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Health and Human Services
Health Care Reform

Ever since the national health care debate began in earnest in 1993, policymakers in North Carolina have wondered how best to proceed with state measures to improve access, increase quality, and reduce the expense of medical care. The state has already made several reform attempts, including a costly expansion of Medicaid coverage and a law introducing greater regulation into small-group health insurance. But critics say these measures have had marginal or even counterproductive results.

In 1995, the General Assembly moved in a new direction by rolling back some insurance regulations, passing a tort reform bill, and endorsing the concept of medical savings accounts (MSAs) as a way of increasing access, portability, and efficiency of medical coverage. In 1998, the legislature took a major step forward by passing a limited tax credit for child health care insurance purchased directly by parents, though unfortunately a subsequent legislature eliminated the credit as part of a tax-increase package passed in 2001. Finally, lawmakers engaged in serious debate about medical-malpractice reform in 2003 and 2004, but failed to pass legislation.

The Core Of The Problem

The health care issue consists of several different concerns. One is the extent of medical cost inflation, not only in the private sector but even more seriously in government programs such as Medicaid. Another is access — the existence of a sizable number of state residents who are uninsured against major medical conditions. Still another is insecurity created by families receiving health insurance primarily through employers, as well as concerns about the quality and choice of care available in employer-provided managed care.

While it might appear that these diverse concerns should have diverse causes, the common denominator is a federal and state tax system that encourages third-party insurance coverage over other ways that North Carolinians might take care of their health care needs. Because fringe benefits such as employer-provided health insurance are free from taxation, while individual purchases of plans or procedures are often taxed, a system of third-party payment for medical bills has become widespread. When consumers have no personal incentive to shop wisely, they tend to consume inefficiently — such as going to the doctor or to emergency rooms for minor ailments. Managed care is a response to this problem, but it places employers in the role of consumer and has created incentives for some physicians to deny care to patients who really need it.

State regulators have compounded problems in the health care marketplace by restricting the supply of qualified medical practitioners through occupational licensing and by restricting the supply of medical facilities, particularly in rural areas, through certificates-of-need and other regulations. Lawmakers have also imposed costly mandates on the services that must be included in private health insurance sold in the state.

Forward In 1998, Backward In 2001

A special session of the General Assembly called in early 1998 to debate child health insurance gave forwardthinking lawmakers an opportunity to begin reforming the tax treatment of health care. As part of a deal to use federal funds to create a $110 million state-run insurance program for children — a regrettable but inevitable increase in the welfare state given the actions of Congress in 1997 — the House insisted on a refundable state income tax credit for families who do not have access to tax-free benefits at the workplace. The original House proposal offered a 33 percent tax credit for out-of-pocket spending on child health insurance, representing the marginal state and federal tax rates on those expenditures, but the final deal watered down the credit, leaving it at $300 per child for families with incomes up to 225 percent of the poverty line, $100 per child up to $100,000 in income for a family of four, and no tax relief to families above that income cap.

This tax credit represented the first step in the process of eliminating the tax code’s distortion of the health care marketplace. It also reflected the latest economic view that treats some health-care spending — particularly for children and young people — as investments in “human capital” that generate future taxable income and thus are deserving of at least some limited tax exclusion. Unfortunately, many lawmakers and state officials do not understand the underlying issues involved in health care taxation, and legislative staffers even incorrectly listed the health care tax credit as a “tax loophole.” In 2001, lawmakers eliminated the credit as part of a massive tax increase on North Carolina families and businesses.

The future offers new prospects for reform, however. At the federal level, a 2002 ruling by the Treasury Department now allows companies to set up health reimbursement accounts (HRAs) for their employees in which unspent funds accumulate tax-free. Then in 2003, Congress enacted an otherwise-regrettable Medicare bill that included authorizing of new Health Savings Accounts, which are more flexible than HRAs. As the private sector begins to react to the changes, state policymakers can take steps on their own to treat families fairly and encourage those who lack employer coverage to provide for their own needs without going on the public dole.

Recommendations

1. State lawmakers should reinstate and expand the tax credit for child health insurance by giving a refundable credit to families for all out-of-pocket health care expenses, including premiums, deductibles, copayments, and deposits into health savings accounts. The state’s health plan for state employees and retirees should also include an HRA/HSA option to provide greater choice and help constrain the plan’s exploding costs.
2. State policymakers should end certificate-of-need regulation and eliminate state benefit mandates on health insurance. The state should also reduce licensing restrictions on non-physician providers and create a subsidized assigned-risk insurance pool to assist those with preexisting conditions to obtain coverage.
3. Lawmakers should enact changes in the tort system — such as a loser-pays rule for attorney fees and expert pretrial reviews — to reduce medical-malpractice costs without excluding patients from just compensation.

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