The Next Step in Health Care Reform: Health Financing Accounts
Dr. Roger Beauchamp says Americans should go a step further than health savings accounts, with 'health financing accounts' (HFAs).
Writing in 2016, Dr. Roger Beauchamp offered the concept of Health Financing Accounts that would "grant the same tax advantage to all workers that corporate employees have enjoyed for over 70 years" and "create 'equality of opportunity' for all workers." With polls consistently showing health care is the public's number one public policy concern, we're reprinting this piece as a reminder of how the federal government has distorted the nation's health care system despite continual claims of having the very best of intentions. The article and a related podcast outline a remedy for one of the most important of those distortions.—Ed.
There is a more common-sense way to run our health care business than steering people toward health savings accounts. Instead, empower people with Health Financing Accounts.
As I have explained to listeners of the Health Care News Podcast, our current tax code creates an advantage for employers to purchase health care for employees. Employees enjoy a tax exclusion for the money they earn that the employer uses to purchase health care benefits for the employee. An exclusion is superior to a deduction because the unpaid Federal Insurance Contributions Act (FICA) tax on the cost of the benefit plan is available for the employer to apply toward the benefit cost. This amounts to 15.3 percent of the benefit cost.
Individuals providing for their own care do not have the FICA tax on a comparable amount of earned income to apply toward their health care needs. The FICA tax of 7.65 percent is deducted from their wages and sent to the Internal Revenue Service (IRS) with the 7.65 percent employer match.
Moreover, individuals must spend 10 percent of their adjusted gross income (AGI) before being able to deduct any health care expenses. A deduction recovers only the income tax, not the FICA tax. Consequently, these individuals never have the FICA tax available to apply toward their health care needs as their employer would.
In order to restore a competitive market, legislation is needed to grant the same tax advantage to all workers that corporate employees have enjoyed for over 70 years. The Health Financing Account (HFA) is designed to accomplish that goal and create “equality of opportunity” for all workers.
The HFA is the basis of the what I call the Common Sense Health Care Tax Policy. Here’s how it would work.
Under Common Sense, the employer-sponsored benefit would be capped, so there would be a fixed number to work with for accounting purposes. For those with no employer-sponsored benefit, the employer would transfer the 15.3 percent FICA tax on that amount of earnings into the employee’s HFA, instead of sending it to the IRS.
These tax-excluded dollars would need to be dedicated to health care costs and not limited to insurance. If every tax-excluded dollar were required to be spent on health insurance instead of on actual health care, workers would gain control of only 69 percent to 75 percent of the portion of their earnings supposedly devoted to procuring health care. Third-party payers would get the rest. That’s bad sense.
For a true competitive market to exist, all suppliers in the market must compete for the support of workers who earn the money and pay the cost. Insurers, doctors, and hospitals are suppliers. A competitive market is the best arbiter of efficacy, quality and price.
With the existence of a true competitive market, primary care—routine diagnostic and preventive services—would be paid directly at the time of service with money from the HFA. Insurance would cover only catastrophic events and diseases.
Comparing an HSA to an HFA
Currently, the money in health savings accounts (HSAs) represent only about .04 of 1 percent of total health care spending, and those spending HSA dollars are being charged many times more for a service than what insurers are paying.
The HFA, however, would put hundreds of billions of dollars back under the spending control of those who earned it and once again enable cash to command the best price.
First, consider how HSAs work.
- Eligibility: In order to qualify for an HSA, one must purchase a high deductible insurance plan with at least a $1,300 deductible for an individual and $2,300 for a family.
- Contributions are limited to $3,350 per individual and $6,650 per family.
- Ownership: The individual owns the account which is placed with a bank, credit union, or savings and loan.
- Rollover: Unused balances roll over to the next year.
- Taxes: Contributions are tax deductible, and plus growth and distributions for IRS-approved medical expenses are tax free.
- Account use or payment from the account: Payments are by debit card or a check drawn on the account for section 213-D IRS approved health care expenses.
- Penalty for unauthorized use: The penalty is that it is taxed at the individual’s rate plus 10 percent.
Now consider how HFAs would work:
- Eligibility: All workers would be eligible who do not have an employer-sponsored insurance plan or whose plan cost is less than the employer cap. There would be no requirement to purchase a high deductible plan designed and dictated by government and special interests to qualify for this account.
- Contributions: They would come from two sources. First, for those with no employer benefit plan, the employer would transfer the FICA tax on the capped amount of earnings directly into the employee’s HFA instead of sending it to the IRS. For instance, if the employer cap on benefit cost was set at $12,000 per individual, this would amount to $1,836 (15.3 percent of $12,000). The individual would be free to contribute more up to the annual cap and deduct the amount from his or her taxable income to recover the income tax. So the total contribution limit for an individual per year would be $12,000 or double that for a married couple, with double the FICA tax transfer ($3,672).
- For those whose employer benefit cost is less than the cap, you would subtract the cost from the cap and the employer would transfer the FICA tax on the difference into their HFA. (Example: An employer benefit cost of $8,000 is subtracted from the $12,000 cap and the FICA tax on the $4,000 difference, or $612, would be deposited into the employee’s HFA by his or her employer, instead of sending it to the IRS.) The employee could then contribute up to $3,388 more and deduct it from their taxable income to recover the income tax.
- Ownership: Owned by the individual or jointly for a married couple.
- Rollover: Same as with an HSA.
- Taxes: Same as an HSA with the additional benefit that people would not be required to spend 10 percent of their AGI before having tax-free dollars to spend for their health care.
- Account use or payment from the account: Same as with an HSA with the exception that one may freely choose to purchase any insurance plan across state lines that is free of onerous mandates and meets their needs and budget with money from the account.
- Penalty for unauthorized use: Unauthorized use is taxed at the individual’s rate plus a 25.3 percent penalty (the 10 percent penalty that an HSA currently has plus recovering the 15.3 percent FICA tax, which is not part of an HSA).
No Burden on Business
Under the Common Sense Health Care Tax Policy, HFAs would not take away or reduce any health care benefit that citizens have already earned. This mutes criticism from an economic, psychological and political perspective.
During 50 working years, HFAs would make up to $200,000 more available for health care to those who do not have an employer-sponsored plan, without their having to earn one more penny.
Tax-excluded dollars would be available to all workers, starting with the first dollar dedicated to their health care, just like employer-sponsored plans have been.
Common Sense places no financial burden on small business, our nation’s primary job creators, and eliminates the incentive for them to reduce workers’ hours.
Common Sense eliminates the incentive to bargain for increased benefits instead of increased wages.
This degree of economic freedom will force price transparency among health care providers, pharmacists, and insurers and enable cash to command the best price.
Common Sense makes more money available to our retired senior citizens who are working part-time jobs to pay for their health care and medications. The FICA tax on their first $12,000 of earnings will go into their HFA instead of sending it to the IRS.
To help restore individual liberty and freedom of choice, citizens must demand their United States legislators sponsor and support legislation to create health care tax plans that make sense—like the Common Sense Health Care Tax Policy.
Roger Beauchamp, D.D.S., (firstname.lastname@example.org) writes from Horseshoe Bay, Texas.
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