Who are our hypothetical patients?

1
TAX POLICY AND THE HISTORY OF HEALTH INSURANCE
2
A Different Model of Health Insurance
Long before the Christian era, it was the custom
among the more affluent people in ancient China
to pay the doctor as long as they continued in
good health. When disability
overtook them, the medical mans compensation was
stopped, and if his ministrations were unavailing
in effecting recovery, the executioner relieved
the doctor of his cares.
E. J. Faulkner, Health Insurance, 1960, pp.
510-511.
3
History of Health Insurance

• Early growth in the 1930s
• World War II
• Post-war rapid growth
• Later developments
• Current issues

4
Private Hospital Insurance Coverage, 1939-2005
Persons covered for hospital care, Hist. Stat of
US
Persons lt65 covered for hospital care, NCHS
Tax reform Acts, 1981 1986
Medicare Medicaid Acts
HSAs/ HRAs
1954 Act
WWII
Sources Historical Statistics of the United
States, Millennial Edition. 2006. NCHS, Health,
U.S., 2007, 2007.
5
Health Care in the 1930s
In the 1930s, the average physician could not
affect the average condition of the average
patient
Source R. Helms based on similar quotes from
medical historians.
6
Major Medical Innovations

• 1929 Fleming publishes discovery of penicillin
• 1935 Sulfur drugs
• 1939 Prontosil
• 1940-41 Penicillin developed and tested
• 1944 Streptomycin developed
• 1946 Large scale production of penicillin
• 1950 Terramycin
• 1952 Isoniazid cardiac pacemaker
• 1953 Open heart surgery polio vaccine

Jonas E. Salk, MD
7
Early History of Health Insurance

• Early prepayment plans by hospitals
• AHA organized these into Blue Cross plans
• To assure hospital payment
• free choice to reduce hospital competition
• Physician prepayment plans developed into Blue
  Shield plans (AMA)
• Commercial health insurance came later

8
World War II Industrial Policy

• War Production Board (WPB)
• Agency to coordinate production of war-related
  materials
• Intensive government planning and control of
  production

John Deere plant
9
WWII Wage and Price Controls

• Two programs to control wartime inflation
• Office of Price Administration (OPA)
• Price controls and rationing of consumer
  commodities (e.g., sugar, coffee, butter, tires)
• National War Labor Board (WLB)
• Control of wartime wages
• Settlement of labor disputes to assure wartime
  production

10
National War Labor Board

• 1943 War Labor Board and IRS ruling that
  employer fringe benefits did not count as taxable
  wages
• But could not exceed 5 of wages

11
The Post-War Period

• 1954 Exclusion of health insurance from taxable
  income confirmed by the Congress
• Post-war period
• Medical advances increased cost of medical care
  and the demand for health insurance
• Rapid growth in health insurance coverage

12
Growth in the Post-War Period
Women in the Workplace
Per Capita Disp. Income
Population
Up 69
Up 122
Up 54
13
Private Hospital Insurance CoverageGroup versus
Individual, 1940-1975
Note Employer group is the total of persons
covered by Blue Cross/Blue Shield plus insurance
company group
policies. Source Historical Statistics of the
United States Millennial Edition, Series
Bd294-305.
14
Growth in Third-party Payments1960-2000
Percent of NHE
15
Private Group Health Benefits as a Share of Total
Compensation, 1960-2006
Source Jacobs, Kaiser Family Foundation, Feb.
2008.
16
Other Developments affecting Health Insurance,
1975-2008

• The growth of self-insurance
• The rise and gradual change of managed care
• The growth of Consumer Directed Health Care
  (CDHC)
• Tax law changes that reduced upper-income MTRs
• Increased the effective price of group health
  insurance
• May have led to a decline in the
  comprehensiveness of coverage

17
Health Insurance Tax Expenditures 1970 2006
(Increased 16B/yr since 2000)
Billions
Sources CBO 1970-1990 The Lewin Group,
2000-2006. 2006 is an unpublished total estimate
by John Sheils.
18
Effects of Tax Policy

• Higher prices
• Lack of access
• Winners Losers

P
S
Higher Prices
Increase In Demand
D
D
Medical Technology
Income Growth
Tax Policy
Q
Higher Output
19
Effects of Tax Policy on Health Insurance

• Intensified the effects of increases in income,
  population, and medical technology
• Expanded employer-based group insurance relative
  to individual insurance coverage
• Expanded insurance benefits hospital,
  outpatient, mental health, dental, drugs
• Reduced cost sharing
• Induced a higher level of costs, prices, and
  expenditures created winners and losers

20
Three Choices for Health Reform
1

• Choice One the tax reform approach
• Variations to end the open-ended subsidy
• Eliminate the tax exclusion
• A tax cap (IRS 1940s, Reagan 1984-85)
• Standard deduction (Bush 2008, 2009)
• Strong incentives to redesign health insurance
  coverage
• More research on cost effectiveness
• No one health delivery model will dominate
• More cost-effective options for small businesses
• Tax reform is a necessary (but not sufficient)
  condition for efficient health reform

21
Three Choices for Health Reform
2

• Choice Two -- The regulatory approach
• Administered fee schedules (ex. Medicare)
• Global budgeting (ex. 1993 Clinton proposal)
• Mandated benefits
• Mandated coverage
• Individual
• Employer
• Underwriting restrictions
• Mandates on insurance payout rates

22
Three Choices for Health Reform
3

• Choice Three The Ancient Chinese Model
• Obvious incentives to improve medical outcomes
• Not much chance of AMA support