Academic journal article Washington and Lee Law Review

Insurance Tax Policy and Health Care Reform: Back to the Future

Academic journal article Washington and Lee Law Review

Insurance Tax Policy and Health Care Reform: Back to the Future

Article excerpt


Congress' piecemeal approach to federal taxation of property-casualty insurance companies has created a system of taxation that detracts from health care reform. A system that starts with a goal of raising revenue and is rationalized in terms of "better matching of income and expense,"(1) "the time value of money,"(2) and "unfair competitive advantage"(3) is unlikely to support necessary and meaningful health care legislation. Meaningful health care reform means making quality health care available at a reasonable price to individuals and small business employees. The authors submit that this goal is at odds with increasing taxes on the property and casualty insurance industry members that participate in providing health care. In order to align these goals, Congress should seriously consider providing tax incentives to insurance companies involved in the delivery of health care.

This essay explores the existing and historical schemes of federal taxation on property-casualty insurance companies involved in health care delivery and challenges Congress to recognize the integral relationship between insurance tax policy and health care reform. In particular, Congress should, at a minimum, (1) maintain the existing tax favored status of Blue Cross-Blue Shield organizations or other organizations that meet certain health care reform standards, (2) clarify the tax status of health maintenance organizations and (3) modify the tax rules that apply to medical malpractice insurance companies. These organizations play a significant role, directly or indirectly, in health care delivery in the United States and should be included in reforming its health care system.

Historically, Blue Cross-Blue Shield organizations and health maintenance organizations were exempt from federal taxation as charitable or social welfare organizations.(4) More recently, however, Congress has chosen to impose an income tax on these organizations due to a perceived competitive advantage over commercial insurers which do not have tax-exempt status.(5) The purpose of this essay is not to challenge whether this competitive advantage exists, but instead to ask whether all health insurance organizations that survive in the reformed health care environment should receive a favored tax status in the name of charity or social welfare.

Hospital and medical malpractice insurance companies provide professional liability insurance coverage to health care providers. Unfortunately, one of the costs incurred in providing health care in the United States is litigation expenses--including damage awards and legal fees--paid by malpractice insurance companies in medical and hospital malpractice law suits. The insurance companies that are willing to provide insurance coverage against health care service malpractice risks must also face an ever-increasing taxpaying and compliance burden. As a part of health care reform, Congress should consider revising the federal taxation of hospital and medical malpractice insurance companies with a view toward reducing the tax they pay and the costs they incur in complying with existing tax laws. The Tax Reform Act of 1986 (the 1986 Act)(6) was a major setback in this regard. If Congress is serious about health care reform, it will recognize the critical role these companies play in health care delivery and provide them with incentives and means to reduce costs rather than increase them.

If Congress is successful in addressing the issues raised by this essay, federal tax revenues will decrease. In what has become traditional thinking, this decrease should be offset to maintain revenue neutrality. In the authors' view, this decrease should come in the form of reduced federal expenditures for health care rather than directly increased tax revenues from other taxpayers. In other words, one of the costs of providing health care is the tax health care entities pay. A reduction in taxes of these organizations should, therefore, provide a reduction in actual health care costs. …

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