Proposed: Allow the deduction of ALL Medical Costs

I have followed our nation’s health care debates with some interest. I was in DC when Mitt Romney announced the Massachusetts plan with the backing of the Heritage Foundation and American Enterprise Institute. You can put me down as a high-income right-winger who KNOWS that our current health care system is not performing optimally.

One problem (among many) is that we are tied to our employers for truly affordable plans. This is thanks to price controls put in place during WWII.

I am on my wife’s plan (her job is more stable than mine). We are well covered, and all insurance costs come out pre-tax from her paycheck. We use my company’s Flexible Spending Plan for co-pays, orthodontics, prescription drugs, etc. However, I have to guess in the Fall of the prior year how much money we will spend out-of-pocket on direct costs. If we over withhold, we lose the money.

If I spend more than I withold, I have to hope that it becomes more than a certain percentage of my income. Specifically, You may deduct only the amount by which your total medical care expenses for the year exceed 7.5% of your adjusted gross income.

So I am rewarded for guessing the amount I will spend, penalized for over-guessing, and making up the difference won’t happen unless there is a catastrophe.

My proposal: Make all health care costs (yes, we need to define this, have receipts, etc.) a deduction from dollar one. If you buy a personal policy, you can deduct all of the cost. Every co-pay is a deduction. Every bottle of pills is a deduction. Income is adjusted downward for every penny of qualifying health care cost.

This would be a tax cut for all classes, would probably benefit the small business and the middle class the most (WAG on my part, I admit - no cite available). Surely this could be embraced by both the Right (its a tax cut!) and the Left (it makes health care more affordable!).

So - why is it bad? Why can’t we do it? Please knock holes in my proposal, so that I can refine and send a note that will be ignored by the new Congress.

Not for people who pay no tax.

Any system based on tax deductions, whether for medical care or mortgage interest or most anything else, is going to particularly favor higher-income people who can afford to spend more to begin with.

Good point. This will predominantly benefit middle and upper class, and won’t help those who pay no income tax.

Also, as a good conservative, you know it has to be paid for. You can’t know the effects till you know how that burden is spread.

For example, abolishing income tax benefits all tax payers. But if you replace it with a sales tax, and include food in that (I’m looking at you, Tennessee), then you will overall have negatively impacted people who paid low levels of income tax in order to positively impact those who paid high levels of income tax.

It would have a massive budget effect, which I would want to know more about.

Wouldn’t it be simpler to just fix the damned health system than to fuck around with the tax system to try and make up for the fact it’s broken?

Seriously, this does nothing to contain the spiraling cost of medicines. It does nothing to reign in medicine done to prevent lawsuits instead of aiding patients. It does nothing to prevent the frivolous lawsuits that are filed (while allowing legit ones to go forward). It does nothing towards breaking the employer provided insurance system which really bones anyone with a job that doesn’t. It does nothing to improve the health system at all. It’s just a quick, but expensive to the US budget, band-aid which only delays problems briefly since health costs are heading out of control.

So, Paris Hilton would get tax relief of about $3,500 on a $10,000 cosmetic surgery. Fine, whatever.

But, Joe Ditchdigger would in theory get $50 back from the $300 he paid to get that infection taken care of, but that doesn’t mean he has $300 sitting around to visit the doctor in the first place.

This would drive medical care costs even higher. Sure, those of use who make enough to pay taxes would get (more) money back at tax time but the overall effect would be for prices to go up on this limited commodity to whatever the market would bear. The poor would lose out in the long run, the wealthy would do OK, especially if they owned medical stock. The government would also lose a lot of tax money.

As others have said, this proposal would only benefit those who are already relatively well off. Let’s say a good health plan cost ten thousand dollars a year.

Now if I’m paying ten thousand dollars a year in taxes, I’d have every incentive to sign up for that health plan. I’d be spending ten thousand a year on a health plan instead of taxes but my take home income would be the same. So I’d get a good health plan essentially for free.

But there are plenty of people who can’t afford ten thousand dollars a year. They don’t pay that much in taxes but they also don’t have the option of paying that much for a health plan.

I think you are confusing tax credits and tax deductions, Little Nemo.

The OP was talking about a deduction and I was talking about a credit but for purposes of this proposal, the principle I outlined would be the same in either case.

No, not really. If a poor person were to spend $10,000 on health care, they’d get about $1,500 of it back, leaving $8,500 as true out of pocket expenses.

If a rich person spends $10,000 on health care, they’d get about $3,500 back, and have only $6,500 in real expenses.

Rather than your argument that everything would be a wash between income levels (except that the poor wouldn’t have the money to spend anyway), it would actually be that the rich would get more tax benefit from their expenses (plus the point that the poor couldn’t afford it anyway).

So, your criticism was actually a little light: the proposal is even more unfair than you gave it credit for.

I’ve bought my own health insurance since I graduated college about 4 years ago. My first year out of school I grossed $24k. Buying individual health insurance really, really sucks.

In your example, as a “poor” person, I wouldn’t have cared what the “rich” guy got back. I would have saved money.

So why would the proposal to make all health care related spending be preferred over something like, say, a tax credit to small businesses or low-income people that could be used to buy health care?

For one thing, a blanket, non-targeted tax deductionwould be far, far, more expensive than a tax credit targeting people recently out of college who are making poor salaries. So while you may not care what benefit rich people derive from a tax deduction, it matters a lot to the Federal budget.

Thanks for the comments. My updated thoughts:

I don’t expect to solve health care. Even nations with universal, single payer care have not solved health care. I was hoping to find one measure that could help some of the problems we have.

I would like to replace the poorly designed flexible spending plan program that already exists with this deduction system. We already allow everyone to get deductions via the flex spending plans, but there is a penalty for both over-withholding AND it is difficult to catch-up if you under-withhold.

Agreed - this will do nothing for those who pay no income tax.

Agreed - the benefits will be more for the middle and upper classes (those who actually pay income tax). I can live with that, if it makes some procedures in the realm of possibility for more people. This is especially true for areas like orthodontics or out-of-network services on some health plans. Paris Hilton won’t change her behavior. My family, however, would spend more on some health care decisions we are currently putting off thanks to the change in cost to us.

So far, the only arguments that I have heard that give me pause:

  1. What would be the total cost to the government? This would have to take into account the current cost of flexible spending accounts and current cost of actual deductions.
  2. Would this allow health care providers to simply raise their rates in lockstep with the deduction?

The latest estimate of annual health care spending is $2.3 trillion. Medicare spending is $528 billion, so let’s be conservative and say private health care spending is $1.2 trillion a year. If we take the average tax rate paid by Americans to be 15%, then that’s $180 billion a year in less revenues.

To compare, the cost of Obamacare – the actual money paid out by the government, NOT including any offset for tax increases to pay for the measure – tops out at about $88 billion per year. (See Table 2, Total Outlays.)

So the “everything is deductable” policy vs. Obamacare costs at LEAST twice as much, according to my terribly unsophisticated 10 minutes of estimation.

When I was a kid, my Mom had Blue Cross/Blue shield. She paid so much every month, and EVERYTHING was covered. No 50% if this and 65% of that providing she paid 25% of it from this source and 50% of it from that source or whatever…

None of that overcomplicated nonsense, one fee and EVERYTHING was paid.

Why can’t we have that again?

The problem that occurs to me are situations where medical costs exceed someone’s total income. This could be either a single, catastrophic occurance (accident, accute illness, whatever) or a chronic illness (in which case medical costs could exceed total income for YEARS, if not a lifetime). Tax deductions won’t really help these people. And the lower one’s income the more likely and more of a problem that becomes.

A lot of your HC spending is already pre-tax when it is provided by your employer.
Another chunk is pre-tax if covered by a flex spending account.
A final chunk is deducted by those folks who spend more than 7.5% of AGI on HC.

My system takes care of the people on the margins of this, plus those who are NOT covered by an employer plan and are instead paying directly.

You are way-over estimating the cost. Then again, I haven’t done the math yet.