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?
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.
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.