Arnold Kling  

Subsidize Health Care to Cut Costs?

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Education Outcomes and Spendin... Health Insurance Regulation...

John F. Cogan, R. Glenn Hubbard, and Daniel P. Kessler argue that by broadening the health care tax subsidy to include personal spending (not just corporate spending), costs would go down.


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?


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TRACKBACKS (12 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/165
The author at Houston's Clear Thinkers in a related article titled Make consumer health insurance tax deductible writes:
    In this Wall Street Journal ($) op-ed, economists John Cogan, Glenn Hubbard and Daniel Kessler make their pitch to make all health insurance tax deductible, not just employer-provided health insurance. This earlier post noted Messrs. Cogan, Hubbard, an... [Tracked on December 8, 2004 8:32 AM]
The author at The Lowest Deep in a related article titled A Not So "Brilliant Deduction" writes:
    Cogan, Hubbard and Kessler propose to "fix" the tax-related issues surrounding health care by expanding tax subsidies for medical expenses. There are so many problems with their propsal that I hardly know where to start. Their proposal, in brief, is ... [Tracked on December 8, 2004 2:08 PM]
The author at Vox Baby in a related article titled Brilliant Deduction? writes:
    Is this a good idea? Maybe. Is it a better idea than eliminating the excludability of health insurance purchases from income and using the higher tax revenues to provide refundable tax credits to lower income households who purchase insurance, as I s... [Tracked on December 10, 2004 10:22 AM]
The author at Signifying Nothing in a related article titled Institutional inertia writes:
    With exams over less than twelve hours, I wasn’t planning on doing much thinking—who knows, after reading this you might conclude that I haven’t been doing much thinking—but this is an issue I care about. So I blog. I read... [Tracked on December 11, 2004 2:54 AM]
COMMENTS (1 to date)
Lawrance George Lux writes:

The evidence exists for broadening the health care subsidy would reduce health care costs, but it is a false hope. It will only work within a framework of static, or declining health care costs. Rising health care costs with broadened health care subsidies will only incite inflationary pressures. lgl

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