Edmund Burke: "A War of a Peculiar Nature"
The Illusions of George Tenet

Greg Mankiw Refers Everyone to Jason Furman on Health Insurance

Greg Mankiw approvingly cites Jason Furman on health insurance:

Greg Mankiw's Blog: Furman on Health Insurance: Economist Jason Furman, a frequent adviser to Democratic candidates, has a new article on health insurance that is well worth reading. In this excerpt, Jason points out that our tax code leads to excessive use of health insurance:

[I]f your employer pays $1,000 in premiums to your insurance company, that money is effectively tax deductible to you. But if your employer raises your salary by $1,000 and you use the extra money to pay for medical bills, you generally will not get a tax deduction. As a result, many people end up with more-generous health insurance plans than they would otherwise choose to have. These plans have lower deductibles, lower co-payments, and lower co-insurance and are often focused around providing first-dollar coverage for routine medical expenses, rather than genuine insurance. As a result, individuals in the health system are often spending someone else's money, which is never a recipe for cost consciousness. Unfortunately, ultimately it is not really someone else's money: the cost is paid in higher premiums, which in turn are reflected in lower wages.

Most economists agree with this analysis (see my previous post on health insurance).

Jason suggests several policy responses, such as limiting the amount of health insurance that is tax-deductible. That proposal has my vote.

Here is Jason's close:

Jason Furman: Congress could cap the amount of health insurance that is tax-deductible... limiting the deductibility of employer-premium contributions to... $7,500 for a family policy.... Those savings, in turn, could be used to expand coverage in a variety of ways, such as by guaranteeing Medicaid to all Americans below the poverty level (or an even higher threshold), by providing progressive tax credits to strengthen the weakest link in the employer-sponsored system (coverage by small businesses) or by funding subsidies for new mechanisms to make insurance affordable for all Americans, such as allowing them to buy into a plan like the Federal Employees Health Benefit Plan (FEHBP), the same health plan available to members of Congress.

In such a scenario, there is little risk of undermining the employer-sponsored health system, because the proposal would retain the current structure of tax subsidies for employer-sponsored insurance.... It is also unlikely that a generous employer who contributes $10,000 toward annual premiums would drop coverage altogether just because the employee’s tax benefit is trimmed....

This approach would buy the health care system some time, but would not cure it. To do that, policymakers should consider scrapping the deductibility of health insurance entirely and replacing it with a progressive tax credit. Individuals could count the value of their health insurance as part of their income when calculating their taxes, but they would get a new progressive tax credit instead of a deduction. The tax credit would be the reverse of the current system, more like $4,000 going to the cleaner and $1,000 to the investment banker.... This could create the basis for a simpler, fairer system of universal health insurance. Although health benefits might be slightly less generous, higher out-of-pocket costs would be offset by higher wages.

Ultimately, the best plan might include many elements from the recent health reform in Massachusetts while also addressing that scheme’s biggest shortcoming, its lack of sufficient funding. Under a plan of this type, people would have the responsibility to ensure that their families are insured.... [T]he federal government would have the responsibility to make insurance affordable for all through a combination of progressive tax credits, employer mandates (or penalties for firms not offering insurance), a new pooling mechanism for small businesses and higher risk individuals, and expansions in Medicaid. The money saved by ending the tax deductibility of health insurance, plus the existing funding for Medicare and Medicaid, might be enough to pay for a well-designed, universal health-insurance plan....

The principal goal of universal insurance is to provide more health care for the uninsured and to reimburse them for more of the costs they are currently paying themselves.... [T]he total bill for universal insurance is likely to be anywhere from $50 billion to $200 billion....

Nevertheless, there are many areas in which our tax code’s perverse incentives take us in the wrong direction, wasting money and exacerbating inequality.... Progressives should focus more on efficiency, not just in the traditional economic sense but also in terms of ensuring that our limited resources are put to the best use in achieving those social goals–-like helping families pay for college or health care–-that are increasingly being funded through the tax system. There is no better place to start than with our number-one national problem: health care. And if we cure what ails our tax code, making it more progressive and fair, we can put health care within reach for all Americans.