Elimination of the Medical Expense Tax Deduction Will Make High Health Care Costs Hurt Even More
The House-passed Republican tax bill would eliminate the medical expense tax deduction to help pay for some of its tax cuts. Currently, people who spend 10 percent or more of their adjusted gross income on medical expenses can claim a deduction if they itemize their income taxes. People who buy insurance on their own and some Medicare beneficiaries can include their premium costs when calculating total expenses. About 9 million people took the deduction in 2015. Its proposed elimination shines a bright light on the growing number of people in the United States who have very high out-of-pocket health care costs.
40 Million People Spent a Large Share of Their Income on Health Care
Based on the Commonwealth Fund’s Biennial Health Insurance Survey, in 2016, 19 percent of adults age 19 and older, an estimated 40 million people, spent 10 percent or more of their gross income on out-of-pocket medical expenses, not including premiums. This is up from 14 percent, or 21 million adults, in 2003. The estimate includes people who are both insured and uninsured. Of the 40 million people with high costs in 2016, 24 million were under the age of 65 and had health insurance all year, 9 million were under age 65 who spent some time uninsured, and 6 million were age 65 and older, mostly covered by Medicare. These estimates are lower than they would be if we had included premiums and used adjusted gross income, as the tax deduction allows.
The majority of people who spent enough of their income on medical expenses to hit the threshold for the tax deduction have low and moderate incomes. Of the estimated 40 million adults with high costs, 44 percent had incomes below 100 percent of the federal poverty level, which is just above the tax-filing threshold of $10,350 for an individual in 2016. Forty-four percent had incomes between 100 percent and 400 percent of poverty, or $47,000 for an individual and $97,000 for a family of four. Twelve percent had incomes of 400 percent of poverty or more.
The Wrong Time to Eliminate the Deduction
Families across the United States are experiencing a decline in health care affordability, as we have documented elsewhere. The medical expense tax deduction is hardly an adequate solution to helping people cope with their medical bills, particularly since it is utilized by so few of those whose expenses would entitle them to take it. In fact, given that people who itemize their taxes have higher incomes, most of the benefits of the deduction flow to higher-income families. But this reality is striking in and of itself: 10 percent of income for someone with a higher income means that the people who take the deduction have extremely high medical costs in the tens or hundreds of thousands of dollars that are not covered by health insurance. These expenses likely include costs associated with long-term care, support for people with disabilities, and serious illness and injuries.
Given the relentless growth in health care costs and the growing inadequacy of health insurance, especially through higher deductibles, eliminating a tax deduction that at least offsets a portion of high medical costs for some families seems poorly timed. An alternative would be to improve the adequacy of insurance coverage and address the overall rate of growth in health care costs.
The authors thank Sherry Glied and Timothy Jost for helpful comments.