POLITICS AND YOUR PRACTICE: A Taxing Solution

February 1, 2006

Could employer-subsidized health care be nearing its end? Maybe. Here's why that would be a good thing.


Liberals and conservatives agree on one issue: it’s time to change the way most Americans obtain health insurance, which is through their employer.

Over two-thirds of Americans under 65 years of age receive health insurance as a benefit of their employment, without paying a nickel of tax on it. While cash compensation is fully taxed by the federal government, every healthcare dollar expended on behalf of an employee is exempt from the tentacles of the IRS.

The tax-exempt status of healthcare benefits started during World War II. As the cost of healthcare coverage rose over the last 60 years, so did the healthcare benefit: a mere $40 billion in 1986, it is expected to increase to $126 billion this year. That’s $126 billion in employee compensation that goes untaxed by Uncle Sam.

Politicians on the left and the right see the growing size of that benefit as a political opportunity. The larger it becomes, the harder it is to ignore. Both sides hope to use it to accomplish their most cherished healthcare policy goals.

On one side are proud liberals like former Clinton Labor Secretary Robert Reich. He says that all Americans should receive healthcare coverage at the same level, whether they work or not.

“Eliminate the current $126 billion tax subsidy,” says Reich, now a professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley.

Instead, he urges, use the money “as a down payment on a universal and affordable system of health insurance available to everyone regardless of how much they earn, where they work, or even whether they have a job.”

On the other side of this issue are conservatives. They, too, would like to see healthcare disconnected from employment. They want to promote the establishment of a health insurance market for individuals, and allow tax credits for anyone - whether employed or not - who purchases healthcare insurance. It’s part of a grander vision of an “ownership society” where individuals are responsible for their own lives without government interference.

Conservatives suffered a defeat last year on this issue. When President Bush appointed a panel to overhaul the federal tax code, many in his party had hoped the panel would suggest replacing the tax-exempt status of employer-provided health insurance with a universal tax credit for anyone obtaining health insurance, whether from an employer or on their own.

Instead the panel wimped out, in the view of conservatives. Rather than kill the tax-free healthcare subsidy, it recommended capping it at $5,000 for individuals and $11,500 for families (the average benefit in 2006), indicating that it should be slowly phased out.

What’s the impact of these two policy views on your practice?

If federal policy followed Reich’s view, reimbursements for physician services could increase dramatically. We might even see an end to the annual end-of-the-year groveling by physicians’ advocates for Medicare reimbursements. But there’s a trade-off: physicians would surely see a significant rise in control of their fees and practices by regulators.

Conservatives claim that their approach will ultimately reduce “out-of-control” health spending in America by making workers more aware of the amount they spend on health insurance. It could also mean consumers would be paying more for healthcare directly. In the short-term this may mean a reduction in regulations of your practice, but also a reduced demand for your services, as some consumers will simple decline coverage that they have to pay for out-of-pocket.

Trade groups representing the insurance industry, among others, want to squelch any talk of change. They say polls show that 90 percent of likely voters in the early 2008 presidential primaries oppose making healthcare benefits taxable.

What the poll shows is obvious: voters do not want to pay more for healthcare.


But with healthcare costs rising, and federal coffers getting smaller, voters may not continue getting what they want.

What do you think? Write to me at kkarpay@physicianspractice.com. The views expressed here are my own, and do not necessarity reflect those ofPhysicians Practice.

This article originally appeared in the February 2006 issue of Physicians Practice.