The release of the House and Senate GOP tax plan this month has left Washington on edge as it comes to grips with the realities of tax reform. The early scorekeeping of winners and losers has dominated press releases, news alerts, and social media. However, there is one issue that House Republicans put on the table in this tax reform package that stands out above the rest as misguided. It is the elimination of the medical expense tax deduction. While the Senate’s version of tax reform does not eliminate the medical expense tax deduction, negotiations are still underway and the threat of eliminating the medical expense tax deduction remains. Removing the medical expense tax deduction not only affects the filers using the deduction, but it also stands to have more broad implications to our health care system. Our country has effectively two policies to address long-term services and supports (LTSS)—the medical expense tax deduction and Medicaid. If you take away the former, you will increase reliance on the latter. The medical expense tax deduction is a benefit available to taxpayers whose medical care expenses are above 10 percent of their adjusted gross income. Although the medical expense tax deduction affects relatively few American households, it assists those filers who have significantly high out-of-pocket medical expenses, including nursing home costs, long-term care insurance premiums, and other medical bills. The medical expense tax deduction is particularly important to those with LTSS needs, such as individuals with disabilities, seniors, those suffering from chronic illnesses, families of children with disabilities, and caregivers. The Internal Revenue Service estimated that 8.8 million filers claimed the medical expense tax deduction on their 2015 taxes. These 8.8 million have significant health care costs and claimed an estimated $87 billion in deductions in 2015. Without this deduction, millions of Americans will be forced to assume a tax liability they may not be able to afford. People who use the medical expense tax deduction need it. Although the number of Medicaid LTSS users is small (approximately 4.1 million in 2013), they represent a disproportionate share of Medicaid spending. The Centers for Medicare and Medicaid Services National Health Expenditure Accounts data estimated that total national spending on LTSS was $310 billion in 2013, accounting for almost 51 percent of Medicaid spending. In 2012, Medicaid accounted for 61 percent of total national spending on LTSS —$134.1 billion. Individuals often “spend down” their resources in order to receive the services and supports they need to maintain their daily lives living in their homes and communities. Essentially, this requires families and individuals to impoverish themselves in order to become eligible. As a result, these individuals become Medicaid-eligible and can continue to receive the services they require. With the elimination of the medical expense deduction, many individuals receiving LTSS would diminish their personal resources more quickly to cover their medical expenses and become more likely to qualify for Medicaid. This would ultimately cause an increase in federal government spending, an increase in reliance on government programs, and increased burden on state Medicaid systems that are already strained. Millions of taxpayers will be forced to look to Medicaid for support. There is no reason that this small group of individuals should be forced into a system they don’t need to be in. An unintended consequence of tax reform should not be to add Americans to government subsidized programs. It is ironic that the first draft of tax reform would increase Medicaid spending, after Congress spent months contemplating capping the Medicaid program earlier this year. Few individuals can afford to pay out-of-pocket for their daily care, and our nation has yet to figure out a better model of long-term services and supports than through the use of Medicaid. Eliminating the deduction without recognizing the impact doing so has on Medicaid is remarkably short-sighted. People with significant long-term support needs drive Medicaid spending, and many people use the tax deduction to avoid turning to the Medicaid program. Capping spending doesn’t actually change the need to use services and neither does eliminating the deduction. If Congress wants to reduce long-term support spending, it will take policies designed to directly address the long terms support utilization. Until Congress recognizes that, the drama will continue.
The proposed House and Senate GOP tax reform includes the partial or total removal of medical expense tax deduction, a benefit for those Americans with medical care expenses that cost more than 10% of their adjusted gross income. Despite being a benefit for relatively few citizens, those who incur very large out-of-pocket medical expenses find it critical for paying for nursing homes, long-term care insurance and more. Those with LTSS requirements for chronic illnesses or disabilities, as well as caregivers, will be among those affected. The lack of medical expense tax deduction will also increase reliance on Medicaid, the other source of assistance for LTSS patients. In 2015, the IRS calculated that two Americans claimed the deduction, totalling $87bn. Though the number of claimants for Medicaid LTSS is proportionally small, numbering only 4.1m in 2013, their needs are costly, representing $310bn of spending in 2013, according to the Centers for Medicare and Medicaid Services. The year prior, Medicaid represented 61% of total national LTSS spend, $134.1bn in total. Personal savings will be at risk of being depleted to cover medical expenses, leading more Americans to meet the qualifications for Medicaid. More Medicaid expenditure means higher federal government costs, further reliance on government programs, and further pressure on individual states’ Medicaid programs. Critics are calling the move “short-sighted” because of the long-term potential effects that will only increase Medicaid spending, at a time when Congress is seeking to put a cap on Medicaid.