharing Reduction (CSR) program, which reduced plan deductibles, cost-sharing amounts, and out-of-pocket limits for exchange enrollees up to 250 percent of FPL who selected silver plans. These were not originally conceived as a subsidy through the tax code but have since evolved to be paid out that way.

While the CSR program was authorized, Congress made no accompanying appropriation. The Obama administration made these payments to insurers anyway, but the House of Representatives under the leadership of then-Speaker John Boehner filed a lawsuit asserting that these payments were unconstitutional without congressional action. In 2017, citing Court decisions in agreement with the House, the Trump administration halted CSR payments to health insurers. Health insurers, which still had a legal obligation to reduce plan cost-sharing amounts, responded by significantly increasing premiums for silver plans. This, in turn, significantly increased PTCs. Such sizeable increases to PTCs led a plethora of zero-premium or very low premium plans, as the larger subsidy could be applied to bronze and gold plans.

In the American Rescue Plan Act of 2021, Congress significantly increased the PTCs—both lowering the amount of income that households would have to pay for benchmark plans and lifting the eligibility cap at 400 percent of FPL—for 2021 and 2022. In the Inflation Reduction Act of 2022, Congress continued these enhanced subsidies through 2025. The effect has been to increase enrollment, as a large share of enrollees no longer need to pay any premiums for benchmark plans—a scenario not contemplated in any of the drafts of the ACA. Figure 8 shows the distribution of federal exchange enrollees by FPL category over time. By 2024, 53 percent of federal exchange enrollees had income below 150 percent of FPL, and these enrollees have the option of numerous plans with zero premiums, as all plans with premiums below the benchmark plans would be free.

Merkel Follow The Money Figure7v2
Merkel Follow The Money Figure8v2

Small Business Health Care Tax Credit

The Small Business Health Care Tax Credit was created as part of the ACA in 2010. The credit is time-limited, and uptake has been extremely low since 2014.

Health Reimbursement Arrangements

The IRS acknowledged HRAs in 2002 through guidance.93 According to the Congressional Research Service, “Under these initial rules, employees and former employees could use employer-contributed HRA funds to help cover the costs of health insurance and/or unreimbursed medical care up to a specified limit.”94 The employers set the term of the reimbursement, determining the total reimbursement amount and the items that employees can use HRAs to purchase.95 Self-employed individuals are not eligible for HRAs. HRA contributions are not included as employee wage income and are thus a form of untaxed compensation.

Bipartisan legislation signed by President Obama in 2016 created QSEHRAs. Using QSEHRAs, small employers could reimburse employees’ premiums for minimum essential coverage, including ACA-compliant individual market insurance.96 Unlike with ICHRAs, an employee who enrolls in a QSEHRA may still receive a PTC, although it would be reduced to account for the QSEHRA contribution. Congress set a maximum amount that QSEHRAs could reimburse, which equals $6,150 for single coverage and $12,450 for family coverage in 2024. These amounts are indexed to inflation.

However, the Obama administration also engaged in regulatory action to restrict employers’ ability to use HRAs to reimburse employees’ individual market premiums, with a $100 daily penalty per worker if employers reimbursed individual market premiums. The Obama administration acted out of concern that employers with relatively unhealthy workforces would move their workers into the individual market, worsening adverse selection in that market. In banning these reimbursements, the Obama administration stated that as group health plans, HRAs had to satisfy Sections 2711 and 2713 of the Public Health Service Act, which respectively prohibited annual and lifetime limits and required coverage of preventive services without cost-sharing.97 Because HRAs cannot satisfy these provisions, they could not lawfully reimburse individual market premiums.

During the Trump administration, the Departments of Labor, Health and Human Services, and the Treasury engaged in public notice-and-comment rulemaking to reverse the Obama administration restrictions and create ICHRAs. According to the 2019 rule, so long as an HRA purchased a plan that complied with Sections 2711 and 2713 of the Public Health Service Act—which all ACA plans must do—it would be a permissible arrangement. The Trump administration rule permitted employers to reimburse premiums for ACA-compliant individual market coverage within a set of parameters. The rule permitted employers some flexibility to tailor offers in ways that employees would prefer, such as being able to vary the offer of coverage across classes of employees. The employee share of the premium is also pre-tax with the use of a cafeteria plan so long as the employee selects an off-exchange individual market plan.

ICHRAs have two primary tax consequences. First, they effectively expand the ESI tax exclusion as some employers who would not have offered group plans offer ICHRAs. This reduces tax revenue, expands coverage, and increases health care spending. Second, ICHRAs reduce one tax distortion by equalizing the tax treatment between employer-selected coverage and employer contributions that employees use to purchase individual market coverage that they prefer. In this way, ICHRAs restore some control to employees over how to spend their compensation on health care. The ICHRA can also lead to more cost-conscious behavior as an employee has an incentive to select a plan that costs less than his or her share of the premium.

Exhibit 1: How Do We Tax Other Comparable Expenditures and Essentials in the American Economy?

Health care is far from the only essential service or item Americans need, yet the tax treatment is quite unique. This sidebar takes a look at comparable items and related policy.

Retirement Income
Most retirement income is subject to taxation either with post-tax dollars being contributed or with taxes paid when the money is withdrawn.98 Employer contributions into defined benefit plans are deductible, but payments to retirees are counted as taxable income. Employer contributions into defined contribution plans are deductible, and employee contributions up to an annual limit can be deferred through the use of a 401(k) to a time in life when people are typically in a lower income tax bracket, but eventually withdrawals are typically counted as taxable income. A Roth IRA is a variation where the contribution into the account is made after tax, but then the withdrawal is not subject to taxation.

Even Social Security Old Age and Survivor Insurance benefits are taxable at certain income thresholds. Individuals with incomes over $25,000 and joint filers with incomes of $32,000 face a tax rate of up to 50 percent on a portion of their benefits.

Since 2002, people with incomes below a certain threshold have been eligible for a tax credit of up to 50 percent on their first $2,000 of savings.99 This “Saver’s Credit” phases out for anyone earning above $73,000 for a joint filer. In 2027, the credit will be replaced by an actual matching contribution into retirement accounts called the “Saver’s Match” with similar income limits and a maximum value of $1,000.

Homebuyers can deduct from taxable income interest payments on the first $750,000 of combined mortgage debt on primary and secondary residences. Housing markets are regional, similar to health care, and average spending can vary significantly depending on the location. However, the limit on the value of mortgage debt eligible for the interest deduction is the same across the country.

Those who rent pay their monthly housing costs with after-tax income.

Food and Drink
Food and drink are purchased with after-tax income. Most states do exempt groceries from sales taxes.100 Food assistance for low-income individuals is provided through subsidy programs as opposed to the tax code, and these subsidies are limited according to income.

Child and Dependent Care101
There is a child and dependent care tax credit (CDCTC). However, the credit is nonrefundable and limited according to income (35 percent of qualifying expenses, decreasing to 20 percent for taxpayers with adjusted gross income over $43,000), and it applies only to expenses up to $3,000 for one qualifying individual (child under 13 or a dependent incapable of self-care) and $6,000 for two or more.

For employers that offer it, an employee can also elect to contribute up to $5,000 to a dependent care FSA, which is then excluded from taxable income. This is separate and can be made concurrently to the health care FSA limit of $3,200. Similar to the health care FSA, funds contributed to the dependent care FSA must be used by the end of the year or be forfeited.

While an employee can claim both the CDCTC and a dependent care FSA, the expenditures from the FSA cannot be counted for the purposes of the CDCTC.

Life Insurance
The very same 1954 law that codified the tax exclusion for ESI also excluded from taxation employer contributions to life insurance plans—but only for policies with up to $50,000 in death benefits. Parente and Phelps note that “this represented about 20 times the per capita income of that era.”102 That cap, if indexed to inflation, would be over $450,000 today. However, it was not, and “employers commonly pay (if anything) the premiums for $50,000 worth of term insurance … and no more.”

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What Could Have Been

This section looks at some of the most significant proposed reforms to the taxation of health care over the past 70 years. The summaries include descriptions of certain provisions included in the proposals outside of the scope of tax policy in order to provide context of how the authors balanced the many trade-offs involved with reform.


President Harry Truman famously proposed a national health insurance program as part of his “Fair Deal” in 1945, but he was met with a skeptical Congress that primarily responded by subsidizing hospital construction through the Hill-Burton Act of 1946 (P.L 79-725). Meanwhile, the expansion of private health insurance grew rapidly—increasing from 23 percent of the population in 1945 to 51 percent in 1950. The new Eisenhower administration in 1953 sought to promote private health insurance rather than crowd it out—and the percentage of Americans with private insurance reached 68 percent by the end of the decade.

1954—President Dwight Eisenhower

Reinsurance to Encourage ESI
In the month prior to the codification of the exclusion as part of the major overhaul of the Internal Revenue Code in 1954, President Dwight Eisenhower saw Congress reject his administration’s most significant health proposal. While not a tax proposal, it provides context as to what was being considered when the exclusion was formally enshrined in statute.

The first secretary of the newly formed Department of Health, Education, and Welfare (HEW), Oveta Culp Hobby (and her undersecretary, the future governor and vice president Nelson Rockefeller), sought a voluntary federal reinsurance program that would reimburse 75 percent of claims above a certain threshold for all participating private health insurance plans that provided a minimum level of benefits. The federal government would provide $25 million in start-up capital, after which the program would be covered by fees generated from participating insurers. The proposal saw action on the House floor, but it was recommitted by a vote of 238-134 and did not see further consideration. President Eisenhower was reportedly surprised and disappointed but did not press the issue.103


Many promoters of a single-payer health care system had pivoted to an incremental approach by the 1960s, focusing on the elderly who were popularly perceived to be “sicker, poorer, and less insured” than the rest of the population.104

1960—President Dwight Eisenhower and Presidential Candidate Vice President Richard Nixon

An Option of a Subsidy for Private Health Insurance for Seniors
Debate over federal financing of health care for the aged would heat up in the run-up to the 1960 presidential election. With President Eisenhower strongly opposed to the social insurance model, then-chairman of the House Ways and Means Committee Wilbur Mills (D-TX) floated an increase in the payroll tax coupled with an option for seniors on Social Security to receive hospital coverage or an increase in cash benefits that could be used to purchase private health insurance plans. On May 4, Secretary of HEW Arthur Fleming publicly announced support for grants to states that could go to one of two options for the low-income elderly: state insurance covering a limited set of benefits or a subsidy to cover 50 percent of the cost of private major medical insurance up to $60 per year.105

1964—Presidential Candidate Senator Barry Goldwater (R-AZ)

Tax Credits for Health Insurance for Seniors
While the debate over Medicare had moved to one primarily over federal matching grants to states versus a social insurance program for the elderly, the Republican platform of 1964 endorsed “tax credits and other methods of assistance to help needy senior citizens meet the costs of medical and hospital insurance.”106

1969—The American Medical Association107

A Tax Credit Tied to Income and the Value of Insurance with Minimum Standards
The AMA, then one of the most outspoken opponents of the social insurance model exemplified by Medicare, debuted a proposal dubbed “Medicredit” in November 1969. Under the proposal, Americans who purchased private health insurance meeting basic federal standards would be eligible for a tax credit the size of which would be determined on a graduated scale according to tax liability. Seniors over 65 years old could use the credit for Medicare Part B premiums and to purchase supplemental benefits beyond those covered in the new Medicare program.

The credit would cover 100 percent of premiums for Americans with tax liability (the amount due in taxes, not taxable income) under $300 (effectively replacing Medicaid) and diminish in increments of $25 in tax liability, bottoming out at 10 percent for those with liability over $1,300. At the time, the AMA estimated that 30 percent of the population had tax liabilities below $300, 50 percent of the population had liabilities between $300 and $1,300, and 20 percent of the population had liabilities above $1,300.

To be eligible for the credit, the insurance plan must have basic coverage. It could also cover a specified set of supplemental benefits. The basic coverage would have included 60 days of inpatient care with a $50 deductible, outpatient services with a 20 percent coinsurance for the first $500 of covered expenses, and physician services also subject to a 20 percent coinsurance for the first $500 of covered expenses. The coverage would be guaranteed issue and guaranteed renewable. Supplemental benefits could provide prescription drugs (with a $50 deductible) and additional hospital and outpatient care beyond the basic benefit (with a 20 percent coinsurance). Coverage would be certified as qualified for the credit by state insurance commissioners.

Tax credits could be used toward the employee share of the ESI premium. There was also a provision for states to contract with the federal government to cover the cost-sharing for individuals and families previously eligible for Medicaid. Any individual taking the credit would be ineligible for the medical expense deduction.

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By the 1970s, the rapid increase in the cost of health care, fueled by general inflation and a new Medicare program that had already spent twice as much as projected over the first five years,108 forced cost containment efforts into the health care debate.

1971—President Richard Nixon

An Employer Mandate, Encouraging Health Maintenance Organizations, and Limiting Tax Breaks for Health-Related Construction
President Nixon forwent major changes to the tax treatment of health care when he proposed his National Health Insurance Standards Act, though the idea modifying the ESI exclusion would percolate among his advisors during this time in office.109 The 1971 proposal was centered around a mandate for employers to provide health insurance at a minimum benefit level for employees working at least 25 hours per week, with the required employer contribution increasing from 65 percent to 75 percent over a number of years.110 Insurers offering employer coverage would be required to participate in pools that would make group plans available to any individual or family without ESI, including the self-employed. However, this aspect would be criticized later by the next round of political appointees in the same administration as “complex and inherently difficult-to-administer.”111

A federally funded “Family Health Insurance Plan” would have replaced Medicaid for any family with a head of household under 65 without ESI (but not the elderly or disabled) with premium and cost-sharing obligations increasing on a sliding scale according to income.

Cost containment was to be achieved in part by promoting the formation of HMOs through federal grants, an aspect that would pass two years later. However, in a nod to the central planning theory of cost control in vogue at the time, the proposal would have also denied federal tax breaks for interest and depreciation for major health care capital expenditures that were not approved by state and local planning agencies. The planning mentality would reach its apex with the passage of the National Health Planning and Resource Development Act of 1974 (P.L. 93-641) with regulatory and grant but not tax components.

1974—President Richard Nixon

Another Attempt to Expand Standardized Coverage Through Employers
In what would be the last year of his administration, President Nixon proposed his “Comprehensive Health Insurance Plan.” The proposal had many similar features to the previous version, with a major distinguishing aspect that the federally regulated plan employers would be required to offer and those available to the unemployed or low-income families would now all have the same base benefits. The household premium shares would be a factor of the plan cost and enrollees’ income, with small employers receiving additional federal subsidies. At the time, Alice Rivlin noted that despite most of the funding never running through federal coffers, “it is still being financed by a regressive per capita ‘tax’” through the guise of a premium payment.112

For a time there seemed to be momentum for Nixon’s proposal as Senator Edward Kennedy (D-MA), the leading proponent of a single-payer program administered by the Social Security Administration and financed with payroll taxes, proposed a compromise bill that narrowly passed the Ways and Means Committee that summer. However, efforts subsided as the administration and Congress became absorbed with Watergate.

1979—President Jimmy Carter

An Employer Mandate, Subsidies for Low-Income Individuals, and Encouraging Less Comprehensive Insurance Coverage
Health care reform was a minefield for President Carter, with substantial disagreements between the liberal and moderate wings of the Democratic party as well as significant internal disagreement between the White House and the new Department of Health and Human Services.113 Late in his presidency, Carter unveiled a proposal of national but privately run insurance coverage with “lean but comprehensive” benefits with an employer mandate and subsidies for low-income individuals.114

Cost controls included a global budget for hospital capital expenditures and a universal fee schedule for services. While not altering the ESI tax exclusion explicitly, employers would have been mandated to offer coverage of all qualified HMOs in their regions and make the same level of contribution for every employee. Any savings from an employee choosing a more cost-effective plan option would be required to come back in the form of additional wages or benefits.115 A minor feature of Carter’s national health plan was also to increase the percentage of income above which medical expenses could be deducted.116


The American economy at the end of the 1970s and the beginning of the 1980s was in a state of turmoil. Inflation breached 5 percent in 1973 and would stay there most of the next decade, peaking at almost 15 percent. During 1980, the year of the presidential election, inflation would average above 12.5 percent, and interest rates would peak at 21 percent. The Reagan administration came into office with a mandate to provide relief from rapidly increasing prices and federal spending.

1983—President Ronald Reagan

Capping the Tax Exclusion for ESI
In the message to Congress accompanying the Health Care Costs Containment Act, President Reagan laid out as clear and concise an argument as any president has made on the negative impacts of an uncapped tax exclusion for ESI:

Elaborate health benefits funded with tax-free, employer-paid contributions are inflationary—they insulate consumers, providers, and insurers from the cost consequences of health care decisions. By doing so, they contribute both to the persistence of inefficient forms of health care financing and delivery and to overuse of health services.117

The Reagan administration proposed to cap the amount of health insurance that could be excluded from federal income and payroll taxes at $70 per month for individual coverage and $175 per month for a family, indexed to general inflation for future years. The value of any additional health benefits provided through an employer would be subject to federal taxation.

The Health Care Costs Containment Act was introduced by then-chairman of the Senate Finance Committee Bob Dole (R-KS). At a hearing on the legislation, the administration indicated that 22 percent of employees would be impacted by the cap and that 90 percent of the aggregate value of the exclusion would be retained.118

While similar proposals received support from members of Congress on both sides of the aisle, including the former Democratic chairman of the House Ways and Means Committee Al Ullman (D-OR) and the chairman of the House Budget Committee James Jones (D-OK),119 Reagan’s proposal did not make it beyond hearings.


The beginning of the 1990s would witness two different administrations, one Republican and one Democratic, putting forth significant health care reform proposals. Both would fail.

1990—Senator Lloyd Bentsen (D-TX)

An Enhancement to the Earned Income Tax Credit (EITC) for Health Insurance for Children
An aberration on this list, the “Bentsen child health tax credit” actually became law—but only briefly. The first federal refundable tax credit for health insurance was passed as part of the Omnibus Budget Reconciliation Act (OBRA) of 1990 (P.L. 101-508) as a supplement to the EITC. It was enacted in large part due to the advocacy of the chairman of the Senate Finance Committee and future Treasury secretary Lloyd Bentsen of Texas.

The supplemental credit retained the main criteria of the EITC: employment, income of under $22,370 per year, and a child living with the recipient for over six months in the year. Unlike the main EITC that was advanceable, the health insurance supplement was available only as a lump sum at the end of the year to cover the premiums of qualified coverage. Like the EITC, the value of the credit phased down with income. Those earning up to $7,140 could obtain a credit of 6 percent of earning income (maximum of $428), phasing out at a rate of 4.28 percent per additional dollar of income. In 1991, 2.3 million taxpayers claimed a total of $496 million for an average credit of $233—an amount that covered 23 percent of the average annual health insurance premium of $1,029 for those who received it.120

The Bentsen child health tax credit was implemented quickly, with an effective date of January 1, 1991, following the passage of OBRA on November 5, 1990. This quick turnaround contributed to a bumpy rollout. The General Accounting Office (GAO, now known as the Government Accountability Office) estimated that only 26 percent of those eligible for the credit benefited from it in the first year. Furthermore, a House Ways and Means Oversight Subcommittee investigation found that some companies attempted to take advantage of confusion around what types of insurance qualified for the credit, how to claim it, and if it was advanceable.121

When the new Clinton administration proposed a large expansion of the main EITC, it also proposed a “simplification” that included the elimination of two supplemental credits—a credit for children under one year of age and the health insurance credit. These recommendations were adopted as part of the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66)—a law with the added distinction of being the first reconciliation bill passed without affirmative votes from the minority party.

Prompted by the consideration of refundable tax credits for health insurance in the next millennium, some researchers sought to parse out the impact of the supplemental EITC for health insurance. Cebi and Woodbury found that it may have increased insurance coverage among single mothers by 6 percent despite the flawed rollout and simultaneous expansions of Medicaid that likely crowded out private coverage for the same population.122

1992—President George H. W. Bush

A New Refundable Age-Adjusted Tax Credit of a Set Value and Minimum Standards for Insurance Coverage
On February 6, 1992, President George H. W. Bush unveiled a “Comprehensive Health Reform Program” centered around a new refundable tax credit for the purchase of health insurance of $1,250 for an individual with no tax liability, $2,500 for a two-person family, and $3,750 for a family of three or more.123 The value of the credit would gradually phase out with increasing income up to $50,000 for an individual and $80,000 for a family. Anyone with taxable income would have the option of an above-the-line deduction of $1,250, $2,500, or $3,750 similarly corresponding to family size. The amounts of the credit and the deduction would be indexed to grow at general inflation for future years.124

Each state would be required to define a basic benefit package that would match the amount of the credit and to ensure that at least two large insurers offered the basic insurance plan statewide. The amount of the credit was less than the cost of the average benefit package in the employer market at the time,125 so the administration put forth a list of model basic benefit packages to illustrate the anticipated generosity of coverage (Table 7). These health plans would not be allowed to deny coverage or charge more for preexisting conditions. States would administer risk adjustment in the individual and small business markets and would be prohibited from restricting utilization review or selective contracting.

Additionally, the proposal called for a deduction of 100 percent of the amount of health coverage for the self-employed (as opposed to 25 percent at the time of the proposal).

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1992—Presidential Candidate Ross Perot

Capping the Tax Exclusion for ESI
In his third-party candidacy that managed to garner 20 percent of the vote while focusing on reducing the federal deficit, businessman Ross Perot proposed capping the amount of health insurance eligible for the ESI tax exclusion at $135 a month for individuals and $335 a month for families.126

1994—President Bill Clinton127

A Complicated Plan Reliant on ESI, Taxpayer Subsidies, Standardized Plan Design, National Spending Targets, and Eventually Capping the Tax Exclusion for ESI
The Clinton health care plan was a complex overhaul of all health coverage in the United States outside of Medicare that centered on regional health alliances—for anyone working for an employer with fewer than 5,000 employees and the unemployed—and corporate purchasing alliances for employees of larger companies. These health alliances would contract with health plans that would have to offer a federally approved benefit package at the same price to all enrollees.

Employers would have been required to cover 80 percent of the weighted average premium of the standard benefit, but employer obligations would be capped at 7.9 percent of payroll. The proposal capped the employee share of premiums at 3.9 percent for families with incomes under $40,000, gradually rising to 7.9 percent for those with higher incomes. Federal subsidies would make up any potential difference for both employers and employees. The federal government would also completely cover the employee share for very low-income families (under $1,000 in annual income)—taking the place of Medicaid—and the employer share of premiums for retirees between the ages of 55 and 64.

A new National Health Board would establish maximum premiums for each regional alliance (but not corporate alliances) based on estimated expenditures for the standard benefit package in that region in 1993 trended forward by general health care inflation with adjustments for health status and demographic changes. Going forward, premium growth would be capped at an inflation factor that could be adjusted downward if actual spending for that region exceeded target health care expenditures. Growth in premiums in corporate alliances would also be capped at a three-year average of the increase in per capita health spending. If spending growth routinely exceeded the inflation measure, the corporate alliance would be terminated and its members would be enrolled in plans offered by regional alliances. Furthermore, there would be a global budget imposed on the health alliances with amounts specified in statute over the first five years and then trended forward at a rate that factored in general inflation, changes in population, and changes in real per capita GDP. If these budget caps were exceeded, the president would make recommendations to Congress eligible for expedited consideration.

Self-employed individuals would be able to deduct 100 percent of premium costs, mirroring the benefit of the ESI tax exclusion. However, starting in 1997, FSAs would be tax-exempt only for benefits within the standard benefit package. Then in 2004, the ESI exclusion would be capped at the value of the standard benefit package.

After the largest nonfederal financial contributions of the employer share and the employee share to premiums, other financing mechanisms included a 75-cent-per-pack cigarette tax, a 1 percent payroll tax for employers setting up corporate purchasing alliances, and a 1.5 percent assessment on premiums for multiemployer corporate alliances and regional alliances.

To address workforce concerns of the time, the plan would have also created a modest tax credit for primary care providers practicing in health professional shortage areas.

1996—Presidential Candidate Senator Bob Dole (R-KS)128

Expanding MSAs and the Tax Deduction for the Self Employed
As part of his campaign for president, Senator Bob Dole touted his past support for MSAs, enabling self-employed individuals to deduct the value of health insurance from their taxes, and providing subsidies to low-income individuals not eligible for Medicaid to purchase health insurance. He also proposed to create a tax deduction for individuals who care for elderly parents or family members.

1996—Presidential Candidate Senator Bob Dole (R-KS)

Expanding MSAs and the Tax Deduction for the Self Employed
As part of his campaign for president, Senator Bob Dole touted his past support for MSAs, enabling self-employed individuals to deduct the value of health insurance from their taxes, and providing subsidies to low-income individuals not eligible for Medicaid to purchase health insurance. He also proposed to create a tax deduction for individuals who care for elderly parents or family members.


Much of the health care policy debate at the turn of the millennium focused on federal budgetary surpluses, how best to structure a new prescription drug benefit in the Medicare program, and limiting the tools HMOs used to constrain costs. However, both candidates in the 2000 election proposed changes to the tax code that would impact health care.

2000—Presidential Candidate Governor George W. Bush129

A New Income-Adjusted Refundable Tax Credit of a Set Value
Governor George W. Bush proposed a refundable tax credit of $1,000 for individuals and $2,000 for families for the purchase of health insurance coverage. The credit would phase out with increasing income up to $45,000 for an individual and $60,000 for a family. He also proposed to expand access to MSAs and FSAs.

2000—Presidential Candidate Vice President Gore130

New Tax Credits Tied to the Value of Health Insurance
Vice President Al Gore proposed creating a refundable tax credit for 25 percent of the amount of health insurance for individuals and families without ESI and for the premium costs of each employee of a small business that joined a purchasing coalition. He also proposed a tax credit of up to $3,000 for families providing long-term care for relatives.

2004—President George W. Bush131

A New Refundable Tax Credit of a Set Value Tied to Income and Encouraging Coverage with High Deductibles
While in office, President Bush built upon his original proposal. In 2004, he proposed creating an above-the-line deduction for high-deductible health plans paired with HSAs and for long-term care insurance. Additionally, low-income individuals would be eligible for a tax credit up to $1,000 for an individual and $3,000 for a family to cover up to 90 percent of the cost of health insurance plans in the nongroup market. The value of the credit would gradually phase down with increasing income, phasing out completely for individuals at $30,000 and families at $60,000 (roughly 300 percent of FPL in 2004). Those eligible for the credit would have the option to deposit one-third of the value of the credit into HSAs. Finally, there would be a tax credit of $200 per individual and $500 per family for small businesses and the self-employed who deposited commensurate amounts into HSAs for their employees.

2004—Presidential Candidate Senator John Kerry (D-MA)132

Reinsurance for ESI, Credits for Low-Income Individuals and the Elderly Tied to the Value of Coverage, and a Limit on Premiums Tied to Income
Senator John Kerry (D-MA) proposed a federal reinsurance program for ESI and a federally subsidized expansion of the Federal Employee Health Benefit Program (FEHBP) for individuals outside of the federal workforce.

If employers would guarantee to cover health insurance for their workers, the federal government would cover 75 percent of costs above a catastrophic threshold ($30,000 in 2006 and $50,000 by 2013). Employers would also have to agree to pass any savings from the reinsurance program along to employees in the form of lower premiums.

The plan would have also created a new “Congressional Health Plan” within the FEHBP with a similar federal reinsurance program. A large employer could elect to participate if it paid a one-time fee, and plans would be available to all individuals and employees of small businesses. The federal government would cap premium contributions for the uninsured enrolling in this new option at 6-12 percent of income. Those with low incomes collecting unemployment would be eligible for a tax credit of 75 percent of the cost of coverage, small businesses with fewer than 50 employees would be eligible for a tax credit of 50 percent of their premium contributions, and retirees ages 55-64 would be eligible for a tax credit of 25 percent of the cost of coverage.

2007—President George W. Bush133

Replacing the Tax Exclusion for ESI with a Universal Standard Deduction
In 2007, President Bush was out with another revision to his proposal. This time he proposed replacing most tax preferences for health care (with the exception of HSAs) with a new, above-the-line, standard deduction of $7,500 for individuals and $15,000 for families for the purchase of health coverage meeting certain specifications. The value of the deduction would increase in future years with the pace of general inflation.

For individuals with ESI, the administration estimated that the size of the deduction would fully cover 75-80 percent of plans, lowering to 60 percent in 10 years if spending growth of ESI did not change. According to CBO, the value of the deduction would also cover about 70 percent of premiums for individuals becoming newly insured.

To be eligible for the deduction, a plan would have been required to have an out-of-pocket maximum commensurate with that of HSA-eligible plans, cover a “reasonable” amount of annual and lifetime benefits, cover both inpatient and outpatient care, and be guaranteed renewable.

2008—Presidential Candidate Senator John McCain (R-AZ)134

Replacing the Tax Exclusion for ESI with a Universal Tax Credit
Similar to the 2007 Bush administration proposal, Senator John McCain’s plan included eliminating the ESI tax exclusion. However, instead of replacing it with a standard above-the-line tax deduction, the McCain proposal would have created a universal, refundable tax credit of $2,500 for individuals and $5,000 for families. Any amount above the health insurance premium could be deposited into an HSA. As a condition of receiving Medicaid funding, states would have been required to supplement the tax credit with risk-adjustment payments for high-cost, low-income enrollees.


Major health reform legislation passed in 2010, but the debate over whether it should be significantly reformed or improved upon consumed much of the following decade.

2010—Repealed Section 9001 of the Affordable Care Act

The “Cadillac” Tax That Never Made It out of the Garage
In a health care townhall in Shaker Heights, Ohio, on July 23, 2009, President Obama took “off the table” the idea of capping the exclusion for ESI.135 Still, the issue was revisited, a testament to the distortions of the exclusion and the significant amount of revenue it could provide to fund a potential coverage expansion. Democrats on the Senate Finance Committee, with special credit claimed by Senator Kerry, proposed rhetorical gymnastics to allow President Obama to maintain his campaign pledge while effectively addressing the same issue—a new excise tax on ESI above a certain value.

The version reported out of committee would have imposed a 40 percent tax on any plan with a premium over $8,000 for an individual and $21,000 for a family starting in 2013. The threshold was increased by $1,850 for an individual and $5,000 for a family for those over the age of 55 or those employed in what was considered a “high risk” profession. Finally, “transitional relief” of a 20 percent higher threshold was provided to the 17 states with the highest-cost ESI, reducing by half each year until phased out.136

In a compromise driven by concern over labor union opposition, the final legislation delayed the tax on “Cadillac” health plans, increased the threshold, and dropped the special treatment for certain groups and states. Starting in 2018, there was set to be a new 40 percent excise tax on policies priced above $10,200 for single coverage and $27,000 for family coverage indexed to general inflation for future years. The delayed effective date reduced the projected increase in revenue resulting from the provision from $201 billion in the Senate-passed version to $32 billion in the 10-year window.

A coalition of labor unions and employers aligned to ensure that the tax would never take effect. In 2015 end-of-the-year omnibus legislation, Congress delayed the Cadillac tax to a 2020 effective date and weakened it by changing it from a non-deductible tax to a deductible tax. In 2018, Congress further delayed the Cadillac tax until 2022. Finally, in 2019, Congress repealed it in overwhelming bipartisan majorities, with the legislation signed into law by President Trump.

2012—Presidential Candidate Mitt Romney137

A Universal Tax Exclusion for Health Insurance
Former Massachusetts Governor Mitt Romney proposed repealing the PTCs that were created by the ACA but had not yet taken effect. In its place he proposed allowing individuals to deduct the value of health insurance bought in the nongroup market, essentially expanding the tax exclusion for ESI to everyone regardless of how they purchased coverage. To be eligible for the deduction, nongroup market needed to be guaranteed renewable. He also proposed expanding HSAs.

2014—Senators Orrin Hatch (R-UT), Richard Burr (R-NC), and Tom Coburn (R-OK)138

A New Refundable Tax Credit of a Set Value, Enable Payment of Premiums from an HSA, and Capping the Value of the Tax Exclusion for ESI
In January 2014, three Republican senators offered a comprehensive replacement to the ACA titled the Patient Choice, Affordability, Responsibility, and Empowerment (CARE) Act that would have made significant changes to the way health care is taxed.

First, it would have repealed the PTCs and other changes made to the tax code by the ACA. In its place it would have created an age-adjusted, advanceable, and refundable tax credit for employees of small businesses with under 100 workers or others purchasing coverage in the nongroup market. The full tax credit would be available for those from 0 percent to 200 percent of FPL, with a phaseout between 200 percent and 300 percent of FPL.

States would be allowed to automatically enroll credit-eligible individuals into default insurance options equal to the value of the tax credit—with individuals retaining the ability to opt out. To be eligible for the credit, plans would be prohibited from imposing lifetime limits and would be required to offer dependent coverage up to age 26 and be guaranteed renewable. It would also have created a new “continuous coverage protection” that would prevent increasing premiums according to health status if someone had been enrolled in a plan with similar coverage—regardless if it was in the group, small group, or nongroup market. Insurers would be able to vary premiums by an age-band ratio of 5:1 in the nongroup market.

Individuals would be able to purchase HSA-eligible plans, long-term care insurance, and COBRA coverage using pre-tax dollars from HSAs. This would have essentially expanded the tax exclusion for ESI to insurance purchased in the nongroup market up to HSA contribution limits.

Finally, the proposal would have capped the value of the tax exclusion for ESI at 65 percent of the average market price for a “high-option plan.” The cap would grow in future years at general inflation plus 1 percent.

2016—Presidential Candidate Former Secretary of State Hillary Clinton139

Increasing the Generosity of the Advanced Premium Tax Credit and a New Tax Credit for Cost-Sharing
Former Secretary of State Hillary Clinton campaigned on strengthening the ACA. Depending on income, the amount an individual or family would spend on premiums was capped under the ACA at 2.01 percent for those with incomes of 100 percent of FPL, gradually increasing to 9.66 percent for those with 400 percent of FPL. Clinton proposed the maximum to be capped at 8.5 percent with proportionate reductions for those with lower incomes. These limits would later be enacted in the ARPA for 2021 and 2022 and extended in the Inflation Reduction Act through 2025.140

Additionally, Clinton proposed a tax credit of up to $2,500 for an individual and $5,000 for a family for cost-sharing expenditures exceeding 5 percent of income for those in ACA-compliant plans.

Notably, the Clinton plan would have allowed these expanded tax credits to be used on a new “public option.” This new government-run or -contracted insurance option would use price controls from Medicare and mandate that Medicare-participating providers accept those rates as payment in full in an attempt to provide an advantage in competition with private insurance options.141

2016—Presidential Candidate Donald J. Trump142

A Universal Tax Exclusion for Health Insurance
As part of his proposal for “Healthcare Reform to Make America Great Again,” Donald Trump proposed repealing the ACA, although without many specifics about what would have been repealed and how replacement provisions would be structured. Similar to Romney’s campaign proposal, Trump’s plan proposed allowing individuals to fully deduct the cost of health insurance purchased in the nongroup market from their taxes.

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2017—American Health Care Act

New Aged-Adjusted Tax Credit of a Set Value and Enhanced HSAs
The legislation that would have replaced significant components of the ACA that passed the House of Representatives in July 2017 featured a new age-adjusted tax credit for the purchase of health insurance in the individual market that would gradually phase down for individuals above $75,000 in income ($150,000 for joint filers).

For families, the amount would be determined by counting the five oldest individuals in a household and be capped at $14,000. The credit was indexed to grow at general inflation plus one percentage point. In order to be eligible for the credit, health insurance would have been required to provide coverage of certain benefits and could not cover abortion. It would have also required insurers to charge anyone with a gap in coverage longer than 63 days a surcharge of 30 percent.

The legislation would have also increased maximum contribution limits to HSAs.

A leaked draft version of the American Health Care Act also included a repeal of the “Cadillac tax” on high-cost employer plans, replacing it with a limit on the tax exclusion at the 90th percentile of annual premiums of self-coverage indexed in future years to inflation plus two percentage points.143 Instead, the version that passed the House maintained but delayed the excise tax on high-cost ESI.

Exhibit 2: Lessons from “How We Got Here” and “What Could Have Been”
  1. Complex, wide-reaching changes are difficult to pass at any time and increasingly difficult under divided government.
    Wide-ranging changes to the tax treatment of health care were proposed by almost every administration since President Richard Nixon. Few came to fruition. The most significant changes were brought forth by a Democratic president with a Congress controlled by his own party with a supermajority in the Senate.
    Now, this does not spell doom and gloom for reformers who do not possess a “trifecta” and a Senate supermajority—many failed or shelved attempts at reform informed later proposals that became law.
  2. Sometimes what seems like half a loaf at the time can lead to bigger change in the future.
    Several major tax provisions—such as tax credits for health insurance, HSAs, and the deduction for insurance premiums for the self-employed—started small and were expanded over time.
  3. Eligibility criteria and subsidy amounts are often a result of political compromise subject to future congressional tinkering, not well-honed proposals to achieve policy objectives.
    Sometimes it is necessary to state the obvious: Elected officials are required to balance many more considerations than just the optimal policy outcome when establishing program parameters.

What Should We Do?

Given the number and magnitude of health-care-related distortions in the tax code and the challenges faced by those seeking to overcome them, a desire for a blank canvas is understandable. However, the history of past reform attempts—both successes and failures—suggests that an incremental approach motivated by core principles is best. What follows are attempts to take those lessons and translate them into a series of such improvements that would help build a more rational, fair, and efficient health sector.

Exhibit 3: Principles for Reform
  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.)

Applying these principles to the current tax code, we recommend policymakers adopt the following suite of reforms.

1. A More Flexible Definition for HSA- and MSA-Eligible Plans

HSAs—and their cousin, Medicare MSAs—were specifically designed to counteract the aspects of the tax treatment of health care that encourage utilization and third-party payment. These accounts make health care more affordable through tax advantages but also encourage savings, not just expenditures. Thus, account holders are incentivized to seek out value to ensure that the quality of the service justifies the cost.

However, only a certain segment of the population can take advantage of these tools. There are several commonsense approaches to expand access while maintaining the positive attributes of these tax provisions.

a. Permit HSA Eligibility to Also Be Tied to Plan Actuarial Value
The HSA was originally paired to a high-deductible health plan to ensure that cost-sharing promoted consumer engagement while enabling tax-advantaged dollars to be used to meet those out-of-pocket obligations. But the strict prohibition of any pre-deductible coverage has always been onerous for individuals with chronic conditions and has become more disadvantageous as plans innovate with benefit design to encourage utilization of more efficient providers and higher value care.

There has been some progress in allowing more flexible benefit design, such as the 2019 IRS guidance outlining preventive care services eligible pre-deductible and the temporary coverage of telehealth pre-deductible during the COVID-19 pandemic and its aftermath. However, waiting for administrative or congressional action to modify such criteria is a cumbersome and onerous process that will never keep up with constantly evolving circumstances.

In 2018, Roy Ranthum, a former White House and Treasury official who was pivotal in the creation and implementation of HSAs during the Bush administration, proposed using actuarial value as another threshold for pairing plans with HSAs. That approach would be a significant improvement upon the current standard. Actuarial value is a measure of what percentage of spending the plan is likely to reimburse for the average enrollee. Thus, it would be an appropriate safeguard against overly generous plans while allowing more experimentation on plan design.

For the actual threshold and to limit the budgetary impact, policymakers should start with an actuarial value of 75 percent. Currently, the average and median actuarial value of ESI is around 83 percent, whereas HSA-eligible plans have an average actuarial value of 76 percent, according to the Employee Benefit Research Institute.144 HSAs should continue to be a tool for increasing consumer engagement with purchasing decisions as opposed to simply an additive tax benefit for every enrollee in health insurance.

One challenge of implementing this policy is the lack of a current enforcement mechanism for determining actuarial value of employer-sponsored plans, which are less standardized than in the individual market. Thus, given that the intention of the policy is to create more flexibility in plan design, it would be important to ensure that any enforcement mechanism does not inadvertently create an incentive to standardize benefits for the purpose of obtaining HSA eligibility. This could be done through a process similar to the one currently used by Medicare to verify that employer prescription drug plans eligible for the retiree drug subsidy are actuarially equivalent to the standard Part D benefit.

An HSA-eligibility-tied actuarial value standard of 70 percent was proposed in President Trump’s fiscal year 2020 budget and was projected to reduce revenues by $28.5 billion over 10 years.145 In 2021, Senator Ben Sasse (R-NE) introduced the Health Savings Account Expansion Act, which would have created an actuarial value threshold at 80 percent.

b. Make Catastrophic, Bronze, and Silver Plans HSA-Eligible
Illustrating the immense challenge the current deductible standard poses to health plans is the fact that 70 percent of ACA plan enrollees with deductibles at or above the necessary threshold for a high-deductible health plan do not have HSAs. Even if Congress does not take the preferred approach above, legislators should make silver (70 percent actuarial value), bronze (60 percent), and catastrophic (50 percent) plans automatically HSA-eligible for enrollees.

The House Ways and Means Committee passed HSA eligibility for bronze and catastrophic plans as part of the HSA Modernization Act on September 28, 2023. JCT estimated that the provision would reduce revenues by $1.4 billion over eight years.146

c. Eliminate Onerous Restrictions on Medicare MSAs
To make Medicare MSAs more viable, policymakers should remove restrictions that are unrelated to ensuring that enrollees have meaningful (but rationally designed) cost-sharing obligations. For instance, eligible plans should be able to integrate with prescription drug coverage, establish provider networks, and cover preventive care services pre-deductible. Additionally, beneficiaries should be able to make their own tax-advantaged contributions into MSAs up to the annual HSA contribution limit.

2. Remove Barriers to ICHRAs

Although there are benefits to ESI, most employers present employees with only a few options of health insurance plans. Many employees at small and mid-sized companies receive only a single plan option. The lack of options harms people because of the wide variance in preference among people for the optimal type of coverage. Because ESI premiums are effectively fully paid by employees, the traditional group model means that employers control a large share of how employees actually use their compensation.

Congress should codify an improved 2019 HRA rule. The codification would provide employers with confidence about ICHRA durability, and the improvements should ease employers’ ability to offer ICHRAs. Employees should be able to use HRA contributions on additional types of plans (not just ACA-compliant plans), and employers should have greater flexibilities to offer employees a choice between ICHRAs and traditional group plans.

Maintaining ESI is an important goal that currently reduces federal deficits given that the alternatives are much more costly from a federal budget perspective. Improved ICHRAs give employers other options for offering health insurance to their employees. Moreover, ICHRAs hold the promise of improving the individual market for health insurance. As more employers offer ICHRAs, insurers will need to compete for the business of individuals rather than that of employers. This additional competition will improve product offerings in the individual market, making it more likely that employers will offer ICHRAs. Thus, improved ICHRAs can create a virtuous cycle of increased enrollment and more insurer offerings.

3. Stop Penalizing FSA Holders

Even if the “use it or lose it” provision made sense at one point to ensure that FSAs did not unintentionally become a vehicle for deferred compensation, the policy rationale has been largely eliminated by the annual cap on contributions created by the ACA and implemented in 2013. Congress should end the provision, which increases wasteful end-of-year spending.

At the very least, Congress should pass legislation that allows FSA holders to roll over any unused balances into HSAs. These additional contributions should still be subject to the overall HSA contribution limit. This proposal was also included in the Bipartisan HSA Improvement Act, and JCT estimated that it would reduce revenues by a modest $200 million over eight years.147

4. Place Limits on Distortionary Subsidies

When a consumer makes purchasing decisions voluntarily, the product is more likely to reflect the needs of the purchaser at a cost commensurate with the value. Therefore, maintaining private insurance as an alternative to public payers is an important policy objective.

However, as explained in the analysis, the current design of many tax advantages for private insurance increases health care spending on low-value care, pushes more health care purchases through intermediaries, and exacerbates geographic inequities. The various tax-advantaged accounts—with the exception of ICHRAs—mitigate each of these distortions maintaining a limit on contributions. This same approach should be taken to other current tax provisions.

a. End ARPA PTC Enhancements
The ACA was designed to provide assistance to individuals between 100 percent and 400 percent of FPL to afford insurance bought on the exchanges. None of the various versions considered during the drafting contemplated enrollees accessing fully-taxpayer-subsidized coverage, much less for nearly half of all enrollees, as is currently the case. There are very good reasons for this: Consumers are bound to be much less discerning of products that are zero cost to them. Suppliers are likely to simply design their products to comply with regulations rather than respond to the needs and desires of end users. The vicious cycle of quality degradation followed by further regulation is not theory—it is the status quo for Medicaid. The result for the ACA will be similar unless enrollees are restored to an active role of cost-conscious purchasers rather than simply recipients of a government welfare benefit.

Policymakers should thus end the ARPA PTC enhancements that reduce the share of income enrollees must contribute—especially the elimination of any contribution for enrollees below 150 percent of FPL. Congress can minimize any disruption by grandfathering enrollees at the enhanced level as long as continuous coverage is maintained. A new administration should also reverse many of the Biden administration policies that have inefficiently extended and increased PTC subsidies.

Congress should also raise the amount of subsidies that can be recaptured to reduce the incentive for people to misestimate their income to gain a higher PTC than which they are entitled, a problem which appears to have grown with the enhanced PTCs.

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b. Cap PTC Benchmarks at a Percentage of the National Average
As previously noted, the PTC increases general health inflation, as it provides an outright subsidy (beyond just a deduction) for the purchase of health insurance. But the design of the actual credit is also inherently inflationary, as it is tied to premiums of a benchmark plan and caps an eligible enrollee’s premium contribution as a percentage of income. This means that, as premiums of that benchmark plan go up, taxpayers foot the bill. In areas where there is little or no insurer competition, this is especially problematic, as it effectively puts control of the subsidy amount to the insurer—the ultimate recipient of the subsidy.

These downsides should be mitigated by instituting a cap on the benchmark plan used to calculate the PTC amount. The cap should be a percentage of the national average with some flexibility for geographic variation in cost of care. A benchmark cap at 125 percent of the national average should provide more restraint and would be a marked improvement over the status quo.

Exhibit 4: Measuring Regional Variation

According to the CMS Office of the Actuary, annual health expenditures per enrollee of private health insurance over the past 10 years fluctuated between 86 percent of the national average in the Rocky Mountain region and 115 percent in New England.

However, ACA benchmark premiums vary significantly more, with the seven-year average148 anywhere from 72 percent of the national average in Minnesota to 178 percent in Wyoming. As another example using New England states with similarly high private per enrollee spending, the 2024 benchmark premium in Massachusetts was 88 percent of the national average versus 139 percent in Connecticut.149

A much more stable indicator of regional variation is difference in ESI premiums as reported by KFF. Averaging the past 10 years, no state has had average ESI premiums higher than 125 percent of the national average. In 2022 (the most recent year for which there was data), no state had average ESI premiums higher than 114 percent of the national average.

Another proxy for regional variation—Part A and B benchmarks used for MA plans—shows that the maximum average benchmarks in each state was 123 percent of the nationwide average. In fact, out of 3,145 counties, only 16 (0.5%) had MA benchmarks over 125 percent of the nationwide average.

This proposal would not cap the premium for the underlying plan. Neither would it be a cap on the actual subsidy. Instead, this would be a cap on the benchmark premium used for the PTC calculation. Table 9 provides an illustration on how it would work.

The cap would be calculated from the previous year’s benchmarks and trended forward at some inflation measure such as the CPI. Plans would therefore know the limit in advance of bidding.

The proposal would not be a radical departure from current federal health policy. In Medicare Advantage, premiums vary across regions more than the federal subsidy does. As previously noted, Medicare Advantage benchmarks—effectively the maximum subsidy the federal government will pay a private insurance company to cover a Medicare beneficiary—by and large do not vary beyond 25 percent of the national average. However, the premiums that beneficiaries pay vary much more, as those are a factor of the bids plans make in any given region. In fact, the 10-year average of Medicare Advantage premiums (including the Part B premium) varies from 86 percent of the national average in Florida and Nevada to 137 percent in Minnesota.

In Part D, despite the fact that the subsidy is based on a national (instead of regional) benchmark and that drug markets (though not pharmacy networks) are national as opposed to regional, the 10-year average for Part D premiums still varies from 83 percent of the national average in Hawaii to 114 percent in New Jersey.

Even the ACA architects conceded that the structure of the PTC is vulnerable to inflationary pressures and were willing to decouple the subsidy from premiums of the underlying plans in order to constrain it. They did so by including a “failsafe” provision in statute that caps aggregate spending on the PTC (and cost-sharing reduction payments) at a percentage of GDP. Capping benchmarks as a percentage of the national average would be a less blunt tool than the failsafe mechanism that would have applied to all plans regardless of efficiency.

c. Appropriate Cost-Sharing Reduction (CSR) Payments
The court decision about the lack of appropriations for the CSR program, which led the Trump administration to stop making direct payments to insurers, caused states to instruct plans to “load” anticipated costs into the value of benchmark premiums.150 Because the value of the PTC is tied to the value of benchmark premiums, there was a resulting increase in federal expenditures. As described in “Shortcomings of the ACA Exchanges” by Cruz and Fann, the spending increase was both large and inefficient: $16,928 per additional enrollee in 2021.151

Congress should end this inefficient workaround by appropriating the required payments and ending CSR loading. Optimally, instead of just sending these subsidies to insurance companies, as under the ACA, Congress would give an eligible enrollee the option of receiving the payment directly in the form of a deposit into a tax-advantaged account, as described in Paragon’s policy proposal “The HSA Option.”152

d. Cap the Tax Exclusion for ESI at a Percentage of the National Average
In a vacuum, the flaws of the tax exclusion for ESI are pronounced. When compared to the other major ways the federal government subsidizes health coverage and care—particularly in comparison to the PTC—it looks much better. Thus, if policymakers are willing to undertake a broad series of reforms that promote less reliance on government programs and/or conduct a systematic reform of the tax code, a cap on the value of the tax exclusion for ESI should be on the list. In the absence of larger reform, modifying the exclusion should not be a priority.

If such an opportunity arises, Congress should cap the exclusion in a way that provides a reasonable amount of flexibility for geographic variation and an added adjustment for the age of the enrollees in the plan.

The percentage should be 125 percent of the national average in value of an employer-sponsored plan. Similar to the proposed PTC cap, this would provide meaningful space for regional variation without exacerbating it to the extent the current exclusion does.

The overall age of a company’s workforce is a predictable and significant aspect of the cost of ESI. Therefore, the IRS should publish an annual adjustment factor based on the average age of covered employees using the actual age-rating variation in the ESI market (approximately 5 to 1), not the price-controlled and condensed age rating band of the ACA (3 to 1).

The cap would also vary according to family size. For instance, the national average for single coverage was $8,435 in 2023. A cap at 125 percent of the national average would be $10,544. For family coverage, the national average was $23,968 for 2023. Thus, a cap at 125 percent of the national average would be $29,960.

The additional administrative burden for the IRS to calculate the annual cap and adjustment factor should be minimal for employers and the government. Since the ACA went into effect, employers have reported the cost coverage under ESI as part of the Form W-2.153 Annual updates would take place through a process resembling the annual update of tax brackets for inflation.154

It is often claimed that limiting the exclusion is a favorite policy of health economists and no one else. However, such commentary views only one side of the coin—removing or capping the exclusion. The exclusion should not just be limited; those resources should be returned to taxpayers in a way that is more valuable to them and the economy at large, which comprehensive tax reform could deliver.

Parente and Phelps make a compelling case that increased revenue from limiting the exclusion should be returned to taxpayers in an across-the-board reduction of the income tax rate.155 This approach would result in more compensation moving to wages, which would then face a lower income tax rate for a broad segment of the American population. The Parente and Phelps analysis reinforces the intuitive point that the reallocation of resources away from health care to more productive sectors of the economy would lead to higher overall economic growth.

The benefits of coupling a cap with an overall tax reduction and simplification should have broad appeal. Excessive spending on health care would be reduced, taxpayer resources would be more equitably distributed across the income scale, and employees would get something they want far more than a modest increase in the generosity of their employer-sponsored plans: more money in wages that they are free to use on what brings them the highest value.

e. Apply the Self-Employed Health Insurance Deduction to the Self-Employment Tax and Cap at a Percentage of the National Average
The deduction for self-employed health insurance premiums should be reformed to mirror the broader exclusion for ESI. This includes a cap at a percentage of the national average value of ESI but also allowing the deduction to apply to the self-employment tax that mimics payroll taxes for these workers.

5. Eliminate Rarely Used Provisions with High Administrative Burden

a. Do Not Revive the Health Coverage Tax Credit
The HCTC had value in proving that a tax credit for private insurance coverage could be administered by the IRS with the help of the states. With the advent of the PTC, it has outlived its value.

b. Eliminate the Small Business Health Care Tax Credit
Even before 2014, the impact of the Small Business Health Care Tax Credit was minimal. Because it was tied to the new ACA regulations of the small group market, the impact has been infinitesimal. There are more efficient ways to assist small businesses in offering health insurance, such as through expansion of association health plans156 and ICHRAs.

Exhibit 5: What Was Left Out?

As noted at the beginning of the paper, there are other tax provisions that health care providers, suppliers, and payers also benefit from that are not exclusive to health care. Below is a brief list of these provisions and the annual magnitude.

Nonprofit hospital exemption from corporate income tax $10.3 billion (2020)157

Deduction for charitable contributions to health organizations $9 billion (2023)158

Exclusion of interest on state and local qualified private activity bonds for private nonprofit hospital facilities $3 billion (2023)

Credit for orphan drug research159 $1.7 billion (2023)

Special deduction for160 Blue Cross Blue Shield companies $0.4 billion (2023)


Merkel Follow The Money TableA1v2


1 Health care taxes for the purposes of this paper will include the tax treatment of health care items and services as well as coverage. The paper does not focus on broader tax breaks, such as those enjoyed by nonprofit entities, that are also important but not specific to the health care industry. A brief review of these other provisions and their magnitude is included at the end of the paper in Exhibit 5.
2 The U.S. Census Bureau features a larger number of 178 million in its annual report. The number includes anyone who had ESI throughout the year, while the CBO number is an estimate of how many people had ESI on average. This paper relies heavily on CBO projections for budget impact and therefore stays with CBO’s estimate for coverage for consistency.
3 Jonathan Gruber, “The Tax Exclusion for Employer-Sponsored Health Insurance,” National Bureau of Economic Research, February 2010,
4 Anne Beeson Royalty, “Tax Preferences for Fringe Benefits and Workers’ Eligibility for Employer Health Insurance,” Journal of Public Economics 75, no. 2 (February 2000), 209-227,
5 More recently in 2022, CBO estimated that limiting the exclusion to the 75th percentile of premiums nationwide would reduce the number of employees on ESI by 2.1 million, of which 1.1 million would be uninsured. Similarly, capping the exclusion to the 50th percentile is projected to reduce ESI by 2.6 million and increase the number of uninsured by 1.3 million. CBO, “Reduce Tax Subsidies for Employment-Based Health Insurance,” in Options for Reducing the Deficit, 2023 to 2032—Volume I: Larger Reductions, December 7, 2022,
6 Actuarial value is the measure of the percentage of costs a plan is likely to cover for the average enrollee. Bradley Herring and Erin Trish, “Quantifying Overinsurance Tied to the Tax Exclusion for Employment-Based Health Insurance and Its Variation by Health Status,” Inquiry 56 (January-December 2019),
7 As summarized by economists Martin Feldstein and Bernard Friedman in 1975: “The current law encourages an excessive purchase of insurance, distorts the demand for health services and thus inflates the price of these services.” Martin Feldstein and Bernard Friedman, “Tax Subsidies, the Rational Demand for Insurance and the Health Care Crisis,” Journal of Public Economics 7, no. 2 (April 1977), 155-178,
8 President Ronald Reagan, “Message to the Congress Transmitting Proposed Health Care Incentives Reform Legislation,” February 28, 1983,
9 Leonard Davis Institute of Health Economics at the University of Pennsylvania, “The Economics of Moral Hazard: A Comment That Launched a Field,”
10 A 2002 review of 50 empirical studies found substantial variation among attempts to quantify “job lock:” “About one-third of papers studied find that health insurance significantly impact the job choice decisions made by workers, another one-third of the papers find no significant relationship between job choice and health insurance, and the remaining third find evidence that varies by empirical specification or the sub-group analyzed, or effects that are not statistically significant at standard levels.” Jonathan Gruber and Brigitte C. Madrian, “Health Insurance, Labor Supply, and Job Mobility: A Critical Review of the Literature,” National Bureau of Economic Research, February 2002,
11 KFF, “Average Annual Single Premium per Enrolled Employee for Employer-Based Health Insurance,”,%22sort%22:%22asc%22%7D
12 Jonathan Gruber, “The Incidence of Mandated Maternity Benefits,” American Economic Review 84, no. 3 (June 1994), 622-641; Katherine Baicker and Amitabh Chandra, “The Labor Market Effects of Rising Health Insurance Premiums,” Journal of Labor Economics 24, no. 3 (2006), 609-634.
13 KFF, “Average Annual Single Premium per Enrolled Employee for Employer-Based Health Insurance.”
14 One benefit of association health plans to employers is the ability to join together and gain advantages of a larger number of plan members, both for risk pooling but also for economies of scale. Kev Coleman, “Small Business Health Insurance Equity Through Association Health Plans,” Paragon Health Institute, April 25, 2023,
15 Brian C. Blase, “CBO Report Highlights Need for Change of Direction in Health Policy,” Health Affairs Forefront, November 15, 2023,
16 Department of the Treasury, Tax Expenditures, December 9, 2021.
17 Department of the Treasury, Tax Expenditures, March 11, 2024,
18 Gary Guenther, Federal Tax Treatment of Health Insurance Expenditures by the Self-Employed: Current Law and Issues for Congress, Congressional Research Service, updated September 10, 2009,
19 For 2023, limits are $480 for age 40 and under, $890 for ages 41-50, $1,790 for ages 51-60, $4,770 for ages 61-70, and $5,960 for age 71 and over. IRS, “Eligible Long-Term Care Premium Limits,”
20 Department of the Treasury, Tax Expenditures, December 9, 2021.
21 Department of the Treasury, Tax Expenditures, March 11, 2024.
22 Hardy, “Workers Lose $3 Billion a Year.”
23 William Jack, Arik Levinson, Sjamsu Rahardja, “Employee Cost-Sharing and the Welfare Effects of Flexible Spending Accounts,” Journal of Public Economics 90, no. 12 (December 2006), 2285-2301,
24 Health-E Commerce, “Beat the Dec. 31 Flexible Spending Account (FSA) Deadline: 10 Surprising Ways to Spend Funds Before Time Runs Out,” December 18, 2023,
25 Hardy, “Workers Lose $3 Billion a Year.”
26 As a result of the Consolidated Omnibus Budget Reconciliation Act (COBRA), employers must continue to offer former employees health insurance coverage for up to 18 months in certain circumstances. Ryan J. Rosso, Health Insurance Continuation Coverage Under COBRA, Congressional Research Service, updated August 13, 2021,
27 Annual limits on long-term care insurance explained in footnote XX.
28 Devenir Research, “2022 Year-End Devenir HSA Research Report,” March 30, 2023,
29 Department of the Treasury, Tax Expenditures, March 6, 2023.
30 Department of the Treasury, Tax Expenditures, March 11, 2024.
31 Gary Claxton et al., Employer Health Benefits: 2023 Annual Survey, KFF, 2023,
32 Amelia Haviland et al., “Do ‘Consumer-Directed’ Health Plans Bend the Cost Curve Over Time?,” National Bureau of Economic Research, revised July 2015,
33 Amelia Haviland et al., “Skin in the Game: How Consumer-Directed Plans Affect the Cost and Use of Health Care,” RAND Corporation, 2012,
34 To put this convoluted logic to the test, take a verbatim criticism from the Center for American Progress: “Each dollar contributed to an HSA by a millionaire is worth 37 cents, for example, while the same dollar contribution is only worth 22 cents for a married couple earning $75,000 per year” (Jean Ross and Andrea Ducas, “Recent Health Savings Account (HSA) Expansion Proposals Are Costly and Misguided,” Center for American Progress, December 13, 2023, This criticism conveniently leaves out that a wealthier American can accumulate even more benefit from obtaining the highest value health insurance plan available through his or her employer instead of a relatively more economical high deductible plan—even with a maxed-out HSA. This is because contributions to an HSA, and the ultimate tax benefit associated with it, is capped regardless of income, whereas the benefit received from the ESI exclusion has no cap. Thus, HSAs incrementally make the system more equitable, not less.
35 Jeffrey T. Kullgren, Elizabeth Q. Cliff, and Christopher Krenz, “Use of Health Savings Accounts Among US Adults Enrolled in High-Deductible Health Plans,” JAMA Network Open 7, no. 3 (July 17, 2020),
36 Kullgren, Cliff, and Krenz, “Use of Health Savings Accounts.”
37 Sarah Dolfin and Peter Z. Schochet, “The Benefits and Costs of the Trade Adjustment Assistance (TAA) Program Under the 2002 Amendments,” Mathematica Policy Research, December 30, 2012,
38 Stan Dorn, “Health Coverage Tax Credits: A Small Program Offering Large Policy Lessons,” Urban Institute, February 2008,; Government Accountability Office, Health Coverage Tax Credit: Participation and Administrative Costs, April 30, 2010,
39 The plan can deny applicants only based on when they apply rather than other factors.
40 The plan can modify premiums only within a region based on age and tobacco use but not health status.
41 Conor Ryan and Robert Book, “Primer: Statutorily Mandated Adjustments to ACA Premium Subsidies and Enrollee Contributions,” American Action Forum, December 18, 2013,
42 Daniel Cruz and Greg Fann, “The Shortcomings of the ACA Exchanges: Far Less Enrollment at a Much Higher Cost,” Paragon Health Institute, September 2023,
43 Anna L. Goldman et al., “Out-of-Pocket Spending and Premium Contributions After Implementation of the Affordable Care Act,” JAMA Internal Medicine 178, no. 3 (March 2018), 347-355,
44 In New York, which imposed guaranteed issue and community rating without accompanying subsidies in 1994, the number of policyholders in the individual market collapsed from 752,000 to 34,246 by 2007. Stephen T. Parente and Tarren Bragdon, “Healthier Choice: An Examination of Market-Based Reforms for New York’s Uninsured,” Manhattan Institute, September 2009,
45 Sonia Jaffe and Mark Shepard, “Price-Linked Subsidies and Imperfect Competition in Health Insurance,” American Economic Journal: Economic Policy 12, no. 3 (August 2020), 279-311,
46 Peter J. Nelson, “Three Steps to Achieving More Affordable Health Insurance in the Individual Market,” Health Affairs Forefront, August 19, 2021,
47 John Holahan, Erik Wengle, and Claire O’Brien, “Changes in Marketplace Premiums and Insurer Participation, 2022-2023,” Urban Institute, April 3, 2023,
48 Brian Blase, “Expanded ACA Subsidies: Exacerbating Health Inflation and Income Inequality,” Galen Institute, updated June 11, 2021,
49 Jackson Hammond, “Options to Encourage Small Business Health Coverage Offerings,” American Action Forum, May 18, 2023,
50 Casey Mulligan, Side Effects and Complications (Chicago: University of Chicago Press, 2015),
51 As summarized by the Council of Economic Advisors in 2021: “Two separate estimates using different data lead to similar results. In one analysis, small groups (under 100 people) face, on average, a loading fee of 34 percent of the premium charged. Groups of more than 100 people in size, on average, face a loading fee of only 15 percent, and the effect continues as firms get larger and larger. Firms with more than 10,000 employees face average loading fees of only 4 percent. A second analysis estimated the loading fee for individual policies (40 to 100 percent loading), groups of 2-20 employees (34 percent loading fee), groups of 100-500 covered lives (16 percent), and, separately, more than 10,000 covered lives (4-6 percent)” (Council of Economic Advisers, Economic Report of the President, February 2020,
52 Leemore Dafny, Kate Ho, and Mauricio Varela, “Let Them Have Choice: Gains from Shifting Away from Employer-Sponsored Health Insurance and Toward an Individual Exchange,” American Economic Journal: Economic Policy 5, no. 1 (February 2013), 32-58,
53 Michael F. Cannon, “End the Tax Exclusion for Employer-Sponsored Health Insurance: Return $1 Trillion to the Workers Who Earned It,” Cato Institute, May 24, 2022,
54 Doug Badger, “Replacing Employer-Sponsored Health Insurance with Government-Financed Coverage: Considerations for Policymakers,” Galen Institute, December 2018,
55 W. Elliot Brownlee, Federal Taxation in America, 3rd ed. (Cambridge, UK: Cambridge University Press, 2016),
56 Stabilization Act of 1942, 50a U.S.C. § 961.
57 Michael A. Morrisey, Health Insurance, 2nd ed. (Chicago: American College of Healthcare Executives, 2013),
58 Congressional Research Service, Premium Conversion of Health Insurance, February 2, 2010,
59 KFF, “2023 Employer Health Benefits Survey: Section 6: Worker and Employer Contributions for Premiums,” October 18, 2023,
60 Guenther, Federal Tax Treatment of Health Insurance Expenditures by the Self-Employed.
61 Brownlee, Federal Taxation in America.
63 Caroll Sierk, “The Medical-Expense Deduction—Past, Present and Future,” Mercer Law Review 17 (1966), 381-388,
64 Internal Revenue Code of 1954, Pub. L. No. 591,
65 Kelly Phillips Erb, “Deduct This: The History of the Medical Expenses Deduction,” Forbes, June 20, 2011,
66 “Medical Deduction: Test and Application,” University of Chicago Law Review 28 (1961), 544-552,
68 Health Insurance Portability and Accountability Act of 1996, 42 U.S.C. 201 note,
69 Joint Committee on Taxation, JCX-17-10, March 20, 2010,
70 Leonard Sloane, “Your Money; F.S.A.: New Fringe Benefit,” New York Times, February 11, 1984,
71 IRS, “Tax Treatment of Cafeteria Plans,” 49 Fed. Reg. 19321 (May 7, 1984),
72 Congressional Research Service, Health Care Flexible Spending Accounts, June 13, 2012,
73 U.S. Senate, Committee on Finance, “Grassley on Treasury Response to Changing Flexible Spending Accounts Use-It-or-Lose-It Rule,” January 5, 2005,
74 IRS, “Section 125—Cafeteria Plans—Modification of Application of Rule Prohibiting Deferred Compensation Under a Cafeteria Plan,”
75 IRS, “Modification of ‘Use-or-Lose’ Rule for Health Flexible Spending Arrangements (FSAs) and Clarification Regarding 2013-2014 Non-Calendar Year Salary Reduction Elections Under § 125 Cafeteria Plans,”
76 IRS, “Section 125 Cafeteria Plans—Modification of Permissive Carryover Rule for Health Flexible Spending Arrangements and Clarification Regarding Reimbursements of Premiums by Individual Coverage Health Reimbursement Arrangements,”
77 Victoria Craig Bunce, “Medical Savings Accounts: Progress and Problems under HIPAA,” Cato Institute, August 8, 2001,
78 Paul N. Worthington, “Alternatives to Prepayment Finance for Hospital Services,” Inquiry 15, no. 3 (September 1978), 246-254,
79 A stark quote by the first Singapore Prime Minister Lee Kuan Yew captures the mentality motivating the reforms: “Subsidies on consumption are wrong and ruinous … for however wealthy a nation, it cannot carry health, unemployment and pension benefits without massive taxation and overloading the system, without reducing the incentives to work and to save and care for one’s family—when all can look to the state for welfare. Social and health benefits are like opium or heroin. People get addicted and the withdrawal of welfare benefits is very painful” (Jeremy Lim, Myth or Magic: The Singapore Healthcare System [Singapore: Select Publishing, 2013],
80 The amount started at 6 percent of income, up to a specified limit, for those under 35, and the mandatory share increased with age. See Lim, Myth or Magic.
81 In 1990 the country added “MediShield”—a voluntary catastrophic insurance plan with age-adjusted premiums. The last leg to the Singaporean “three-legged stool” is Medifund—a dedicated government fund that receives deposits in times of surplus to which those with low income can petition for reimbursement of health care services after the fact. See Lim, Myth or Magic.
82 John Goodman and Richard W. Rahn, “Salvaging Medicare with an IRA,” Wall Street Journal, March 20, 1984.
83 Devon Herrick, “A Brief History of Health Savings Accounts,” National Center for Policy Analysis, December 9, 2013,
84 Bunce, “Medical Savings Accounts.”
85 Douglas Holtz-Eakin, “Estimating the Cost of the Medicare Modernization Act,” statement before the Committee on Ways and Means, U.S. House of Representatives, March 24, 2004,
86 CBO, cost estimate of H.R. 1, Medicare Prescription Drug and Modernization Act of 2003, and S. 1, Prescription Drug and Medicare Improvement Act of 2003, July 22, 2003,
87 Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432,; CBO, cost estimate of H.R. 6111, Tax Relief and Health Care Act of 2006, December 28, 2006,
88 IRS, “IRS Expands List of Preventive Care for HSA Participants to Include Certain Care for Chronic Conditions,” July 17, 2019,
89 Bernadette Fernandez, The Health Coverage Tax Credit (HCTC): In Brief, Congressional Research Service, updated January 5, 2021,
90 Edwin Park, “An Examination of the Wyden-Bennett Health Reform Plan: Key Issues in a New Approach to Universal Coverage,” Center on Budget and Policy Priorities, September 24, 2008,
91 Kevin Sack, “Clinton Details Premium Cap in Health Plan,” New York Times, March 28, 2008
92 Len Burman, “An Updated Analysis of the 2008 Presidential Candidates’ Tax Plans,” Urban-Brookings Tax Policy Center, updated September 12, 2008,
93 Ryan J. Rosso, Health Reimbursement Arrangements (HRAs): Overview and Related History, Congressional Research Service, March 7, 2022,
94 Rosso, Health Reimbursement Arrangements (HRAs).
95 In its report, CRS discusses five types of HRAs: group health plan HRAs, QSEHRAs, ICHRAs, excepted benefit HRAs, and retiree-only HRAs. This paper does not discuss excepted benefit HRAs or retiree-only HRAs.
96 Minimum essential coverage includes Medicaid, Medicare, individual market coverage, and a spouse’s ESI.
97 IRS, “Further Guidance on the Application of the Group Health Plan Market Reform Provisions of the Affordable Care Act to Employer-Provided Health Coverage and on Certain Other Affordable Care Act Provisions,”
98 Elizabeth A. Myers et al., Pensions and Individual Retirement Accounts (IRAs): An Overview, Congressional Research Service, June 1, 2022,
99 Brendan McDermott, The Retirement Savings Contribution Credit and the Saver’s Match, Congressional Research Service, updated December 15, 2023,
100 Janelle Fritts, “How Does Your State Treat Groceries, Candy, and Soda?,” Tax Foundation, October 30, 2019,
101 Margot L. Crandall-Hollick and Conor F. Boyle, Child and Dependent Care Tax Benefits: How They Work and Who Receives Them, Congressional Research Service, updated February 1, 2021,
102 Charles E. Phelps and Stephen T. Parente, The Economics of US Health Care Policy (London, UK: Routledge, 2017),
103 Jordan M. Graham, “We Are Against Socialized Medicine, but What Are We For? Federal Health Reinsurance, National Health Policy, and the Eisenhower Presidency,” University of Montana, 2015,
104 Theodore Marmor, The Politics of Medicare, 2nd ed. (Aldine de Gruyer, 2000).
105 Eugene Feingold, Medicare: Policy and Politics (Chandler Publishing Company, 1966).
106 Gerhard Peters and John T. Woolley, “Republican Party Platform of 1964,” American Presidency Project,
107 Social security and welfare proposals: hearings before the Committee on Ways and Means, House of Representatives, 91st Congress, 1st session (1969).
108 Robert J. Myers, Actuarial Cost Estimates for Hospital Insurance Act of 1965 and Social Security Amendments of 1965, Social Security Administration, January 1965,
109 Richard D. Lyons, “Health Care Plan Would Tap Taxes,” New York Times, September 4, 1973,
110 Healthcare-NOW, “1971 House Hearing on National Health Insurance,”
111 Hearings before the Committee on Labor and Public Welfare, U.S. Senate, 93rd Congress, Part 2: Appendix—Comprehensive HEW Simplification and Reform “MEGA Proposal,”
112 Alice M. Rivlin, “Agreed: Here Comes National Health Insurance,” New York Times, July 21, 1974,
113 Robert Finbow, “Presidential Leadership or Structural Constraints? The Failure of President Carter’s Health Insurance Proposals,” Presidential Studies Quarterly 28, no. 1 (Winter 1998), 169-186,
115 President Jimmy Carter, “National Health Plan Message to the Congress on Proposed Legislation,” June 12, 1979,
116 Budget of the United States Government: Fiscal Year 1981,
117 President Ronald Reagan, “Message to the Congress Transmitting Proposed Health Care Incentives Reform Legislation.”
118 Hearings before the Committee on Finance, U.S. Senate, 98th Congress, 1st Session, June 22, 1983,
119 Alain Enthoven, “Health Tax Policy Mismatch,” Health Affairs 4, no. 4 (Winter 1985),
120 GAO, Tax Policy: Health Insurance Tax Credit Participation Rate Was Low, April 1994,
121 U.S. Congress, House Committee on Ways and Means, Subcommittee on Oversight, Report on Marketing Abuse and Administrative Problems Involving the Health Insurance Component of the Earned Income Tax Credit, vol. 4 (Washington, DC: Government Printing Office, 1993),
122 Merve Cebi and Stephen Woodbury, “Health Insurance Tax Credits and Health Insurance Coverage of Low-Earning Single Mothers,” Upjohn Institute, revised March 31, 2010,
123 Louis W. Sullivan, “The Bush Administration’s Health Care Plan,” New England Journal of Medicine 327, no. 11 (September 10, 1992),
124 The President’s Comprehensive Health Reform Program, vol. 34, February 6, 1992,
125 Robert D. Reischauer, Director, CBO, statement before the Committee on Ways and Means, U.S. House of Representatives, March 4, 1992,
126 Steven A. Holmes, “The 1992 Campaign: Ross Perot; Perot Plan to Attack Deficit Thrusts Issue at Opponents,” New York Times, September 28, 1992,
127 CBO, An Analysis of the Administration’s Health Proposal, February 1994,
128 Dole Kemp ‘96 Campaign Committee, “Where Bob Dole Stands on Health Care,”
129 Alison Mitchell, “Bush Proposes a Tax Credit to Help Buy Insurance,” New York Times, April 12, 2000,
130 “Prosperity for America’s Families: The Gore-Lieberman Economic Plan,” September 2000,
131 Budget of the United States Government: Fiscal Year 2005,
132 Joseph Antos et al., “Analyzing the Kerry and Bush Health Proposals: Estimates of Cost and Impact,” American Enterprise Institute, September 13, 2004,; Sara R. Collins, Karen Davis, and Jeanne M. Lambrew, “Health Care Reform Returns to the National Agenda: The 2004 Presidential Candidates’ Proposals,” Commonwealth Fund,
133 CBO, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2008, March 2007,; Len Burman et al., “The President’s Proposed Standard Deduction for Health Insurance: An Evaluation,” Urban-Brookings Tax Policy Center, February 14, 2007,
134 Thomas Buchmueller et al., “Cost and Coverage: Implications of the McCain Plan to Restructure Health Insurance,” Health Affairs 27, Supplement 1 (2008),; John McCain campaign, “Straight Talk on Health System Reform,” archived at
135 Jake Tapper, “Obama Promised Obamacare Wouldn’t Do Exactly What Gruber Says It Will Do,” CNN, November 19, 2014,
136 America’s Healthy Future Act of 2009, S. Rept. 111-89, 111th Congress,
137 Mitt Romney, “Replacing Obamacare with Real Health Care Reform,” New England Journal of Medicine 367, no. 15 (October 11, 2012),
138 Office of Sen. Orrin Hatch, “The Patient Choice, Affordability, Responsibility, and Empowerment Act: A Legislative Proposal,” January 2014, archived at
139 Christine Eibner, Sarah Nowak, and Jodi Liu, “Hillary Clinton’s Health Care Reform Proposals: Anticipated Effects on Insurance Coverage, Out-of-Pocket Costs, and the Federal Deficit,” Commonwealth Fund, September 23, 2016,
140 Hillary Clinton campaign, “Hillary Clinton’s Plan for Lowering Out-of-Pocket Health Care Costs,” archived at
141 Hillary Clinton campaign, “Hillary Clinton’s Commitment: Universal, Quality, Affordable Health Care for Everyone in America,” archived at
142 Donald J. Trump for President, “Healthcare Reform to Make America Great Again,” archived at
144 Paul Fronstin et al., “The More Things Change, the More They Stay the Same: An Analysis of the Generosity of Employment-Based Health Insurance, 2013-2019,” Employee Benefit Research Institute, October 28, 2021,
145 A Budget for a Better America: Budget of the U.S. Government, Fiscal Year 2020,
146 JCT, JCX-42-23, September 26, 2023,
147 JCT, JCX-40-23, September 26, 2023,
148 This window excludes fluctuations during initial implementation and in the wake of CSR defunding.
149 According to CMS national health expenditures data, the 10-year average of per enrollee expenditures for those on private health insurance in Massachusetts was actually 7 percent higher than in Connecticut.
150 Insurers are still required to increase plan AVs for low-income enrollees who select silver plans. Because most silver plan enrollees have low-income and higher AV plans, the average benchmark plan premium reflect an AV closer to 88 percent.
151 Cruz and Fann, “The Shortcomings of the ACA Exchanges.”
152 Brian C. Blase et al., “The HSA Option: Allowing Low-Income Americans to Use a Portion of Their ACA Subsidy as a Health Savings Account Contribution,” Paragon Health Institute, November 2022,
153 IRS, “Form W-2 Reporting of Employer-Sponsored Health Coverage,”
154 IRS, “IRS Provides Tax Inflation Adjustments for Tax Year 2024,” press release, November 9, 2023,
155 Phelps and Parente, The Economics of US Health Care Policy.
156 Coleman, “Small Business Health Insurance Equity Through Association Health Plans.”
157 Jamie Godwin, Zachary Levinson, and Scott Hulver, “The Estimated Value of Tax Exemption for Nonprofit Hospitals Was About $28 Billion in 2020,” KFF, March 14, 2023,
158 Department of the Treasury, Tax Expenditures, March 11, 2024.
159 There is also a broader credit for research and development of which pharmaceutical industry is one of the largest beneficiaries, but unlike these other provisions neither the Treasury Department nor JCT currently estimate the portion of that broader credit devoted to health care.
160 During the 1986 tax reform, the tax exemption of nonprofit Blue Cross Blue Shield companies was reevaluated under concerns that there was little to distinguish the business model from for-profit competitors. Instead of applying the corporate income tax in full, lawmakers agreed to a compromise to preserve a special deduction for plans with reserves worth less than three months of premium income. “To remain eligible for the deduction, plans were barred from making substantial changes in the way they handled their high-risk, individual, and small group business.” While many Blue Cross Blue Shield plans have since converted to full for-profit status, a number have not and continue to use the special deduction. Robert Cunningham III and Robert M. Cunninghan Jr., The Blues: A History of the Blue Cross and Blue Shield System (DeKalb, IL: Northern Illinois University Press, 1997).


Theo Merkel

Theo Merkel

Theo Merkel is the Director of the Private Health Reform Initiative and a Senior Research Fellow for the Paragon Health…
Brian Blase

Brian Blase, Ph.D.

Brian Blase, Ph.D., is the President of Paragon Health Institute. Brian was Special Assistant to the President for Economic Policy…


The authors are grateful to Doug Badger, Christopher Pope, Jackson Hammond, Joe Albanese, Emma Gallutia, Drew Gonshorowski, Alye Mlinar, and the Paragon team for their exceptional comments and work in review of the paper.