TAX POLICY
AND THE HISTORY
OF HEALTH
INSURANCE
Robert B. Helms
Resident Scholar
American Enterprise Institute
Taxes and Health Insurance:
Analysis and Policy
The Tax Policy Center and the
American Tax Policy Institute
February 29, 2008
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.
2
History of Health Insurance
Early growth in the
1930s
World War II
Post-war rapid growth
Later developments
Current issues
3
Private Hospital Insurance Coverage,
1939-2005
Persons covered
for hospital care,
Hist. Stat of US
200
Millions
150
Persons <65
covered for
hospital care,
NCHS
100
50
1954
Act
WWII
Tax reform
Acts, 1981
& 1986
Medicare &
Medicaid
Acts
HSAs/
HRAs
0
1940
1950
1960
1970
1980
1990
2000
Sources: Historical Statistics of the United States, Millennial Edition. 2006.
NCHS, “Health, U.S., 2007,” 2007.
4
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.
5
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
Jonas E. Salk, MD
1952: Isoniazid; cardiac pacemaker
1953: Open heart surgery; polio vaccine
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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
7
World War II Industrial Policy
War Production
Board (WPB)
 Agency to coordinate
production of warrelated materials
 Intensive government
planning and control of
production
John Deere plant
8
WWII Wage and Price Controls
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
9
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
10
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
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Growth in the Post-War Period
Women in
the Workplace
Population
40
200
$10
$ Thous, 1982
250
30
150
Millions
Millions
Per Capita
Disp. Income
100
20
10
50
1945 1975
Up 54%
$6
$4
$2
$0
0
0
$8
1947
1975
Up 122%
1945 1975
Up 69%
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Private Hospital Insurance Coverage
Group versus Individual, 1940-1975
Millions of Persons
200
150
Employer Group
100
Individual
50
0
1940 1945 1950 1955 1960 1965 1970 1975
Note: Employer group is the total of persons covered by Blue Cross/Blue Shield plus insurance company
group policies.
Source: Historical Statistics of the United States – Millennial Edition, Series Bd294-305.
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Percent of NHE
Growth in Third-party Payments
1960-2000
90
80
70
60
50
40
30
20
10
0
Out-of-Pocket
Third Party
1960
1970
1980
1990
2000
14
Private Group Health Benefits as a Share of
Total Compensation, 1960-2006
7
6
Percent
5
4
3
2
1
0
1960s
1970s
1980s
1990s
2000s
Source: Jacobs, Kaiser Family Foundation, Feb. 2008.
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Other Developments affecting
Health Insurance, 1975-2008
The growth of self-insurance
The rise and gradual change of managed care
The growth of Consumer Directed Health Care
(CDHC)
Tax law changes that reduced upper-income
MTRs
 Increased the effective price of group health
insurance
 May have led to a decline in the comprehensiveness
of coverage
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$ Billions
Health Insurance Tax Expenditures
1970 – 2006 (Increased $16B/yr since 2000)
State
$250
$200
Self Empl and
Retirees
$150
Employer-Paid
Premiums and
Payroll Taxes
$100
$50
$0
Med Exp
Deduction
1970 1980 1990 2000 2004
2006
Sources: CBO 1970-1990; The Lewin Group, 2000-2006.
2006 is an unpublished total estimate by John Sheils.
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Effects of Tax Policy
•Higher prices
•Lack of access
•Winners & Losers
P
S
Higher
Prices
Increase
In Demand
D’
D
Higher
Output
Q
Income
Growth
Tax
Policy
Medical
Technology
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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
19
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
20
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
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3
Three Choices for Health
Reform
Choice Three –
The Ancient
Chinese Model
 Obvious
incentives to
improve medical
outcomes
 Not much chance
of AMA support
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