Medical Expense Tax Deduction – a Versatile Tool to Confront Extraordinary Health Care Costs

The medical expense tax deduction helps millions of middle-income taxpayers of all ages confront extraordinarily high out-of-pocket health care costs. Through this tax deduction, the federal government offsets a portion of unreimbursed medical expenses. The deduction complements other elements of the national health care financing system, such as health insurance, relieving pressure on those who fell through its cracks.

The 2017 tax law had a significant impact on the policy. While the change reduced the value of all tax deductions, policymakers temporarily and partially counterbalanced the effect on the medical expense deduction by adjusting its formula. That adjustment, which lowered the amount of medical expenses that a taxpayer must have to be eligible for the deduction, expired in 2018. Today policymakers are deliberating its extension. Without it, the number of taxpayers taking advantage of the provision is estimated to fall in 2019 by about 800,000 (or about 18 percent), and for 3.6 million taxpayers the benefit would get smaller. Thus, the future direction of this policy has major implications.

Runaway Health Care Costs

Today the medical expense tax deduction remains as relevant as ever. According to a recent study, “medical costs continue to outpace incomes, 29 million remain uninsured, and many of those with health insurance face unpredictable and unaffordable out-of-pocket costs as copayments and deductibles ratchet up.” The deduction helps with a broad scope of financially debilitating medical expenses, whether long-term or unforeseen, incurred in- or out-of-network, triggered by services of doctors, anesthesiologists, home health providers, and so on. Meanwhile, the deduction’s limited benefit and stringent qualification requirements keep its budgetary cost down and discourage abuse, making it one of the “low-cost/high-impact” tax provisions.

A Nimble Cost Shield

The tax deduction targets costs that fall through the cracks of the health care financing system on a number of fronts. Unlike health insurance, the deduction eligibility does not depend on “in-network” status, pre-qualification, or other restrictions. For example, the deduction may help with emergency room (ER) costs at hospitals not participating in patients’ insurance plans. These services frequently lead to unexpected medical bills in the tens of thousands of dollars, even when patients can’t choose a provider at the time of the service because they are incapacitated. A recent study found that surprise medical bills likely occurred after 20 percent of hospital inpatient admissions that originated in the ER, 14 percent of outpatient visits to the ER, and 9 percent of elective inpatient admissions.

The medical expense deduction can also help defray non-emergency health care costs, such as rapidly rising prescription prices. A recent poll found that nearly a quarter of Americans taking prescriptions say it is difficult to afford their medicines, and that even larger shares of low-income and near-Medicare age respondents have such difficulty. According to the poll, 29 percent of patients did not take prescriptions according to doctor recommendation because of cost. Nearly a third (29 percent) of these respondents reported their condition getting worse as a result. Recent stories even documented deaths resulting from the inability to afford the medications as common as insulin.

Medicare beneficiaries are by no means immune from the high out-of-pocket costs. In 2013, roughly 25.8 million traditional Medicare beneficiaries spent at least 10 percent of their income on out-of-pocket health care expenses.

Overall the medical expense deduction is an important provision of the tax code that provides unique benefit to many patients facing health care bills far in excess of their ability to pay.

Maxim Shvedov is a senior strategic policy advisor at the AARP Public Policy Institute. His areas of expertise include tax burden, fiscal sustainability, and tax provisions for retirement and caregiving.