12 Oct 2015 Free Market Health Care Reform Requires Both Refundable Tax Credits and Large Health Savings Accounts
Including Both in an ObamaCare Replacement Will Give Americans More Choices of How to Fund Their Health Insurance
This Can Bridge the Divide on the Political Right over How Best to Reform the Tax Treatment of Health Insurance
Use Medicaid to Help Pay for the Tax Credits; Use Large Health Savings Accounts to Replace the Inefficient Employer-Based Tax Exclusion
Washington, D.C. – “The best way to replace ObamaCare is with a free-market based reform that includes both refundable tax credits and large Health Savings Accounts (HSAs),” said Dr. David Hogberg, health policy analyst at the National Center for Public Policy Research.
In a new policy analysis entitled “Refundable Tax Credits or Large Health Savings Accounts? Let’s Do Both,” Dr. Hogberg explains how the divide on the political right has made it difficult to unify around a free-market alternative to ObamaCare.
“Basically, there is a divide not only within the Republican Party but also among conservatives and libertarians over whether refundable tax credits or large HSAs are a better way to reform the tax treatment of health insurance,” said Dr. Hogberg. “One side criticizes refundable tax credits as redistributive because people with no income tax are eligible for them. The other side criticizes large HSAs as doing little to help lower-income people.”
Hogberg proposes a system that gives Americans a choice. They can choose a refundable tax credit that will be age-based. People under age 18 will receive a credit of $900, age 18-34 $1,200, age 35-50 $2,100, and age 51-64 $3,000. Or they can choose a large HSA that will also be age-based. The amount they can put into a large HSA will be triple the amount of the tax credit. The tax reduction they will receive for setting up an HSA will be equal to the amount of the tax credit.
“That makes the system tax-equitable,” said Dr. Hogberg. “It also allows Americans to choose a tax treatment of health insurance that fits their needs. Younger people who tend to earn less and have little tax liability will probably find the tax credit more useful. As they get older and earn more and have more medical expenses, they will probably find large HSAs more appealing.”
To address the criticism that refundable tax credits are redistributive, Dr. Hogberg proposes reducing Medicaid by an amount equal to a tax credit for every person who leaves Medicaid and receives a tax credit. “I think a lot of people on Medicaid will jump at the chance to leave it and get private insurance using a tax credit,” he said. “However, to help pay for that funding, Medicaid should be reduced by an equivalent amount.”
Finally, large HSAs can be used to replace the highly inefficient employer-based tax exclusion. Currently, employees receive health insurance tax-free, but only if they get it through their employer. Letting employers switch to a system of large HSAs will enable them to switch from a system that currently results in unstable premium hikes year in and year out, to a stable, defined benefit. More importantly, it will give employees more freedom to choose their preferred insurance and will give them a benefit that is “portable.”
“However, the change must be voluntary,” warned Dr. Hogberg. “That is, it must be left up to employers to make the change. Over 160 million people receive their insurance through employers. If Congress forces the change on them, they’ll likely be worried about losing their insurance, causing a backlash.”
The National Center for Public Policy Research, founded in 1982, is a non-partisan, free-market, independent conservative think-tank. Ninety-four percent of its support comes from individuals, less than four percent from foundations, and less than two percent from corporations. It receives over 350,000 individual contributions a year from over 96,000 active recent contributors. Sign up for free issue alerts here.
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