On Saturday President Bush outlined a new plan to help deal with the problem of people who don’t have health care insurance. It is expected to be discussed in tonights State of the Union Speech. The other day I indicated that my feeling was that the Left would take a negative view of Bush’s plan, and based on the posts linked at Unpartisan.com (a blog aggregator) that looks to be the case.
At the top of the Left column of blog posts is this post from Watching Washington. Right off the bat there is a somewhat misleading statement,
If you have health insurance through your job — President Bush wants to tax you for it. Those taxes would then pay for tax breaks given to people who buy their own health insurance.
Uhhmmm no. You would only be taxed for your health care benefits if and only if it exceeded the cap on health care benefits an employer provides. Thus, if the cap is say, $5,000 for an individual and you have a plan that costs $6,000 then you’d get taxed on the $1,000 (at least that is my understanding of how it would work). But think about what Mr. Turner is implying here. If this were income, the same logic would apply. Mr. Turner, in his eagerness to bash this plan, sounds like…well, like a Republican/conservative. If you make too much money, those pesky Republicans (or Democrats or whatever political party) wants to tax you! Those jerks! After all, health care benefits from an employer are part of the employees compensation package. Why should the wage protion be taxed, but the health care benefit be exempt?
Lets be clear about this, the employer doesn’t one wit how the employee is paid. If it is all wages, wages and benefits, or anything else. All the employer cares about is that it costs $X to hire an employee and in the current situation $X is comprised of wages and benefits. The only reason to provide health care benefits is that it has a tax preferred status. The following example can help highlight the situation. Suppose we have an employee who is paid $35,000 in wages and $5,000 in health care benefits. The employee also pays say a 25% tax. That means the employee pays $8,750, and he gets $31,250 in consumption/savings. The last number is (0.75*$35,000) + $5,000. The $5,000 is the health care benefit. If the employer paid in cash the value of the health care benefit the employee would have $30,000 for consumption/savings. Thus, the health care benefits could very well be more attractive to the employee. This is why we tend to see health care insulation vs. health care insurance. Now if we treat health care benefits as we do income, then this tax benefit disappears and we’d see less incentive for health care insulation and more incentive for health care insurance.
The White House thinks it can reduce rising health care costs by forcing Americans to give up plans that cover everything — in favor of bare bones health insurance.
Well…yeah. Suppose I tell you that your oil changes, tune ups and tire costs are now going to be subsidized so each item will cost $5/$5/$20. Do you think that people will be getting more or less oil changes, tune ups and new tires or less? One could argue that such a subsidy would result in better care for our cars and thus less costs in terms of accidents, break downs (e.g. traffic in some areas) and so forth and that the subsidy is a good idea (traffic caused by accidents itself is a good example of an externalities). But, we could also be over-subsidizing and end up with higher consumption and perhaps other problems like more pollution, higher oil consumption and so forth. The idea behind Bush’s plan is to try to get people to pay for some health care out-of-pocket. This will reduce consumption to some degree. Will it solve all of the health care problems? No. Add on that there is a tax subsidy for the poor, and it helps even more.
Frankly, I find this kind of post simply amazing. The Left uses this rhetoric all the time. “Bob has lots of money, so we are going to take some of it to help out John, who doesn’t have lots of money.” Same thing here, but now that Bush is proposing it…well it is bad, bad, bad.
Here is the second post from Unpartisan.com which simply regurgitates Krugman’s baloney. Never mind that Krugman has already backtracked in some regard.
What conservatives in the “consumer-directed” health movement believe, however, is that the big problem is “moral hazard” – people consume too much medical care, because someone else pays for it.
Now, this isn’t entirely wrong. People probably do undergo expensive surgery with questionable effectiveness, and so on, because it’s not out of pocket.
Of course, Krugman is also complete nuts now, the Ann Coulter of the Left. Consider the following passage,
The whole consumer-directed thing is, in my view, just an attempt to avoid facing up to that failure [of HMO/managed care]. Rather than admit that private-sector institutions aren’t any good at rationing, conservatives now say that patients should be induced to ration their own care by being forced to pay more out of pocket.
That last line is pretty disquieting, IMO. Another word for “private-sector institutions” is “a market economy”. We have plenty of examples where “public-sector institutions” do a pretty bad job as well. In England they are instituting mandatory wait times for various procedures to curb the flow of red ink. In Canada, you’ll have longer waits for access to an MRI machine. France seems to do a good job, but then again people there pay a not insignificant amount out of pocket from what I’ve read. And, it isn’t clear that we can do on a national scale what the VA has done for veterans and that it is actually going to be cheaper.
No More Mister Nice Blog calls the plan pathetic. Why? Because it doesn’t solve the entire health care problem in one fell swoop. The belief here seems to be that universal health care provided by the government is the only thing that will work and if you advocate anything other than that, why you’re just a piece of human excrement.
Ezra Klein is the only person on the Left that I have found so far that actually thinks this could be a good thing.
Early response from many on the left is lukewarm, at best. And, to be sure, dismissing this as useless incrementalism is a fair attack. Bush’s plan will do nothing to salve the deeper dysfunctions of the health care system. It will not keep insurers from discriminating on grounds of health and history, it will not subsidize low income workers, it will not create universality, or widen the risk pool, or aggregate buying power, or end the employer tie, or do most anything else that needs to be done.
But so far as incrementalism goes, this is supportable. The full deductibility of employer-based benefits has had nothing but pernicious consequences for the health system, creating and strengthening a structure that traps Americans in jobs, giving employers absurd control over their workforce’s health security, and penalizing the entrepreneurial and unemployed alike. And every taxpayer, whether they have insurance or not, is forced to subsidize this unjust, inefficient structure. It’s crazy. Progressives should indeed support efforts to sever the Gordian knot tying insurance to employment and, now, with Democrats in control of Congress, should see this proposal as a starting point atop which a yet-more progressive tax change can be constructed.
Except for the last part about more progressive tax changes I agree with Ezra. This is at least a good starting point when it comes to addressing health care issues.
Update: Well, Ezra Klein has changed his mind. Now he doesn’t like the plan. I haven’t had a chance to fully read Klein’s post, hopefully I’ll have some time later and will update again.
More below the fold.
Update: Well I’ve read Klein’s objection to Bush’s policy and my reading of it is this. An individual gets a $7,500 deduction for health care from his income tax. If that individual spends say $2,500 on a policy then that person would get a percentage of the $5,000 back.[1] Klein’s objection is that now it actually pays to look for a cheap policy that will still meet one’s needs. This, he argues, will lead to people having inadequate insurance when they need it. And I’m somewhat sympathetic to this argument. As I’ve noted before, people tend to be really bad at estimating risk and making “rational” decisions about risk.[2] Still, the whole point of allowing people to claim the whole deduction is to give them an incentive to not “gold plate”. If we use the example below and change it to allow people to deduct only the cost of their health care then it becomes much, much less of an incentive.
Greg Mankiw also has another post on this and argues that the tax deduction is not nearly as good as a tax credit that is same for everyone and points to an editorial in the Washington Post.
Update: Arnold Kling also has another post on this as well. Kling looks at Jonathan Zasloff and has a rather harsh response,
Zasloff writes:
Bush plans to pay for [his proposed health insurance deduction] not by efficiencies, but rather by restricting the benefit packages of the already insured, through the deductibility cap.Kling Responds:
Paying for something with efficiencies is nothing but a scoundrel’s refuge for policymakers. It’s like saying you’re going to balance the budget by getting rid of waste, fraud, and abuse. Of all the criticisms one could make of the Bush health plan, this is the least persuasive.
Arnold also writes,
I am not proposing to outlaw health plans that insulate consumers from costs. However, I am suggesting that the public policy case for treating health insurance as a “merit good” (something for government to subsidize) stops with catastrophic health insurance. If consumers want to go further and get pre-paid health plans that relieve them of having to calculate costs and benefits of individual medical decisions, then so be it. You can pay for the luxury of insulation, just as you can pay for a fancy sports car.
Hmmm, I have a feeling that last line is going to cause some people to be unhappy with Arnold, but I have to agree with him. Having health care that insulates people from virtually all out of pocket expenses save for a $5, $10 or $20 co-pay just isn’t going to be feasible. If you want that kind of insurance/insulation then you had better expect to pay for it. To implement it for the entire nation, expect some pretty undesirable outcomes like more and more of the government’s budget and our national output to go towards health care.
For example, as James Hamilton notes, Medicare is growing at a rate that is 3.1% faster than GDP. If left unchecked by 2050 federal spending will be pushed up to 32% of GDP. In the past 50 years federal spending has hovered around 20% of GDP. By 2150 federal spending will be 370% of GDP. Of course, we’ll never actually get to that point. The point of bringing up the 370% is to emphasize how the current growth path is unstable. Eventually something will be done, and the longer we wait the harder it will be to fix and also possibly more likely that the fix will be nasty–e.g. just terminating Medicare or cutting it to the bone.
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[1]He wouldn’t get the full $5,000 since it is a deduction from his income, that is the $5,000 would lower the individual’s taxable income. Here is a simple example (with some made up numbers to show how it would work in theory, not in reality):
Income: $35,000
Health Insurance: $2,500
Deduction for Health Insurance: $7,500
Tax rate: 25%.
Now, based on this this person’s taxable income is $27,500. The taxes paid would be, $6,875. Thus after paying his taxes and purchasing health insurance this individual would have $25,625 left for savings and consumption. With out the deduction the person would have, $26,250 if they bought no health insurance and $23,750 if they did buy health insurance. One might wonder why purchase insurance? Well, if one does actually need insurance for large expenses and doesn’t have it, they will still get treatment, but their credit will be ruined for years and they might have other unpleasant things like wage garnishment, etc. Basically under a Bush type policy in our little fantasy world one could get a $2,500 for only $625.
[2]The problem is that people aren’t irrational in that they are crazy, they just tend not to make use of all the relevant information that they have. How many people go to older relatives and try to get an idea of any possible risks of various genetic diseases? Do they look at their medical reports and say, “Hmmm, that blood pressure is a bit high, either I need to alter my life-style to go with the cheaper policy or go with the slightly more expensive policy”?
