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The Keckley Report

The Federal Role in Healthcare: Where Your Taxes Go!

By April 13, 2015March 1st, 2023No Comments

The following is an excerpt from Navigant Healthcare’s Pulse Weekly. Click here for a complete copy of this week’s article.

This week, many of us will submit our Federal Income Tax forms to the Internal Revenue Service, continuing a national mandate since the passage of the 16thAmendment to the Constitution in 1913. Last year, 86% of 137,887,000 filers used e-filing and the average refund was $2,861.

Individual taxes are 42% of the $3.0 trillion the federal government took in last year: an additional 40% comes from payroll taxes, 9% from corporate taxes, 3% from excise taxes and 6% from others. The official tax rates across our 7 major brackets range from 10% to 39.6%, but after deductions and other adjustments, the effective rate is 0% to 20.1%.

And of the $3.5 trillion the federal government spent in 2014, $1.1 trillion went to healthcare led by Medicare and Medicaid funding.  So federal income taxes play a major role in funding the U.S. healthcare system in addition to out of pocket costs paid by employers and individuals for co-payments, deductibles, premiums and more.

The current debate about health reform in the U.S., and the announced goal by CMS to accelerate the transition away from fee for service payments to a performance-based alternative payment system are chapters in the short history of the U.S. health care system. Before passage of legislation authorizing federal funding for Medicare and Medicaid July 30, 1965, a payment system in health care did not exist consistently across the states. It was a retail market: doctors charged for their services, hospitals were paid either directly or through insurance that covered inpatient events, and that was it. The American Medical Association (AMA) supported hospital insurance, but resisted efforts to regulate professional and outpatient services vigorously.

In the Eisenhower, Kennedy and Johnson years, the problems of the aging and poor were perplexing to the country: the passage of the Civil Rights Act of 1964 opened the door to a desegregated health “system” but a payment mechanism did not exist at the time. LBJs “Great Society” sought to fix the problem, with Medicare and Medicaid becoming the healthcare safety nets for seniors and the poor. In the year after passage, their costs were less than 3% of total federal spending and .4% of the U.S. GDP; last year they were 31% and 17% respectively.

That’s how we got to where we are. The role a federal government plays in a country’s social structure and its healthcare is a challenge across the globe. It’s different in every country as illustrated in Table A in this week’s Navigant Healthcare Pulse Weekly.

In every developed and developing country, the healthcare system is under stress to accommodate increased demand and access to new technologies and drugs that serve their citizens. The Chinese, a developing economy, launched their 12th Five-Year Plan to create a system of care that can lend to the creation of a middle class. The Brits, who heralded their National Health Service as a national treasure at the opening ceremony of the 2012 Summer Olympics, recently altered their system’s financing in favor or primary care capitation.

In most, two things are clear: healthcare is a primary concern to its government and the pursuit of better care at lower costs for its citizens a common aim. But no system is perfect. None can be cut and pasted into another, but best practices and failed programs may be incorporated judiciously by thoughtful policymakers.

So what’s the next chapter in the unfolding story of the federal role in the U.S. health system?  It seems to me there are four huge issues that our federal government must address:

  1. Incentives. Much of what’s done is not necessary, but lack of readily transparent evidence-based standards of care combined with no-fault liability reform limits our system’s ability to pay for doing the right thing the first time every time. Incentives that reward doing more instead of doing right will follow. The shift from volume to value is largely dependent on policies that reward innovative ways to diagnose and deliver services linked to what’s done (processes) and what happened (results), not who did it (scope of practice). The ACA included the Patient Centered Outcome Research Institute to foster standardization around comparative effectiveness and multiple models for changing incentives, but lacks liability reform. Can incentives change in a meaningful way without liability reform? It’s a federal issue.
  2. Structure. Consolidation into regional fully-integrated systems of care that bear clinical and financial risk requires a new view of health that’s challenging to current policies that assume “all healthcare is local,” “states determine licensing of professionals,” and so on. The federal government must weigh in on healthcare’s version of “too big to fail” while recognizing that much of what’s done today is “too small to scale.”
  3. Employers. Is employer sponsored insurance a desirable attribute of a system of healthcare in the U.S., or a root cause of its failure to keep its costs down and engage consumers (employees) in a meaningful decision-making role about their treatment options and associated costs? The jury’s out. The federal policy today is to sustain the employer’s role via the tax deductibility for their share of coverage costs for 169 million. At the same time, the penalties for not providing coverage per the ACA ($2,000 per fulltime employee plus loss of tax deductibility for premiums paid) are less than what they pay for coverage now. What’s the end game for employer-sponsored coverage?
  4. Consumers. Healthcare in the U.S. is a manufacturer controlled market: producers sell goods to distributors who mark up and pass through to the next layer in the supply chain and so on. Costs are buried in pricing that’s not transparent. Desirable outcomes (safety, efficacy, effectiveness, et al) are not systematically defined nor readily available and the growing amount of out of pocket costs to households is nonsustainable, especially for middle income families. Is the healthcare system best served if it migrates to a retail market, or alternately, a one size fits all models a/k/a a single payer system where most are served by a central government model?

Our federal income tax contributes to funding a system that’s admittedly flawed but a work in process. It serves every American, even though not everyone has to pay income taxes to support it.


Sources: ¹To qualify for federal financial contributions under the Canada Health Transfer block grants, provincial and territorial health insurance plans must provide first-dollar coverage of medically necessary physician, diagnostic, and hospital services (including inpatient prescription drugs), for all eligible residents. Block grants estimated to account for 19 percent of total provincial and territorial health expenditures in 2012-2013; Tables from Congressional Research Service for Federal Income, Expenditures 1962-2020; “Reflections on the Implementation of Medicare,” National Academy of Social Insurance, January 2001; “The Distribution of Household Income and Federal Taxes, 2011,” Congressional Budget Office, retrieved January 20, 2015; U.S. Taxpayers e-filed More than 117 million Returns in 2014,”, retrieved on April 12, 2015; “The Numbers: What are the federal government’s sources of revenue?,” Tax Policy Center, retrieved on April 12, 2015.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Navigant Consulting, Inc. The information contained in this article is a summary and reflects current impressions based on industry data and news available at the time of publication. Any predictions and expectations noted herein are inherently uncertain and actual results may differ materially from those contained in this article. Navigant undertakes no obligation to update any of the information contained in the article.

©2015 Navigant Consulting, Inc.