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]

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[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]

The Great Divide in the Democratic Party on Economic Policy

The following commentary was delivered by Michael Meeropol over WAMC radio in December of 2006

When it comes to economic policy issues, there are two separate and antagonistic wings to the Democratic Party. One is associated with the policies of the Clinton Administration while the other is represented most strongly by Senator-elect Sherrod Brown of Ohio.[1] That divide was most apparent during the debate over ratifying NAFTA in 1995. Had Clinton not garnered support from a majority of House Republicans, NAFTA would have been defeated. More on the Brown wing later.

As I see it, the Clinton wing represents only a slightly less virulent version of the Republican Party’s neo-liberalism.[2]

Take the minimum wage issue. Clinton supported a rise in the minimum wage as a way of embarrassing the new Republican majority in Congress in 1995, but neither he nor any in the Democratic leadership in Congress had sought to pass such an increase during the two years between his inauguration and 1995.

Clinton’s priorities were elsewhere. He focused on reducing the federal budget deficit and passing NAFTA.[3]

The failure to fulfill his campaign promise to pass universal health insurance is usually blamed on an extremely liberal proposal involving a government takeover of the health care industry. In fact Clinton’s proposal failed because it attempted to satisfy both the insurance industry and the public’s clear desire for a universal system. This effort made the proposal so complicated that it could easily be misrepresented by its opponents. Congress could not even agree on a bill to consider, let alone vote on it.[4]

Looking at Clinton’s 8 years, we can be pleased that the economy grew, creating millions of jobs and that at least between 1996 and 2000 the downward trend in the purchasing power of typical workers’ wages was reversed.[5]

However, NAFTA-style globalization, the repeal of the federal guarantee of a cash benefit to children living in poverty, and the single-minded commitment to budget balance were the major enterprises of that administration.[6]

Even the best anti-poverty program of the Clinton era, the earned income tax credit, has its negative side. It helps businesses get away with paying low wages because the general taxpayer (through the credit) makes up part of the difference between the poverty level wages paid and a minimum income necessary to survive. Meanwhile, welfare reform has thrown thousands of unskilled single mothers into the labor force creating more downward pressure on wages.

I have said it several times in my commentaries and I’ll say it again here. The best way to fight poverty and improve general prosperity is for wages to rise. The best way to fight against the polarization of incomes in the population is for workers to form unions and push for those higher wages.

But in the words of economist Robert Pollin, “[T]he Clinton Administration did almost nothing to advance the interests of organized labor or working people more generally.”

As a result “… union membership continued its long decline during the Clinton presidency, standing at 13.5 percent of the total workforce when he left office …”[7]

Opposition to Clintonomics was showcased this past Sunday in the New York Times by Lou Uchitelle’s, article “Here Come the Economic Populists.” He specifically identified Senator-elect Brown as a member of the new group. [8]

These populists argue that the trade agreements beginning with NAFTA and continuing through the various World Trade Organization negotiations have failed to protect workers’ rights to organize unions and thus raise wages in the low-wage countries. Instead, wages in high wage countries have continued to stagnate or drift downwards in real purchasing power. They also insist not only on an increase in the minimum wage but on tying it to the cost of living so that future inflation will not erode its real value.

For the minimum wage to have the same purchasing power it had in 1968, it would have to be $7.71 today.[9] Raising it to $7.25 immediately is the most just thing to do. I believe it is unacceptable to compromise with Republicans and so-called pro-business democrats by delaying implementation till 2009. (By the way, why is it “pro-business” to impoverish the average worker? Who is going to buy anything if wages keep stagnating? A business which pays its workers very little and has no customers is guaranteed to go out of business soon!)

Let’s watch closely while these populists and Clintonites duke it out for the soul of the Democratic Party.

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[1] In addition to Senator-elect Brown, others who have been mentioned are Senator-elect Jon Tester of Montana and Senator-elect James Webb of Virginia. Senator-elect Webb published an extremely strong populist statement in the November 15 Wall Street Journal entitled “Class Struggle: American Workers have a chance to be heard.” It is readable on his Web Site at http://www.jameswebb.com/articles/highlighted_articles.htm. Meanwhile, Senator-elect Brown had authored Myths of Free Trade: Why American Trade Policy Has Failed, Revised and Updated Edition (Paperback) which was published October 1, 2006 when he was a member of Congress and ran a strong campaign highlighting his economic differences with the Republican majority in Congress and President Bush but also former President Clinton.

[2] There is an excellent book that develops this point quite clearly, It is Contours of Descent by University of Massachusetts Economist Robert Pollin (NY: Verso, 2000 [pbk]). This book clearly shows that the trend towards increased inequality and insecurity for the majority of people in the US (in fact the world) continued under the Presidency of Bill Clinton with a short cessation of the inequality trend between 1996 and 2000. See particularly pp. 42-47.

[3] For Clinton’s first term policies see Surrender: 227-258.

[4] For a discussion of Clinton’s Health Care proposal, see Surrender: 245-247. See especially the endnotes on p. 340. For the details presented by the Clinton Administration, see Economic Report of the President, 1994, ch. 4. Historian Theda Skocpol has written an analysis of the Clinton Administration’s failure to get its reform through Congress: Boomerang: Clinton’s Health Security Effort and the Turn Against Government in US Politics. (NY: Norton, 1996). She argues that the simple more radical Canadian-style alternative would have been “easily caricatured.” My response is Clinton’s proposal was similarly caricatured and its lack of simplicity made it harder for people to understand and defend.

[5] See Pollin, p. 43.

[6] There is a tremendous literature around NAFTA and the WTO. For a good critique of the arguments as to how wonderful NAFTA is because it opens markets to competition, see Meherene Larudee, “Integration and Income Distribution under the North American Free Trade Agreement: The Experience in Mexico,” in Dean Baker, Gerald Epstein and Robert Pollin (eds.) Globalization and Progressive Economic Policy, (Cambridge: Cambridge University Press, 1998). For a generalized critique see Joseph Stiglitz Globalization and its Discontents. The repeal of the federal guarantee for children of single parents in poverty has been touted as a great success – so-called “welfare reform.” For a brief discussion, see Surrender: 247-249. The law is mis-named the Personal Responsibility and Work Opportunity Act of 1996. What it does is replace the old AFDC program with a new one, Temporary Assistance to Needy Families (TANF) with a nominally fixed federal grant to states at the level of spending in 1995. The states basically had carte blanche to create their own new programs within the following constraints: No family may receive more than five years of these benefits in a lifetime and for no more than two years in a row. Adults receiving cash assistance must be involved in a work program, an education program (but only up to achieving a high school GED) or an active job search. The law has been considered a great success because the percentage of the population receiving TANF fell dramatically from the percentages receiving the old AFDC program in the early 1990s and many of the people leaving the welfare rolls ended up getting jobs. In my personal opinion the main impact of the creation of TANF was to transform many women who received welfare and took care of their children at home into working single parents who were still poor. The disaster some of us feared did not occur because there was tremendous job growth and thus reduction of poverty in the period from 1996 to 2000. However, the percentage of people who left the rolls was much higher than the percentage of people who raised themselves out of poverty. In other words, many people who left welfare became quite destitute. In the period since 2000 when the percentage of the population in poverty has risen and when some families have reached their five year lifetime limit, I think the impact will begin to be quite negative. For a fascinating journalistic account of the situation since TANF was introduced see Jason DeParle, American Dream: Three Women, Ten Kids, and a Nation's Drive to End Welfare. (NY: Viking Penguin, 2004). For a discussion of budget balance, see Pollin: 68-75, and Surrender: 249-264.

[7] Pollin: 24-5. In 1973, 24% of the workforce was organized into unions. See http://www.trinity.edu/bhirsch/unionstats/.

[8] New York Times, November 26, 2006.

[9] The Economic Policy Institute (www.epinet.org) maintains a data base showing the real purchasing power of the minimum wage going way back to its origins.