Arnold Kling

The Bush Health Plan

Arnold Kling
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I write,


Consider the status quo. An economist on the faculty at Princeton who receives generous health benefits from the University is able to enjoy them tax-free. So can the professor's secretary. But, as with all tax breaks, there is a vertical inequity–the professor derives more benefit from the tax break than does the secretary. But today there is a horizontal inequity as well. A self-employed economist and a self-employed secretary get no tax break for obtaining comprehensive health insurance.

Now, if the President's proposal is enacted, the self-employed economist and the self-employed secretary will get a tax break. It is true that this introduces a new vertical inequity–the new tax break benefits the economist more than the secretary. But those who complain about this vertical inequity leave themselves open to the charge of being insincere. If they believe that vertical equity is more important than subsidizing health insurance, then why don't they support getting rid of the tax break for employer-provided health insurance?


But my views are better expressed by

the Washington Post's Steven Pearlstein


Almost every health economist agrees that the tax subsidy for employer-paid health insurance is not only unfair but that it also encourages people to buy too much insurance, consume too much health care and pay too much for both. Bush deserves praise for having the political courage to confront the issue.

..Anyone seriously interested in health reform would welcome the president's proposal as a basis for negotiations, raising public expectations and increasing pressure on the president to embrace more comprehensive reform. Unfortunately, that is not the approach of Messrs. Stark, Rangel, Reid and Kennedy, who apparently prefer demonizing the president and grandstanding on the issue until the next election.


Read the whole thing.

UPDATE: Greg Mankiw points to a reaction from the Urban Institute's Leonard E. Burman, Jason Furman, Roberton Williams.


The innovative plan is a major step toward improving the efficiency of the market for health insurance. By severing the link between work and insurance, it would offer everyone the same tax incentives to obtain insurance coverage and limit spending on health care. Whether it would succeed in meeting its objectives in a fair way is less clear.

They go on to suggest numerous changes.

I used to think that the Democrats had the best economists. In 1992, when Alan Blinder was advising Bill Clinton, I was making that case. This Urban Institute paper reassured me that there are still economists with hard heads and soft hearts.

UPDATE 2: Tyler Cowen peeks behind the TimeSelect firewall to look at Paul Krugman's "add-on" take on the Bush health plan. Krugman writes,


the whole focus of consumer-directed doctrine is on things like routine visits to doctors' offices and annual dental checkups. It's going where the money isn't — because the advocates just can't believe that markets aren't always the answer.

In the middle of an otherwise-reasonable essay, this is a canard. I illustrate consumer choice in health care not with routine office visits but with unnecessary diagnostic tests and specialist visits.

My paradigmatic example of the problem with insulation is getting an MRI after you hurt you back moving furniture. I have asserted on numerous occasions that this has almost zero chance of affecting the treatment plan. No doctor has ever told me otherwise. Several have told me that this is purely defensive medicine. Yet many doctors will order an MRI in this case, as long as insurance is paying for it.

I think that there are enough examples like that to add up.

Krugman believes in the "adverse selection" narrative, in which private health insurance cannot possibly work. In Crisis of Abundance, I discuss this narrative, and I explain why the alternative narrative of premium medicine is more consistent with the facts.



TRACKBACKS (1 to date)
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The author at Roth & Company, P.C. in a related article titled STATE OF THE UNION HEALTH CARE PROPOSAL writes:
    As expected, the President proposed a bold new health care proposal in his speech last night. The proposal would end... [Tracked on January 24, 2007 9:48 AM]
COMMENTS (33 to date)
Randy writes:

I disagree that the professor will necessarily get a better deal than the secretary. Don't forget the Alternative Minimum Tax. For those above a certain income level, the deduction won't do them any good (assuming of course that the deduction is treated the same as mortgage interest).

I'm all for having benefits taxed as income. I think they always should have been taxable, and I don't even see any reason to stop with healthcare benefits - retirement plans and a wide variety of other perks should be taxed as well. The whole idea of non-taxable income is just a big subsidy to the middle class - and primarily the upper middle class. The more I think about the AMT, the more I like it. Forget taxing the rich - just stop subsidizing the middle class.

ilsm writes:

Go for it.

Eliminate all tax shelters, pay the general funds as you go and quit using regressive no deductible social security taxes to hide the growing debt.

Pay down the debt, the country is not some househod whose breadwinner never gets sick or retires.

And yes let's make sure the middle class carreis the entire burden.

The country exists for the many not the few.

The many should pay.

Boonton writes:

Consumer Driven

I would ask advocates of 'consumer driven healthcare' why it would merit government intervention? Consider the following scenero - Government gives everyone a blanket $7,500 voucher to go out and buy their own insurance or to supplement the insurance their employer provides.

Plan A is consumer driven. It has a high co-pay but provided the consumer uses their own money against procedures will the plan will pay for quite a bit of high end care.

Plan B is not consumer driven. It uses its expertise and data mining ability to map out which treatments are most cost effective and which are not. As a result it makes things that it finds very cost effective like regular check ups very cheap for patients. Things that it finds less effective such as specialists or experimental operations it makes difficult. It limits consumer choice but also provider choice as well. Ideally it would act on the consumers behalf...being able to process more expertise it can challenge the doctors judgement when it is wrong.

It seems to me Plan A would work great for the do it yourself type personality. They would take everything their doctor tells them with a grain of salt, they would research it on the internet and do plenty of shopping around. They would use their insurance company as backup to maybe get better rates or in case they needed a very expensive procedure.

Plan B would be better for those who don't trust their judgement as much. Instead of trying to cram 6 years of medical school into a few Google and Wikipedia searches they would rather have a team of experts reviewing the relevant medical literature and data to see which procedures are questionable. In essence Plan B is just like Plan A except the company is acting as a 'professional shopper' screening choices on behalf of the consumer.

Both plans seem to be equal in terms of the market. Either plan might end up as the preferred choice in a free market. So I don't see any need to grant either one a tax preference. If there is plenty of savings to be captured by 'consumer driven care' then Plan A would have plenty of premium payments left that it could devote to offering patients coverage for very expensive operations, experimental procedures etc. that Plan B doesn't.

My ideal plan would be my health care voucher proposal:

1. A dedicated tax is used to give everyone a voucher to purchase health insurance or refund against employer provided coverage.

2. The voucher could be used for any type of health insurance policy provided it meet certain 'bare bones' types of coverage.

3. Individuals are free to supplment the voucher with their own money if they want better choices or fancier coverage.

4. Being a dedicated tax, there is no entitlement issue here. If people want a bigger voucher they have to accept a higher tax, lower tax means a smaller voucher etc.

Randy writes:

Boonton,

I see no point in giving anyone anything that they should pay for on their own if able. I like the idea of a tax deduction or even a credit, but the amount should gradually decline and stop entirely at about $60k/yr. I could even go for adding some socially acceptable amount to the EITC for very low income workers - with proof of insurance, of course.

Boonton writes:
My paradigmatic example of the problem with insulation is getting an MRI after you hurt you back moving furniture. I have asserted on numerous occasions that this has almost zero chance of affecting the treatment plan. No doctor has ever told me otherwise. Several have told me that this is purely defensive medicine. Yet many doctors will order an MRI in this case, as long as insurance is paying for it.

So why is the insurance company paying for it? If it's a HMO type insurance company wouldn't they have an interest in cutting out unneeded MRI tests? If it is a 'consumer driven' type company then presumably the consumer himself would want to avoid the high co-pay of an unnecessary test.

Boonton writes:
I see no point in giving anyone anything that they should pay for on their own if able. I like the idea of a tax deduction or even a credit, but the amount should gradually decline and stop entirely at about $60k/yr. I could even go for adding some socially acceptable amount to the EITC for very low income workers - with proof of insurance, of course.

The difference is that we have generally agreed as a society to provide needed healthcare no matter what. So this is unlike, say, cable TV or internet access. If someone making $60K/yr doesn't pay for things he will simply not get them but if he doesn't buy health insurance or save enough for healthcare he WILL get treated if he breaks his leg or gets cancer. As a result you have a free rider problem. When push comes to shove you will get treatment so why bother paying for it ahead of time?

The voucher idea essentially recognizes this. Those that don't do something with their voucher can be entered into a pool for a 'standard' policy so at the end of the day everyone who is able to will pay and those that are not are given some type of coverage.

Randy writes:

Boonton,

Obtaining the service isn't the problem. There's only a problem if someone doesn't pay. We already have charitable organizations and bankruptcy courts to deal with that issue.

The idea is to give no one an excuse for being irresponsible. Those with lesser means would be given a credit (or partial credit) with which to obtain insurance. Those with greater means would be expected to be responsible for themselves - one way or another. The situation now is that those with greater means are being irresponsible by accepting a government subsidy (tax free benefits), while those with lesser means are being priced out of the system. Turn it around. Give the subsidy to those in need.

Boonton writes:

That creates its own incentive problems. If you're on the borderline it becomes economically more sensible to 'fall behind' and collect the subsidy rather than 'be responsible' and make as much as you can.

The universal voucher does not have that incentive problem because you always are better off putting out more effort. No matter where you are if you work a bit more for $100 you are $100 ahead always.

Randy writes:

P.S. Boonton,

It seems to me that if the government writes laws to require a hospital to provide a service regardless of an individual's ability to pay, then the government has assumed the responsibility for the payment. The hospital would file a claim with the government for reimbursement, and the government would place a lien against the individual's tax returns and/or property, just as it does for unpaid student loans. With the tax credits for insurance in place, there would be no valid excuse for not being able to pay.

Randy writes:

Boonton,

No doubt that any subsidy creates perverse incentives. But the universal voucher is also a subsidy, and in my opinion, would create a far more perverse incentive than would that of a gradually declining subsidy to those of lesser means. It creates a belief among the general population that one's healthcare is someone elses responsibility.

Boonton writes:

Randy,

It would seem like that belief is entirely accurate. If the hospital gets to pass its unpaid bills to the government then indeed 'someone else' is paying for your healthcare. Even just giving the gov't such unusual enforcement power to collect medical debts is making it 'someone else's' responsibility. Does the cable company get to tap your tax refund for all those unpaid PPV movies you racked up before switching over to Direct TV?

IMO the voucher would have a much less distortionary effect than trying to craft a voucher that just applies to the poor.

Randy writes:

Boonton,

Yes, the belief is already common, primarily due to the subsidy contained in the tax treatment of employer provided healthcare benefits. I think if that belief remains while vouchers are handed out, that a predictable result will be that the cost of providing the vouchers will spiral out of control so quickly that it will make our collective heads spin.

Boonton writes:

The cost of the vouchers is simply the revenue raised by the tax divided by the population. If people feel the vouchers do not cover the cost of 'good' insurance they either have to pay for more on their own, get their employers to do it or vote for a tax increase.

Boonton writes:

This would make it fundamentally different from other entitlement programs. With Medicare, for example, 90% of your hospital stay is covered regardless of what that would actually cost. The only way to predict how much Medicare will cost in the future is to predict how much hospital stays will cost and how many people will need them.

Since you're entitled not to a dollar value but to the service there is a cost control problem. If you're entitled to a dollar value then there is no cost control problem. The cost is simply how many dollars you get. As to what those dollars will buy is determined by the market since insurance companies will compete with each other to provide as much care for the premium as possible.

Randy writes:

I hear you, Boonton. I just don't think it would stay at the starting amount any more than Social Security has. Prices will rise and calls for increases in the voucher will follow - not to mention that the existance of the vouchers is likely to drive up the demand and the cost, just as Medicare has. Also, as the wealthiest spend money on premium care, calls will come from the voucher holders (consisting of the set of all voters) that they should have access to premium care as well.

But all that said, as long as it is voluntary, I have no problem with this or any collective program.

Boonton writes:

And that would be fine as raising the voucher would also raise taxes. As more and more gets spent on giving everyone vouchers big enough to buy 'premium' insurance those pissed off about tax increases will grow until the marginal benefit of everyone getting yet a bigger voucher is equal to the marginal 'pissed offness' of those paying yet more taxes.

I don't see why this would cause medical care prices to necessarily increase more than any other prices in the economy as a whole or to increase more than they are otherwise doing now. Again since the insurance companies are competiting for voucher dollars every dollar they can save by finding ways to get doctors, hospitals, labs etc. to charge less is additional profit for them.

There's even the added bonus in that people don't generally like to utilize medical care. Yes it sucks if your house burns down but it can be fun to redesign one from scratch as you use your homeowners insurance. But few people enjoy getting MRI scans. If an insurance company found 70% of them were wasted and got doctors to stop using them not only would it save the company money but it would benefit those patients who have one less procedure to endure. Such a company could charge a lower premium and give patients more value despite the fact that technically they are getting 'less care'!

Randy writes:

Boonton,

If I'm reading you correctly, the amount paid in taxes would be exactly matched by the amount received for the voucher (minus the administrative costs, of course). So why not do it as a tax credit? It would accomplish the same thing without requiring the collection of a payroll tax. It would also allow for the program to remain voluntary.

Boonton writes:

I wouldn't object but some potential problems:

1. The purpose of the voucher is to ensure some form of universal coverage so you want people to buy the insurance BEFORE they end up in an ER.

2. Quite frankly some people have problems spending their money wisely. A tax credit, if I have your proposal correctly, requires them to pay premiums and then at the end of the year get it refunded to them in the form of the credit. I think the system should be a bit less foolproof. If you want to ding me for a bit of paternalism here then feel free.

3. How would a tax credit apply to those who do not make enough money to pay enough in taxes to equal the proposed voucher? How about those who don't even make enough to file a return?

4. I didn't say the voucher would be funded by a payroll tax but a dedicated one. Perhaps a VAT tax or maybe a combination gas, sales or other ty pe of tax. The thing about it would be that it would be dedicated so it would be easy to track the revenue generated by the tax (of course there's always some forecasting variation year by year) so the amount of the voucher would be tied directly to the tax. Ergo you have something that would be deficit neutral. If you want more voucher you have to accept more taxes right now...not 20 years from now. Likewise if you want to cut taxes you have to cut the voucher now.

I think an equilibrium would end up at a level where the voucher is sufficient to purchase a basic plan. Employers that want to grab talented or in demand workers would offer to supplement the voucher with more premium plans but they would be relieved of having to provide everyone with healthcare at top dollar.

I don't think there would be serious demand for giving everyone a very high voucher. Once people know the basics are covered political irritation at taxes are likely to be more potent. If, say, the voucher was $2,000 a year that would purchase a low end policy from a site like www.ehealthinsurance.com. If you wanted something better how bad would it be to chip in $200 a month or so of your own money and be able to afford something twice as expensive?

Randy writes:

The devil is in the details. I still think the most important attribute of any such program is that it be voluntary. As a cooperative enterprise, the members would be able to create and/or modify it as they saw fit. Hell, if its a good enough deal, I might even sign up myself. Of course the question then becomes, why do we need the government to be involved? Maybe the real trick is just to get the government out of the way.

Boonton writes:

Randy,

I think the voluntary aspect departs when we have decided that people will get treatment if they really need it regardless which we have.

In this regard it is a bit like police or national defense protection. I can sit there and say all day long that if someone breaks into my house I will waive my right to call the police. I still am not entitled to 'opt out' of police protection and get a tax break because when push comes to shove society will send the police if I call 911 screaming "forget what I said there's a guy here threatening me with a gun help!"

Like with police protection you retain the freedom to use your own money to supplement what society gives you. You are free to hire security companies, body guards, install alarms etc. above and beyond what you get from your local police. In theory I suppose people could say why should only the rich person get such protection and demand tax increases so that everyone in town has the type of protection a CEO of a Fortune 500 company or celebrity has. In practice the equilibrium between wanting more protection and not wanting more taxes sets the bar much lower.

The difference with the analogy is that police seem to be best produced by a monopoly (the gov't). I'm sure libertarians have some ideas for private 'competiting police departments' but to my knowledge they haven't demonstrated such a thing to be workable yet in the real world. If one cop car rolls by your house it's pretty hard to see how it could be economical to send yet another car from another police force to roll by my house (right next to yours).

With healthcare, though, there's no particular reason why if Oxford HMO is paying my basic medical expenses you couldn't have Blue Cross paying for yours. If that wasn't the case then you'd have a good argument for a single payer plan with a private market on top of it.

The only two good arguments I heard for that is Krugman's argument about the paperwork created by multiple competiting insurance companies versus a single payer and adverse selection. I think, though, that if administrative costs are high there is no reason the market couldn't find ways to bring them down. There's all types of computers hooked to the internet but that 'market' has developed tools to keep costs down such as standardized file formats, protocols etc.

Adverse selection could be countered the same way employer provided insurance counters it. In order to accept vouchers the insurance company must agree to limit variation in its premiums and cover pre-existing conditions with reasonable exceptions. Like with employer provided insurance, the insurance company couldn't price out all the potentially sick people to cover only healthy people while sick people find themselves uninsurable.

Given this it seems that while we have a good that we want to be universal (like police protection) the most efficient way to produce it is not a monopoly (unlike police protection).

Randy writes:

Boonton,

Re; "...it seems that while we have a good that we want to be universal."

On the contrary, we have a good that only some of us want to be universal. Many of us still believe strongly that healthcare is an individual responsibility.

I'm saying that the group of people who want a "national health plan" should get together and create whatever kind of plan(s) they want. There is no reason whatsoever to involve those who do not wish to participate. Certainly the 50 to 100 million people who want such a program could create a fine program for themselves. If it works as its proponents expect, it would be inexpensive and portable, and should work quite well for those with lower incomes who can't afford more expensive plans.

And I just don't buy the free rider argument. As a voluntary program, those who choose not to participate would have no right to receive benefits. These would simply have to pay by other means (e.g., cash, family, charity, welfare, bankruptcy, etc.). I'm not opposed to government funding for the truly needy, but its a mistake to conflate the truly needy with those who just need an affordable plan or with those who just think they have better uses for their money than to pay for healthcare.

Boonton writes:

Randy,

See my comparison to cable TV. You don't pay by bankruptcy, you avoid paying by bankruptcy. The cable TV company has a right to deny you service or to demand payment before service if they think you're going to try to skip out on your bill.

While you say many think healthcare should be an individual responsibility only the fact remains you will get healthcare if you're laying in the street with a broken leg or having a heart attack just as you will get police aid if you call 911 even if you earlier declared that you wanted to 'opt out'.

Randy writes:

Boonton,

Yes, the person will get treated because we have decided to treat them. But you can't turn around and say that because we have decided to treat them that we have to treat them for free. Compassion is not a legitimate reason for invalidating personal responsibility. If the problem is free riders, then something should be done about the free riders.

It would be a huge step forward to create a national plan (or plans) that almost anyone could afford - not to remove personal responsibility, but to leave very little excuse for avoiding personal responsibility. But there's no reason to make them mandatory. If they are a good deal, then there will be no problem getting people to sign up. And if they aren't, well... healthcare isn't free.

Randy writes:

P.S. Just saw a story about Obama wanting universal healthcare. In it there is a figure given of $15 billion dollars spent anually on providing healthcare to the uninsured. Forgive me for sayin', but if the figure is accurate, it doesn't sound to me like a whole lot of money. In fact, it sounds like a bargain. In other words, the problem with healthcare is simply that people feel insecure without it. So all that is needed to remove the insecurity is a plan they can afford. So create it - and let those who want it sign up.

Boonton writes:

I think we both agree so the question is what type of subsidy is the most efficient. Creating tax credits and special debt collection procedures for medical debt is not 'voluntary'. Those who do not want to participate still have to pay higher taxes to accomodate tax credits and you're basically lurching towards mass regulation in order to pull off your collections (no doubt doctors will be required to treat their 'fair share' of poor patients in return for the special status you would have the law give their receivables).

As for $15B to cover the uninsured. The problem will probably be that the gov't will offer too good a deal. Employers and those with insurance will, next year, say why pay for this ourselves when the gov't will insure those who are uninsured. $15B will soon become $30B and more until you basically will have a virtual single payer program in place.

Randy writes:

I agree that if the deal is good enough, it might very well take over a large share of the market. This might concern some but it doesn't concern me. As long as it is voluntary, it is part of the free market even if government sponsored. It would be a good test. Start it. Let people sign up. See if it works. If it works, it won't have to be mandatory. If it doesn't work, we sure as hell don't want to make it mandatory.

Randy writes:

As for employers dumping their existing plans, I don't have a problem with that either as I don't think they should have been in the business in the first place. Employees will get raises and buy their own insurance. Many might choose one of the national plans. Others will choose the national plan plus some sort of supplemental. Still others might choose some sort of gold plated private plan with a doctor on call or whatever. What won't happen is that employees with plans will suddenly find themselves without. The money once paid for health insurance isn't going to vanish. It would just be paid in cash and the employees would have greater flexibility in choosing a plan. And of course, this will happen whether the national plan is mandatory or not.

Boonton writes:

I think you misunderstood, the 'good deal' would be for workers and employers but not taxpayers. So yes in year 1 the cost to cover all uninsured might be only $15B but then what would prevent both individuals and employers from dumping their insurance and picking up the 'free' insurance from the gov't?

Even worse adverse selection could kick in. Those who would cost a lot to insure because of age or pre-existing conditions (or genetic profiles etc.) could get kicked out of the private system by high premiums and dumped into the 'free' insurance from the gov't. Net result either way is you end up getting to a convoluted version of single payer that would be a lot more complicated than simply saying from the start that's what we are doing.

Randy writes:

Re; "...what would prevent both individuals and employers from dumping their insurance and picking up the 'free' insurance from the gov't?"

The fact that they would have to pay whether they had insurance or not. We have no reason to believe that the number of people with no resources (the truly needy) will increase just because a national program becomes available. And those with resources will still have to pay - through some type of insurance, or out of pocket.

Re; People who private insurance wouldn't normally cover.

Yes, but the whole idea of a national program would be to have a large enough group to make such concerns irrelevant. True that there is no guarantee that the costs of the program would be containable, but that's still the theory of universal coverage. Either it will be a good deal or it won't. What better way to find out than by letting 50 million or so volunteers give it a try (and given the fact that a majority of the population says they want universal coverage, surely it would be no problem getting 50 million volunteers). I mean, think about it. It would be the largest HMO in the country, and bigger than that of some other countries that currently have national plans. It would be government run and non-profit. It would have enormous bargaining power. If such a program couldn't overcome the problem of having to insure other than the most healthy for a reasonable flat rate, then it is a problem that size isn't going to fix.

Boonton writes:

The fact that they would have to pay whether they had insurance or not. We have no reason to believe that the number of people with no resources (the truly needy) will increase just because a national program becomes available. And those with resources will still have to pay - through some type of insurance, or out of pocket.

I'm not sure what you are even talking about then. If those without insurance are going to pay for insurance then what is the $15B for? I thought you were citing an Obama statement on what it would cost to cover those who are currently uninsured.

Randy writes:

As I understood the article, the $15 billion is what it costs hospitals to provide healthcare services for which they are not paid. That is, that it does not include amounts that the uninsured pay out of pocket. The hospitals do attempt to collect in most cases. Simply not having insurance doesn't get folks like you and me off the hook. Not now, and not if a national plan comes into being.

Boonton writes:

Still seems like the same problem. If tomorrow the gov't said we're just going to write a check for those bad hospital debts of $15B then the day after how many more people might not pay their OOP invoice thinking the gov't was going to grab the tab? How many collection agencies owuld be told "why are you hounding me, just put it to the write off account and get your gov't check?" As in simply giving the uninsured insurance the cost of simply paying the hospitals bad debts will grow quickly. That's a variation on what insurance companies call moral hazzard. If I'm covering you then what's your incentive not to start piling the costs onto me?

Randy writes:

You're absolutely right - if the government simply pays the bill without doing any form of collection. I see no reason why it would not do collections. At this point, my guess is that the government is already covering the bill in some subtle form. If not, the hospitals would be screaming, not whining quietly only when the subject comes up. But if it becomes a bigger problem, which it may be, then the government will have to find a way to do collections. Perhaps, this is what the entire debate is really about. What is any form of national health insurance but a way of forcing people to buy healthcare insurance - that is, a way for the government to get out of picking up the tab. With the voluntary approach that I have suggested above, the government would probably have to be more open about it and take up collections directly.

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