TAX POLICY AND THE HISTORY OF HEALTH INSURANCE

1. TAX POLICY AND THE HISTORY OF HEALTH INSURANCE

2. A Different Model of Health Insurance “Long before the Christian era, it was the custom among the more affluent people in [ancient China] to pay the doctor as long as they continued in good health. When disability overtook them, the medical man’s compensation was stopped, and if his ministrations were unavailing in effecting recovery, the executioner relieved the doctor of his cares.” E. J. Faulkner, Health Insurance, 1960, pp. 510-511.

3. History of Health Insurance • Early growth in the 1930s • World War II • Post-war rapid growth • Later developments • Current issues

4. Private Hospital Insurance Coverage, 1939-2005 Persons covered for hospital care, Hist. Stat of US Persons <65 covered for hospital care, NCHS Tax reform Acts, 1981 & 1986 Medicare & Medicaid Acts HSAs/ HRAs 1954 Act WWII Sources: Historical Statistics of the United States, Millennial Edition. 2006. NCHS, “Health, U.S., 2007,” 2007.

5. Health Care in the 1930s “In the 1930s, the average physician could not affect the average condition of the average patient” Source: R. Helms based on similar quotes from medical historians.

6. Major Medical Innovations • 1929: Fleming publishes discovery of penicillin • 1935: Sulfur drugs • 1939: Prontosil • 1940-41: Penicillin developed and tested • 1944: Streptomycin developed • 1946: Large scale production of penicillin • 1950: Terramycin • 1952: Isoniazid; cardiac pacemaker • 1953: Open heart surgery; polio vaccine Jonas E. Salk, MD

7. Early History of Health Insurance • Early prepayment plans by hospitals • AHA organized these into Blue Cross plans • To assure hospital payment • “free choice” to reduce hospital competition • Physician prepayment plans developed into Blue Shield plans (AMA) • Commercial health insurance came later

8. World War II Industrial Policy • War Production Board (WPB) • Agency to coordinate production of war-related materials • Intensive government planning and control of production John Deere plant

9. Two programs to control wartime inflation Office of Price Administration (OPA) Price controls and rationing of consumer commodities (e.g., sugar, coffee, butter, tires) National War Labor Board (WLB) Control of wartime wages Settlement of labor disputes to assure wartime production WWII Wage and Price Controls

10. National War Labor Board • 1943: War Labor Board and IRS ruling that employer fringe benefits did not count as taxable wages • But could not exceed 5% of wages

11. The Post-War Period • 1954: Exclusion of health insurance from taxable income confirmed by the Congress • Post-war period • Medical advances increased cost of medical care and the demand for health insurance • Rapid growth in health insurance coverage

12. Growth in the Post-War Period Women in the Workplace Per Capita Disp. Income Population Up 69% Up 122% Up 54%

13. Private Hospital Insurance CoverageGroup versus Individual, 1940-1975 Note: Employer group is the total of persons covered by Blue Cross/Blue Shield plus insurance company group policies. Source: Historical Statistics of the United States – Millennial Edition, Series Bd294-305.

14. Growth in Third-party Payments1960-2000 Percent of NHE

15. Private Group Health Benefits as a Share of Total Compensation, 1960-2006 Source: Jacobs, Kaiser Family Foundation, Feb. 2008.

16. Other Developments affecting Health Insurance, 1975-2008 • The growth of self-insurance • The rise and gradual change of managed care • The growth of Consumer Directed Health Care (CDHC) • Tax law changes that reduced upper-income MTRs • Increased the effective price of group health insurance • May have led to a decline in the comprehensiveness of coverage

17. Health Insurance Tax Expenditures 1970 – 2006 (Increased $16B/yr since 2000) $ Billions Sources: CBO 1970-1990; The Lewin Group, 2000-2006. 2006 is an unpublished total estimate by John Sheils.

18. Effects of Tax Policy • Higher prices • Lack of access • Winners & Losers P S Higher Prices Increase In Demand D’ D Medical Technology Tax Policy Income Growth Q Higher Output

19. Effects of Tax Policy on Health Insurance • Intensified the effects of increases in income, population, and medical technology • Expanded employer-based group insurance relative to individual insurance coverage • Expanded insurance benefits – hospital, outpatient, mental health, dental, drugs • Reduced cost sharing • Induced a higher level of costs, prices, and expenditures – created winners and losers

20. 1 Three Choices for Health Reform • Choice One – the tax reform approach • Variations to end the open-ended subsidy • Eliminate the tax exclusion • A tax cap (IRS 1940s, Reagan 1984-85) • Standard deduction (Bush 2008, 2009) • Strong incentives to redesign health insurance coverage • More research on cost effectiveness • No one health delivery model will dominate • More cost-effective options for small businesses • Tax reform is a necessary (but not sufficient) condition for efficient health reform

21. 2 Three Choices for Health Reform • Choice Two -- The regulatory approach • Administered fee schedules (ex. Medicare) • Global budgeting (ex. 1993 Clinton proposal) • Mandated benefits • Mandated coverage • Individual • Employer • Underwriting restrictions • Mandates on insurance payout rates

22. 3 Three Choices for Health Reform • Choice Three – The Ancient Chinese Model • Obvious incentives to improve medical outcomes • Not much chance of AMA support