The President’s Plan

With the President having proposed a new health care plan in his State of the Union Address, this might be an occasion to comment. The plan is to recognize employer-provided health insurance premiums as taxable income, while creating a standard deduction that everyone with health insurance can use. Because the deduction is limited to $7500 for individuals and $15,000 for families, the most expensive policies would lose their tax subsidy. Thus, this is a small step toward tilting the tax system away from insulation and toward real insurance.

The President’s policy is reasonable and centrist. If you had shown it to me six months ago, I could have not guessed whether it came from a Republican or a Democrat.

Daniel Pink, in the book Free Agent Nation, sees employer-provided health insurance as an anachronism. He is passionate on the issue of the unfairness of the tax code for workers who are outside the large organizational umbrella. He writes, “becoming a free agent means entering a sort of tax hell. You’re hit with double taxation. You’re not permitted to deduct much of your already towering health insurance premiums.”

Pink is no Republican—he worked in the Clinton White House as a speechwriter for Al Gore. Yet he recognizes that the current system is a “tax hell.”

Since the President’s plan was leaked, I have seen three complaints from the left.

  1. The tax break benefits the rich more than the poor.
  2. The tax break encourages people to leave employer-provided health plans and instead get health insurance on their own.
  3. The proposals encourage catastrophic health insurance rather than insulation.

In my view (2) and (3) are positive developments. I am curious whether Holt or Cohn finds them objectionable.

As for (1), I fail to see the cause for alarm. 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?

Personally, I could get behind eliminating the employer-provided health insurance tax break. But the President is dealing with political reality, and he is taking a different approach. I think it is a reasonable approach.

In the past, when Democrats have suggested centrist ideas, I have given them fair consideration. For example, I was supportive of the “catastrophic reinsurance” idea when it was floated by the Kerry campaign in 2004. My sense is that the hard left is going to dig in against the President’s proposals. Too bad for the millions of people for whom health insurance is more expensive simply because where they work falls outside the corporate umbrella.

Also from this issue

Lead Essay

  • Insulation vs. Insurance by Arnold Kling

    In this month’s lead essay, Cato Institute adjunct scholar Arnold Kling draws from his book, Crisis of Abundance, to argue that the health coverage most Americans enjoy is not insurance at all, but what he calls “insulation.” “The problem with insulation,” Kling argues, “is that it is not a sustainable form of health care finance… Insulation leads people to over-consume health care services. Americans make extravagant use of services that have high costs and low benefits.” Kling explains how real health insurance would work, and how it would help solve the crisis in health care, and explores how we could transistion to a system over time institutionally and culturally in order to resolve the inconsistent demand for insulation and affordable, effective care.

Response Essays

  • Abundance Is Insulated from a Crisis—For Now by Matthew Holt

    According to health care strategist Matthew Holt, Arnold Kling is correct that consumer insulation from the costs of “premium medicine” is partly responsible for the rising cost of health care, but Holt dissents from Kling’s solution. Holt examines what he takes to be the three main strategies for dealing with “the insulation and overuse of medical care in the U.S.”: a nationalized “single payer system; a system of “managed competition”; and “individual consumer control of spending at the point of service.” Holt argues that the latter two options face deep problems, and that a nationalized single-payer system “is the likeliest outcome in perhaps a decade or so,” even it is not politically feasible at present. “Kling has provided a decent analysis,” Holt argues, “but has proposed a solution that both ignores the political and cultural realities of the health care system, and probably wouldn’t even work in theory.”

  • Unhealthy Subsidies by Clark C. Havighurst

    Clark C. Havighurst agrees with Kling’s “diagnosis of what’s wrong with health care” in the U.S. “as far as it goes.” Havighurst goes further and digs into the reasons the U.S. health system “has evolved into an entitlement program under which everyone expects nothing less than the very best that ‘modern medicine’ has to offer.” Havighurst lays the blame at the feet of the government’s choice to subsidize the purchase of health care by “excluding the cost of employer-sponsored coverage from employees’ taxable wages and income” and lucidly details three different mechanisms by which the tax subsidy insulates workers, consumers, and voters from the costs of health care. Havighurst proposes that “something approaching [liberals’] goal of universal health coverage could be achieved by ending the current tax subsidy and offering refundable tax credits of, say, $6000 to families that spend at least that amount in health plan premiums or contributions to a health savings account.”

  • Yes, We Need Real Insurance … Real Social Insurance by Jonathan Cohn

    Jonathan Cohn, a senior editor at the New Republic, agrees with Kling that our current health care system doesn’t function according to the widely understood principles of individual insurance, but he doubts we’d do better at fighting rising costs and maintaining quality if citizens with “real” insurance were free to take price into account in their choice of care. “We have precious little evidence to believe that people can distinguish good care from bad care,” Cohn writes. And the notion that consumer choices will improve over time is, according to Cohn, “a lovely idea, but one that seems highly dubious.” Cohn argues that we need a broader notion of insurance – social insurance – to shield people not only against unexpected illness and harm, but against “genetic and economic bad luck.” Cohn argues that many nations do just fine in managing the cost/quality tradeoffs inherent in a state-controlled system of universal coverage, and that Americans would be happy with such a system “if only they knew how those systems really worked.”

The Conversation