The current tax treatment of employer sponsored health insurance offers a substantial subsidy of nearly $157 billion to American families. However, the benefits appear to accrue mostly to families from higher income levels and to those with more disposable income.
Since many options for health reform include providing subsidies to low income persons in order to facilitate the purchase of private health insurance, it is important to understand the current effect of present subsidies. In 2002, it is estimated that various tax subsidies covered approximately 16 percent of total health care costs for the civilian non-institutionalized population. This study focuses on this population, but specifically within the non-elderly (less than 65 years old) group. The purpose of this study was to examine the effect of various subsidies on the economic burden of families that purchase health care.
Data for this study was derived from the national Medical Expenditure Panel Survey for years 2002 and 2003, which measured out-of-pocket health insurance premium expenses. The amounts of employer contributions to health care costs where extrapolated from an employer survey. The exemption of health insurance from payroll and income taxes yielded the largest subsidy ($156.6 billion). The next largest subsidy was exclusion from state and local taxes ($38.0 billion). A far smaller amount comprised the medical expense deduction available to individuals who itemize their tax deductions ($2.7 billion).
One of the major findings it that the tax subsidies in existence for families is relatively small. The benefits of these subsidies appear to accrue mostly to families from higher income brackets. For instance, for families with incomes less than 100% federal poverty level (FPL) the average subsidy is about $199. Whereas for a family with inome 400% FPL or greater, the average subsidy is over ten times larger ($2,861).
Thus, when looking at which families have greater economic burden (defined as spending a set proportion – 10, 20, or 30 percent – of income on medical care), lower income families suffer at a much greater frequency than families with higher incomes.
Interestingly, economic burdens do appear to be drastically reduced among low income families that have some form of public coverage (Medicaid, CHIP, etc.). For instance, while greater than 42 percent of privately-insured families with incomes <100% FPL spent greater than 20% of their income on health care, only about 18 percent of publicly-insured families with incomes <100% FPL spent more than 20% of income on health care.
Families from higher income brackets (>400% FPL) demonstrate the opposite trend. While 1.4 percent of privately-insured higher-families spend greater than 20% of income on health care, approximately 5% of publicly-insured families from this income group spend 20% of income on health care.
This article summarizes the types and amounts of current subsidies available to Americans to assist with the purchase of health insurance. Overwhelmingly, the largest of subsidies is the exclusion of employer-sponsored health insurance (ESHI) from taxes. Some advocates recommend removing this major subsidy and replacing it with vouchers that individuals could use to purchase health insurance on their own. As this study shows, current subsidies are targeted towards benefitting higher-income individuals. Unfortunately, the American public and many Democratic leaders oppose the idea of restructuring health care subsidies. The most recent Kaiser Family Foundation poll indicates that 50 percent of Americans oppose such a plan; while only 45 percent favor it. Likewise, the current health reform bills have no plan to remove the subsidies benefiting higher income individuals but instead seek to add additional subsidies targeted to low-income individuals. In so doing, lawmakers are potentially losing $157 billion which could be used to pay for health reform.
Cedric K. Dark, MD, MPH