Health care reform in the United States is receiving lots of attention recently from politicians and the media, and major changes in federal as well as state health law are likely. In thinking about reforms it is crucial to recognize that the American system has many strong features that should be preserved, such as the predominant role of private physicians, private hospitals, and private HMO's that compete against each other for patients and health care dollars. I will not undermine these strengths in my discussion of how to correct a couple of problems.
President Bush's recent State of the Union Address tackled two defects: the tying of health insurance to employment, and the over 40 million persons who are not covered by insurance. The President proposes a standard tax deduction for anyone with health insurance equal to $15,000 for families and $7,500 for individuals. This means that families with health insurance will pay no income or social security taxes on the first $15,000 of their income, while individuals with health insurance will pay none on the first $7,500 of their income. This would increase the tax benefits from health insurance to anyone who is not now covered by employer provided health insurance. All health coverage provided by employers above the $15,000 family cap would be taxed as ordinary earnings.
Leveling the tax playing field between those with individual health insurance and persons with employer insurance is desirable, as is encouraging widespread insurance coverage of individuals and families. The first could be achieved either by taking away the current tax benefits of employer based health insurance plans-which I would prefer, and the President proposes to do for the more expensive plans- or by extending the same benefits to individual health plans, as is in the President‚Äôs proposal. The second is best achieved by making basic catastrophic health insurance compulsory for everyone, and concentrating government financing of health care on the poor who do not have sufficient resources to get their own insurance.
Under the present system, employed workers get tax benefits when their employers make contributions to employee health insurance plans because employees do not have to report employer contributions as part of their taxable income. Since there are no limits on how much can be deducted, employers competing for employees have an incentive to take out more extensive and expensive coverage than employees would want if employees had to pay the full costs. Wages paid do tend to adjust downward to take account of the value to workers of health benefits and other "fringe" benefits, which is less than the cost to society because of the tax advantages.
The President's proposal is designed to make the same tax benefits from health insurance available, regardless of whether or not employers provide the insurance. The $15,000 family cap would save the federal government tax revenue, and also would discourage more elaborate insurance plans that often add little to healthiness, but are artificially cheaper because of tax benefits.
Since under present tax law, medical expenses has to exceed 71/2 % of a family‚Äôs taxable income before this spending begins to be tax deductible, it is very hard to get any tax benefits with individual health insurance. This aspect of tax law helps explain why so many Americans do not have any health insurance. The proposed tax deductibility for persons with their own health insurance plans would sharply reduce the net cost of getting private health insurance for many of the almost 47 million Americans who presently do not have such insurance, Medicaid, Medicare, or are under the 10 year old State Children's Health Insurance Program. It would also contribute to leveling the playing field between persons who get health coverage through jobs, and those who must get insurance as individuals, perhaps because they have no job, or are self-employed, or their employers do not provide health insurance. The proposed reform should therefore significantly reduce the number of Americans without health insurance.
The tying together of health insurance with employment is partly a legacy of World War II, when employers began to offer health insurance as a fringe benefit to help them compete better for workers whose wages were regulated by the wartime government. Employer-provided health insurance expanded over time even after wage controls were abolished because income tax rates rose greatly over time. This artificial incentive to combine health insurance with employment would be eliminated under the President's proposal.
Aside from humanitarian concerns about the wellbeing of others, why should it matter to the rest of us if individuals and families, many of who are young and healthy, do not have health insurance? The main reason usually given is that since all persons must be accepted for treatment by hospital emergency rooms, regardless of whether they have insurance, taxpayers and other hospital patients who do have insurance bear the cost of treating persons without insurance. Due to this "externality", persons without health insurance impose costs on others whenever they use emergency health care facilities. The ability to avoid paying for medical care by going to an emergency room encourages some persons not to have their own medical insurance.
Yet this incentive is limited since emergency room care is neither the most effective nor the most pleasant. A few studies indicate that emergency rooms are not used disproportionately by the uninsured, probably because they are mainly young and healthy, so the total cost imposed on others of emergency room visits by the uninsured is likely not large. Moreover, the President's proposed tax savings for those with private insurance also hurts taxpayers by creating a tax advantage for persons with private insurance, although his proposal is supposed to be tax neutral by eliminating deductibility for insurance above the $15,000 cap.
Even if the uninsured did use emergency room care a lot and thereby raised the costs of others, a better way to handle that would be to mandate that everyone purchase basic health insurance that covers catastrophic health problems. Several state governors, including Mitt Romney of Massachusetts and Arnold Schwarzenegger of California, have recently proposed that all of their state residents be required to get health insurance. The State of the Union Address also contains a proposed federal subsidy to help states pay for the coverage of the poor and sick for states that require basic health insurance for all residents. Making some coverage compulsory for all, and then subsidizing only the coverage of poor families, is the right way to go.