Looking Ahead On Market-Based Health Reform

Over the past several years, advocates for market-based reform have put forward a panoply of ideas about the future direction of the US health system. This includes comprehensive proposals such as the Health Care Choices 20/20 project and Rep. Bruce Westerman’s (R-AR) Fair Care Act, as well as targeted proposals such as the HSA (Health Savings Account) Option from the Paragon Institute. Indeed, recent market innovations such as direct primary care services and expanded access to telehealth have already succeeded in creating more options for Americans. But unfortunately, policy makers have often failed to embrace these ideas as a focus of their efforts. For too long, and for too many, discussions on health care have centered on how to cripple or limit the Affordable Care Act (ACA).

With the 2024 election cycle upon us, and the continuing progressive push for Medicare for All, it’s more important than ever for policy makers who believe in market-based reform to be able to articulate their own, alternative vision for the future of our health system. At the same time, health reform should not upend the current system or take options away. That includes the ACA, which has fallen short of its authors’ objectives. It covers fewer people than projected, has led to increased consolidation in our health system, and resulted in higher premiums for some. But while the law’s shortcomings merit reform, a continued focus on the ACA is ill-placed. It is not the primary culprit for our health care woes.

The “Original Sin”: Tax Preference For Employer-Sponsored Insurance

Genuine choice won’t be available until we address the “original sin” of the US health care system: the federal tax exclusion for employer-sponsored insurance, under which workers do not have to pay income or payroll taxes on the premiums of work-based plans. This policy has distorted the Marketplace and driven up consumption of services, resulting in higher health costs for everyone. Since the tax code favors premiums over out-of-pocket payments, consumers choose low cost-sharing plans and only see prices after their insurer has negotiated with their medical provider. The overreliance on high-premium plans leaves little incentive to save for unexpected medical spending.

Changing the existing employer-sponsored insurance tax exclusion to remove the unequal treatment of premiums is politically untenable. So instead, to address these challenges, we propose the creation of individual health accounts (IHAs), a new, tax-preferred saving vehicle that would be available in addition to existing options such as health savings accounts (HSAs). Although HSAs have played a valuable role in expanding choices for more than 30 million US families, they come with stringent rules, such as the requirement that participants must select high-deductible health plans to accompany them, that limit broader adoption.

IHAs would be eligible to all individuals with at least catastrophic health insurance, whether privately purchased or publicly provided. Contributions to these plans would be deductible only against federal income taxes, not income and payroll taxes as is the case with HSA contributions. Unqualified withdrawals—withdrawals not used for qualified medical and dental expenses incurred by the account holder, their spouse, or a dependent—would be subject to income taxes. Unlike HSAs, however, there would be no additional tax penalty for unqualified withdrawals. To encourage lower premiums and a higher share of out-of-pocket spending, the maximum contribution amount families could contribute would be higher for those who choose lower-premium plans.

Many tax-advantaged health care policies disproportionately benefit higher-income taxpayers, who tend to have higher premium plans. But the way we have designed IHAs means that those who are already receiving tax breaks are unlikely to receive any more; instead, IHAs will open up new benefits for low- and middle-income Americans.

Notably, IHAs would not just benefit those with employer-sponsored plans. They could be used by both Medicaid recipients and those who buy ACA-subsidized plans. States should be permitted to use Medicaid funds to contribute to IHAs for low-income families who want the accounts, empowering them to make more decisions about the health services they receive. Likewise, ACA rules should be relaxed to allow individuals to opt for cheaper catastrophic plans with excess premium subsidies deposited into their IHAs. These reforms could be facilitated by making it easier for states to get waivers under existing provisions in both the ACA and Medicaid laws.

Other Proposals

We also advocate extending federal tax deductibility to all out-of-pocket health expenses, not just spending on premiums. This would further remove the bias in favor of purchasing higher-premium employer plans and give patients more control over their health care spending. Put together, we estimate these proposals would reduce federal tax revenues by $94 billion over 10 years.

Beyond these new reforms, policy makers should rethink the myriad federal and state regulations that undermine Americans’ health care choices. Restrictions on scope of practice for nurses and others prohibit patients from seeing medical providers who have the training to offer high-quality care. States unnecessarily ban patients from choosing telehealth providers that live across state lines. And limits on new physician-owned hospitals and ill-advised certificate of need laws, which force hospitals to receive government permissions before building specialized facilities, leave consumers with fewer choices.

These regulations are ostensibly to protect consumers, but more often they merely serve an anticompetitive purpose: protecting existing players in the health care economy, rather than improving patients’ health. Removing or loosening these unnecessary regulations would give patients more options—and thus more control—over their health care futures.

Policy makers looking to advance market-based health care reforms would benefit from directing their attention away from undoing the past and toward a vision centered on more choices within the system we already have. When given the chance, patients have exposed the downsides of a system in which government exerts ever more control. They deserve more opportunities to choose for themselves—and policy makers should embrace ideas to give them those opportunities.

Authors’ Note

The authors of this article, Lanhee J. Chen, Tom Church, and Daniel L. Heil, are the authors of a new health reform plan, The Choices for All Project.