Health Insurance Crisis Again

20th century solutions for 21st century problems?

The number of Americans without health insurance rose by 2.4 million from 2001 and 2002, up to 43.5 million, according to figures just released by the Census Bureau. Since health care is shaping up to be THE political issue for the 2004 presidential campaign, the new numbers garnered front-page coverage in the New York Times, The Washington Post, and The Los Angeles Times, among others. The usual suspects will undoubtedly use the news to call for "comprehensive" (read: socialized) health insurance.

"Considering that 2.7 million jobs have been lost recently, why would anyone be surprised that 2.4 million more people are without health insurance?" asks Greg Scandlen, director of the Center for Consumer Driven Health Care at the Galen Institute. "If you lose your job, you lose your health insurance."

"The problem is that politicians are still trying to impose a 20th century health insurance system on a 21st century workforce," says Galen Institute President Grace-Marie Turner.

California, for example, seems determined to keep itself stuck firmly in the 20th century by trying to require further costly health insurance mandates on employers. If California employers who pay wages of, say, $25,000 per year, are required to purchase $8,000 health insurance plans to cover their workers' families, the result will be that companies will have to fire people in order to cover the workers they still have. The unintended but unavoidable consequence of trying to extend the state's old-fashioned employer-centered health insurance system will be higher unemployment and fewer business startups.

The fact is that fewer and fewer Americans are following the career paths of their parents and grandparents—i.e., graduating from high school, going to work for one big company that provides health insurance for the worker's family, and retiring at 65 with a company pension. In the 2lst century, workers change jobs more frequently, more people are working for smaller companies that offer fewer benefits, and one in 12 Americans will start her own business. What is needed is a more flexible health insurance system to meet the needs of the modern world. So why not let workers decide how to handle their own health insurance needs?

One way to increase the number of insured Americans is to break the link between a job and a health insurance policy. Right now employers are subsidized to the tune of more than $140 billion per year in federal tax breaks to supply coverage for their employees. Employees do not pay taxes on health insurance benefits provided by their bosses. Individuals have to pay for their health plans with after-tax dollars. The goal should be to level the insurance playing field by giving the same tax break to all consumers, whether they work for a company or not.

Wharton economist Mark Pauly and American Enterprise Institute adjunct scholar John Hoff have calculated that, "A modest tax credit paying50 percent of the premium would reduce the number of uninsured workers and family members with low incomes by as much as 52 percent." If health insurance for a family costs $8,000 per year, a 50 percent tax credit will mean that the family would be able to reduce their tax bill by $4,000 to pay half the cost of their policy. If Pauly and Hoff are right, such a tax credit would reduce the number of uninsured by 21 million, while giving them the flexibility to choose the coverage they want and the freedom to change jobs without fear of losing their health insurance.

Currently, the Bush Administration is proposing that "families with two or more children and incomes under $25,000 could receive up to a $3,000 credit to cover as much as 90 percent of the costs of purchasing health insurance. The credit phases out at $60,000 for families." Individuals with incomes under $15,000 would get a $1,000 credit. That's a start, but it should be expanded to include all Americans.

Another attractive option for increasing the number of Americans who can afford health insurance is allowing for medical savings accounts (MSAs), combined with high-deductible catastrophic health insurance policies. MSAs allow people to put money into tax-deductible IRA-like accounts. Tax-free MSA funds would be used to pay for routine checkups, vaccinations, and so forth, while costly medical procedures would be covered by high-deductible insurance policies. Such plans typically cost 20 percent to 60 percent less than conventional health insurance policies.

Currently Congress limits MSAs to only 750,000 Americans, and will permit no more to be established after the end of this year. Those limits should be lifted to allow more Americans access to the benefits of MSAs.

The old-fashioned centralized health systems are beginning to crack around the globe. Just last week Germany passed legislation requiring its citizens to pay more out of their own pockets for health care. It is becoming clearer that what worked badly in the 20th century will only work worse in the 21st.