Other Entitlements Topics:

Health Care

The Issue

Americans benefit from some of the best medical care in the world, but its financing and delivery is marred by significant weaknesses. While millions of Americans are living longer and healthier lives, America’s health care system remains too costly, confusing, and inefficient. American health care is also uneven in its quality and results, and leaves too many people without access to adequate, patient-centered care.

The Patient Protection and Affordable Care Act (Obamacare) fails to address the fundamental problems that bedevil American health care, and indeed, makes many problems worse. It imposes even greater cost, complexity and inefficiency by applying a model of centralized, top-down federal government management that is unworkable, unaffordable, unfair, and unpopular. Despite the President’s repeated promises to the contrary, the law has resulted in millions of Americans losing the private coverage they once had, millions more paying higher premiums, and fewer real choices. In addition, it saddles Americans with higher taxes and uses funds from cutting Medicare to finance this flawed experiment.

Rather than giving government officials even more control over health care, the better approach would be to pursue patient-centered, market-based health care reforms. This approach would give Americans and their families much greater control over their health care dollars and decisions. By making individuals and families the key decision-makers in a reformed health care system, powerful economic incentives will realign the interests of plans and providers and patients to maximize value by delivering higher quality care and services at lower cost.


Repeal Obamacare. Policymakers should repeal Obamacare in its entirety. The problems created by the law and its implementation are mounting. Coverage gains are not due to better access to private coverage, but instead are due almost entirely to expanding Medicaid, the government-run health care program for the poor. Costly insurance mandates and regulations are driving up the cost of coverage both inside and outside the government-run exchanges while the level of choice and competition within the government-run exchanges is worse than before Obamacare. Moreover, the government’s increased role in the delivery of care through rules, regulations, and red tape further frustrates health care providers, undermines the doctor–patient relationship, and tramples on personal and religious freedoms. After almost six years, it is no wonder that more Americans still oppose the law than support it.


Encourage Personal Ownership of Health Care by Reforming the Tax Treatment of Health Care. The current tax treatment of health insurance is largely a relic of World War II when employers effectively avoided wage and price controls by offering health insurance to their employees as a way of increasing employee compensation. The tax exclusion of health care benefits allows employees to receive non-taxable income from their employer in the form of health insurance. There are many problems with the tax exclusion. Because the exclusion is unlimited, it hides the true cost of care and thus drives up consumption; it disproportionately benefits higher-wage workers more than lower-income workers; it ties tax relief for medical expenses to the place of work, thus undercutting portability and personal ownership of coverage; and it is only available to workers whose employers choose to offer health insurance. Rather than reform the tax treatment of health insurance, and create a level playing field for all kinds of health insurance options, Obamacare simply imposes a tax on employer health plans whose benefits exceed specified amounts, per employee. True reform of the tax treatment of health insurance would give individual tax relief to workers and their families for the purchase of the health insurance plans they want. It would make the system simpler, fairer, and neutral with respect to how or where one obtains health care coverage. It would replace the current open-ended tax relief afforded only to those workers who have employer-based coverage with a more rational and equitable system of individual tax relief.


Modernize the Medicare Program to Meet the Demographic, Fiscal, and Structural Challenges. Established in 1965, Medicare is a government health care program for seniors over the age of 65 and some disabled. Medicare is facing major challenges. It is generating trillions of dollars in long-term debt. It must cope with an enormous demographic shift as America’s aging population is growing steadily; it is funded by a workforce that is shrinking relative to the size of the rapidly growing population of retirees; and it is saddled with an outdated design, based on price controls and central planning, that contributes to its inflexibility and sluggishness. Incredibly, traditional Medicare still fails to meet the most basic test of insurance: the protection of patients from the financial devastation of catastrophic illness. Rather than reform Medicare, Obamacare imposes hundreds of millions of dollars of cuts on Medicare providers, and redirects these Medicare savings to offset Obamacare’s costly new entitlement programs. Policymakers should look to transform Medicare from its 1960s style defined-benefit structure, which is financially unsustainable, to a defined contribution (“premium support”) model of financing. Under this model, seniors would receive the value of their Medicare benefits in the form of a government contribution to purchase the private health insurance plan of their choice. It would also allow more dependable budgeting for both seniors and the government and inject the powerful free market forces of choice and competition into the program to meet the needs of today’s seniors.


Transform Health Care Coverage for Low-Income Americans by Restoring Medicaid to a True Safety Net and a Path Out of Poverty. Medicaid, established alongside Medicare in 1965, is a welfare program to provide health care for certain vulnerable, low-income populations. Over the past 50 years, the program has changed significantly. Not only has Medicaid eligibility expanded, so also has the scope of its covered services. As a result, mounting fiscal, demographic, and structural challenges increasingly strain this jointly funded federal–state program. Rather than implementing much needed reforms, Obamacare simply expands Medicaid eligibility to millions of additional Americans, further straining the program. Tension over federal and state funding, a growing and diverse set of enrollees, and a delivery system that lags behind private coverage put this program and those dependent on it at risk. Therefore, policymakers should change the way Medicaid is structured by adopting a premium support approach to transition able-bodied low-income families into the private health insurance market where they can secure superior care and coverage while refocusing traditional Medicaid on the difficult to insure and the disabled. In conjunction, policymakers should look to replace the current financing design with one that provides greater certainty for federal and state budgeting while at the same time loosening restrictions that hamper innovation and greater beneficiary engagement.

Promote a Free Market in Health Care by Removing Regulatory and Policy Obstacles that Discourage Choice and Competition. Health care is one of the most over-regulated sectors of America’s economy. Government often imposes regulations that are too detailed, or too arbitrary, or that tilt the playing field to favor some competitors over others. Many of the regulations governing the delivery and financing of medical care by doctors, hospitals, and insurers are premised on blocking any innovation that might disrupt the long-standing business models with which the incumbent players are comfortable. Thus, the government exceeds its proper role and enacts restrictions that limit the incentives to innovate, leaving in place a system that is often outdated, inefficient, and unnecessarily costly. Policymakers should address the supply side of the equation to complement the financing reforms—the tax treatment of health insurance, Medicare, and Medicaid—that address the demand side of the equation. To that end, policymakers should conduct a comprehensive review and removal of those regulatory and policy obstacles at the federal and state level that inhibit a true free market from flourishing.

Facts and Figures

  • Health care is nearly one-fifth (17.5 percent) of the national economy and a major driver in the growth of government spending. With the enactment of Obamacare, federal spending on Medicare, Medicaid, and subsidized coverage in the government exchanges will reach 6.1 percent of gross domestic product by 2025, up from 3.1 percent in 2000.
  • The vast majority of gains in coverage since Obamacare took effect were due to the dramatic expansion of Medicaid. Of the 9.25 million who gained coverage during 2014, 8.99 million was the result of increased Medicaid enrollment, while private individual-market coverage saw a net increase in enrollment of just 260,000 people.
  • The Obamacare major insurance mandates and regulations increase premiums for young adults by as much as 44 percent and for pre-retirement-age adults by about 7 percent.
  • The Obamacare government exchange market is 21.5 percent less competitive based on a comparison of the number of participating exchange insurers across all 50 states in 2015 with the number of carriers in the individual market in 2013.
  • The aggregate value of the federal tax preference for employer-based health insurance in 2014 was about $250 billion per year, with reductions in federal personal income tax accounting for about $175 billion of that figure and reductions in federal payroll taxes accounting for the other $75 billion.
  • The share of non-elderly population covered by employer-sponsored health insurance peaked at an estimated 71.4 percent in 1980, and even though the share has gradually declined since then, in 2014, an estimated 60 percent are still covered under such plans.
  • Medicare has been running deficits since 2008, and based on the most recent 75-year projection, the Centers for Medicare and Medicaid Services (CMS) actuaries estimate that Medicare’s unfunded liability—the dollar value of promised benefits that are not paid for—is between $28 trillion and $37 trillion.
  • Total Medicare spending will jump from $613 billion in 2014 to more than $1.2 trillion by 2024, according to the Medicare Trustees Report. Historically, taxpayers fund about 88 percent of Medicare’s annual spending, with only about 12 percent of spending covered by beneficiary premiums.
  • Total federal and state spending on Medicaid is estimated to have been $456.1 billion in 2013 and is expected to accelerate over the next decade reaching $835 billion by 2023, according to CMS actuaries. A large part of this increase is due to the effects of Obamacare and its Medicaid expansion.
  • Medicaid—the federal–state program for the poor, elderly, and disabled—currently serves almost one out of every five Americans. With the ACA adding millions of able-bodied working-age adults to the program, the Congressional Budget Office projects that Medicaid enrollment will increase dramatically in the coming decade from 63 million in 2014 to 76 million by 2025.

Selected Additional Resources

Edmund Haislmaier, “Health Care Reform: Design Principles for a Patient-Centered, Consumer-Based Market,” Heritage Foundation Backgrounder No. 2128, April 23, 2008.

Edmund F. Haislmaier and Drew Gonshorowski, “2014 Health Insurance Enrollment: Increase Due Almost Entirely to Medicaid Expansion,” Heritage Foundation Backgrounder No. 3062, October 15, 2015.

Edmund F. Haislmaier and Drew Gonshorowski, “Responding to King v. Burwell: Congress’s First Step Should Be to Remove Costly Mandates Driving Up Premiums,” Heritage Foundation Issue Brief No. 4400, May 4, 2015.

Edmund F. Haislmaier, Robert E. Moffit, Nina Owcharenko, and Alyene Senger, “A Fresh Start for Health Care Reform,” Heritage Foundation Backgrounder No. 2970, October 30, 2014.

Robert E. Moffit, “Four Years of Obamacare: Early Warnings Come True,” Heritage Foundation Backgrounder No. 2907, April 28, 2014.

Robert E. Moffit, “Medicare at 50: Reform Will Better Serve Seniors’ Health Care Needs,” Heritage Foundation Issue Brief No. 4448, July 30, 2015.

Nina Owcharenko, “Medicaid at 50: Reform Is Needed to Better Serve Low-Income Health Care Needs,” Heritage Foundation Issue Brief No. 4447, July 30, 2015.

Nina Owcharenko and Edmund F. Haislmaier, “States Should Start Planning Now for a Post-ACA World,” Heritage Foundation Issue Brief No. 4441, July 23, 2015.

Alyene Senger, “Measuring Choice and Competition in the Exchanges: Still Worse than Before the ACA,” Heritage Foundation Issue Brief No. 4324, December 22, 2014.