Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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The Effect of Tax Law on Health Costs: The IRA for Health

The Effect of Tax Law on Health Costs

The IRA for Health

Section I

Chapter Three

Introduction

If the preceding chapters have done nothing else, I hope they have at least acquainted the reader with the fact that the current federal deficit is currently made worse by seventy billion dollars through the tax exemption of health insurance premiums, the largest American tax loophole ever recorded. Further, that this tax exemption is inequitably distributed and is a source of societal friction which could express itself in unpredictable ways. And therefore the politics of dialing with it must be very carefully handled. This chapter is a serious description of a proposal for dealing with the issue. I believe it contains nothing which would injure a component of society, and it would not increase the federal defeat. It would slowly remove health costs from employer budgets, and it would ultimately nudge them considerably.

The idea of a Health IRA had its beginning at a dinner for the White House policy staff which I was invited to address in 1980, and the Provocateur was John Mc Claughry, then Senior Policy advisor in the Reagan administration. It must be remembered that the IRA (Individual Retirement Account) law had not yet been passed, but John must have heard about it, and suggested an extension to health costs. Since Mc Claughry’s main intent was in agriculture, he never did much with the health idea. But I was electrified by the idea, and took it back to the American Medical Association. Curiously a relatively similar idea was independently brought to the AMA by Dr. Michael Smith of Thibodaux, Louisiana (he called it The CHIP program) the AMA took quite a while to digest the the idea but it was eventually adopted by the AMA House of Delegates as an official AMA policy proposal. Somewhat later, but entirely independently Peter Ferrara of the Cato Institute and John Goodman of the Institute of Policy and Research came on the idea and pushed it forward as a replacement for the Medical program. My own views are more expansive. I believe that all health insurance should be eligible for the IRA approach. with a voluntary conversion provision any time after age 65..

Funded Insurance.

Having rattled the cage about tax deductibility in the previous two chapters, it is necessary to make another digression before discussing the Health IRA. It relates to second flaw in the tax laws of effecting health insurance. Employer- paid health insurance premiums are tax deductible, but it is forbidden to carry the benefit forward beyond the year in which it is earned. There were probably good uses for this limitation which are obscure to me, but the essential fact is this limitation made it impossible to build up a cash value within a health insurance policy the way you normally build up a cash value within a whole life insurance policy, except by HSAs. Using the reasoning of life insurance, all health insurance is term insurance. Using the reasoning of social legislation, health insurance is a pay as you go scheme. Any way you look at it, health insurance is by law hampered in using the massive power of compound infected to reduce its ultimate cost. Here is the appeal of IRA for Health in the eyes of Peter Ferrara and John Goodman: forty years of compounding where it could greatly reduce the cost of Medicare when the individual reaches age 65, and the existence of the funded reserve would make the insurance promise a lot more secure.Alternatively, just allow everyone to have two policies, one for current expense, and one for saving for the future.

Portability.

I like that thought, too but for me an equally important need is to build up a reserve within the policy so the individual could experience periods of unemployment without losing his health insurance. To lose your insurance when you lose your job crippled the Clinton Health Plan, and preventing a pre-existing condition limitation crippled the finances of the insurance companies, because the average time between job turnovers was 3.5 years Obama plan, almost all chronic disorders were excluded unless the Obama administration was willing to raise premiums. Some hidden hand was unable to concede the point, and Obamacare costs spiralled out of control. Either the insurance must transform from term insurance to permanent insurance, or else cost would be insupportable. Apparently, those speaking on behalf of employers were unable to concede either point, so the situation just drifted, and got more expensive. I have repeatedly seen patients who became sick while they were unemployed. And then became they had developed a “preexisting illness” they became uninsurable even if they got a job. Or they couldn’t get a job because employers recognized they were expensive to hire. To me, the linking of health insurance to employment was a concept which needed re-thinking if individual tragedies were to be avoided. Somehow, it was easier to characterize such opinions as insensitive, than to do anything to repair the underlying problem.

Furthermore, part of my job is to listen to people’s troubles. Many times I have heard patients complain they hated their jobs but were afraid to quit for fear they would become unemployable during the change-over. For practical purposes, health insurance under the employer-based system is not portable between jobs. It has not already collapsed because so many diseases of younger people have been cured, adding thirty years to life expectancy. If the new employer provides group health insurance, it is on his own terms and those terms may be unfavorable to the individual. I have just once in sixty years of practice, encountered an employer who changed the benefits of his group policy and was thus able to terminate the ongoing payments to the dependent of one employee. Employer casual group health insurance is a reasonably good system. But as the health of the nation improved it developed lots of flaws which might have been been corrected. They weren't, because the health part was never the main concern of enough employers, so they permitted the health companies to resort to short term patching.

To me, it is a flaw that the employer sets the terms of the policy. It seems much better if a way can be found for the employee to own his own policy, raise, lower or change the benefits as he is willing to pay for them, and carry his policy with him as he chooses his own employment circumstances. The employer is mainly interested in the cost of the employee benefit, so let him restrict his interest to how much he is willing and able -- to pay.

 

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