More HCR Onanism

Here I go, spilling my thought-seed on the internet again.

As I’ve already mentioned, I’m deeply uncomfortable with the cost-limiting mandate of the HCR proposals we’ve seen over the past year and a quarter (or thereabouts).  Most of this discomfort comes from a sense of Canadian whiplash: Canada’s health-insurance system is single-payer by province, and the Canadian refrain for as long as I can remember has alternated between “We need to cut health-care spending or it’ll destitute us!” (from the provincial governments) and “The province isn’t spending enough money on health care!” (from everyone else).  This was accompanied by what’s now a hazy blur of unsettling memories: hospital closures, execrable nursing-home care, years-long waiting lists, and so on — but the plural of “anecdote” is not “data”, particularly when the stakes (and emotions) are so high.  I’m not trying to convince you that Canadian health care sucks (it doesn’t); I’m just trying to explain my unease when a government that waterboards people offers to reduce health spending.

At the same time, I find it hard to believe that the United States federal government can’t find some package of money in its corpulent budget that wouldn’t be better spent on giving a few dozen million people access to health insurance.  I kinda like the idea of scrapping the FCC and auctioning its goodies to ham-radio junkies, scrapping the BATFE and auctioning its goodies to gun nuts, and carrying on through a shit-ton of other actively harmful tentacles of the federal Leviathan.  And, oh yeah, scrapping the drug war, telling rent-seeking agricorps to go fuck themselves, pulling back from foreign adventures, blah blah blah libertarianism blah.

Or as Andrew Sullivan puts it:

But I do believe that finding a way to get 40 million Americans some access to healthcare is worth doing more than, say, occupying Iraq and Afghanistan for ever, or paying for tens of thousands of US troops to stay in Germany, or the vast behemoth of corporate welfare that never seems to disappear.

Alas for a lot of us (40,000,000 of us if you believe Sully’s figures), this solution fails the Frakt Criterion: it’s vastly unlikely that enough people to matter will support a HCR package that doesn’t “pay for itself”.

Now, one of the ways this HCR proposal is supposed to “pay for itself” — reduce the deficit, even; har har — is via the Cadillac Lexus Tax, in which high-dollar employer-based health insurance plans don’t get the full tax subsidy.  When I first came across this idea, I dismissed it as post-credit crisis rape-the-rich populism.  (Because that works so well whenever we try it.)  But when Austin Frakt argued that the Lexus Tax really serves as a thin wedge to roll back the employer-care tax subsidy, I started to reconsider:

Now, I’m not a fan of the precise structure of the Cadillac tax. It could be improved in many ways, e.g. adjusted for geographic variation in health care costs and risk profile of workers. Another thing I’d like to see is that it be made more progressive by setting it to be the actual worker-specific tax subsidy rate rather than a flat 40%. But to do that would require imposing the tax directly on workers instead of on insurance companies. Since workers will ultimately pay the tax either way, the politically expedient ruse that insurers are the ones being taxed actually prevents the Cadillac tax from being more sensibly designed. That’s a shame.

And now that Greg Mankiw’s making the same point, the idea that  actually managing to penetrate my thick skull that the Lexus Tax isn’t really a tax — with some quibbles about its structure, as above — but rather a restriction on a transfer from “people who pay taxes” and “our grandchildren” to “people who get health insurance through their employers”.  Limiting transfers… that’s what libertarians are supposed to like, right?

John Graham points out that the employer-care tax subsidy is wildly distortive:

Suppose you travelled to a parallel USA, where the tax code was malformed such that workers’ homes were owned by their employers (using non-taxable dollars). If your employer’s HR department changed HMO (Home Maintenance Organization) annually, you’d have to move house every year. If you got a new job, even across the street from your old office, you’d have to switch homes. Obviously, housing costs would be out of control and there would be huge bureaucracy and lack of responsiveness in the “system.”

Consider three reforms:

  1. Reform the tax code so that individuals can use pre-tax dollars for their own housing (through, perhaps, a mortgage-interest tax deduction);
  2. Allow employers to use HMOs that were regulated in another state where the building code was not so strict; or
  3. Allow small employers to band together in “association housing plans” so that they could get the same discounts on commissions, etc., as large employers.

Surely, everyone in this America, where people choose their own homes, would immediately dismiss the latter two policy options in favor of the first (which is also imperfect).

(Dr. Frakt has already crunched the numbers, but you probably saw that coming.  Also, a tip of the hat to Andrew Sullivan for the link.)

Graham’s response is to extend the tax subsidy to all health insurance plans.  That seems like a small thing, easy to fit into a bill — but it would have wide-ranging consequences.  Moreover, I like the idea of the tax credit being applied at the individual level.  Of course, this one probably also fails the Frakt Criterion (“HCR needs to pay for itself”).

Personally (you did wade through all that bullshit just to get to my opinion, didn’t you?), I’m persuaded that every element of the tax code is exploitable somehow, and it follows that removing elements from the tax code should reduce rent-seeking and regulatory capture.  With that in mind, I’d be tempted to remove the employer-plan tax subsidy altogether.  That ought to have the same sort of leveling effect as Graham’s proposal, and strengthens the case that HCR could maybe pay for itself — but probably also fails the Frakt Criterion on the basis that it “adds to the health-care costs of ordinary Americans”.

Now, once again, tell me why I’m wrong.

5 Responses to “More HCR Onanism”

  1. 1 Sennin
    February 24, 2010 at 01:26

    How ’bout we get the Gummint out of the health care business entirely?

    Our family physician got off the insurance addiction about five years ago (cash only) and something strange happened. Our health costs dropped significantly and his profit margin increased. Same with our dentist. The difference between what the doctors charge us and what they charge insurance companies (due to increased overhead costs to do the paperwork) is amazing.

    When I was a kid (centuries ago) “Health Insurance” was a benefit for corporate executives and Government Employees. The rest of us just paid the doctor a mutually agreed upon reasonable amount and we got good care.

    Health INSURANCE is an expensive benefit, NOT A RIGHT!

    • February 24, 2010 at 01:56

      Graham’s scheme is a first hack at getting government out of health care. I kinda like it from a “starve the beast” angle.

      Claire Wolfe said the same thing about cash-on-delivery health care in at least two of her books, and I believe it. Also, IIRC Warren (?) at Coyote Blog carries only a catastrophic health insurance policy, pays for routine care in cash, and loves it. Bit of a problem if you’re living paycheque to paycheque, though. (There are plenty of caveats on that, and that could turn into a whole blog post on its own.)

      My understanding of the history of “health insurance” is that it started out in WWII, where companies subject to federal wage controls started offering health benefits as a way to compete for labour. Nobody had done this before, at least not on a large scale, so nobody had thought to tax it. When the feds did try to tax it, as feds are wont to do, the recipients kicked up such a fuss that the Revenuers backed down with hands in the open and no sudden movements.

  2. 3 kbiel
    February 24, 2010 at 15:33

    Removing the employer-plan tax subsidy will add to the health care costs of only some Americans. As the employers find they have more money because they are no longer are paying for expensive group health care plans that must cover every employee regardless of their health condition or pre-existing condition, they will eventually redistribute that savings in the form of increased pay offsetting any increased cost. I would make a great example. I can buy individual health insurance for about half the cost to my employer because I, my wife and kids are generally healthy (and young). I do not buy individual health insurance because my employer provides a group plan at the same or lower monthly cost to me than an individual insurance plan because they subsidize the rest of the true premium, which is inflated because they must cover people who are not as healthy as I am and/or are hypochondriacs. If my employer did not have the tax incentive to provide health insurance (and were convinced that health benefits were a losing proposition when competing for talented employees anyway), then they could pay me more. Now, the savings would not appear in my pay check immediately, because, hey, it looks like free money to my employer. Eventually (within 6 months), other employers will use their extra money to compete for my services which will force my employer to dole out more to keep me (assuming that I am worth keeping, but that is another discussion). In the end, I would guess that I will recapture all of the cost of individual insurance and then some through a pay increase.

    On the other hand, it would be a losing proposition for those who have poor health and/or are hypochondriacs. On the gripping hand, they would be forced to be more judicious about using health services they may not need.

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