Executive Summary

A tax incentive for employers to provide health insurance for employees was supposed to make health insurance more affordable. Instead it has proven a classic example of government failure that has penalized women by making health insurance largely unaffordable for those who do not receive it as a benefit of employment. Expanding the tax exclusion to include savings for future medical expenses, or “health accounts,” would make health care more affordable and more responsive to women.

  • The tax exclusion for employer-provided coverage led to skyrocketing costs. Since it was implemented during World War II, medical prices have risen faster than other prices in all but four years. By 1997, excess consumption caused by the exclusion accounted for nearly 30 percent of health spending. One estimate suggests the exclusion wastes $150 billion annually.
  • Health premiums and the number of uninsured are rising. In 2003, health insurance premiums rose an average 15 percent — the largest increase in more than a decade — and the number of uninsured Americans grew to 43.6 million.
  • Women suffer disproportionately from higher costs caused by the tax exclusion. Women have greater medical needs than men. They account for 60 percent of all physician office visits and spend 68 percent more out-of-purse on medical care during their childbearing years. They have lower incomes than men and are more likely to forgo needed care due to cost.
  • The tax exclusion further penalizes women by linking health insurance to employment. Women disproportionately work in jobs where health benefits are less common. They leave the workforce more often than men, and are thus more likely to lose coverage. Women are also more likely to lose coverage due to divorce or a spouse’s death. As a result, the number of uninsured women is growing at three times the rate of uninsured men.
  • Policymakers must eliminate or minimize the harm done by the tax exclusion for employer-provided health insurance.
  • Health accounts improve women’s health insurance and care. Health accounts make coverage more affordable for women. They expand women’s coverage options, make health insurance portable, and allow women to choose what items are covered.


Every day, American women are penalized by a government policy that increases the cost of medical care, injects third-party bureaucrats between women and their doctors, and makes health insurance largely unaffordable for those who do not receive it as a benefit of employment. Women are particularly vulnerable because women require more medical care, have lower incomes, and have more difficulty finding and holding on to employer-provided health insurance. A classic example of government failure, this policy could hardly be more hostile toward the goal of making health care affordable for women.

The federal tax code singles out one method of financing health care — employer-provided health insurance — to be exempt from payroll and income taxes. Though few make the connection between the tax treatment of health insurance and the problems we see in our health care system, consider what would happen if we treated car insurance the same way. Most consumers would purchase car insurance through their employer. Insurance companies would stop marketing to drivers and start marketing to employers. Car insurance would come to cover more things — routine, predictable items like oil changes — because pre-paying for these items through insurance makes them tax-free as well. Before long, we would have a feeding frenzy where workers, spending someone else’s money, would drive up the cost of insurance, maintenance, and repair. Millions would no longer be able to afford auto insurance or a trip to the mechanic. Losing one’s job would mean losing one’s car insurance too.

This is precisely the state of America’s health care system. The tax exclusion of employer-provided health insurance has delivered ever-escalating costs, increased frustration, and reduced access to health care. All Americans are affected by this government failure. One survey finds that while most Americans are pleased with their own medical care, majorities are (1) dissatisfied with the overall quality of care in America, (2) worried they may lose their health coverage, and (3) willing to let the government assume control of the health care system. Another survey finds more Americans worried they might lose their health insurance than worried they might lose their savings in the stock market, lose their job, or be the victim of a violent crime or terrorist attack. The tax exclusion is the culprit. It is a driving force behind the rising cost of health care and health insurance, and the growing number of Americans without health insurance.

While this government failure touches everyone, women are most affected. As a recent study observed,

Women are major consumers of health care services, in many cases negotiating not only their own care but also that of their family members. Their reproductive health needs, greater rate of health problems, and longer life spans compared with men make their relationships with the health system complex. Their access to care is often complicated by their disproportionately lower incomes and greater responsibilities juggling work and family. Because of their own health needs, limited financial resources, and family responsibilities, women have a vested interest in the scope and type of services offered by health plans, as well as in the mechanisms that fund health care services.

Women are acutely aware of the health care system’s ills. Amid a sluggish economy, a recent survey asked what is the most critical issue facing America today. Men were nearly twice as likely to answer “the economy” as “health care.” Women, however, were as concerned about health care as the economy. Women are less confident than men that they will be able to afford medical care in retirement. Moreover, women are increasingly connected to the health care system in multiple capacities. Every year, more women come to know America’s health care system not just as patients, but as physicians and employers. Women have the most to gain from health care reform done right and the most to lose if it is done wrong.

To enable women to get the most from the world’s finest health care system, policymakers must eliminate or minimize the harm done by the tax exclusion of employer-provided health insurance. The proposal that holds the most promise is to expand tax-free health accounts, which allow individuals to save money for their medical needs. Health accounts return control over medical care to the patient and make health insurance more affordable. This paper will examine the role that health accounts could assume in our health care system, and the likely effects of this policy on women.