Value-added Tax Proposal To Reform US Health Care

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Main Category: Medicare / Medicaid / SCHIP
Also Included In: Regulatory Affairs / Drug Approvals;  Public Health
Article Date: 22 Oct 2008 - 0:00 PDT

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In an article published in the October 22/29 issue of JAMA, authors argue that incentives for cost-containment and health care quality could be created by implementing a value-added tax for universal health insurance vouchers. Samuel Y. Sessions, M.D., J.D. (Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center, Torrance, Calif.) and Philip R. Lee, M.D. (University of California, San Francisco) also claim that this plan would allow for a substantial decrease in other taxes.

According to Sessions and Lee, U.S. health care finance is in disarray partly due to the complex nature and types of health care funding sources. "It is time to consider a thorough overhaul of this non-system. The goal would be not only to strengthen health care finance for its own sake, but also to achieve fundamental reform of health care. In other words, along with a small but increasing number of other commentators, we contend that comprehensive tax reform could be a powerful driver of health care reform," they write.

An overhaul of the health care finance system, including comprehensive tax reform, would require a complete reexamination and reengineering of the entire U.S. tax structure. Sessions and Lee note that, "The 60 percent of U.S. health care costs financed by taxes equals 10 percent of U.S. gross national product or more than one-third of federal and state tax revenues. That is, de facto U.S. tax and health policy already devotes more than one-third of all U.S. taxes to health care." The authors believe that tax and finance reform would enable:

• Increased accountability of government policy makers for health care finance decisions
• Greater public awareness of health care costs
• A system where nearly everyone pays into and benefits from the same program
• A system where everyone has an incentive to consider both costs and benefits

This value-added tax (VAT) method of financing universal health insurance builds on a reform model pioneered by Ezekiel J. Emanuel, M.D., Ph.D., and Victor R. Fuchs, Ph.D. Sessions and Lee specify that, "Insurers would be required to accept any applicant presenting a voucher regardless of health status. Risk adjustment, possibly with a backup reinsurance pool, would protect them against adverse selection. Households could purchase additional insurance, but with after-tax dollars only; the subsidy for employer-provided insurance would be repealed. Medicaid would be phased out under a set schedule. Medicare would also be phased out by not adding new enrollees and by allowing Medicare beneficiaries already enrolled to opt into the new system if they wanted to do so."

Some rough calculations using current health care cost levels suggest that a VAT rate could be as low as 5% if most existing revenues are maintained or as high as 20% if the sole revenue source were the VAT. The voucher system would be funded by the VAT and possibly other revenues. The authors argue that as tax revenue increases from the VAT, there would be a significant and possible dramatic cut in other taxes. It may be possible to remove many U.S. households from the income tax entirely and require lower tax rates for the remainder if VAT revenues are substituted for the income taxes that are currently used to pay for health care. Since premiums paid by employers and employees would also be reduced, many incomes would increase by a significant amount.

"Because families and individuals would be able to choose freely among health care insurers, insurers would have to compete to secure and retain their customer base. This would weaken incentives to focus on cost-shifting gamesmanship and strengthen incentives to pursue customer satisfaction and long-term and short-term health care quality. It would also require establishing working relationships motivated by the same goals with individuals and institutions directly providing health care," write the authors.

They conclude that, "For better or worse, fundamental tax and finance issues are inevitably much more than extra cargo in health care policy. Unfortunately, and in no small part because of skittishness about directly confronting the subject of taxes, they have too often been treated as such. In thinking about health care reform, it is time for this to stop. Those concerned about the direction of U.S. health care should start putting the finance horse before the benefits and delivery cart."

Using Tax Reform to Drive Health Care Reform: Putting the Horse Before the Cart
Samuel Y. Sessions; Philip R. Lee
JAMA (2008); 300[16]: pp. 1929-1931.
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Written by: Peter M Crosta
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