Here’s a simple fact: It’s impossible to reform the health insurance markets and create a consumer-driven system based on personal choice and real health plan competition without reforming the federal tax treatment of health insurance. All arguments to that fact, from Republicans and Democrats alike, are nonsensical.

So, it’s heartening when self-proclaimed progressive Sen. Ron Wyden (D-Ore.) is on the same page as the Heritage Foundation and the nation’s leading conservative health policy analysts on the central issue of federal tax policy. Wyden’s comments today at the Urban Institute underline the broad bipartisan support that does exist in Washington and elsewhere for changing the tax treatment of health benefits to make it more equitable for individual consumers.

In a panel on overall tax policy, Wyden renewed his push for Congress to convert the unlimited tax break that’s available for employer-sponsored health benefits (technically called the employer-based exclusion) into a system of individual tax relief so that individuals and families could buy their own insurance plans without today’s punishing tax penalties.

“We need to convert the tax exclusion into a generous deduction or credit and put that in the hands of individuals to go into the marketplace and find policies that work for them,” Wyden said, a member of the Senate Finance Committee, which is currently marking up legislation that could dramatically overhaul the U.S. health care system. “This will result in millions of Americans getting tax cuts when they shop.”

Heritage health policy and tax expert Stuart Butler has pointed out this tax reform also would incentivize millions of Americans to help drive down soaring health care costs:
“There are two objectives behind proposals to reform the “exclusion” of [employer-sponsored] benefits from a worker’s taxable compensation:

  • First, it would focus the unlimited special tax break — which, after all, is a distortion in the underlying tax code — on those who need help the most. Currently the total value of the tax exclusion is about $270 billion annually to families at the federal level (there is also tax relief from state taxes), with most going to upper-income families who are in higher tax brackets.
  • Second, it would achieve efficiencies and cost reductions in health care over time by making workers more attuned to their health benefits. Economists generally agree that the tax-free status of health benefits means their true cost is essentially hidden: Their value does not even appear in paychecks or year-end W2s. This discourages workers from questioning value for money in health insurance or whether they are overusing services. This in turn pushes up the cost of these benefits and correspondingly reduces the cash income component of worker compensation. A cap would focus workers’ attention on the total cost of their insurance and make workers a self-interested partner with employers in seeking more efficient and less costly plans.

Now, this doesn’t mean that either Butler or other Heritage experts feel the rest of Sen. Wyden’s health policy agenda, including his legislative proposal with Sen. Robert Bennett (R-Utah), are desirable or sound. Nina Owcharenko had urged lawmakers to approach the bill with caution:

Despite many attractive tax reform aspects, a troubling feature of the bill is that it would replace the current health system with one that is heavily regulated by the federal government: Individuals would have access only to plans permitted by the government and would be required to purchase such a plan.

Still, giving individual consumers tax breaks to buy their own insurance plans — plans they could keep through any job changes or spells of unemployment — would greatly stabilize today’s unstable health insurance markets. Moreover, real consumer choice, in which individuals can hire and fire health insurers just like they can with other insurers, would exert intense pressure on the market, forcing it to offer competitive and affordable health plans or lose market share.

As Wyden said today, “Choice and competition are how you get to affordability in health care.” That’s the right response to the statist, central planning, bureaucratic rationing and price controls that are being proposed.