Universal Health Care: Economics Easier Than the Politics

Here's a proposal for health care reform that provides increased coverage by eliminating the tax break for employer provided health insurance. While the economics may work, the same cannot be said about the politics:

Health Care for All, Just a (Big) Step Away, by Eduardo Porter, NY Times, Economic View: You may find it shameful that some 45 million Americans lack health insurance. Well, by reallocating money already devoted to health insurance, the government could go along way toward solving the problem. But you may not like the solution. Next year, the federal government expects to provide about $130 billion for Americans to buy health insurance. ... about 11 percent of all federal income tax revenue... Nonetheless, this financing remains under the political radar because it is provided indirectly - ... as a tax break that allows workers to receive health insurance coverage from their employers without having to pay income taxes on whatever it costs. ...

Although subsidizing health insurance may seem a ... positive contribution to the goal of universal coverage, it is among the most inefficient spending in the nation's fiscal arsenal. "If you had $150 billion to play with, you could come very close to universal coverage," said David Cutler, an economics professor at Harvard. ... According to President Bush's advisory panel on tax reform, about half of the tax break ... accrues to families making more than $75,000 a year. More than a quarter goes to families making over $100,000. These families would surely hate to lose the subsidy. ... On a typical family policy costing $11,500 a year, that is equivalent to some $4,000. ...

[T]he fiscal incentive isn't helping many of the people who need it most. ... In addition to going to the wrong people, the subsidy ... promotes wasteful medical spending, encouraging the wealthy to buy more insurance and to use more health services than they need... And it may bolster premiums across the board. ... As part of a series of proposals to rejigger the tax code, the president's tax panel ... suggested capping the total ... pretax dollars at an amount equal to the average health insurance premium ... some $11,500 for a family.

But if the objective is to expand health care coverage, a bolder option is available: focusing the bulk of the money on the bottom end of the income distribution. Added to what is already spent on Medicaid, this ... would be roughly enough to make health insurance free for people earning up to three times the poverty level... said Jonathan Gruber, an economics professor at the Massachusetts Institute of Technology... To make insurance universal, ... some mechanism would be needed to pool groups of people and to avoid leaving higher-risk people to face enormous insurance costs. ... And to make it universal, a mandate would be needed to make people buy it.

This isn't communism. The changes could happen under a public health care system ... But the new regime could be run privately as well... The government could give tightly focused tax credits so that lower-income people could buy health insurance on the market. And it could organize pools ... Regina E. Herzlinger, a professor of business administration at Harvard Business School, notes that the Swiss have such a system .... This, she said, gives the Swiss top-notch health services, universal health insurance and a medical bill that tops out at 10 percent of the nation's output, compared with 15 percent in the United States. ...

This health care revolution, however, is unlikely to catch on ... anytime soon. For starters, losing the tax break ... would be tremendously disruptive for the millions of Americans who get their insurance through their jobs. Perhaps most important, it would force higher-income families to buy health care without the tax break; that idea is probably as politically suicidal as abolishing the mortgage tax deduction. "I don't think anybody would dispute the economics," Mr. Gruber said. "I think the dispute would be over the politics."

Comments

[Tom M]

If all it takes is 150 billion to have broader coverage, it's not an insurmountable problem.

But transferring the tax credits from the rich to the poor, even if it's revenue neutral, ain't gonna happen.

[Bruce Webb]

You don't know whether to laugh or cry. First of all this would take a "heighten the contradictions" moment, this I think rather understates the politics/economics:

"For starters, losing the tax break ... would be tremendously disruptive for the millions of Americans who get their insurance through their jobs. Perhaps most important, it would force higher-income families to buy health care without the tax break; that idea is probably as politically suicidal as abolishing the mortgage tax deduction."

And this should be required reading: "The government could give tightly focused tax credits so that lower-income people could buy health insurance on the market. And it could organize pools " Dude, that was the Clinton Plan in a nutshell. And setting Harry and Louise aside, and giving a generous discount to the tremendous arrogance of Ira Magaziner (Clinton's Health Care Plan Czar), the plan was way too top-heavy to begin with.

Single Payer = Socialized Medicine = Big Government. Well sorry for the Randians out there, I'm down with all three terms. And transitioning to Single Payer would be a lot less disruptive than simply abolishing deductability and letting just about everyone go without insurance until the government was forced to step in. Can't we just avoid that middle term?

You can's spell 'market' without 'Mark' and I understand that professional economists prefer economic solutions, but in some cases you just have to grasp the nettle hard to avoid all of those scratches on the way to a market solution.

Supply side is voodoo economics, and big government is often the solution and not always the problem. Bush I, a classic Big Government guy, not only understood that but verbalized it, but ended up marginalized in his own White House.

Unleash our Inner FDR and push for Single Payer. "We have nothing to lose but fear itself". Big Government Liberals have been in a defensive crouch since 1983. Just about everything was conceded to Supply Siders back then and in totality they screwed the pooch. We gave Reagan/Bush I the keys and they drove the car into the deficit ditch. We gave Bush II the keys and he returned us to the deficit ditch. Time to take back the keys.

[anne]

"If all it takes is 150 billion to have broader coverage, it's not an insurmountable problem."

Well, sure, but the signal worry seems to be building the health care system of Iraq. I think there have already been about $225 billion in appropriations.

[ilsm]

Defense seeks to "spend" $2,300 billion over the period 2007 through 2011. That is $460B a year. UK spends around $35 billion per year. French, Germans, other EU a bit less than Brits.

How come they all have universal heath insurance or the equivalent and we have B-2 bombers?

[Bruce Webb]

"I don't think anybody would dispute the economics," Mr. Gruber said. "I think the dispute would be over the politics."

It is always about the politics, it always has been about the politics. None of this is being driven by what we can and cannot afford. That is just the surface chatter in this phase of an unending power struggle over the proper distribution of the gains from productivity.

One of my emphases in graduate school was early English medieval peasant economy and my last big paper was "Why kill the Lawyers" which tried to explain why the Peasants Revolt of 1381, which scholars on both sides have long explained as a struggle between peasant/worker and landlord, focused most of its violence on lawyers.

My argument was that between 1100 and about 1215 lawyers had introduced a totally new system of land law, all the while insisting they had changed nothing. The short version is that the lord owned the land, including the commons, and that he could evict peasants at will. This went against centuries of folk practice, and while you can maintain that the landlords ultimately won on ownership as a matter of settled law, you really can't blame the peasants from being pissed at having their age old rights wiped off the board by some lawyer in London.

In 1381 they tried to get even.

In the current battle over Social Security and Health Insurance the warriors of choice are Economists and the new system of economic law they are trying to establish is "Capital is a hero, labor is a zero". Well they may win, and I doubt that we economic peasants will be storming the Faculty Lounge at Cato with fire and pitchforks. But we can and will make it a little hot in there. Because Social Security and now Medicare are still the twin Third Rails of American Politics.

[Betsy L. Angert]

Dear Mark . . .

I thank you for keeping track of Typepad and congratulations for advancing thought in one, somewhat bureaucratic system. If only you, I, or we were able to effectuate change is a larger, less liberal system.

Your missive is the first I have read in well over a month. Normal life has languished in a whirlwind of transitions.

This reading is a sad one, though fascinating; it is almost inspiring. Knowing that it would take so few dollars to ensure universal health care is interesting. One could be optimistic.

However, reality is haunting, even daunting. What a paradox, we, in a democracy, have created. It is said in the United Sates, “all men are created equal.” No one in America is equal to another. In practice, the rich do get richer, and the poor, well, many just fade away. Illness and injury overtake them. If only we could consider the cost of change and make it. Sigh!

It is a pleasure to read your sharing again Mark.

Betsy L. Angert Be-Think

[cm]

ilsm: In a nutshell, "universal" German health insurance is largely financed on a percent-of-earned income (up to a cap) basis. Healthcare is only "free" for those on the unemployment or welfare rolls (the latter is heavily means tested).

[cm]

Another significant difference with the US is that normally the public insurance carriers cannot reject you, and have to insure you at the rate that applies to your income situation.

(There is one disqualifying disposition, which is prior membership in a private insurance, and your income is above the threshold allowing you to leave the public system. This is to limit adverse selection -- choosing lower private rates when young, and coming back to public coffers when pivate rates rise with age.)

[Mark Thoma]

cm - How did you find quality, etc. compared to here?

[ilsm]

cm,

I know there are no free lunches.

Except for paying rents to the makers of such fine reliable things as the B-2.

[cm]

Mark: Neither here nor there was I ever a heavy-duty user of healthcare, but I think quality is on par in all Western nations. In Germany I had less work to do in terms of following up with insurance and chasing down billing screw-ups. OTOH I did not get EOB's (explanation of benefits) there, and couldn't see what is going on behind the scenes. Here you are well advised to have a PhD in healthcare administration, and good phone menu navigation skills.

What is a tougher question to answer is accessibility to resource-limited services, e.g. advanced diagnostics. There is probably not enough equipment and qualified personnel, or investment in such, on both sides to send everybody to CT scans and interpret the results.

[cm]

Clarification: Here I have to deal with billing screw-ups as I see how the difference is billed to me directly, or I get a bill when somebody thinks they do not have my insurance information. In a system where healthcare plans are more carefree and uniform, and having good coverage is the norm to begin with, I would probably just not see wrong billings and "accidental" frauds such as double billing.

[cm]

Final iteration: Here in the US I have rarely heard people complain about the quality of the actual healthcare service, but a lot about administrational and billing problems, and outrageous overbilling. It appears to be a common thing that in the absence of insurance, you get a 3-6 times larger bill e.g. for hospital procedures like childbirths. And as with the people who I know this is always because the insurance info has been mishandled, you can actually compare and see this.

[Mark Thoma]

Thanks cm.