Comprehensive tax reform could play important role in creating health-care reform

October 21, 2008

A proposal to implement a value-added tax for universal health insurance vouchers would also provide for significant decreases in other taxes, according to the authors of a commentary in the October 22/29 issue of JAMA, a theme issue on the Health of the Nation. They add that this plan would create incentives for cost-containment and health care quality.

Samuel Y. Sessions, M.D., J.D., of the Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center, Torrance, Calif., presented the commentary at a JAMA media briefing at the National Press Club in Washington, D.C.

Dr. Sessions and co-author Philip R. Lee, M.D., of the University of California, San Francisco, write that the complex variety of health care funding sources has left U.S. health care finance in disarray. "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."

According to the authors, comprehensive tax reform would mean re-examining and re-engineering the entire structure of the U.S. tax system. "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." They suggest that tax and financing reform would result in increased accountability of government policy makers for health care finance decisions and greater public awareness of health care costs; a system structured so that nearly everyone pays into and benefits from the same program, and incentives for all to consider both costs and benefits.

The authors propose, building on the work of Ezekiel J. Emanuel, M.D., Ph.D., and Victor R. Fuchs, Ph.D., a value-added tax (VAT) to finance a system of universal health insurance vouchers. "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."

They write that a rough estimate at current health care cost levels would be for a VAT rate of as low as 5 percent if most existing revenues are retained and of more than 20 percent if the VAT were used as the sole revenue source. The VAT and perhaps other revenues would be dedicated to the voucher system. Tax increases from the VAT would be offset by significant, and potentially dramatic, cuts in other taxes. Substituting VAT revenues for income taxes now used to pay for health care would make it possible both to remove many U.S. households from the income tax entirely and to institute significantly lower tax rates for the remainder. Also, many incomes would increase by the amount of premiums no longer paid by employers or employees.

"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."

"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," the authors conclude.
(JAMA. 2008;300[16]:1929-1931. Available pre-embargo to the media at

Editor's Note: Please see the article for additional information, including financial disclosures, funding and support, etc.

The JAMA Network Journals

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