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Wednesday, January 24, 2007

Bush's Health Care Proposal

Now, I recognize the plan is not likely to pass a Congress that didn't even want to remove government responsibility for a portion of retirement savings, but I like the plan. President Bush's plan, as outlined in his state of the union address, proposes treating employer-provided health insurance as taxable income, but then giving a tax credit for health insurance, up to $7500 for individuals or $15,000 for families. If your company spends that amount or less on insurance, your tax bill is unchanged. Only if your employer offers a luxury health care plan would you have extra taxable income.

Example: If I have an inexpensive health insurance package that costs $300 a month, with $250 per month paid by my employer, I'd have an added taxable income of $3000, but would deduct $3600 from my taxable income. If a university professor has a no-deductible, no-copay, no-drug cost, no-network, full mental health, full chiropractic, etc. plan that costs $1000 a month, he'd have $12,000 more taxable income, and a deduction of $7500.

I understand that the proposal applies the tax credit to both income taxes and payroll taxes, providing additional benefit for lower-middle and middle-class families.

Under the current system, health insurance is tax-deductible for businesses, but not for individuals. A CPA with Price-Waterhouse enjoys a subsidy that an independent CPA doesn't get. Under the proposed system, everyone will receive the same tax treatment for identical insurance. At the very least, it's a fairer system than what we have now. President Bush's proposal still doesn't require people to have insurance, though.

An additional benefit of Bush's proposal? It might make people look more at buying INSURANCE, not buying a mechanism to transfer the payments for medical costs.

Take two health plans:
  • $A deductible, B% copay, $C drug copay, $D annual out-of-pocket maximum for necessary medical expenses
  • $A deductible, B% copay, $C drug copay, $D annual out-of-pocket maximum for necessary medical expenses, PLUS semiannual checkups.
The latter plan will be more expensive, obviously. If a checkup runs $100, then the latter plan with its two checkups will cost... wait for it... MORE than $200 more. Here's the issue: In the first case, the insured gets a bill from the doctor and pays it. In the second case, the insured gets a bill from the doctor and sends it to the insurance company, who processes the envelope to the mail department, who processes the claim, who issues a check, who mails a check, and who pays overhead for all of the above.

There's a reason to encourage insureds to go to checkups; they help identify problems earlier, when they're cheaper to fix. (Warning: that's also one of the reasons hated HMOs are supposed to save money over indemnity insurance.) However, there's really no reason to bill the insurance company for a service that is known in advance. It's not insurance to pay for a sure thing. (An insurance company that executes a financial transaction, calling it insurance, but not exchanging any risk, will get in trouble.)

The plan is a start, but here are some issues the plan does not address.
  1. The plan does not help people buy insurance. Plenty of families above the Medicaid threshold are honestly unable to pay for inexpensive health insurance, and plenty more would rather spend the money on something else. Some manner of sliding scale to provide payment assistance would help, but would be expensive.
  2. The plan does not make individual insurance cheaper. Until insurance is mandatory, the people who buy individual insurance are the kind who expect to use it. People generally don't elect or unelect group insurance provided by an employer based on their health status.
  3. Insurance for people with chronic problems will continue to be expensive. Let's be honest, if you have chronic conditions that require $1000 of covered drugs and a battery of tests each month, you're not going to find individual insurance for $7500 per year. A risk pool will continue to be necessary (insurers contributing funds to cover the medical expenses of the uninsurable). The same thing happens with the inevitable higher health care costs of older people. Again, group insurance is cheaper; as long as you meet what is effectively a minimum level of underwriting (you're healthy enough to work), your expenses get spread with healthy individuals.
  4. The plan does not allow people to buy cheaper insurance built around fewer mandates. New York requires insurance to cover mental health and chiropractic. If you don't want it? Tough. Individuals should be able to buy insurance issued under other states' regulations.
Above all, Bush's plan keeps the important aspect of CHOICE in the system. Do you not like something about your in-network treatment? You can go out of network. Heck, you could even pay for some health care by yourself. That's in contrast to goverment health care that forces you to wait for desired treatment, or HillaryCare (a plan created by lawyers, not doctors), which made it a crime to pay a doctor for your own care.

One warning for the future: Bush's plan would make it easier for healthy individuals to elect individual insurance, electing out of group insurance. It won't have much of an impact now, but if there's ever a realistic market for younger insureds, it could increase the age and average cost of group insurance.

Others' comments:
Ruth Marcus, Washington Post
Arnold Kling, Cato Unbound


At 1:02 AM, Blogger king said...

As the population has gotten older, the need for health insurance has increased. Despite possible changes in the regulatory environment, healthcare is expected to continue its rapid expansion.


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