According to our calculations, based on research from the RAND Health Insurance Experiment and others, we estimate that tax deductibility would reduce spending by approximately $40 billion in 2004 dollars, or 6% of total private health spending. These savings could be achieved without significant adverse consequences for health outcomes. This occurs in spite of the fact that tax deductibility makes health care overall look cheaper relative to all other goods, which leads to higher spending. By making insured health care look more expensive relative to out-of-pocket health care, tax deductibility leads patients to choose health plans with higher deductibles and copayments, and therefore to reduce spending enough to more than offset this effect.
If individuals can deduct health care expenses, then this will increase the trend toward disintermediation in health insurance. More young, healthy workers will opt out of company-provided health insurance, leaving corporations covering a relatively high-risk population.
For Discussion. How convincing is the evidence that broadening the tax subsidy for health care would reduce total spending?