'Sharing' is not what this administration is about

By Rashi Fein
rashi_fein@hms.harvard.edu

The President wants the health insurance premium paid by employers to count as taxable income to the individual. At the same time he suggests a new health insurance deduction of $7,500 for an individual and $15,000 for a family for all those who have health insurance which they or their employer has purchased. Sure, some folks whose insurance cost less than the deductible would “win” and some whose insurance cost more than the deductible would “lose.” But that’s not the whole story.

Q. What’s the social benefit of employer-paid health-care premiums not being subject to taxes?

Employer-paid health insurance premiums have not been considered taxable income since the Second World War. That helped stimulate the expansion of insurance. Most Americans now get their insurance through employer sponsorship with some employee contribution. The employer link has enabled people to get insurance even when they had pre-existing conditions and were viewed as bad risks by insurers. These poor risks benefited from the “law of large numbers” wherein their medical risks were averaged with those of all other employees.

Q. But aren’t there downsides to such a subsidy?

Yes. This is certainly not a perfect system. Most obviously, not everyone has an employer or an employer who can afford health insurance. Also, some employers with few employees can not take advantage of the “law of large numbers” and discriminate against potential employees whose medical conditions would result in a large premium cost.

Furthermore, the cost to the federal treasury of not taxing benefits is very considerable and the benefit to the individual is worth more the higher the income tax bracket the individual is in.

Q. Why does Bush say his idea is better?

A. The administration paints a picture in which it would tax employer-paid insurance (above the deductible amount) and use that money to help everyone who has or who would buy insurance themselves. It claims that all that would be “fairer.” Furthermore, it argues that under this program there would be less of an incentive to buy what it calls “gold-plated” policies (since people would get the full deduction even if their policy cost less than the $7,500 or $15,000). Presumably, if all of us had more stripped-down policies we’d all be more careful in our use of medical services and that would relieve the pressure on rapidly escalating health expenditures and increasing premiums.

Q. But what might the effects really be?

Let’s begin with a general remark: Lots of observers and policy analysts have all kinds of problems with the employment linkage. It hasn’t been a fair system and it hasn’t covered everyone. But tearing down a shoddy house only makes sense if what you are going to put in its place is stronger and better. The administration’s replacement for the employment-linked system isn’t as strong as what we have.

The President’s proposal would lead to erosion of employer-based health insurance and especially so since over time the deduction of $7,500 or $15,000 would increase at the rate of general inflation. (Health care costs and premiums have historically increased much faster than inflation.) As insurance became more expensive and routinely cost more than the deduction, more and more of us would have to pay a tax or settle for minimal -- and what would become basic -- coverage.

But there’s more: As employer contributions to health insurance became taxable, employers would “cap” their contributions. It would also increase the already-present incentive to get out of the business of providing insurance entirely. That is undoubtedly what the administration wants.

But the problem is that if each of us purchases insurance for ourselves, insurance will be more costly. One reason: Because administrative costs per person are higher when you enroll people as individuals rather than enrolling larger groups (think what it costs to enroll all municipal workers as one group and what it costs if they were enrolled one at a time). Another reason: Because insurers will want to be compensated for the increased risk that those who sign up are individuals who are likely to need medical care who are not balanced off by others of lower risk – the problem of “self selection” in the absence of the law of large numbers. Furthermore, insurers will make it difficult, if not impossible, for persons with pre-existing conditions to enroll. After all, insurers are there to maximize returns for their stockholders, not to solve the social problem of universal insurance and access to health care.

Let me add that the “new” system would not solve the fairness problem. Today, higher income people get a bigger tax benefit as a consequence of our not taxing the value of the employer payment for premiums. But under the new system, the deduction would be worth more the higher your tax bracket. If you think of the value of the deduction as a subsidy to help you buy health insurance, it’s a subsidy of $0.00 if your family income is so low that you owe no taxes, a maximum of $2,250 (you won’t get much health insurance for your family for $43 a week) if you’re in the 15% bracket, and $5,250 if you taxable income is over $336,550 which puts you in the 35% bracket. So the rich still get more help than others.

Nor would “spending your own money” lead to lower prices and costs. Think of the consequences as the utilization of preventive care services decrease and early diagnoses are replaced by postponement of physician visits and later diagnoses. The President wants to tear down the house, but he’s not substituting a more efficient, fairer, and more comprehensive house that all of us could enter.

Q. But won’t some people who aren’t getting any help from their employers in buying insurance start to receive assistance? And won’t that put a big dent in the 47 million Americans who have no insurance?

Yes, the proposal would help some people buy insurance who in today’s world are unable to do so, either because they have no employer or because their employer doesn’t contribute anything to the purchase of insurance. But no, it would not make much of a dent in the 47 million and rising uninsured. The administration states that 3 to 5 million persons would be newly enrolled. Thus, in the best of worlds we’d be back to where we were just a few years ago. That’s not putting a dent in the numbers and it’s not solving the problem the 47 million uninsured face.

Q. What, then, is the President’s motivation in putting this idea forward? Why would he propose this approach?

My guess is that Bush’s proposal provides him several things: a way to talk about health insurance and fairness without expanding public funding;  a mechanism that helps employers deal with the increasing costs of health insurance (even if it does so at the expense of employees); and a respite from talking about Iraq.

Even so, I would suggest that the proposal is deeply ideological. It fits with the President’s approach to what he terms “an ownership society,” one in which we own our own 401K or other pension arrangement, our own Social Security account, and our own health insurance policy. It fits with the new emphasis on having your own Health Saving Account and your own high-deductible health insurance. Indeed, it doesn’t just “fit.” As inflation exerts the impact previously alluded to, it would move more and more Americans into those newer savings and insurance structures.

Put simply, the administration believes we are millions and millions of individuals not bound together into a society. But medical care is just another good or service that we purchase as we will in the marketplace subject to normal market forces. The proposal is the antithesis of a point of view that states that we are a society of individuals who are in it together; who assist each other through an instrument called government, and who look to government in fields like education and health care that we feel should be available to all. “Sharing” is not what this administration is about and sharing risk (don’t think alone of health insurance or Social Security; think of risks and sacrifices associated with Iraq) is not one of its goals. Rather, it seeks to take apart many of the societal protections that were erected by earlier administrations and respected by Presidents of both parties.

The pity is that there are real problems with our health care sector: real people without insurance, real issues of access and of quality, real problems of chronic illness and long-term care, real fiscal issues for Medicare. Those are the problems that need to be addressed and that are best addressed on a comprehensive basis. Yet, the President has elected not to devote his energy and some of his remaining political capital to those real and pressing issues. One hopes we will not be deflected from those issues into a time and energy consuming debate around a proposal whose merits are few and whose deficiencies are many.  

Rashi Fein is Professor of Medical Economics, Emeritus, at Harvard Medical School, and co-author of The Health Care Mess; How We Got Into It and What It Will Take To Get Out, from the Harvard University Press. E-mail: rashi_fein@hms.harvard.edu

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