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Employer-Based System for Health Insurance Should Change, But It's Complicated, Panelists Say

By Leah Nylen, CQ Staff

March 21, 2008 -- Although many agree that the current model of employer-based tax subsidies for health insurance should be changed, there is little agreement on the best solution, said panelists at a Kaiser Family Foundation webcast.

Under the current system, employers receive a tax break for providing health insurance coverage to their employees. The subsidies act as an incentive for employers to offer more expensive coverage rather than basic coverage, according Katherine Baicker, professor of health economics at Harvard School of Public Health. If individuals had to pay for coverage on their own, more people would choose basic coverage and pay for routine expenses out-of-pocket, leading to reduced insurance premiums, she said.

"The tax code pushes people into those kinds of plans and that means that people pay more for health care and more for health insurance than they would otherwise," Baicker said. "The tax code shouldn't be pushing us one way or the other. All of these proposals [with] a flat amount, whether it's a credit or a deduction ... in essence takes the tax code out of the decision-making process."

Because it is based on pre-tax dollars, the current system also subsidizes health care for higher-income workers more than it does for lower-income workers, said Jason Furman, a senior fellow and director of the Hamilton Project at the Brookings Institution.

"It's an upside down system," Furman said.

Jack Meyer, a principal at Health Management Associates, a private health care research firm, said the market-based model has problems because people with preexisting conditions or chronic illnesses would have difficulty getting adequate coverage.

"Older, sicker workers are often priced out of that market, if not turned down, flat out rejected from that market," Meyer said. "The problem with some of these proposals is they would incentivize people out of good coverage into this highly inequitable market ... The goal of this tax reform should be to stop subsidizing health care for people like Bill Gates and start subsidizing it for a waitress who works the night shift and the day shift."

Baicker suggested one way to get around the problem would be to offer transition assistance, such as risk-adjusted credit deductions based on health status, for those who might have a harder time finding private insurance.

"If you are diabetic, you could be given a much bigger voucher with which to buy health insurance and you can then take that voucher anywhere you want," Baicker said. "Maybe you go to an insurer who specializes in the disease management of diabetic care. You could end up with much more effective insurance because insurers would no longer be trying to repel sick enrollees while attracting healthier enrollees."

President Bush has suggested a plan that would eliminate the tax exemptions for employer-based health insurance. Instead, those who purchase health care plans would receive a standard deduction.

But a tax deduction would not help all of those currently uninsured because those with low-income do not pay taxes, according to Furman.

A more fair way would be to offer tax credits for health insurance, Furman said, because this would allow lower-income workers who don't pay taxes to receive money for health care.

Republican presidential candidate John McCain has suggested a similar tax credit that would give $2,500 to a single individual or $5,000 for a family to use toward health insurance.

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