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HEALTH POLITICS: Continuing the Employer Tax Exclusion Debate

As we continue to approach Election Day 2008, journalists will play a pivotal role in educating American voters about the policies and promises coming from Senators John McCain and Barack Obama. (Journalists can check out New America's health care reporting guide here.) Therefore, I was pleased to see Trudy Lieberman, director of the health and medicine reporting program at the Graduate School of Journalism at CUNY, challenge her colleagues to "go for it" when it comes to reporting on the candidates' health care plans. I think the media can play a critical role in making sure policy positions don't get consumed by day-to-day campaign politics. So, as a person committed to sound public policy, I applaud Trudy's purpose.

In addition, Trudy touched on some excellent points in her analysis of the potential impact of a flat tax credit in an unregulated insurance market:

For example, instead of just mentioning the tax credit, reporters could explain why a $2,500 credit might buy more insurance in the individual market for a young, healthy 26-year-old than for a 56-year-old with a couple of chronic conditions. Premiums in the individual market...are based on age. Older people pay more, so a flat credit might not buy as much for them. And just how far will the credit go, anyway, considering that family policies now cost upwards of $12,000 a year?

At the same time, I wanted to take a couple of minutes to build on her comments about the employer tax exclusion and its potential role in the health reform conversation.

As Jonathan Gruber said at a Senate Finance hearing last week, "no health expert today would ever set up a system with such an enormous tax subsidy to a particular form of insurance." The current tax treatment of employer-sponsored health insurance costs the treasury a bundle in lost tax revenues every year and is highly regressive (because this particular tax break is worth more to people who make more and have higher income tax rates and because high-income Americans are more likely to have employer-sponsored health insurance than those with lower incomes.)

Eliminating or capping the employer tax exclusion is one option that could play a substantial role in financing comprehensive reform. However, if you consider eliminating or even tinkering with the employer tax exclusion you must also be committed to making sure all Americans have access to the advantages of today's large group market (administrative economies of scale and risk pooling). This is what Senators Wyden and Bennett have done in their legislation, the Healthy Americans Act, which has 16 bipartisan cosponsors in the Senate and 22 in the House. Specifically, the bill and other similar proposals a) reform the insurance market so that all Americans can access coverage (guaranteed issue) and so that individuals do not have to pay higher premiums if they are sick (modified community rating), b) redirect the current tax expenditure to provide subsidies for low-income individuals. Let me be clear: there is a huge difference between the Healthy Americans Act, which includes substantial insurance markets reform and a commitment to covering every American, and proposals that eliminate the exclusion without remaking the insurance market.

Employers will always have a role to play in the health care system. What that role will be is one of the big questions of the health reform debate. If rising health care costs really impact the ability of U.S. firms to compete internationally, is continuing to rely so heavily on them to finance our health system a smart strategy for our nation's economic future?

Given the realities of both our current health care system and economy, my message to journalists is this: the employer tax exclusion represents an opportunity to help fund a more efficient health care system for every American in a 21st century global economy. At the same time, it would be irresponsible to move people away from the employer-based system without creating a new market and making subsidies available. The difference between the Healthy Americans Act and proposals that focus on tax reform alone could not be more explicit.