Our tax laws are among the most effective and disruptive means by which government controls where we get and how we pay for our healthcare. For example, job-based health insurance represents the nation’s single largest coverage source, making it a ripe target for regulation and oversight and, consequently, a dumping ground for special interests.
Many of us have gone through the process at our workplace. If we choose to obtain health insurance through our employer, we do not have to pay income or payroll tax on the money our employer pays toward the premium. And the alternative? Well, the federal and state tax codes in place effectively penalize those who choose not to enroll in the employer-sponsored health plan and individuals who choose to get coverage directly (not through their employer) don’t get the same beneficial tax treatment. In other words, private health insurance companies profit, big time.
This model has stopped working for most people — and especially for small businesses whose costs continue to rise. The consequences of this broken system on these small businesses and their employees have been painfully magnified in recent months. During the pandemic, 5.4 million people lost their health insurance when they lost their jobs. Those small businesses that are hanging on are finding it harder and harder to control their healthcare costs with smaller employee pools.
Toppling the employer-based insurance model is nowhere on any government agency’s agenda. Instead, the IRS and the Trump administration are finally proposing to change the rules to offer a level playing field for choice.
Last month, the IRS announced a proposed rule that would allow individuals and employers to deduct costs associated with direct primary care and healthcare sharing ministries — increasingly popular healthcare solutions, neither of which are related to insurance companies. This rule initially stems from the June 2019 executive order by the Trump administration, calling for new ways to empower patients by promoting choice and enhancing control over healthcare decision making.
This comes amid recognition that more than 1.5 million people in the United States, and counting, are putting their money into healthcare sharing ministries for financially responsible, community-based care. Direct primary care arrangements that emphasize transparency in pricing, improve quality of care, and offer more meaningful doctor-patient relationships have also become a powerful disruptor in the healthcare payment landscape. The proposed rule is an exciting advance away from the single-choice, confined, expensive system that we are boxed into today.
While the IRS and Trump administration deserve credit for good intentions, the best intentions are too often lost in execution. One crucial problem with the proposed rule is the definition provided for healthcare sharing ministries. It only recognizes the ones that have been in existence and sharing medical expenses continuously since at least Dec. 31, 1999 — a completely arbitrary and unexplained date. This provision hurts the very employers that need our help. The sharing ministries that were in existence in 1999 only serve a narrow handful of religious communities. By limiting the tax-advantaged status to only these entities, the rule as currently written excludes from tax-advantaged status newer healthcare sharing ministries that serve communities united by ethical beliefs or those that would serve a broader range of religious communities.
This limitation would also stifle competition and innovation in this market. If new healthcare sharing ministries are disincentivized from forming and operating on a level playing field, there will be no incentive to innovate and challenge the status quo.
The IRS needs to take action when it finalizes the rule to address these issues, especially regarding the narrow and anti-competitive definition of healthcare sharing ministries. If this isn’t fixed, then the government’s intention to promote more choice and innovation in a broken healthcare sector will never go beyond just words on a page.
Jamie Lagarde is the CEO of Sedera Health, a medical cost-sharing community.