concurring: The respondent has ruled that the premiums paid for health insurance, rather than the benefits paid by the insurance plan, are the amounts to be included in support for determining who is entitled to a dependency exemption. Rev. Rul. 64-223, 1964-2 C.B. 50. While a good argument can be made that this position corresponds with the economic realities,1 the validity of this revenue ruling is not before us and was never an issue in these proceedings. This case was tried and briefed solely on the validity of the Government’s position that the hospital insurance benefits of part A of title XVIII of the Social Security Act are not insurance, while the supplementary medical insurance benefits of part B are insurance.2 The respondent’s case must, therefore, stand or fall on his assertion that part A is a severable and distinct part of the program of “Health Insurance for the Aged and Disabled” established by title XVIII (including parts A, B, and C), and that the severed portion is not insurance.
The Government’s position is purely and simply at odds with the history and structure of the program of health insurance for the aged and disabled.3 The original Committee on Economic Security considered the issue of health insurance for the aged along with Social Security. The report of the committee sent to Congress on January 17, 1935, discussed general principles and promised further efforts to develop a health insurance plan, but specific recommendations were not included for tactical reasons, although a report was subsequently filed.4 From the mid-thirties to the mid-sixties when the present program was enacted, a series of bills were introduced and reintroduced embodying provisions similar to those found in part A of title XVIII.5 These bills were drafted to provide a public health insurance program for the aged. This is in fact what title XVIII of the Social Security Act accomplishes, by providing an integrated program of inpatient and outpatient benefits that must be looked at as a whole for purposes of the issue we face.
Parts A and B are intertwined and interdependent components of a single comprehensive health insurance plan. Like comprehensive health insurance plans underwritten by private insurers, it provides inpatient hospital services (part A) and outpatient hospital services (part B), physicians’ services (part B), care in an extended care facility (part A), and home health services (both part A and part B). Part C (ignored by respondent) provides a common definition of all the critical terms (various providers, services covered, reimbursement methods, etc.) applicable to both parts A and B. For example, a home health agency is defined in section 1861(o) (42 U.S.C. sec. 1395x(o)) and home health services are defined in section 1861(m) (42 U.S.C. sec. 1395x(m)). This definition is applicable whether the services are provided under part A (within 1 year of an individual’s discharge from a hospital or skilled nursing facility) or under part B. Similarly a provider-such as a hospital or a home health agency (see sec. 1861(u), 42 U.S.C. sec. 1395x(u)) — is reimbursed on a reasonable cost basis as that term is defined in section 1861(v) (42 U.S.C. sec. 1395x(v)), regardless of whether the services are provided under part A or part B.
Similarly, provisions relating to Federal interference in the practice of medicine, free patient choice, and the option to obtain other health insurance (secs. 1801, 1802, and 1803, 42 U.S.C. secs. 1395,1395(a), 1395(b)) are common to both parts A and B. Sections 1862-1879 (42 U.S.C. secs. 1395y-1395pp) contain a number of provisions common to both part A and part B, including inter alia, such basic provisions as exclusions from coverage (sec. 1862, 42 U.S.C. sec. 1395y), the Health Insurance Benefits Advisory Council or HIBAC (sec. 1867, 42 U.S.C. sec. 1395dd), Appeals (sec. 1869, 42 U.S.C. sec. 1395ff), Over-payments (sec. 1870,42 U.S.C. sec. 1395gg), Payments to Health Maintenance Organizations or H.M.O.’s (sec. 1876, 42 U.S.C. sec. 1395mm), Penalties (sec. 1877, 42 U.S.C. sec. 1395nn), and Limitations on Beneficiary Liability where “Medicare” claims are disallowed (sec. 1879,42 U.S.C. sec. 1395pp). In fact, the very term “Medicare” is commonly used to denote the entire title XVIII program of comprehensive benefits provided by parts A, B, and C.
Like medicare, most comprehensive health plans can be divided into two aspects, the provisions relating to inpatient hospital services and those relating to physician’s services and other health services provided on an outpatient basis. The latter are generally subject to a deductible and coinsurance factor to net out administrative expenses attributable to small claims and to provide cost disincentives to overutilization. Indeed, the two major plans offered to Federal employees under the Federal Employees Health Benefits Act of 1959,6 after which major features of the medicare program were patterned, contain these characteristics.7 In recognition of the similarity of Medicare to private health insurance plans, claims administration was delegated to private insurance companies (carriers and fiscal intermediaries) to utilize their ongoing experience with very similar health insurance plans.
It is true that these two features of medicare are financed through different trust funds and different revenue sources, the trust fund revenue for part A resulting from payroll taxes on employers, employees, and the self-employed (as well as some general revenue financing for gratuitous wage credits provided certain military personnel), and the trust fund revenues for part B coming one-half from premium contributions made by enrollees and one-half from general Federal revenues. But this financing disparity, resulting from the historical development of the legislation within Congress in 1965 and associated political exigencies,8 does not obscure the insurance character of the system: pooling of risks; specified benefits payable on specified contingencies; benefits payable as a matter of right to those in an insured status; and contributions imposed in accordance with actuarial methods designed to insure actuarial soundness. An integrated public health insurance program, modeled after those made available by the private sector, should not be fragmented into its component fragments any more than the private prototypes.
Respondent nevertheless asks us to treat the comprehensive health insurance plan provided by medicare as two distinct and separate plans — parts A and B (ignoring part C), and declare that part A is not insurance. For the reasons stated above, the program cannot be looked at in fragmented components for purposes of the issue presented in this case.
Even if we accepted respondent’s attempt to sever part A from the integrated program provided by title XVIII, he errs in characterizing part A as social “welfare” rather than insurance. Respondent bases his refusal to recognize part A as insurance (while admitting that part B is insurance) on three factors: (1) Part A is, like the cash benefits program established by title II of the Social Security Act, a social “welfare” program;9 (2) part A is a compulsory program financed by a payroll tax, while part B is a voluntary program financed by general revenues and contributions made by electing participants; (3) payroll taxes paid for health insurance are not deductible as medical expenses under section 213 of the Internal Revenue Code of 1954 while the contributions made by those participating in part B are deductible under that section. None of these distinctions are valid.
The decisions respondent cites holding that welfare benefits— either cash or in the form of medical assistance — are includable in determining support (see Helen M. Lutter, 61 T.C. 685 (1974), affd. per curiam 514 F. 2d 1095 (7th Cir. 1975)), are clearly irrelevant to the issue herein presented. Lutter involved cash payments pursuant to the program of Aid to Families with Dependent Children (A.F.D.C.) established by title IV of the Social Security Act. This is a welfare program entirely different from the insurance programs established by title II and title XVIII of the Social Security Act. A.F.D.C. is a welfare program for needy families with dependent children (secs. 401, 42 U.S.C. sec. 601, and 402(a), 42 U.S.C. sec. 602), and can only be paid in accordance with need standards established by each State in accordance with general provisions included in the Federal law (see sec. 402(a)(7) and (8), 42 U.S.C. sec. 602(a)(7)(8)).
Lutter also involved payments of medical assistance pursuant to the Federal-State matching programs established by title XIX of the Social Security Act (42 U.S.C. sec. 1396). These payments can only be made to individuals already receiving a cash grant under one of the applicable public assistance programs (such as A.F.D.C. which is based on need) and to certain medically needy individuals who need help with their medical expenses, but not their basic living expenses. (Sec. 1902(a)(10), 42 U.S.C. sec. 1396a(a)(10).) Again, for the latter group, the States must establish need standards in accordance with general criteria in the Federal law (sec. 1902(a)(17), 42 U.S.C. sec. 1396a(a)(17)) and their need standards must be related to those used to establish eligibility for cash grants (sec. 1903(f), 42 U.S.C. sec. 1396b(f)).
There is no need standard imposed in determining eligibility for either social security or medicare. The wealthiest man qualifies for benefits if he meets the insurance requirements; the poorest individual is ineligible if he fails to meet the insurance requirements.10
Anyone with a passing acquaintance with health insurance for the aged knows that the whole program was designed to avoid a means test that was applicable to the existing program for medical assistance to the medically indigent elderly. Respondent confuses the concept of social welfare underlying a portion of the cash benefit formula in the social security program established by title II, and in a non sequitur, attempts to characterize part A of title XVIII (as fragmented from its related parts) as welfare. It is true that the benefit structure for cash payments is based on principles of individual equity and social adequacy.11 While benefits are wage-related to provide individual equity, the benefit formula is weighted, a minimum benefit is provided, and benefits are provided for certain dependent relatives (such as a wife and dependent children) to insure social adequacy. These concepts do not destroy the insurance character of cash benefits under Social Security.12 Even if they did, they have much less relevance to the hospital insurance benefits provided by part A, wherein each beneficiary receives the actuarial value of the insurance protection provided, rather than a cash benefit that varies greatly as between individuals. Individuals who are not covered under part A can now elect coverage for a premium contribution that is currently a flat rate of $40 per month.13 The numerous variations in benefits based on social adequacy in the cash program is simply not applicable to the hospital insurance protection provided by part A of title XVIII.
Respondent’s analogy of the hospital insurance program to social security cash benefits is wrong for an additional reason. It is clear that annuity income — whether from a private annuity or Social Security — is included in an individual’s support if expended for that purpose.14 For these reasons cases involving the inclusion of social security benefits — or any other annuity income — in support for purposes of determining dependency are not relevant to the issue at hand. We are here concerned not with an annuity, but health insurance benefits, and respondent attempts to distinguish benefits provided under a private health insurance program from benefits provided under a public health insurance program for purposes of determining support. It is this distinction we are confronted with and the distinction is without validity for the purposes of determining support under the income tax laws.
Respondent next argues that part A is not insurance because it is a “compulsory” program (while part B is voluntary). This distinction is without legal merit. An insurance program does not lose its insurance character simply because participation is compulsory. Even if this were true, the distinction respondent makes between parts A and B with regard to freedom of choice to participate is more illusory than real. An individual is not required to accept hospital benefits under part A (sec. 1814(a)(1), 42 U.S.C. sec. 1395f(a)(l)) and may purchase alternative or supplemental health insurance, if available (sec. 1803, 42 U.S.C. sec. 1395b). An individual who declines part A benefits is nevertheless required to pay the hospital insurance tax while foregoing the benefits provided. But this situation is analogous in some respects to part B. Whether an individual elects the part B coverage or not he will, as a general taxpayer, be required to underwrite the 50 percent of the program costs provided from general Federal revenues. An individual will be paying taxes to provide approximately half of the costs of both programs — part A through the employee’s tax on his covered wages and part B primarily through the individual income tax, whether or not he participates in either program.
Additionally, when a person reaches 65 and is eligible for hospital and related insurance benefits under part A, he is virtually compelled to take part B. It is impossible to find a commercially available plan equivalent to part B for a competitive premium since the Federal Government is paying one-half of the premium costs of part B. Additionally, the law presumes that an eligible individual elects part B coverage,15 and premiums are automatically withheld from his social security or railroad retirement benefits (sec. 1840(a) and (b), 42 U.S.C. sec. 1395s(a‘)(l) and (2))16 unless the individual takes affirmative action to elect out of the program. This presumed election, combined with the economic incentives of Government cost-sharing and the mechanical simplicity of the withholding of premium payments, has resulted in the participation of virtually all of those eligible for part B. Indeed, the Congress anticipated that up to 95 percent of the aged eligibles would participate in part B,17 and the latest data indicate that this expectation has been fulfilled. The compulsion may be economic rather than juridical in part B, but from an empirical viewpoint, it has approximately the same coercive effect.18
Finally, social security has traditionally been a compulsory program for several reasons, including a desire to insure that individual workers will have prepaid benefit rights upon reaching retirement age and to guard against “antiselection.” Antiselection would result if the public program underwrites the poor risks while the better risks seek private insurance protection. These are both factors attributable to the hospital insurance plan established by title XVIII, which covers the major portion of the health insurance costs of the elderly.19
Additionally, the risk of antiselection in the prepaid part A program was probably of more concern in the health programs than the cash benefit program in view of the additional actuarial uncertainties the health program presented.20
Respondent’s reliance on the apparent distinction between the juridical compulsion and empirical compulsion to participate in part A and part B is therefore without any substantive significance in resolving the issue before us.
Respondent contends that by not permitting an individual employee to deduct the hospital insurance portion of the tax under section 213 of the Internal Revenue Code of 1954, Congress indicated that the hospital insurance program was not insurance. This ignores the pattern of the legislative history wherein Congress consistently described all of title XVIII as an insurance program.21
Moreover, respondent’s reasoning is a non sequitur. The deductibility for tax purposes of the costs incurred in acquiring health insurance coverage does not affect the insurance character of the program provided. The program may (and the hospital insurance program provided by part A does) provide a widespread pooling of risks against specified contingencies; provide various benefits specifically spelled out in the program; provide benefits as a matter of right to those in an insured status; and provide specific contribution rates determined in accordance with actuarial methods calculated to meet the estimated costs of the system. These are the relevant criteria, and whether or not a plan meets them is wholly unrelated to the deductibility for tax purposes of contributions to acquire an insured status.
Dawson and Hall, JJ., agree with this concurring opinion.No prudent man with the'means and opportunity to acquire health insurance will fail to do so with the enormous costs of health care today. The average man looks at his health costs as his insurance premiums plus his unreimbursed payments for health care, which accords with the economic realities (and the amount deductible as a medical expense). Viewing large third-party payments (made when the contingency insured against occurs) as support can be viewed as distorting the economic realities.
References to part A, part B, and part C are to tit. XVIII of the Social Security Act, as amended, 42 U.S.C. sec. 1395. Tit. XVIII was added to the Social Security Act by Pub. L. 89-97 (1965), 79 Stat. 286.
The disabled were first covered under Pub.L. 92-603 (1972), 86 Stat. 1329.
See Witte, The Development of the Social Security Act (University of Wisconsin Press 1962); Sydenstricker, “Public Health Provisions of the Social Security Act,” 3 Law and Contemporary Problems 263, 264 (1936).
See, for example, H.R. 1 and S. 1,89th Cong., 1st Sess. (1966) (King-Anderson bill).
73 Stat. 708,5 U.S.C. sec. 8904.
That the annual deductible (currently $60) and the 20-percent coinsurance attributable to medical care on an outpatient basis is very similar to the two major high option plans offered to Federal employees by private insurers is no surprise, since Medicare was patterned after these plans. An alternative to Medicare considered by Congress in 1965 was explained by its sponsor as follows:
“The substitute adopts the approach used by the private insurance industry and it is patterned after the system of insurance that we have provided for our own Federal employees. The benefits are patterned on the high option of the Government-wide indemnity contract negotiated between the Civil Service Commission and private carriers for the benefit of Federal employees. Remarks of Mr. Byrnes, 111 Cong. Rec. 7220 (1965).”
The floor manager of the bill that became Medicare stated that, with regard to health insurance, the substitute bill incorporated “everything that is within the committee bill except with respect to the one matter of how do we finance the cost of taking care of this problem.” Remarks of Mr. Mills, 111 Cong. Rec. 7213 (1965).
There was a desire to use both general revenue and payroll tax financing; the latter to enable individuals to prepay during their working years the costs of hospital expenses in their later years, which was thought to represent the major health costs of the elderly. Additionally, it was felt that physicians would be less apprehensive of Government interference if their fees were not paid from payroll taxes. Also, part B, as developed within the Congress, enabled physicians to be reimbursed on the basis of reasonable charges — the physicians’ customary charge limited by that prevailing in the locality for similar services. (The current provisions, somewhat modified since 1965, are found in secs. 1833(a)(1), 1395 1(a), and 42 U.S.C. secs. 1842(b)(3), 1395u(b)(3)). See Remarks of Mr. Mills, 111 Cong. Rec. 7213, 7214 (1965). The development of the bill is briefly recounted in Manley, The Politics of Finance 118-121 (Little, Brown 1970).
Respondent vastly oversimplifies this program. See Meyers, Social Insurance and Allied Government Programs 8 (Irwin 1965). See also Meyers, Medicare 87 (Irwin 1970).
There were transitory provisions in 1965 covering those who did not have an opportunity to meet the insurance requirements because of their advanced age, but these provisions were not based on any standard of need and respondent does not make an issue of these provisions in this case.
See Meyers, Social Insurance and Allied Government Programs 25,26 (Irwin 1965).
Benefits are still paid as a matter of right to individuals in an insured status and the benefit formula is wage-related. See sec. 215 (42 U.S.C. sec. 415); Meyers, supra at p. 36 n. 9.
See 39 Fed. Reg. 45309 (1974).
It is a mystery why respondent identifies part A of tit. XVIII with the social security cash benefits provided by tit. II (rather than with part B of tit. XVIII) to reach this result. In the very ruling he relies on he also clearly states that “neither the basic Medicare benefits nor the supplementary Medicare benefits qualify as a ‘pension or annuity.’ ” Rev. Rui. 70-341, 1970-2 C.B. 31, 32 (emphasis supplied). Respondent in this quotation recognizes that tit. XVIII is in its entirety a health insurance program as distinguished from the annuity program provided under tit. II.
Sec. 1837(f) (42 U.S.C. sec. 1395p(f)) provides:
(f) Any individual—
(1) who is eligible * * *
(2)***
(3)*** .
shall be deemed to have enrolled in the medical insurance program established by this part.
These are the principal sources of wage-replacement income for most of the nation’s nearly 30 million aged and disabled.,
H. Rept. No. 213,89th Cong., 1st Sess. 3 (1965).
The number of aged enrolled in part B had by July 1974 reached 21.2 million, about 95 percent of the total population aged 65 and over. 1975 Annual Report of the Board of Trustees of the Federal Supplementary Medical Insurance Trust Fund, H. Doc. No. 94-137 2(1975).
Part A benefits disbursed from the Hospital Insurance Trust Fund (including administrative expenses) in fiscal year 1974 were $8.1 million; the comparable figure for part B disbursed from the Supplementary Medical Insurance Trust Fund was $3.3 billion. Compare 1975 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund, H. Doc. No. 94-136 1, with 1975 Annual Report of the Board of Trustees of the Federal Supplementary Medical Insurance Trust Fund, H. Doc. No. 94-137 1 (1975).
The manager of the House bill stated during floor debate:
“We picked this single biggest element, namely, the cost of being in a hospital, and we financed that by the payroll tax to let the person during his working years, through small amounts of money paid per week, per month, or per year, make advance payments to that trust fund entirely on his own and from his employer and by the self-employed on their own account. Remarks of Mr. Mills, 111 Cong, Rec. 7214 (1965).”
See H. Rept. No. 213, 89th Cong., 1st Sess. 47 (1965). The factor of antiselection in the part B program was dealt with by empirical compulsion. The program was structured to integrate with the part A program as a unitary whole, so that virtually everyone was expected to follow his own economic interests (particularly in view of the economic compulsion imposed through financial incentives) and elect coverage. Additionally, the law included safeguards for antiselection under part B by providing limited enrollment periods, as well as increased premium contributions for those making a deferred election. (See also Meyers, Medicare 88 (Irwin 1970)). To the extent the voluntary versus compulsory distinction has any meaningful distinction in substance as opposed to form, it is attributable to the manner in which the legislation developed in Congress and tactical political considerations. See nn. 7 and 8 supra.
Additionally, the problems associated with the tax treatment of premium contributions and benefits under Social Security are considerable to say the least. (See, for example, Joint Staff of House Comm, on Ways and Means and Senate Comm, on Finance, 91st Cong., 1st Sess., Tax Reform Studies and Proposals, U.S. Treasury Dept. 232-234 (Comm. Print 1965); Goode, The Individual Income Tax 105-110 (Brookings 1964). Congress may simply not have wanted to open up all of these problems in connection with the Medicare bill, which in itself presented enough problems. One problem that comes immediately to mind is how to treat refunds of taxes where an employee working for multiple employers pays taxes on excess wages, if the hospital insurance tax (as opposed to the remaining payroll tax) were deductible. Additional administrative problems would be presented and Congress, in declining to make the hospital insurance tax deductible, may have been concerned about these as well as the difficulty of explaining to the average man why only a portion of his payroll taxes could be deducted. Finally, Congress provided relief in 1965 to the working individual by permitting him to deduct a portion of his current health insurance premiums without regard to the 3-percent floor contained in sec. 213 of the Code. Sec. 213(a)(2), I.R.C. 1954. See H. Rept. No. 213, 89th Cong., 1st Sess. 138 (1965).