Millions of Americans lost their jobs during COVID-19-related economic lockdowns, which resulted in many without employer health insurance. One reason health care is so cost-prohibitive for people is that they do not enjoy the same tax advantages as those who get insurance from an employer. Health Finance Accounts (HFAs) could fix that disparity. Roger Beauchamp, DDS, is a policy advisor to the Heartland Institute, which co-publishes Health Care News and a long- time champion of HFAs. Beauchamp discusses how HFAs could work without disruption to employer health care and could save the federal government money.
Health Care News (HCN): In a nutshell, what is a health finance account?
Beauchamp: HFAs are health care spending accounts individuals own and manage. If you are self-employed or work for an employer, you are required to pay 15.3 percent in the payroll tax, the tax that supports Medicare and Social Security on your earnings. Employers split this tax with their employees. There has been a general agreement among economists that every dollar that the employer spends, that benefits the employee, has been earned by the employee. This includes the employer FICA tax match and unemployment compensation which has been agreed to in collective bargaining. Employers also compensate their employees by paying for health care. This compensation is excluded from all tax, with the idea that the tax savings help to pay for health care. Health insurance is really earned compensation. Self-employed people, however, do not have this tax advantage. An HFA makes the tax savings, on a comparable amount of earned income, available to all workers to apply toward their health care needs. Equality of opportunity.
HCN: Don’t health reimbursement accounts (HRAs) do what an HFA would do? Wouldn’t it be easier to keep HRAs and give self-employed people a payroll exemption for money they spend on health care?
Beauchamp: No. The money in an HRA has to be spent or it is lost. And the government determines how it is spent. It should be up to the individual who earned the money to decide what kind of health care they want to purchase. It wouldn’t necessarily have to be spent on insurance. Many self-employed cannot afford to dedicate as much of their earned income to health care as someone who works for a large employer, but they still have to pay their FICA tax, 100 percent of it. The HFA eliminates that disparity.
HCN: You say we would have to determine the amount that could go into an HFA each year. Are you suggesting a cap on what an employer spends on health care? Wouldn’t this, in essence, be giving the government control over how much an employer compensates an employee?
Beauchamp: Yes, but this is important: the cap on the employer exclusion does not limit how much an employer compensates an employee. It just limits the amount of tax excluded dollars that can be dedicated to health care so all workers can have the same opportunity to provide for their health care needs to the best of their ability. Employees could now be in a better position to negotiate for a pay raise because HFAs would eliminate the incentive to shift so much of their compensation to health insurance. The exclusion cap would have to be adjusted for inflation.
HCN: Could you give an example with numbers on how an HFA would work?
Beauchamp: Let’s say we set the employer cap on $13,000 per individual. The payroll tax on this would amount to $1,989. For those workers with no employer health care benefit, the FICA tax on that amount of earnings would be deposited into their HFA annually, instead of sending it to the IRS. The self-employed person also could place the FICA tax on their first $13,000.00 of earnings into their HFA, instead of sending it to the IRS. Employees and the self-employed would be free to contribute to their HFA up to the $13,000 less the $1,989 already set aside in the account. That would be $11,011 ($13,000.00 minus $1,989.00). That $11,011 could be then deducted from a person’s taxable income. Let’s say the employer benefit-cost is $8,000.00, the employer would transfer $765.00 into the employee’s HFA, instead of sending it to the IRS.($13,000.00 minus $8,000.00 equals $5,000.00. The FICA tax on that amount is $765.00).
HCN: That does not sound like a lot of money to purchase health insurance, but is it possible employees would reject this idea?
Beauchamp: Why would they? We are not taking away any benefit that employees have presently earned. I would say the majority, maybe 99 percent, of all employees, whose benefit-cost is less than the cap, would benefit from an HFA by having more money under their direct spending control.
The money wouldn’t have to be spent on an expensive health plan but could be used on any health-related expense. There is no requirement to purchase insurance, but they are free to purchase any insurance that meets their needs and budget. If people paid for more health services directly, it could have a dramatic impact on pricing. Prices would more closely reflect value. This is not something we see necessarily in health care today. There is a lot of waste because individuals are abstracted from the true cost because someone else is managing the bill. It is not free, however. Individuals earned their employer benefit and they also pay for co-pays, which have been steadily rising. There is also enormous overhead and profiteering enabled by the third-party payment system that has to be factored into costs.
HCN: If we were to offer this payroll exclusion to all employed people, wouldn’t that hurt funding for Medicare and Social Security?
Beauchamp: No. There is no money in the so-called trust funds. It has been spent and replaced with government IOUs.
Roger G. Beauchamp, D.D.S., “Common Sense Health Care Policy,” November 31, 2016: https://drbeauchamp.wordpress.com
Roger Beauchamp, D.D.S., The Next Step in Health Care Reform: Health Financing Accounts, March 25, 2020: https://www.heartland.org/news-opinion/news/the-next-step-in-health-care-reform-health-financing-accounts
The Heartland Daily Podcast, May 11, 2016: Reforming Tax Code to Empower Employees’ Health Care Options: https://www.heartland.org/multimedia/podcasts/dr-roger-beauchamp-reforming-tax-code-to-empower-employees-health-care-options