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.