By Veronique de Rugy
Thursday, 05 March 2026 11:22 AM EST
America’s healthcare system ranks as the most expensive among developed nations. This isn’t due to market failure, as some claim, but rather because the market has been repeatedly blocked from succeeding.
The core issue is simple: The person receiving care rarely pays for it directly. Roughly 90 cents of every dollar spent on healthcare is covered by a third party—either an insurer or government.
This arrangement severs the natural give-and-take relationship between provider and customer that disciplines all other economic sectors. When someone else pays, there’s no incentive to compare prices, shop around, or question whether services are worth it. Without direct financial responsibility, consumers don’t restrict their spending.
The result is predictable: opaque pricing, resistance to competition, and a lack of discipline that aligns costs with benefits.
This isn’t about who should have coverage—it’s about whether the structure of American healthcare creates real incentives for affordability.
A decades-old tax code provision has built this crisis. Specifically, the exclusion of employer-sponsored health insurance from taxable income has been in place since early Treasury rulings. In the 1940s, wartime wage controls prompted employers to use health benefits as a workaround. By 1954, Congress codified the exclusion, cementing employer-based insurance as the dominant model.
This tax break is projected to cost the federal government $487 billion this year alone—a consequence few anticipated at the time. Michael Cannon of the Cato Institute has identified it as the most damaging provision in the entire tax code: three times larger than the next biggest tax break and responsible for behavioral shifts over eight decades.
The exclusion chains workers to their employers, eliminates consumer price sensitivity, suppresses wages that could have been paid in cash, and systematically crowds out direct, consumer-driven healthcare spending that would otherwise create market pressure to control costs.
Under an ideal tax system—taxing income once with no loopholes—the employer insurance exemption wouldn’t exist. But eliminating it is politically difficult. For now, expanding health savings accounts (HSAs) offers a practical step: allowing individuals to save pre-tax dollars for medical expenses.
HSAs put patients in the role of paying customers who compare prices and seek value. Evidence suggests HSA users spend less on care and engage more with wellness programs—but it’s unclear how much is due to the plans versus the people who choose them.
Unfortunately, HSA eligibility remains restricted to those enrolled in high-deductible health plans, excluding millions who could benefit most. The 2025 “One Big Beautiful Bill Act” (OBBBA) expanded HSA contribution limits and qualified expenses but left this eligibility barrier intact.
Another structural flaw persists: the consumer-directed model should follow the consumer, not their insurance plan category. Millions have opted out of the Affordable Care Act market for more control—yet HSAs don’t reach them.
Expanding HSA eligibility isn’t just a band-aid fix; it’s a step toward a coherent tax code. It would lower costs by letting individuals accumulate healthcare savings over time and restore direct financial relationships between patients and providers.
That’s sound tax policy as well as good health policy.
Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. Her primary research areas include the U.S. economy, federal budget, homeland security, taxation, tax competition, and financial privacy. She has also been a resident fellow at the American Enterprise Institute, a policy analyst at Cato, as well as a research fellow at the Atlas Economic Research Foundation.
