The Curious Disconnect between Paying Taxes and Healthcare

Tomorrow, a time-honored tradition in our country continues: it’s the deadline for paying 2017 income taxes. By tomorrow night, more than 145 million American households will file their federal taxes along with state and local taxes in 42 states. Most will not think about how their tax dollars are spent: they’ll simply file and move on.

The fact that their taxes are the primary source of funding for the healthcare system is not readily understood. It’s a disconnect that’s problematic and it’s likely to get worse.

Background

Since the 16th Amendment to the Constitution was ratified by the states in 1913, the federal government has used its power to impose taxes on individuals and organizations to fund its programs, priorities and obligations. The biggest source of the federal government’s revenues are income taxes: they’re 48% of federal revenues ($1.66 trillion); payroll, estate, property and sales taxes make up the rest. On top of federal income taxes, many taxpayers pay up to 16% more in state and local taxes for roads, schools and much more.

Paying taxes is not a major concern to most Americans. Brookings Institution’s Vanessa Williamson makes the case that Americans are proud to pay income taxes as an expression of their patriotism. The American Enterprise Institute’s compendium of 80 public opinion surveys about income taxes conducted from 1937 to 2017 concludes “In many areas, public opinion on the topic has changed little over time… People are not overly concerned about how much they personally pay in federal income taxes.” And Gallup polling shows 51% think their federal taxes are too high vs. 42% who think they’re about right today reflecting a gradual decline in public discontent from 1967 when 69% said their income taxes were too high vs. 25% who thought them about right. So, taxes per se are not the issue in the general public: it’s how taxes are used that seems to spark debate.

The government is playing an increasingly bigger role as a healthcare purchaser; the private market is shrinking. In 2016, the federal government spent $3.95 trillion: 29% for healthcare (Medicare, Medicaid, CHIP, Veterans Health benefits, et al), 24% went to social security; defense got 15%, income security programs including Veterans pensions took 12%, interest payments on the national debt were 6%, education got 3% and other federal programs (i.e. crop subsidies, space travel, highway repairs, national parks, foreign aid et al) accounted for the rest. Of these, healthcare has grown fastest relative to every other category. The same is true at the state level: Medicaid represents up to 34% of budgets in some states—half of this is funded by state taxes and half is funded by the federal government.

Last year, 48.7% of the $3.4 trillion spent on healthcare was funded by state and federal taxes. The rest came from employers and individuals. They paid for care provided to beneficiaries in Medicare, Medicaid, military health, Veterans, Children’s Health Insurance Plan, the Indian Health Service, the federal employees and other groups. Many of those covered pay premiums based on their income; and some access these programs through private managed care organizations with whom the government contracts. There are 135 million Americans who use these programs, and 10,000 baby boomers are aging into Medicare every day. Their ranks are growing at the same time as private sector coverage is shrinking: only half of all employers provide coverage today—down from 70% 15 years ago--and one fourth (24%) of these offer only a high deductible option so their employees will have more out of pocket exposure.

Ours is a system wherein the government’s role as regulator, purchaser and, for some, provider is increasing. Taxes are a major part of the funding.

Paying higher taxes to support healthcare is a tough sell. Surveys by Kaiser, Pew, Commonwealth and others indicate the public’s assessment of how efficiently government spends our tax dollars on healthcare programs is negative. The majority think our system is inefficient and they push back when increased public funding is sought. Academic analyses (IHI, RAND, Dartmouth et al) suggesting as much as 30% of our national expenditure is wasted due to administrative inefficiency, unnecessary care and avoidable redundancy buoy their premonitions.

Legislative efforts to contain health costs and improve system efficiency have been highly controversial. The Affordable Care Act circa 2010 sought to slow health costs and increase access to insurance for those lacking coverage building on the chassis of a private health system. Costs slowed but drug costs and healthcare workforce inflation wiped out cost reduction improvements. The ranks of the insured dropped from 16% to less than 10% but almost 30 million still lack coverage. The ACA remains a highly divisive law with seemingly hardline positions for and against digging in.

Fueling public suspicions, the health system is a soft target for negative media attention. Rogue physicians who take advantage of patients, price gouging by drug companies, executive compensation in our C suites, expenditures for lobbying activity, insurance premium hikes and quarterly earnings reports are staples of the industry’s coverage by outside media organizations.

Thus, the public’s not inclined to take favorably to paying higher taxes for healthcare, leaving it to hospitals, doctors, drug companies, device makers and everyone in the healthcare food chain to charge as much as possible and wage aggressive food fights.

In 1960, healthcare was 5% of our GDP; today it’s17.9% and it will be 19.7% in five years. As the private sector’s role shrinks, dependence on public funding will grow. But the public’s predisposition to see more of their taxes spent on healthcare is problematic.

My take:

The reality is this: our system’s dependence on taxpayers is increasing. But we’re behaving as if there’s time to adjust. It’s more comfortable and lucrative for us to build newer facilities and introduce newer drugs to treat the sick than reduce the numbers who need them. It’s easier to presume patients need us than equip them to act independently and confidently in managing their own health. It’s business as usual to claim there’s too little money in the system rather than re-engineer how we design and deliver services better and cheaper. In response to the fiscal storm cloud gathering around healthcare, we’re responding with radical incrementalism.

Some aren’t: they’re outsiders and a few health systems who see huge waste in the system and our aversion to change. In the last six months, notable outsiders have staked their claims: CVS, Apple, Walmart, Optum, Microsoft, Amazon, Intel and others. The common denominator in this league of disruptors is impatience. They believe health is about more than absence of sickness. They think individuals can manage their own health with the right technologies that equip them with information in their teachable moments. They think our system’s vision is flawed: with our patients, we perpetuate a culture of dependence reinforced by insurance that’s not affordable, care that’s not necessary, costs that are not transparent and outcomes that are not assured. They see tax-funded healthcare as merely one dimension of its resources and they’re not paralyzed by its limitation.

It seems to me some fundamental questions need answers at this important juncture in the evolution of our health system:

1-Is our intent to operate a health system or perpetuate a collection of disconnected operations loosely organized to protect their interests? What’s our end game for U.S. healthcare?

2-How much should we invest in our healthcare system? Is the government the optimal source of funding? Are there better ways to fund the health system going forward?

3-Is the public prepared to discuss the future of our health system—how it’s funded and where it’s going?

4-How will the new entrants to the system—Apple, Amazon and the like—alter that discussion?

5-Is a two-tiered system—a large government run system for the masses and private system for the privileged—our destiny or intent?

These questions are not likely to come to mind as most file their taxes tomorrow. But perhaps they should.

Paul