Taxes fair target for U.S. healthcare revamp: experts

By Kim Dixon - Analysis

WASHINGTON (Reuters) - In 2008 U.S. presidential candidate Barack Obama mocked rival John McCain for proposing to tax some health benefits to rein in runaway medical costs, but most economists say tackling the tax treatment of healthcare should be a major element of reform.

Americans are comfortable with their employer-sponsored healthcare, which they have been receiving tax-free since World War Two. Under current policy, individuals do not pay taxes on health insurance provided by their employers, and companies can treat the expense of healthcare as a cost of doing business.

The wealthy enjoy the biggest boon from the policy, with their better jobs and richer perks. Still, Obama and many lawmakers are reluctant to embrace a tax.

Economists from across the political spectrum back putting some type of cap on tax-free benefits, whether based on income or other factors that account for geographic variation.

The congressional Joint Committee on Taxation found that the subsidy cut would have raised tax receipts by $246 billion in 2007.

"The current system is extremely regressive so it's really surprising that Democrats haven't come around to this position a long time ago," said Paul Ginsburg, an economist who is president of the nonpartisan Center for Studying Health System Change.

Revamping the $2.5 trillion dollar U.S. healthcare system to help cover the roughly 46 million people without insurance, provide better care and rein in ever-increasing costs is a major domestic priority for President Obama.

But touching the tax benefit enjoyed by tens of millions of Americans to help pay for universal health coverage is proving to be a tough sell, because of Obama's earlier opposition and also because unions and employers oppose any changes.

Employers know the benefits are generally popular and see them as a key recruiting tool. Unions are suspicious of changes that would diminish healthcare for their members or make it more expensive.

"The historical reason is that traditionally unions negotiate better health benefits than non-unionized workers, and any attempt to limit this tax exclusion would impact unions more" than other workers in similar situations, Ginsburg said.

Employers say cost savings can be wrung out of the delivery of care to help pay for expanded coverage, if only doctors and hospitals would follow best treatment practices.

"We've always had the view that we should maintain the current tax system," said Steve Wojcik, vice president at the National Business Group on Health, which represents Fortune 500 companies.

Still, he acknowledged evidence the current tax treatment may encourage unneeded healthcare consumption. "What we realize is that there are a lots of gains to be had especially in terms of controlling costs that would benefit the employer-sponsored coverage world," Wojcik said.

WIDE (NON-POLITICAL) BACKING

"You'd have a hard time finding an economist who didn't think that was a good idea," said Joe Antos, an economist at the conservative American Enterprise Institute.