3 ways tax reform can fix our fractured healthcare system

The recent failure to pass a health care bill does not mean that the issue is dead. Significant improvements in our health care system can be achieved by changes in the tax system and should be addressed in the current debate over tax reform.  

Any rational health reform has to treat the three biggest illnesses in our current system — employer-based risk pools, lack of price transparency and state-by-state fragmentation. We need to open up employer-based plans to the general population, bring about price transparency and unleash interstate delivery of care and coverage.   

{mosads}The biggest pathology in our current healthcare system is the reliance on employer-based plans. Large employers cut special deals with insurers. People who are working are healthier and less costly to insure than people who are not working. Thus, the large employers can insure their workers at cheaper prices than the general population.  

People outside the large employer-based plans are condemned to a sicker and costlier risk pool.The Obamacare exchanges were doomed from the start to be extremely expensive.

Not only do employer-based plans skim off the healthy cream of the healthcare market, they contribute other inefficiencies that are a drain on the economy. They reduce labor mobility and force employers to do things outside their core competency, such as negotiating custom deals with insurance companies.

The employer-based system was cemented in place by our tax code, which does not tax employee health benefits. What the tax code giveth, the tax code can taketh away through the budget reconciliation process. The tax deduction for employee health insurance should only be allowed for plans that are open to everyone on the same terms and conditions.  

Anyone should be able to buy the exact same insurance that the insurance companies sell to companies like Apple and Google. Insurance companies should not be allowed to discriminate against people based on their employer.

By combining the large and healthier risk pools of employer-based plans with the much smaller risk pools of the exchanges, the cost of health insurance will be equalized to everyone on a fair basis. Only about 16 percent of the population lacks insurance through employer-based plans, Medicare or Medicaid.

Combining this 16 percent of the population with the half of the population in employer-based plans will cause only a minor increase in cost to employer-based plans. This could be part of the quid pro quo for a corporate tax cut. As those outside the employer-based plans will be able to access more affordable plans, their costs will drop and there will be less need to subsidize them. 

Congress should go one step further and levy a stiff excise tax on discriminatory health plans that are not open to all. This will discourage insurers from offering discriminatory plans, and the revenue raised can be used for helping those who cannot afford coverage. 

The second deadly pathology in our healthcare system is the lack of price transparency. The true prices accepted for medical procedures are treated like closely-guarded state secrets. An enormous amount of resources are currently being wasted in after-the-fact disputes over medical prices.  

Providers send out bills for ridiculous prices and then engage in negotiations to determine a final payment. This leads to costly hassles for patients, providers and payers. While the negotiations drag on, underinsured consumers are often hounded by bill collectors attempting to collect far-higher prices than the providers accept from others.

In order for any market to work, people must have good information about the price and quality of the goods and services they are consuming. This creates the right incentives for people to produce and consume the right things. That’s why the law requires nutrition labels on food and why the law requires stock markets to reveal their prices.  

Large medical providers and payers should be required to report the true prices they accept for medical procedures, just like stock market trades are reported. The database of procedure codes and prices would be available to the general public so they can see the real prices of medical procedures.

With price transparency, consumers and insurers can shop around better for non-emergency care. This will promote competition and efficiency in the delivery of medical services. Providers should also be required to provide patients with good faith estimates of their out-of-pocket costs before providing non-emergency care.

Price disparities will disappear, as price gougers will no longer be able to rip off those who are less able to negotiate. Price transparency will also help reduce disputes over emergency care prices, as there will be good reference prices to determine an appropriate price.

The third major pathology is the state-by-state fragmentation of the medical industry. This impedes the economies of scale that can be achieved through the nationwide delivery of care and insurance coverage. Details, of course, need to be worked out in the definition of a tax-qualified plan.

At the very least, it must be available on the same terms and conditions to everyone in a particular geographic area. It must report the actual prices it pays for medical procedures to a price-reporting service. It must have no or very limited exclusions for pre-existing conditions.  

Chances are,  Congress will want to keep the more popular ACA requirements, such as certain preventative care, keeping the kids on family insurance plans until 26 and no lifetime maximums. Chances are also good that Congress will fight over the controversial parts, such as benefits for birth control. 

These three reforms:  Eliminating employer-based risk pools, promoting price transparency, and facilitating interstate competition, will go a long way to improving our health care system.

They will result in fairer, simpler and more affordable coverage for the entire population, and thus should have broad bipartisan appeal. They will not solve every problem. There is still the vexing public policy question of how and how much to subsidize the less fortunate.

James J. Angel, Ph.D., CFA is an associate finance professor at Georgetown University’s McDonough School of Business.

The views expressed by contributors are their own and not the views of The Hill.