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Tax Credit Hides True Cost of Healthcare

 |  By Philip Betbeze  
   October 15, 2010

A health insurance premium tax credit that is part of the Patient Protection and Affordable Care Act could assist more than 28.6 million Americans in purchasing healthcare coverage by the time it's implemented in 2014. Sounds great, doesn't it?

It's not. This is a bad idea.

Let me back up. This is a good idea with an extremely bad mechanism, tax credits, for achieving its stated goals: helping middle-income Americans afford healthcare coverage.

Here's why I hate the way it's being administered. In an industry that many claim is economically out of whack, overburdened by regulation, and  extraordinarily expensive, government is going to exacerbate the problem by hiding the true cost of healthcare through income tax credits.

Get this: the families being helped by this tax credit mechanism never actually see the money. The government and the (presumably private) health insurer take care of all the administration of the benefit.

That distorts behavior.

Before you argue that a lot of the rest of us are sheltered from the true cost of healthcare through our employer plans or through coverage under Medicare and Medicaid, yes, I agree. The way those plans are administered is a bad idea too. Sheltering people from the true costs of healthcare has played a large part in getting us to this crisis situation.

If we all had to pay for what it costs to insure us, I guarantee the rate of healthcare inflation wouldn't be double or triple the annual inflation rate for other goods and services. The value of the tax credits is expected to be about $110.1 billion during the first year. That's an amount equal to the GDP of Kyrgyzstan that will help hide the true cost of healthcare for many, if not most Americans with private health insurance.

There is no perfect solution to covering everyone's healthcare needs. We are where we are, but a better mechanism might be transferring the money directly to the people who need the help under our current system, and requiring them to have health insurance by installing an individual coverage mandate with actual teeth.

The tax credits will be provided on a sliding scale. For example, a four-person family purchasing a $15,000 family insurance plan in 2014 with $60,000 in annual income would receive tax relief of approximately $10,200. A similar family with annual income of $35,000 would receive tax relief of about $13,600.

So why not just write them a check from the Treasury to cover the shortfall? Then, people have the incentive to actually shop for a healthcare plan that works for them and pocket the difference, if there is any. Before you ridicule this approach, the current plan is not simply accounting paperwork. Treasury will still be issuing checks to someone, or something. Guess who?

Under my proposal, there still would be the problem of protecting people from dishonest health plans that give the impression of coverage but don't pay out when disaster strikes, but we have that problem now, and will likely still have it under the current tax credit plan. Besides, PPACA, in addition to covering the uninsured, was supposed to be about solving the systemic problem of healthcare cost inflation. In short, it won't.

And guess what else? Getting the federal government to sign off on 10% annual increases in healthcare cost inflation is much easier than getting savvy consumers to do the same thing. Makes you wonder whether they did all this with that cynical thought in mind, doesn't it?

Philip Betbeze is the senior leadership editor at HealthLeaders.

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