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Wednesday, September 15, 2004

AEI's "Independent" Analysis of Bush Health Plan

The American Enterprise Institute's Joseph Antos has come out with a new analysis comparing the Kerry and Bush Health plans. One claim that caught my eye was that the Bush plan would newly insure 6.7 million people at a 10-year cost of $39.4 billion. That's $5,881 per person over 10 years, meaning less than $588 in the first year, since costs presumably rise over time. That seems pretty implausible. It's also quite a bit different than the Kaiser foundation's estimate, prepared by MIT health economics guru Jonathan Gruber, that 1.3 million people will gain coverage under the Bush plan.

In other words, Gruber estimates that Bush's plan amounts to a drop in the bucket compared to the 45 million uninsured, and the AEI's estimate of 6.7 million isn't that big either. As even the AEI admits, Kerry would cover 27 million new people.

The authors of the AEI study don't offer any analysis justifying its (implausible) figure, but in an earlier study, Antos cites the Bush administration's Council of Economic Advisors as the source. The CEA's discussion pretty much amounts to: let's just assume 15% of the uninsured will gain coverage.
Several different studies have examined the likely effects of the health insurance credit on insurance purchases. Pauly, et al. (2001) find that a $1000 refundable tax credit would likely increase the participation rate among the uninsured by 21 to 85 percent. Gruber (2000) finds smaller effects, closer to 10 percent, but analyzes plans with premiums that are much more expensive than those described above. Other studies focus on average premiums, not the best offers available. Even with the most conservative assumptions, the health insurance credit would substantially increase participation in health insurance markets. If even 15 percent of those uninsured for a full year (or 10 percent of those uninsured for part of a year or more) take advantage of the health insurance credit, 6 million people would be newly covered.
That's the CEA's entire discussion of the calculations.

The difference between the CEA/AEI figures and the Kaiser/Gruber ones turns out to rest not so much on differing assumptions, as on the fact that the CEA/AEI calculations are incomplete. The CEA and AEI look only at the benefits of the Bush plan (uninsured people gaining insurance) and ignore the costs (employers dropping health insurance coverage).

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The Bush plan has two components. The first is aimed at low-income households: a tax credit of up to $1000 per person or $3000 per family, phased out as income rises. The second is mainly valuable to high-income people: making premiums for privately purchased health insurance tax deductible. The catch is that the private health insurance has to be a high deductible plan combined with a health savings account (HSA). An HSA is essentially a super-IRA, with still more tax breaks that are most valuable to the rich.

The CEA analysis addresses only the tax credit for low-income households. Gruber estimates that the credit will be used by 3.1 million previously uninsured people, but that this will be offset by 1.3 million people whose employers drop health coverage. The CEA acknowledges that Guber may be right, that some businesses might drop coverage:
Employers may choose not to offer health insurance at all if many of their employees can take advantage of the credit and purchase insurance individually, and receive taxable wages in lieu of employer health insurance contributions.
But the CEA argues that the credit only affects low-paid workers, many of whom don't have health coverage to begin with, adding, "Furthermore, employers make the decision to offer health insurance based on all of their employees, so they are unlikely to stop offering insurance simply because a minority of their employees become eligible for the health insurance credit."

So the CEA argues that no employers will drop coverage (that's what they assume in their calculations). But the CEA's argument only makes sense because they're limiting their analysis to the low-income tax credit! They ignore the other piece of Bush's plan, the tax deduction, which is aimed at highly-paid workers!

So employers can drop health coverage, offering their workers higher wages instead, knowing that the Bush plan will give tax breaks to both low and high paid workers. Some workers, those in the middle perhaps, will inevitably be left out in the cold when businesses stop offering insurance. Gruber looks at both pieces of the Bush proposal, not just the one benefiting low-income people. He finds that 3.9 million uninsured people will buy private coverage with the tax breaks, but 2.6 million will lose employer based coverage, for a net gain of 1.3 million newly insured.

If anything, my guess is that Gruber is overly optimistic (as I've argued before). That's wintry Mark Scmitt's guess too. Bush's plan radically changes a system that is currently strongly biased towards employer-based health coverage. It's radical enough that the effects are hard to predict and could be big; Bush's plan could totally disrupt the health insurance market. At the very least, It's pretty clear that the number of people losing insurance because of the Bush plan ain't going to be zero.


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