Fowler and Cannon Get It Right—and That’s the Easy Part

Elizabeth Fowler of Johns Hopkins and Michael Cannon of the Cato Institute recently did the fiscal debate a service in the Washington Post . They name the right driver of costs. The tax exclusion of employer-sponsored insurance (ESI), they argue, is one of the primary forces pushing national health spending up: Because wages are taxable but employer-provided coverage is not, the tax code rewards richer benefits over cash compensation and “reduces price sensitivity.” Diagnose the spending problem from the right angle, and the exclusion is what you see first. That is the kind of clear-eyed framing the rest of the fiscal debate badly needs. Most of what currently passes for spending reform is not on the scale the problem demands. Health savings accounts, price transparency rules, and most of the consumer-shopping toolkit have their place at the margins, but on their own, they cannot offset a tax code pushing in the opposite direction. The newer enthusiasm for most-favored-nation pricing and other rate regulation may damage access without delivering much in the way of durable savings. While industry consolidation is an issue, economists’ fixation on it captures attention but does not offer as much of a pathway to curb spending growth as attention suggests. None of these will deliver the relief that taxpayers, premium payers, and consumers need. If we are serious about bending the spending curve, we should look to Fowler and Cannon’s fundamentals. It helps to put the exclusion in its proper place of the American coverage architecture. Medicare covers seniors and the disabled. Medicaid covers the low-income population. The Affordable Care Act (ACA) subsidizes lower-income people in the individual market. The tax exclusion is, in effect, the federal program for the employed, and on the whole, that has been a good thing. It is how most working Americans get covered. The problem is not the exclusion’s existence; the problem is that it is open-ended. There is no income limit, no benefit-richness limit, and no test of need. The richer the plan, the larger the federal subsidy. That is why the numbers have grown the way they have. The exclusion cost the federal government roughly $478 billion in foregone revenue in 2026, and the Treasury projects it to reach $749 billion in 2035—far and away the federal government’s largest tax expenditure, and many times the deduction for out-of-pocket medical expenses. Economically, the effect is exactly what Fowler and Cannon described: Favorable tax treatment leads workers and employers to choose richer plans than they would with their own money, which dulls price sensitivity, raises utilization, and feeds back into higher prices. Capping the exclusion at a defensible benchmark would do what HSAs were designed to do and largely have not: restore some discipline at the point where benefit packages are chosen. The reason this idea has been studied for 40 years and never enacted is politics. The exclusion’s proliferation is an accident of World War II wage and price controls that were codified in 1954 and have been protected ever since by a coalition that does not break along the usual party lines. The Reagan Treasury Department proposed a cap in the early 1980s as part of comprehensive tax reform ; Senator Bob Packwood , a Republican, led the opposition that killed it. The Clinton White House considered including a cap in the 1993 reform package; a single phone call from organized labor ended that. President Bush proposed it in his 2007 State of the Union and received almost no support. President Obama got the closest. The ACA’s Cadillac Tax —an excise tax on high-cost plans, projected to save $32 billion over 10 years—was the first cap to make it into law. But the law set the effective date eight years out, in 2018, giving opponents time to organize—and Congress delayed it twice more before repealing it outright in 2019 , with overwhelming bipartisan majorities and President Trump’s signature . The subsidy is defended by an alliance of labor and business that does not usually agree on much, and by both parties, each for its own reasons. That is the challenge for those who would follow Fowler and Cannon’s lead. Reforming the ESI exclusion would be a keystone of any serious effort to bring health spending under control and to make care more affordable for the taxpayers, premium payers, and consumers who foot the bill. It would not, by itself, be enough—bending the curve will require a comprehensive reform agenda that also takes on how care is paid for and how value is measured—but it is hard to picture serious spending reform without it. And getting it done will require a coalition built to overcome a 40-year record of bipartisan defense, ideally before the fiscal pressures of federal and state health spending force the conversation on terms nobody will like. The post Fowler and Cannon Get It Right—and That’s the Easy Part appeared first on American Enterprise Institute - AEI .