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Thursday, July 22, 2004

Bush's Assault on Employer-Provided Insurance


Paul Krugman wrote a great column last week critiquing Bush's health care plan, but there are a few points worth some additional comment, especially since Krugman's conservative critics don't seem to have understood Krugman's point.

The first part of Bush's plan is a modest tax credit, to help low- and middle-income families buy health insurance. Krugman offers a clear description of the second part:
The other main component of the Bush plan involves "health savings accounts." The prescription drug bill the Bush administration pushed through Congress last year had a number of provisions unrelated to Medicare. One of them allowed people who purchase insurance policies with high deductibles, generally at least $2,000 per family, to shelter income from taxes by setting up special accounts for medical expenses. This year, the administration proposed making the premiums linked to these accounts fully tax-deductible.


Personally, I think that health savings accounts (HSAs), combined with high-deductible insurance policies are a pretty good idea. Insurance for small losses is usually drastically over-priced, paying tax-free out-of-pocket dollars seems preferable to a HMO, there should be less paperwork, and consumers have incentives to economize if they're paying the full cost. (Yes, I know that a lot of people are likely to hate this kind of policy). But despite the fact that I'm sympathetic to HSAs, I still think that Bush's version of the HSA idea is a terrible one.

The main problem with Bush's health care plan is that it would undermine the present employment-based health-care system. Right now, employer-provided health benefits are tax-free. If employers stopped paying for health insurance and used the money to raise pay, workers would be much worse off, because they would have to use post-tax dollars to buy their own health insurance.

Individual health insurance is also much more expensive than group insurance because of adverse selection. Since many people go uninsured, especially the young and healthy, insurance companies are suspicious of their customers, assuming (correctly) that they are more sick than average. Hence, they jack up premiums, further pricing the healthy out of the market. And individual insurance provides much less risk-pooling, since insurance companies are free to screen on pre-existing conditions and the like. If they could do this perfectly, there'd be no insurance at all, just pre-paid health care.

So it's crucial that the government provides tax benefits to employer-paid health insurance, but not to individual-paid coverage. Without these tax incentives to get coverage through work, there would probably be little health insurance available at all. Health insurance would become like private disability insurance, where policies are priced at sky-high rates, and almost nobody buys them. Or like almost-nonexistent private unemployment insurance.

David Hogberg, writing in this week's American Specator, tries to rebut Paul Krugman's column, but entirely misses the point. He provides a welter of figures (mostly provided by insurance companies, but never mind) that allegedly show how wonderful HSAs are. As I said, this may well be true today, when HSAs don't come with much in the way of tax breaks. But if Bush passes his plan, and premiums for HSA-linked insurance are made tax deductible, we'll be seeing a lot more companies drop their health-insurance benefits, according to projections by MIT health-insurance guru Jonathan Gruber.

Bush's proposals, which provide tax credits and deductions only to privately purchased insurance, could really be disastrous. By moving us towards a world where the tax incentives to purchase insurance privately are just as great for employer-paid insurance, Bush threatens to undermine everybody's employee health insurance.

Why would Bush want risk all this for a plan that will only increase insurance coverage of the population from 85.3 to 85.9%? As I'll discuss in a later post, the main goal of Bush's health insurance plan doesn't actually seem to be providing medical care to the uninsured, instead it's to sneak though some more tax cuts for the rich.
 
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