Reading over the liberal reaction to President Bush’s health
insurance tax reform proposal outlined in his State of the Union
Address, I noticed that the American Prospect’s Ezra Klein
initially backed the idea. He later recanted, claiming he
was confused about what Bush was proposing. I can’t fault him, as I
was confused at first too.
Unlike Klein, however, I liked the plan even more after I fully
understood it.
Bush’s plan offers a standard health insurance deduction of
$7,500 for an individual and $15,000 for a family. You must buy
health insurance to qualify for it, but you get the full deduction
no matter what the cost of the policy. Buying a policy that costs
less than the full deduction means that you would keep more money
in your pocket that is income tax-free. In short, the President’s
plan discourages over-consumption of health care by discouraging
the purchase of expensive policies.
Of course, not everyone is happy about that. Here are the
various objections:
Low-quality health insurance and the potential loss of
health security: In his retraction, Klein claims that the purpose of the
Bush plan is to “incentivize the purchase of low-quality,
high-deductible care, particularly among the healthy, young and/or
rich… To reduce coverage, costs and health security.” Perhaps
quality is in the eye of the beholder. If one has a high-deductible
plan with a health savings account, one does not have “first
dollar” health coverage. However, one also has more control,
flexibility and choice over his health care dollars. For example,
one does not have to worry about whether an insurance company will
pay for a doctor visit. Control, flexibility, and choice are not
characteristics of “low quality.” It’s also hard to see how the
President’s plan will reduce health security. If it reduces the
cost of health insurance, more people will be able to afford
coverage.
Over time, more people will pay taxes on their health
insurance: Only about 20 percent of those with health
insurance currently have policies exceeding amount of the
deduction. But Brad Delong writes, “The deduction would indeed worsen the
finances of only 20% of those with employer-sponsored coverage in
2009. But it would worsen the finances of about 50% of those with
employer-sponsored coverage in 2019. And 90% of those with
employer-sponsored coverage by 2030.” Delong’s numbers come from
Treasury Department calculations, but those calculations assume
that the cost of health insurance will rise at pretty much the same
rate it has over the last few years. In other words, they assume
that people will not change their behavior in response to the
change in tax policy. Yet, if the amount of health insurance that
is tax-free is limited, as it would be under the Bush plan, then
people will have incentive to shop for lower-cost policies. That
will bring costs down over time, meaning that fewer and fewer
people will exceed the deduction.
It will do little to help the uninsured: Karen
David, president of the Commonwealth Fund, claims:
Nor would the President’s proposal likely help those
who are currently uninsured. According to the U.S. Treasury
Department, some 3 to 5 million of the 47 million uninsured
Americans could gain coverage. About 95 percent of the uninsured
would not benefit substantially from the tax deductions. As
described in a 2005 Commonwealth Fund report by Sherry Glied and
her colleagues, more than 55 percent of the uninsured have such low
incomes that they pay no taxes, while another 40 percent are in the
10 to 15 percent tax bracket.
The amount of the uninsured that will be helped by President Bush’s
plan will likely be much higher. A recent
study by researchers at the Urban Institute and
Johns Hopkins University estimated that 20 percent of the uninsured
could afford coverage, which would mean that over 9 million people
would have a bigger incentive to purchase health insurance should
the Bush plan become law. Also, as noted above, the Treasury
Department estimates assume that people will not change their
behavior in the face of new incentives. If the plan causes people
to purchase less health insurance and thus drives down the cost,
then it will likely help millions more of those uninsured due to
low income.
Fracturing of the risk pool and a decline in
employer-based coverage: Over at Spot On, Matthew Holt
summarizes this criticism nicely:
…in California, a $7,500 deduction for a young
individual exceeds their cost for a bare-bones insurance plan by a
factor of five. In that case, you can expect young employees to go
their employees and demand a few thousand dollars more in cash and
then opt out of the health insurance benefit, and take the full tax
deduction. What happens next? Well the employer’s risk pool
fractures, leaving only those employees whose insurance costs much
more than the average looking to the employer for coverage. The
likely result is that those employers offering insurance on the
margin will give all their employees cash, and then tell them to go
fend for themselves in the individual market. This won’t affect
members of Congress, high-priced lawyers and investment bankers,
but it will be a big deal for those employees who were getting
decent benefits at work but now forced to go cap in hand to the
underwritten individual market — a market place where pooling risk
is a dirty word.
On the other hand, employment-based coverage is already declining
because it is too costly. And one reason it is too costly is that
younger, healthier employees are turning down the health insurance
offered by their employers. As the Cato Institute’s Michael Cannon
put it, “healthy people realize they’re being ripped off and they
want out.” Should the President’s plan result in lower costs for
health insurance, employers would be more able to offer it and
younger, healthier employees would be more likely to purchase it,
leading to some preservation of the risk pool.
The President’s Plan Is Behind the Times:
Jonathan Cohn ends his reaction to the Bush proposal thusly:
Four years ago, a proposal like the one Bush is making
might have been the opening bid on a workable compromise — one
that could have helped make medical care more affordable for a
modest, but significant, group of people. But the conversation
about health care reform has moved way past that point already.
Even conservative industry groups like the Business Roundtable and
America’s Health Insurance Plans have put their imprimatur on far
more sweeping initiatives. Meanwhile, a Republican governor
(Schwarzenegger) is proposing truly universal coverage for his
state while a former Republican governor (Mitt Romney) has already
enacted it for his. Forget the talk about Bush’s bipartisanship; at
least on health care, he can’t even keep up with his own
party.
Cohn is probably correct. The President’s proposal is a few years
too late and pales in comparison to grander schemes being pushed
elsewhere.
Unfortunately, politicians in Massachusetts and California are
ignoring recent history. Other states that, in recent years,
enacted more modest programs aimed at covering the uninsured have
either crashed and burned (Tennessee) or are in the process of
doing so (Maine). Massachusetts and California (if it passes Arnold
Care) will eventually suffer a similar fate. When they do,
reformers may finally look for more market-oriented approaches.
President Bush’s plan will be a good place to start.
David Hogberg is a senior analyst at the National Center for
Public Policy Research. He also hosts his own website, Hog
Haven.
