WASHINGTON _ Leading conservative public policy groups hereare prescribing some strong medicine for the nation's ailing health caresystem: rewrite U.S. tax policy to create a consumer-driven health caremarket.At a news briefing on Wednesday, analysts from The HeritageFoundation, the Cato Institute and the American Enterprise Institute forPublic Policy Research (AEI), among others, proposed that thegovernment end its policy of excluding employer-paid medical benefitsfrom employees' taxable income.According to Robert Helms, director of health policy studies at AEI,commonly identified villains of the current costly health care system _such as physicians, malpractice lawyers, drug companies, insurancecompanies and government bureaucrats _ pale in comparison to thesilent, unseen villain of distorted tax incentives.In the early 1950's, the Internal Revenue Service (IRS) decided not tocount employer-provided health benefits as taxable income. "The IRSdecision has cascaded through the U.S. health care system for nearlyhalf a century to dictate its structure and create many of its problems,demonstrating the awesome power of tax incentives," Grace-MarieArnett, principal of the Washington-based health consulting firmArnett & Co., wrote in a recent Wall Street Journal editorial. Arnettcoordinated the efforts of the think tanks and analysts, called theConsensus Group, who reported their findings and recommendationson Wednesday.Helms said that because of federal tax laws, consumers of health carehave been disastrously removed from the real costs of the goods theyare consuming. The unhappy result is that prices and spending haverisen uncontrollably, a state of affairs which the U.S. can no longerafford."Federal tax law has contributed to what we call the `third partypayment' problem where consumers, the first party, have weakincentives to become cost-effective purchasers, the providers haveweak incentives to consider the cost of care, and the employees havestrong incentives to keep bargaining for more and more in their healthinsurance packages and less cost-sharing," said Helms.For example, a typical worker who earns $30,000 per year might alsoreceive from his or her employer medical benefits worth $4,000 peryear. Under current law, the $4,000 is deducted by the employer as anoperating expense and the worker does not list the $4,000 as income.As a result, many workers regard their medical benefits as "free."Indeed, unions and other employee groups have negotiated richmedical policies with low deductibles precisely because of the beliefthat the employer is paying.However, as medical benefits packages have grown nationwide, wageincreases have slowed, according to experts. Analysts in the ConsensusGroup maintain that workers have paid dearly for their benefits.Meanwhile, the 40 percent of Americans who do not receive healthbenefits from their employers must buy health insurance with after-taxdollars giving them an unfair disadvantage.Although rewriting tax law may sound rather dry, the ConsensusGroup's proposal _ ending the government's tax subsidy foremployer-provided health insurance _ is about as radical as it gets. Asone reporter at Wednesday's briefing pointed out, the idea holds aboutthe same appeal for politicians as repealing the home mortgagededuction. Rep. Jim Cooper (D-Tenn.), author of a major managedcompetition health care plan, has reportedly called it "politicalnitroglycerin."Several of the health care reform proposals floating around Capitol Hillthese days, including Cooper's, do contain watered-down attempts torestructure the health benefits tax subsidy, but none goes as far as theConsensus Group's proposal. Many politicians appear to be movingtoward the idea of incremental reform of tax and insurance laws.But health policy analysts from the Consensus Group warned thatincremental reforms will not create a truly competitive market forhealth care. They said that, ultimately, the nation faces two starkalternatives for controlling health care costs: market forces orgovernment regulation. If incremental reforms are enacted and then failto create a competitive market, lawmakers will resort to massivegovernment controls, they warn."Incremental reforms are ultimately unstable," said Michael Tanner,director of health and welfare studies at the Cato Institute. "If the realproblems of health care are not addressed, Congress will be backrevisiting the issue year after year."The Consensus Group recommendations are as follows:y End the exclusion of employer-paid health benefits from employees'taxable income. In certain circumstances, the government couldprovide tax relief to offset the increased taxes that would result fromthe loss of the exclusion.y Offer tax relief to individuals in the form of tax credits or vouchers tobe used to offset the costs of catastrophic health insurance, out-of-pocket expenses or the opening of medical savings accounts;depending upon personal choice and individual family circumstances.y Reform insurance markets to expand access to health insurance,including guaranteed renewal and continued access to insuranceregardless of job changes. In addition, include provisions to rewardhealthy lifestyles and encourage responsibility for medicalexpenditures.y Incorporate Medicaid beneficiaries into the private insurance market.y Reform Medicare by expanding private sector options forbeneficiaries and giving beneficiaries the option, at initial eligibility, toretain their own private insurance. n0602094THINKTANK

-- Lisa Piercey Washington Editor

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