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by Peter A. Belmont / 2009-09-17
© 2009 Peter Belmont
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If the health reform legislation ends up mandating purchase of health insurance and sets a maximum price based on income, then (unless a wholly unnecessary new administrative agency is created) the IRS will have to collect the annual premiums based on income. Sounds like a tax.
But especially, it sounds like something the IRS should administer.
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Occasionally one may learn a little about a problem by trying to imagine how an “administrative solution” would work in practice. In this essay I consider some issues implicit in determining health care premiums and in paying for them.
I have heard reports that one proposal for mandated health insurance will require that the annual fee for the insurance be paid by the government to the extent that it exceeds 13% of income.
(Here we may imagine poor people paying 31% of income for PIT housing costs and 13% for health care. OK! That leaves how much for eating? Transportation? Babysitting? Movies?)
This is a reminder that any national health care system which is not provided gratis to every citizen will require an administrative agency to determine and collect annual health care fees (which fees will be called “premiums” if the insurance model continues to be followed).
(Presumably, unless a universal, free, national health care plan comes into existence, each citizen-insured will, in principle, have to pay something for it, and an administrative mechanism will be needed for determining and collecting the proper fee and for verifying that code-compliant health care had indeed been obtained. The 13% cap is one among many issues.)
How will “income” be determined to determine a 13% cap? Presumably by the IRS, to which most US income, other than tax-free exceptions to taxation, must be reported. The IRS already has enforcement mechanisms and is better placed than most agencies to assess the correctness of declarations of income. The US really does not require a new agency to determine incomes.
How will premiums be paid? Presumably also to the IRS (which can then transfer it to the corporate insurer involved—if any—and supplement it (if this 13% falls below the “proper” premium) from the federal fisc (a/k/a “taxpayer money”). The US really does not require a new agency to collect and distribute these premiums.
Will taxes have to rise? Or, in the modern style, will the government have to go more deeply into debt? Perhaps we should ask the real question: what will all this cost the federal fisc?
Suppose you pay your health-care premium in cash today but pay it with your taxes in the new plan. In this case, it will be a “wash.” If you were formerly paying for health insurance in cash you will save the cash but pay a new (and more or less equivalent) tax. If you were insured by your employer, and if that continued, then (presumably) the employer would pay the premium to the provider, as it does today, and you will have no new tax to pay. However, since there will be people some or all of whose health care fees will be paid by the government, the federal fisc will have to provide these fees.
Questions of tax-deductibility will arise. Presumably the amount paid by employers as employer-paid-premiums would be tax-deductible to the employer and the all health care premiums paid in cash or via a new tax would be tax-free to the taxpaying premium-payer, whether or not employed, etc.
How would a mandatory insurance plan be administered if not by the IRS? In what follows, the administrative agency administering the new mandatory health-care legislation will be called “IRS”.
This agency must verify that every American was covered by code-compliant health care. It must also pay health-care premiums to the extent these exceed 13% of income. (Determining code-compliance of providers will fall to another agency perhaps.)
Let’s imagine April 15 after such a plan is in effect.
Case 1: employment-based health insurance.
Taxpayer checks a box which says “code-compliant health care provided by employer to self and enumerated dependants” and also recites the dependants covered and recites the total premium charged for this care and recites the ( perhaps smaller) amount actually paid by employer-employee. IRS then checks W-2 and sees the same box checked, sees the enumeration of the dependants for which health care was provided, sees the amount of premium charged and the (perhaps smaller) amount paid, and identifies the code-compliant provider.
Perplexities:
But what if employee loses his job mid-year, or employer terminates the plan mid-year, or health-insurer terminates plan mid-year. Well, a small matter of administrative creativity, but IRS and Congress will cover it nicely.
What if the taxpayer, although employed, has income below the 13% level? Who will tell the employer? Who will tell the provider? How will IRS detect this and supplement the premium actually paid by paying the excess of the total premium over the 13% amount?
Case 2: individually-purchased health insurance.
Not all employers purchase (or contribute toward) health insurance, even today, and not everyone is employed. So some health insurance must be individually-purchased. Taxpayer checks a box which says “code-compliant health care purchased privately by taxpayer for self and dependants” and recites the dependants covered and the premium charged and the premium actually paid.
Perhaps there is a new “1099” from the health-care provider to the IRS and to the taxpayer which tells the months during which health care was provided to the taxpayer (and enumerates the dependants and recites the premium charged and paid).
Again, what if this care terminates mid-year? What if the full premium wasn’t paid and the 13% rule kicks in? What if there are several providers during the year?
Case 3: No income, doesn’t file with IRS.
Well, everyone including newborns will require a SSN, and everyone will have to file income tax forms, maybe merely a simple 1040VEZ which identifies dependants and a code-compliant health-care provider and asks the IRS to pay the premiums.
Item: Tax-free Income
In order to compute 13%, all taxpayers will have to declare all of the income upon which the 13% is computed. If this includes tax-free municipal bonds, then income from such bonds must henceforth be declared.
Item: Gold-Plated Plans
If the government is required to pay the excess of premium over 13%, should it do so even if a “gold-plated” plan is selected? Or is this an argument for a fallback “government-insurance-option” like MEDICARE?
By “gold-plated” may be meant either a plan with a too-high premium or a plan with a modest premium which offers a substandard health-care provision. In either case, why should the government support something too highly priced?
Perhaps the government could state a “limit premium” for various “plans” of health-care provision and although allowing a higher premium to be charged for the plan nevertheless decline to pay more for any plan (over the 13%) than (limit_premium - 13_percent_of_earnings). That’s one way to save the government money. In this case, could they require the providers to accept the “limit” amount whenever the 13% kicks in? And why should anyone else pay more? Good questions!
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