What's Wrong With President Bush's Health Insurance Proposals?

The following commentary was delivered by Michael Meeropol over station WAMC on Friday, February 2, 2007.

HEALTH CARE: What Did President Bush actually propose and why what he proposed won’t work.

In the state of the Union speech last month, President Bush said his goal was to help the uninsured buy health insurance.[1] His plan offers tax breaks to families to help them purchase it. However, at the same time, he will make all employer-provided health insurance taxable. In other words, if your taxable income is $50,000 and your employer provides you with health insurance worth, say, $15,000 a year, your taxable income will now be $65,000. Then, you will get to deduct $15,000 from your taxable income. The goal is to give individuals an incentive to purchase a health insurance policy that costs $15,000 or less.[2]

Since many health insurance plans cost more than $15,000, some families will see their taxes go up. This, according to President Bush, will raise funds necessary to give tax deductions to those with no employer-provided health insurance.[3]

So imagine a family that pays $1500 a month out of pocket for health insurance. That comes to $18000 a year. The family will get a $15,000 tax deduction. Here’s where the complications begin. If the family is very well off and pays income taxes at the rate of 35%, the tax deduction will be the equivalent of a discount of $5250 off the $18,000 premium. If the family is not so well off and pays income tax at the rate of, say, 10% that tax deduction will represent a $1500 discount on the same policy.

For some people the discount might make it possible to purchase health insurance – especially those with relatively high income where the tax deduction really saves money. For those with low incomes the savings are less. Taxpayers whose gross income is so low that they don’t owe any federal income tax, will get a ZERO discount for any policy they purchase.[4] Thus, the higher your income, the greater your discount for the same premium paid.[5]

There is a much bigger problem with President Bush’s proposal beyond the fact that using a tax deduction to create a discount for those who buy health insurance coverage as individuals is an unfair way to do it.[6]

The BIG problem is that insurance companies are in business to earn profits for their share holders not to guarantee that people get the health care they need. Accordingly, they try not to insure people who are at high risk of costing them a lot of money. Thus, companies routinely fail to cover people who have a “pre-existing condition.” In other words, the more insurance companies succeed in insuring healthy people who don’t file claims -- and the more insurance companies succeed in weeding out the sick who will undoubtedly file many claims, the more successful these companies will be.

When insurance companies make a deal to cover employees in a business, they make a judgment as to how much risk they are taking with the group as a whole. Over time, as their payouts increase, so do premiums – this is called “experience rating.”

When individuals buy their own private insurance, the companies are happy to insure the healthy. When someone who they’re insuring gets sick, there is no question that they will raise that person’s premium because the risk of insuring that person had gone up. Thus, a tax deduction to subsidize individual purchases of insurance will not make that insurance affordable and it will not protect sick people from being priced out of the market.

As I’ve said before. There is only one way to insure the entire population --- and that is to actually insure the entire population with the same rules. Either we force the private sector to insure everyone and mandate affordable rates or we utilize the principle of social insurance and do it ourselves through the government.[7]

---

[1]“Bush Touts Health-Care Plan as Cost Control,” Michael Fletcher and Christopher Lee, New York Times January 26, 2007

[2] Thus, people who buy health insurance worth $15,000 will see no change to their taxes. Those whose health insurance policies cost less will actually see a decline in their taxes.

[3] The way the incentive would work, when workers see their taxes going up because they are choosing a relatively expensive plan from their employers, they will switch to a less expensive plan. Those who choose to stay with the more expensive plan will, in effect, have to pay more for it because it will not be tax-free income. That extra income for the federal government will be put towards reducing government revenue by giving everyone who purchases insurance as individuals in the private market a tax deduction of $15,000. Obviously, the revenue has to come from somewhere. By the way, many economists have long opposed the tax-free status of employer-provided health insurance. They argue that just because one doesn’t actually receive a check for the amount spent by the company to pay your health insurance premiums that doesn’t mean it isn’t in every real sense income. If it’s income, they argue, it should be taxed. The problem with this reasoning is that it ignores the fact that making health insurance available to people is an important positive contribution to all of society's well being. Thus, it is worthy of tax subsidy. The problem is not that people are subsidized in the purchase of health insurance – the problem is that not all of the people are subsidized in that purchase – and many are subsidized unequally.

[4] Bush also made a passing reference to the fact that he was proposing that the first $15,000 of income would be exempt from Social Security Payroll taxes as well. The examples in the commentary do not include this because the details of how this would interact with a deduction from federal income taxes has not been spelled out. However, there is a serious complication here. Will reducing the social security payroll tax liability of a worker buying health insurance out of pocket mean that the individual’s social security pension will be lower because that person is paying less in payroll taxes? At this stage of the proposal we don’t know the answer to that question.

[5] On the face of it, this seems grossly unfair. If I am spending $18,000 out of pocket for a policy and you are spending the same amount, why should our discount be different? It is especially unfair if the higher discount is given to the person with the higher income.

[6]It is also highly inefficient to give people a tax deduction to stimulate their purchase of a particular item – whether it’s health insurance or a house. A much better way to directly subsidize the purchase of something like health insurance is to give people a tax credit which will finance dollar for dollar the health insurance premiums paid. A tax credit would also avoid the fact that higher income people are given a bigger discount on their out-of-pocket purchase than lower income people.

[7] In my March Commentary (available on the WAMC web site and also at the WNECONOMICS Blog) I wrote the following:

[begin quote]

Health care would be best delivered as a form of social insurance.

What is social insurance? It is a system where everyone insures everyone else against potentially serious costs associated with sustaining life. Social security already insures the entire working population against outliving their savings (that’s the pension) or becoming disabled or unemployed.

It also insures retirees through Medicare. What it doesn’t do is extend that insurance to the entire population, which is why medical cost inflation is so much higher in the US than elsewhere.

Though Medicare strives mightily to contain the costs of the procedures it subsidizes, hospitals, nursing homes and other medical facilities are able to raise prices charged to insurance companies who then of course raise premiums charged to employers.

If we were to re-organize our system in conformity with social insurance principles, then the system could be integrated institutionally (at either the federal or state level). It would be much easier to contain costs.

The basic principle of social insurance is – we all pay to guarantee health care to everyone who gets sick.

When a healthy person gets sick, he or she gets to dip into the revenue stream being contributed by fellow citizens.

If you “lose” by never getting to spend any of that money because you never get cancer or need a heart transplant, you WIN by being healthy.

Those who must have recourse to the insurance fund can rest easy knowing their needs will be met without bankrupting them and their families

MY SOLUTION TO THE HEALTH CARE PROBLEM: Extend Medicare to the entire population. Social insurance is the answer to our health care crisis.

[end of quote from the previous commentary]