Health Tax Policy Mismatch

Prologue: The favorable tax treatment of employer-provided health insurance has had the very beneficial effect of motivating the rapid growth of private insurance coverage. Data from the National Health Care Expenditures Study estimated that by 1977, 883 percent of employees in the United States worked for employers that offered health insurance plans. But the cost of this tax incentive, which is most generous to employed upper-income people, has escalated by many billions during a period when the federal government has squeezed medical spending for the old and poor. These foregone tax revenues now represent the federal government's second largest health program, as the administrations 1986 spending estimates document: Medicare 73 billion; tax expenditures 24 billion; Medicaid 24 billion; veterans medical care system 9 billion; and the National Institutes of Health 5. 5 billion. In this essay, Professor Alain Enthoven of the Stanford University Graduate School of Business puts forward a sharply higher estimate of the revenue loss that will result from this favorable tax treatment and then explains why. Enthoven, an economist by training, has provided much of the intellectual lifeblood for the movement toward the use of market principles in health care delivery. But, interestingly, his relationship to the Reagan administration, which believes fervently in market approaches, has been, at best, arms length. For the better part of a decade, Enthoven has been promoting comprehensive medical care delivery reform through the marriage of two ideas: (1) the creation of a network of competitive medical plans which would operate under economic incentives that encourage efficiency and (2) the development of a regulatory framework that insures the operation of these plans on a basis which comports with the best interests of society. The administration has embraced the first idea, but considered the second to be in conflict with its determination to deregulate government. The administration supports the placement of a ceiling on the deductibility of employer contributions to employee health benefits, but the tax revision bill recently approved by the House Ways and Means Committee retains the exemption.