Look to tax credits to fight skyrocketing health insurance premiums

The cost of employer-based health insurance is putting a crimp on people's budgets and adding to the ranks of the uninsured. The AMA has a plan to solve these problems.

Editorial. Oct. 6, 2003.

There is great agreement among those in health care that the private-sector health insurance system, as it now stands, is untenable. One reason for the pessimism is the sheer cost of insurance.

According to an AMA Health Care Financial Trends report released over the summer, employer-based health plan premiums went up 43% just between 1998 and 2002. The Kaiser Family Foundation says premiums increased 13.9% between mid-2002 and mid-2003, the highest increase since 1990. No one is predicting such increases will abate anytime soon.

See related content

What has gone wrong? The AMA's report, put together by its Health Policy Group, maps out the reasons. Consumer demand for care, improvements in medical technology and a short-term decline in insurers' profitability all play a part. But so does health plans' control of their local markets.

As the AMA stated in an earlier report, most cities and states have a few large plans that make up the majority of the market. That's reflected, too, in the fact that 92% of businesses, representing one-third of American workers, offering health benefits give their employees only one plan to choose from.

Health plan market dominance is so great that even in cases where more than one option was available, the multiple options were only variations within one plan, according to the latest AMA report. The result is that there is not enough competition in the marketplace to compel plans to find ways to reduce their premiums.

Employers, through efforts like the Fortune 500-employer-led Leapfrog Group, are trying to keep a lid on costs, but ultimately it is the individual patient who pays.

On paper, employers' share of the health plan premium is growing faster than employees' -- up 52% for employers from 1998 to 2002, compared with a 24% increase for employees. But employers' share, unlike their employees', is a tax-deductible business expense, just like cash wage and salary compensation, according to the AMA report.

So the employer share of the premium is effectively 0%. Meanwhile, employees are seeing their raises being poured into the health plans' pockets instead of their own, no matter how much an individual employer kicks in.

But what would take the place of the current system? We've argued on these pages previously against a single-payer system because it would replace an already bureaucratic system with one even more bureaucratic and less adaptive and less responsive to patient needs. In theory, everyone would be insured; in practice, it would be difficult to get in to see a physician, and fewer resources would be available.

That is why, in its report, the AMA again calls for adoption of a plan that would provide tax credits to consumers, instead of employers, for their health insurance expenditures. The tax credits should be inversely related to income, refundable and advanceable and would be available to most households. Families who owe little or no income tax would proportionally receive the highest tax credit. Because the money is advanceable, those who can't afford monthly premium payments can purchase coverage without waiting for a year-end tax credit.

In turn, this plan will create more competition in the health plan market, making plans more responsive to members and limiting premium increases. Putting the power in individuals' hands means no more reliance on what the employer may or may not offer, and greater access to coverage for those who couldn't ordinarily afford it.

With health plan premium rates continuing to skyrocket, there's no time to lose. Why not fix this faltering system now?