America is drowning in medical debt. It is a reality for nearly one in 12 adults, with at least $220 billion owed nationwide. This burden cuts across income, gender, geography and profession. Medical debt doesn’t care about your politics; it quietly undermines families and the broader economy. Creating targeted tax incentives — both credits and deductions — for consumers should be on the table.
Whether you cheer or groan, a Republican tax bill, approved by Congress, and signed by President Trump is likely to happen. Whatever emerges from the legislative sausage-making, the status quo is about to shift. And beauty to some is ugliness to others.
The Republicans tout market-friendly reforms, such as expanding Health Savings Accounts and updating Individual Coverage Health Reimbursement Accounts. These tools use tax incentives to nudge Americans toward smarter health care spending. These are good for middle class, mostly healthy consumers, but not for low-income Americans.
There will likely be steep Medicaid cuts and trims to Affordable Care Act subsidies. That means millions at or near the poverty line could lose coverage, driving up medical debt and forcing many into bare bones plans with high out-of-pocket costs and limited provider networks. The think tank Third Way estimates that proposed Medicaid cuts alone could push 2.8 million more Americans into medical debt, adding $26 billion to the nation’s tab — a 10 percent jump.
Is there a way to bridge this divide? Yes — if Congress is willing to think creatively. Supplemental “gap” insurance plans, like those from Aflac, FlexBenefits or Colonial Penn, are designed to cover what primary insurance doesn’t. Yet these plans are almost always paid for with after-tax dollars, and individuals receive no tax credits for buying.
Why not change that? Let’s make these plans tax-deductible for those who pay for their own health insurance. This isn’t a radical idea — it’s how health insurance deductions evolved for the self-employed over decades, growing from a 25 percent deduction in the 1980s to 100 percent by 2003. Back then, a typical plan cost $150–$300 a month with a $1,000 deductible. Today, premiums can run $500–$1,500 a month, with deductibles of $5,000 or more, plus co-pays and out-of-network charges.
For $50–$100 a month, consumers can buy a comprehensive gap plan that covers up to $5,000 for accidents or illness, and even more for serious conditions like cancer or heart attack. If these plans were tax-deductible or — for lower-income Americans — came with a refundable tax credit enrollment would soar.
Are all gap plans equal? No. Should there be minimum standards? Perhaps. But we need to start somewhere.
What would it cost? If 10 million low-income Americans received a $500 tax credit for gap insurance, the price tag would be about $5 billion. Not everyone would sign up immediately, but those who do would see fewer medical bills leading to bankruptcy or collections and would avoid the “private recession” of high-interest credit card debt. Freeing families from medical debt boosts consumer spending, increases sales tax revenue, and helps people get better jobs — raising state and federal tax receipts in the process.
If 20 million Americans got a tax deduction — at a 25 percent tax rate — for a $1,000-a-year gap plan, the cost would also be $5 billion, phased in over time. This would further reduce medical debt, improve preventive care, and ease mental health burdens — key drivers of health care costs.
There’s a cost, but also a payoff: less cost-shifting by providers, more consumer spending, and a healthier, more productive workforce. When the self-employed could finally deduct health insurance in the 1990s, more farmers, tradespeople and blue-collar workers bought coverage.
Tax incentives work. Make gap plans tax-advantaged, and millions more will buy them. It gives consumers new tools to manage out-of-pocket costs and encourages smarter health care choices.
Reducing medical debt through tax incentives should be a bipartisan cause. It’s smart politics for both parties. All it takes is a few leaders willing to think differently about rewarding responsible consumer behavior — no matter what income.
Under current law, businesses can deduct disability insurance and, in some cases, life insurance as overhead. But accident and illness coverage doesn’t get the same break. Accident insurance isn’t deductible under an Health Savings Accounts or Individual Coverage Health Reimbursement Accounts, though it is under a Section 125 plan. Isn’t it time to fix that?
Jeff Smedsrud is a longtime advocate for market-centric health insurance reforms who started seven companies in the health insurance space, focusing on niche markets.