Who are our hypothetical patients?

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Tax Reform and Health Insurance A History Lesson
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The Politics of Health Policy
3
Are the Stars Alignedfor Health Reform?
Senator Kennedys Task Force
Public Opinion favors reform
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Past Attempts to ReformHealth Policy

• President Truman and National Health Insurance
• President Nixons offer
• The Reagan era
• President Clintons
• Health Security Act

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.
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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

7
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
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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

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National War Labor Board

• 1943 War Labor Board ruling that employer
  fringe benefits did not count as wages subject to
  wartime controls
• But could not exceed 5 of wages

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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

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Major Medical Innovations

• 1929 Fleming publishes discovery of penicillin
• 1935 Sulfa 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
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Growth in the Post-War Period
Women in the Workplace
Per Capita Disp. Income
Population
Up 69
Up 122
Up 54
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Growth of Health Insurance CoveragePercent of
the Population, 1940-1975
Source Historical Statistics of the United States
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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.
15
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.
16
Private Group Health Benefits as a Share of Total
Compensation, 1960-2006
Source Jacobs, Kaiser Family Foundation, Feb.
2008.
17
Growth in Third-party Payments, 1960-2000
Percent of NHE
18
OMB Estimates of Federal TaxExpenditures for
Health Insurance, 1968-2009
Sources OMB Special Analyses
19
Federal Tax Expenditures as a Percent of GDP,
NHE, and Federal Entitlement Expenditures,
1968-2007
Federal Tax Exp As a of Entitlement Exp
Federal Tax Exp as a of NHE
Federal Tax Exp as a of GDP
20
John Sheils Estimatesof Total Tax
Expenditures,Federal Income, FICA, State
Taxes, 1998-2007
Billions
Sources The Lewin Group, Health Affairs,
1998-2004. 2006 and 2007 are unpublished
estimates by John Sheils.
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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
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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

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Two Approaches to 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)
• McCains tax credit proposal
• 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

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Two Approaches to Health Reform
2

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

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Are the Stars Alignedfor Health Reform?
All the players in health care reform . . . came
to the political process with strong convictions
in support of their first-choice proposal. For
each of these groups, their second-favorite
choice was the status quo. Stuart Altman, as
quoted in Health Affairs, 2001.
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Are the Stars Alignedfor Health Reform?
. . . the health insurance proposals were weak
on practical details and generated considerable
confusion, even among their supporters. Rosemary
Stevens, health policy historian, referring to
the reform effort in 1917-1919 following WWI.