Friday, July 10, 2009

Health Reform, Column 1

I have a column in today's Raleigh, News and Observer discussing the possibility of repealing or limiting the tax subsidy for employer provided health insurance as a way to pay for health reform. On the side bar to the right is a new paper in the New England Journal of Medicine by Jonathan Gruber discussing this idea more completely.

I wrote an op-ed laying out what I say as the basics of any health system in early June.

I will be writing a weekly column in the N and O on various aspects of health reform. If there is a topic you would like to see addressed, let me know.


  1. Don..Per an article in Wed Wall Street Journal, "senators are cooling" to a proposed tax on employer provided insurance. Unions have some of the best medical coverage in the country. There is NO WAY they will let this administration tax that. This is very similar to the Administrations position on teachers. A week after declaring the need for a carrot and a stick to improve education, the stick disappeared. Teacher unions would not stand for any of their members, even the most incompetent, to be fired.

  2. People with great employer provided insurance will be worse off with this. Of course, if they lose their job they lose their insurance. Will be a test of how bad Administration and Congress want a bill. If they are going to stick to paygo they have to come up with a way to pay for the new spending....only so many choices. CBO is quite conservative in crediting efficiency gains, etc.

  3. I'm still unclear as to how taxing employer-provided health insurance will lead to expanded coverage for the uninsured, and/or lower the cost for those who struggle to pay for their health insurance. There seem to be more assumptions than direct evidence. Is the government going to use the new tax revenue to subsidize employers who can't afford to provide health insurance for their employees, and/or individuals who can't afford it, and/or expand a Medicare system that is already regarded as a broken?
    If employers started providing health insurance benefits after WW2, and have continued to do so, maybe they simply did it because it was a good idea to do so. Someone probably figured out they could lower the cost for individuals by grouping them with their fellow employees to create a larger risk pool, then hire or secure the services of a person with the right expertise to go out and purchase insurance at a better price. It saved both the individual and the company money and created another form of compensation that was more valuable to both parties than its equivalent cash value. And maybe it saved the government money by keeping individuals who otherwise couldn't or wouldn't purchase health insurance off of the public dole. In the words of the Office's Michael Scott, it was win-win-win.
    While I agree that being a degree or two removed form the cost of healthcare has shielded consumers from the true cost, but taxing Health insurance does something very similar in that it shields them from what is essentially a reduction in pay and/or a tax increase. Health insurance is just another form of compensation. It's not a gift. People who have it have health coverage have generally earned it, if only by getting themselves hired. (This would even include the faculty of Duke.) There's reason to believe that if health insurance benefits are taxed, employers would have to make up this pay reduction by increasing salaries. For employers who are already on the ragged edge in terms of being able to provide this benefit, this may be the final nail in the coffin. The employee might get more salary, but the most likely scenario would be a net reduction in compensation which would ultimately lead to less tax revenue for Uncle Sam than anticipated.
    I think it entirely implausible that untrained individuals could be "better consumers of healthcare" versus the trained professionals who generally make health insurance decisions for employers. Individuals should have the option, but on a large scale, it’s highly doubtful that they would make better more informed decisions.
    While I come from a proud family tradition of hypochondria, I seriously doubt that there are a lot of people with gold-plated health insurance, and that shielding consumers from the cost leads to overuse. Except for my Aunt Leila, I know very few people that actually enjoy going to the doctor. More to the point though, according to most HR statistics, healthcare claims follow the 80/20 rule, meaning that 20% fo employees file 80% of the claims. I have no idea how many of the people who constitute this 20% have gold-plated health insurance or overuse their benefits (or how many of them are just plain sick), but does anyone really think that punishing the remaining 80%, who are presumably using their health insurance responsibly, along with the 20% who may or may not be, is really going to solve the healthcare problem. My thinking is that the whole notion of gold-plated insurance coverage, and the overuse of health insurance, as a contributor to our current healthcare problems is largely overstated.
    Finally, I believe the problems with our healthcare system are caused by an obvious lack of competitive restraints on the providers. Free market solutions only work when people have choices. If we want the cost to come down, we need solutions that offer more choices. I'm not sure that something that is effectively just a tax increase on individuals who have "earned" healthcare benefits as part of their compensation package does anytihng to improve those choices.

  4. *Libertarians would probably like to end the tax subsidy, do nothing else, and then see what happens.
    *employer provided insurance has been pretty good at pooling risks across lots of folks, especially large companies with community rating (like Duke) are good places to get a job if you have chronic illness since all pay the same premium. If you got rid of tax subsidy and moved toward indivdiual purchase, you have to have something like guaranteed purchase or you will end up with the sickest folks without insurance.
    *Most are discussing ending this subsidy as a way to offset new spending designed to increase insurance rates. New spending is premium support to individuals (most likely) to purchase coverage in an insurance 'market' that has an individual mandate to purchase and guaranteed issue (can't deny coverage). But, lots of ideas flying about.
    *Ending the subsidy will have distributional effects (those with good insurance worse off) but so to does the current policy have distributional effects (those without insurance subsidizing those with).
    *When you say market, do you mean market for insurance? or market for health care?
    *eoncomic theory suggests that employees 'pay for' their benefits through lower if the tax subsidy is repealed or capped, then I should get an immediate salary increase from Duke...haha.

  5. Hi Don, You cited $6600 in tax-free income you receive in insurance benefits from Duke. You also mentioned another $4020 you pay for your family. This amount is also tax free to you and your employer under IRS Section 125 cafeteria plan. In other words should employer sponsored insurance benefits loose their tax exemption - or subsidy as you call it, you and Duke will equally share the Payroll (FICA, FUTA) Taxes on $10,800 added back into payroll amounting to $1,652.40.($826.20 ea.) You then will be required to pay state and federal income tax on the $10,800 of your increased income - even though you won't see it. Ouch!

    If congressional democrats can find a way to exempt labor from this tax we're likely to see it happen, and I think we will. What effect this will have on employers is uncertain. It depends on what options are available. Certainly the option of no insurance will be one. The penalty for employers to go without insurance may be worth paying. I've heard 7% of payroll. Small employers who do not offer insurance now will be worst hit and may not be able to sustain that additional expense. Larger employers who do (offer insurance) may find it a more attractive alternative. In either case a public option (where there really is no option) and ultimately a single payor system is where the current congress wants to go.

  6. You are correct about my premium share being pre-tax...I was trying to highlight the part I never see and many people don't understand exists (meaning, there are cheaper options Duke offers in terms of my premium share).

    I just don't see how it will fly if labor is exempted, but who knows.

    I think you are correct that many employers will be glad to pay a payroll tax and be out of the headache of arranging insurance. If large employers ever get out of the business of arranging they will not come back. A key question is what size of business will be exempt...heard 25 and 50 employees and smaller.

    I actually suspect alot of the current Congress (Democrats) don't want to go to single payer, but that paradoxically some of their efforts could make it more likely if there is a big increase in indivdiual's purchasing insurance and there are problems/hassles with it.

  7. I understand. I was attempting to illustrate how a fully taxed insurance premium would be unaffordable to most families. Of course if the free market was left to adjust...and economic theory holds (ha ha) it seems demand for more affordable consumer driven products would rise but I don't think that's part of the big plan. When I spoke of Congress wanting a single payor system for everyone I was referring specifically to the current leadership.

  8. I read your commentary in the N&O on Friday and I think you need to make a correction. I am a small business owner and my health insurance premiums ARE taxpayer subsidized in the sense that it is subtracted from my income before my "adjusted gross income" is calculated - the same way that 1/2 of my self-employment tax is deducted. This allows me to be on equal footing with large businesses that can deduct their health care expenses. What doesn't make sense to me is that this benefit is not available in the same form to anyone paying their own health insurance. That would certainly be fair. I am entitled to it because I am a small business owner, but there doesn't seem to be a reason that a person who works for wages but pays for her own health insurance shouldn't be able to take the same exclusion.

  9. What I called tax free income is what Duke pays on my behalf ($6,600) per year. The premium I pay each month is pre-tax just as your premium is, so both are subsidized via tax code, but I think of that as being a bit different since I decide which plan to elect which implies different premium on my part, and I and (you, I am sure) know exactly how much money is flowing. I was trying to highlight the amount that employers pay that employees never see and are shielded from; this is truly where the notion that someone else pays comes from...but the figure I noted in terms of cost to treasury($250 Billion) inlcudes what employers pay, what employees pay in pre tax premiums, what you pay, etc. So, I was imprecise.

    I am going to do a longer post on monday on this topic and breakdown different tax expenditures related to health (there are others, such as health expenditures greater than 7.5% of gross income).

    I agree that it doesn't seem fair that an individual buying an individual plan has to do it with after tax dollars.