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Health Care

The Issue

Health care is a huge and growing sector of the U.S. economy. The share of total health expenditures funded by the government is also quickly rising. By the end of this decade, half of all health care spending will be due in part to rapidly growing government health care programs. More government financing of health care means more government control, and government control means less personal freedom.

Health care entitlement programs like Medicare and Medicaid have grown beyond their original estimates in both enrollment and cost, making Americans more dependent on the government for their health care than ever before. Even in the private sector, the current tax treatment of health insurance, a byproduct of World War II–era wage and price controls, perpetuates an outdated coverage model that discourages and discriminates against people owning and buying their own health insurance.

Regrettably, enactment of the Patient Protection and Affordable Care Act (Obamacare) makes matters even worse. It fundamentally transforms the health care system into a centralized, top-down federal government system and alters the relationship between millions of patients and the sources of their care, creating greater dependence on the government for the delivery of care and services. Moreover, striking at the heart of American federalism, it reduces states to mere vehicles for implementing federal policy. Moreover, and for the first time in history, Americans will be required, under penalty of federal law, to buy federally designed health insurance. This federal overreach undermines the Founders’ framework and the Constitution.

Individuals and families should have greater control of health care dollars and decisions through a consumer-centered, market-based system. To achieve this, lawmakers must begin by repealing the health care law. Congress cannot create a market of consumer choice and competition on the foundation of federal bureaucracy and central planning. But repeal alone does not solve American’s health care problem. Lawmakers must also reform the health care entitlements, make the tax treatment of health insurance fairer and more rational, and work with the states to reform the insurance markets.


Recommendations

  1. Repeal Obamacare. A consumer-centered, market-based health care system cannot be built on a flawed foundation. Congress must remain committed to repealing the health care law in its entirety before embarking on a new set of reforms. Since most of the major provisions do not go into effect until 2014, there remains ample time for elected officials at all levels of government to educate the public on the law’s broken promises and harmful effects.

    Obamacare ignores the trillions in unfunded obligations from Medicare and instead uses “savings” from Medicare cuts to offset the cost of the new law. It ignores the breakdown in Medicaid and instead pushes millions more into this unstable program. Its trillion-dollar price tag does not bend the cost curve down, and its claims of reducing the deficit are based on Washington budget gimmicks and unrealistic savings. It also threatens job creation and investment, impeding a much-needed economic recovery.

    Finally, the law’s federal regulatory regime intrudes into almost every facet of private insurance and care delivery. The law usurps state power and gives the Secretary of Health and Human Services sweeping new power to impose a wide range of new rules and regulations that undermine choice, increase premiums, and destabilize the marketplace.

  2. Reform the structure of health care entitlements. Medicare and Medicaid are the major drivers in our growing fiscal and debt problems, but there are relatively fewer and fewer taxpayers to fund them. To secure and sustain these programs, Congress should move both Medicare and Medicaid away from their current unsustainable, open-ended, defined-benefit entitlement model to a more fiscally sound defined-contribution model. This would allow consumers greater choice and introduce genuine competition into the program, resulting in better care at a lower cost.

    Specifically, Congress should transition to a premium-support model for Medicare that would provide a generous, income-adjusted contribution toward a health plan of the enrollee’s choice. Reforms should allow those on Medicare to enroll in private health insurance plans that should compete on a level playing field with traditional Medicare fee for services, with all plans required to offer catastrophic protection. Congress also must raise the normal retirement age and put Medicare on a sound and sustainable budget, just like all other federal programs.

    Congress should mainstream non-disabled adults and children out of traditional Medicaid and into superior private health insurance. That should be done by providing them with a refundable tax credit. Congress should give states greater flexibility and latitude to design and apply innovative approaches to better serve and improve the quality of care for the aged and disabled. Finally, as with Medicare, Congress should put Medicaid on a budget.

  3. Reform the tax treatment of health insurance. The federal tax code currently excludes, without limit, the value of employer-sponsored health insurance from a worker’s income for the purposes of income and payroll taxes. There is no comparable tax relief for those who obtain coverage on their own. To fix this unfair, inefficient, and non-transparent tax policy, Congress should replace the current tax exclusion for employer-sponsored health insurance with a fairer and more fiscally prudent system of individual and family tax credits.

    While there are many ways to design a credit, Congress should ensure that the federal credit is seen as a floor, not a ceiling, though it should be capped at a dollar amount. Employers and states should be free to provide additional contributions. Any remaining credit amounts not going toward premiums could be deposited into a savings vehicle to help offset any cost-sharing requirements or for other purposes. In sharp contrast to Obamacare, these credits should be available to individuals regardless of where they purchase coverage.

    As a matter of financing, the revenue from the exclusion should be used exclusively for a tax credit for taxpayers, and the “refundable” tax credits for non-taxpayers should be offset with other health care spending.

  4. Work with the states to develop market-based insurance reforms. The Founders understood that states should be free to determine the best way to achieve public policy objectives. Significant variations exist across the states, both in geography and demographics and in how health insurance markets and medical delivery systems are organized and financed. The careful division of power between the federal government and the states not only ensures limited government and preserves liberty, but also guarantees that any damage from bad public policy will be contained and confined to the state that initiated it.

    The federal government, however, does have a role in the health insurance markets. First, Congress should focus on facilitating interstate purchase of health insurance so that individuals are not prevented from buying more affordable policies sold in other states. Second, Congress should amend existing law to ensure that individuals who wish to switch from one plan to another have the same protections regardless of the type of health insurance policy they have. Finally, Congress must remove federal barriers that make it complicated and difficult for employers to change their health care benefits from the outdated defined-benefit model to a defined-contribution model for their employees (as many have done with retirement benefits).

    Finally, as noted, states play a critical role in regulating their health insurance markets. State officials should focus on reforms that expand consumer choice, enable portability of individual coverage, and remove barriers to competition in both the private and public sectors. Moreover, states should roll back harmful and costly mandates and regulations that make coverage less affordable to their citizens and should work with Congress to identify federal policies that erect barriers to state innovations in health policy.


Facts & Figures

  • In 2010, the United States spent $2.6 trillion on health care, or 17.6 percent of GDP.
  • By 2020, the government is expected to control 50 percent of all health care spending.
  • The existing tax exclusion for employer-sponsored insurance amounted to $270.2 billion in federal spending in 2010, a huge tax expenditure available only to citizens who receive health coverage through their employers.
  • Medicare spent $520.4 billion in 2010 and holds close to $37 trillion in unfunded obligations.
  • 20.4 million Americans were enrolled in Medicare in 1970, compared to 47.5 million Americans in 2010, and 80 million are expected to be enrolled by 2030.
  • Total federal and state spending on Medicaid is estimated to have been $401 billion in 2010 and is expected to reach $840 billion by 2019.
  • While 22.9 million people were enrolled in Medicaid in 1990, enrollment has increased to include close to 54 million Americans. Under Obamacare, Medicaid will expand to include as many as 25 million additional individuals.
  • Nationwide, states enacted 2,156 benefit mandates in 2010.

Selected Additional Resources

Heritage Experts on Health Care


  • Stuart Butler, Ph.D.

    Distinguished Fellow and Director, Center for Policy Innovation


  • Robert Moffit, Ph.D.

    Senior Fellow


  • Kathryn Nix

    Policy Analyst


  • Edmund Haislmaier

    Senior Research Fellow, Health Policy Studies


  • Nina Owcharenko

    Director, Health Policy Studies

Legal Concerns

Obamacare strikes at the heart of American federalism by requisitioning states to carry out federal policy. Moreover, and for the first time in history, Americans will be required, under penalty of federal law, to buy a specific, federally approved commercial product: health insurance. These federal overreaches violate the Constitution and undermine our federalism. Congress must remain committed to repealing the health care law in its entirety before embarking on a new set of reforms and should act preemptively rather than wait for the courts to strike down the law in whole or in part. Because most of its major provisions do not go into effect until 2014, there remains ample time for elected officials at all levels of government not only to educate the public on Obamacare’s broken promises, harmful effects, and unconstitutional provisions, but to put forth compelling, and constitutionally acceptable, consumer-centered reforms.

Regulatory Excess

In addition to its enormous expansion of government spending on health care programs, the Obamacare legislation dramatically expanded the federal government’s already substantial regulation of the health care sector. For example, Obamacare creates a new requirement that private insurers and employer health plans pay 100 percent of the cost of an ever-expanding list of preventive health services. The legislation also authorizes HHS to establish “and periodically update” a package of “essential benefits” that must be included in every health insurance policy.

Obamacare also imposes new regulations that will have perverse effects. For example, it limits insurers’ ability to vary premiums by age, thus forcing them to overcharge younger, healthier individuals—who are already the ones least likely to buy health insurance in the first place. Similarly, new regulations limiting what insurers can spend on administrative costs will effectively penalize efforts by carriers to control health care fraud.

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