The big issue here is not just the effective cost of insurance, nor the waste & overspending produced by the current structure, but also to decouple your health insurance contract from your employer – to make it completely portable. The insurance contract must be directly between insurer and insured. The following is focused just on making the tax code neutral on who pays for the insurance – employer or employee.
Greg Mankiw highlights a coherent explanation of the flawed US health insurance approach:
Economist Jason Furman, a frequent adviser to Democratic candidates, has a new article on health insurance that is well worth reading. In this excerpt, Jason points out that our tax code leads to excessive use of health insurance:
if your employer pays $1,000 in premiums to your insurance company, that money is effectively tax deductible to you. But if your employer raises your salary by $1,000 and you use the extra money to pay for medical bills, you generally will not get a tax deduction. As a result, many people end up with more-generous health insurance plans than they would otherwise choose to have. These plans have lower deductibles, lower co-payments, and lower co-insurance and are often focused around providing first-dollar coverage for routine medical expenses, rather than genuine insurance. As a result, individuals in the health system are often spending someone else’s money, which is never a recipe for cost consciousness. Unfortunately, ultimately it is not really someone else’s money: the cost is paid in higher premiums, which in turn are reflected in lower wages.
Most economists agree with this analysis (see my previous post on health insurance).
Jason suggests several policy responses, such as limiting the amount of health insurance that is tax-deductible. That proposal has my vote.
and the latest Bush health insurance reform
Reuters reports the new heath insurance initiative from the Bush Administration:
Bush’s health-care proposal would use tax breaks to make it easier for people who do not have employer-provided health insurance to buy coverage on their own. The tax incentives would be similar to deductions used by homeowners for the interest on their mortgages, Bush said.
But the program is intended to have no effect on government revenues because the cost of the tax breaks would be offset by changing the way health insurance is treated in the tax code, according to a senior administration official who described the proposal to reporters.
The current health system relies primarily on employers to provide health-care coverage as a fringe benefit. Employees are not taxed on the benefits but the Bush plan would set a cap on the amount of coverage that could be offered tax-free.
Anything above that would be taxed as income, the administration official on condition of anonymity.
Economists have long suggested that tax subsidies lead to excessive use of employer-provided health insurance. This proposal would help fix that problem, while giving a helping hand to the uninsured.
Note that some Democratic economists have made similar proposals in the past, so there is hope that this idea will command bipartisan support.
President Bush explaining his reform proposal in last week’s radio address:
…One of the most promising ways to make private health insurance more affordable is by reforming the Federal tax code. Today, the tax code unfairly penalizes people who do not get health insurance through their job. It unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need.
We need to fix these problems, and one way to do so is to treat health insurance more like home ownership. The current tax code encourages home ownership by allowing you to deduct the interest on your mortgage from your taxes. We can reform the tax code, so that it provides a similar incentive for you to buy health insurance. So in my State of the Union Address next Tuesday, I will propose a tax reform designed to help make basic private health insurance more affordable — whether you get it through your job or on your own.
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