The conservative agenda: pushing business out of health care - business and health insurance benefits

Business & Health, June, 1995 by Harris Meyer

Free-market proponents would shred longstanding involvement with benefits, but employers aren't buying the idea.

Coffee and donuts. Meat and potatoes. Republicans and business. They all go together, right? Not anymore. Fear of fat has split up the first two couples, and sharply differing opinions on how to reform the health-care system are driving a wedge between the third.

Many Congressional Republicans say they want employers out of the business of arranging health insurance for their employees. House Speaker Newt Gingrich blames this third-party system for constant inflation and bloated bureaucracy. Supremely confident that unfettered personal choice makes markets work, he and his colleagues want individuals to shop for their own health-care services and coverage.

Employers have something very different in mind. They are rapidly taking even greater control of health-care purchasing for employees, forming large buying groups to magnify their bargaining power with insurers and providers. Smaller firms want federal law changed so they can band together in large self-insured groups and drive tough managed care deals. Few prominent business leaders envision most Americans buying health care on their own any time soon.

This surprising split between traditional allies grows out of two radically different philosophies for controlling costs and improving the quality of care. It won't be mended this year and may well frame the health reform debate over the next several years. At stake is nothing less than the future of the managed care revolution that employers have painstakingly wrought over the past decade.

THE TAX-EXEMPTION TARGET

Top Republicans have yet to draft health reform legislation, but a first step toward individual purchasing could be to make all or part of the cost of health benefits taxable to employees, theoretically prodding them to ask their employers to hand over healthcare dollars. Workers could continue to let employers arrange coverage, buy through a sponsor such as a church or trade group, shop for insurance on their own, or self-fund their medical care.

The main advocates of the tax change are market-oriented policy thinkers from influential conservative think tanks like the Heritage Foundation and Cato Institute, but there's agreement across the political spectrum that tax-free health benefits encourage employers and employees to buy excessive coverage. Last year 300 economists of all political stripes signed a petition calling for the change.

Supporters argue that taxing benefits would not only increase consumer cost-consciousness but would also encourage individually owned policies with portability to match the emerging economy of highly mobile workers and temporary jobs. But there is heated disagreement on how to structure any tax change.

Some want to distribute the new revenues from taxing benefits--an estimated $66 billion annually--to help those who can't afford coverage. They note that the current tax exclusion offers a larger subsidy to people with higher incomes and richer policies.

The Heritage Foundation would fully tax health benefits and give all households a fixed-dollar tax credit to help offset the cost of coverage or care. Those too poor to pay tax would get a government check.

Another proposal, by Mark Pauly of the University of Pennsylvania and John Goodman of the National Center for Policy Analysis in Dallas, would let people choose between the current tax exclusion for benefits and a tax credit tied to the purchase of high-deductible coverage combined with an MSA.

But getting a tax credit must be tied to buying insurance through an employer plan or other group, caution the managed-competition theorists of the Jackson Hole Group. Group leader Paul Ellwood explains: "It's Health Economics 101 that if you let those who are healthy be put in a separate pool from those who are sick, the sick have to pay vastly more for coverage. That defeats the whole idea of insurance."

Benefits managers fear a similar impact for somewhat different reasons. Theoretically, employees would want to take control of any money they had to pay taxes on. If allowed to cash out their employers' premium contribution and use it as they choose--the cash-and-carry concept--healthier workers might leave a firm without enough funds to pay the claims of sicker people who stay with its plan. Cash and carry also poses a sticky employee relations problem. Employers might end up distributing less money to younger, single workers, who generally have far lower medical costs than older workers with families.

Two other points of opposition are broader-based. The business community feels strongly that the tax exclusion is the main reason employment-based reform has flourished. And the public would likely see this as a tax increase, a lesson that President Clinton learned last year before abandoning the idea. The upshot: "No matter how good an idea it is, it ain't going to happen in the 104th Congress," says Mark Isakowitz, health policy analyst for the National Federation of Independent Business.