January 06, 2005
Tax Policy for Health Care
Burbling up from the Lowest Deep:
The Lowest Deep: A Last Thought on Taxes and Health Insurance: Good tax policy for health insurance is hard to design because policy makers face conflicting goals of increasing health insurance coverage rates while reducing the generosity of the health insurance individuals receive. The current tax preference for health insurance ensures that most employees are offered coverage, but also generates incentives for employees to choose "too much" insurance. [By "too much" I mean what Hubbard et al. mean: "the incentive to purchase care through low-deductible, low-copayment insurance instead of out-of-pocket, which in turn leads to cost-unconsciousness and wasteful medical practices."] Choosing a "bare bones" plan (high co-insurance, high deductible) that costs $2,000 a year saves an employee $1,035 in taxes.* This is why we have employer provided coverage. But getting the more generous plan for $2,000 more saves an additional $1,035 in taxes. This is why no one gets just the "bare bones" plan.
While I will always appreciate Glenn Hubbard's efforts to leave no playing field un-leveled, I don't believe that expanding unlimited deductibility for medical expenses is a plausible way to reduce medical spending. [My other criticism of the his and his co-authors' plan stems from the fact that tinkering with the exclusion for health insurance so that more people pay out of pocket can have nasty implications for progressivity and for coverage rates.] My feeling is that the tax code should retain strong incentives for employers to offer and for employees to take-up high deductible, high co-insurance "catastrophic" coverage plans, but should remove marginal incentives for additional coverage beyond that threshold. For example, provide a tax break or tax credit for the first $3,000 of insurance benefits but tax benefits above $3,000 as regular income. [Adjusting, of course, for single versus family coverage etc.] How this is implemented, as a credit (as Samwick suggests) or an exemption/deduction as in the current tax system, seems less essential than making sure the structure of incentives is right.
I'm actually surprised that I couldn't find more good research on this subject. Gruber does a good job hammering out the issues related to coverage and the costs and benefits related to increasing coverage through various tax provisions. But he's clearly not interested in the separate issue of how to structure incentives to minimize wasteful health spending. If there's stuff I'm missing let me know.
Posted by DeLong at January 6, 2005 03:41 PM
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MANY thanks for bringing his blog to our attention. I just left "Adam" a comment to his Social Security post (dated yesterday) as it addresses an issue that I have yet to see a good discussion - at least in BlogLand. This is a blog that I'll follow closely.
Posted by: pgl at January 6, 2005 04:19 PM
Just a question: Can anyone tell me if they have met a healthy person who visits the doctor too often because they are not properly incentivized to NOT go to the doctor too often.
Follow up, if you please: Can anyone tell if they know someone who is chronically ill who visits the doctor too often?
One more: Say I've got a brain tumor. How is shopping for the medical cure commodity at the right effing price different from shopping for my next effing wide-screen T.V.? And, should I be incentivized to shop long enough for the effing medical cure long enough that the tumor metastisizes?
Or should I buy 2 wide-screen T.V.s instead of seeking the medical cure because it's a more productive way of stimulating the effing Republican idea of an economy?
Posted by: John Thullen at January 6, 2005 04:50 PM
I realize that its all you got to work with, but does anybody besides economists really believe that human behavior is moved by taxes and interest rates?
People go to the doctor because they feel sick. Often they are forced to the doctor because their mistrustful employer insists on a doctor's excuse if you miss more than 3 days work. People go to the doctor because they are driven by fearmongering news articles that they have checkups, x-rays and probes. People go to the doctor because they are seduced by beautiful hopeful images in ads scientifically designed to move them to activity by bypassing rational thought.
And they go to the doctor because they are sick from breathing poisoned air that's too expensive to clean up and injured by workplace accidents that are cheaper to settle on than to prevent. They get sick because their kids catch the flu at school from other kids who are sent to school sick by parents who have to go to work.
They are sick from tobaco which we are too cowardly to eradicate, sugar in Coca Cola which is subsidized, and alcohol that the politicians love to drink.
But by all means, tinker with a deduction here and an incentive there if it makes you happy.
Posted by: pragmatic_realist at January 6, 2005 05:07 PM
The contribution of economists to the debate about health care financing policy has been close to worthless. (There have been a few exceptions.)
Anything short of universal coverage under common benefits (debated and determined by the peoples representatives [as if we really had any]) is irrational in a modern society. While far from a perfectly efficient solution, it is the only practical solution for a civil, humane society. Certainly the very wealthy will always be able to purchase something in excess of what is agreed to be sufficient common benefits, but who cares. Perhaps some economists will be helpful in determining benefit formulas, payment mechanisms, etc. but I doubt it. I know too many very bright thoughtful people on the ground with medical practices, hospitals and insurance companies who are much better informed.
Posted by: Sam Taylor at January 6, 2005 05:59 PM
Sam Taylor offered, "Anything short of universal coverage under common benefits (debated and determined by the peoples representatives [as if we really had any]) is irrational in a modern society."
I don't know Sam. Have you ever actually thought about health care and its costs, considering the concept of price elasticity (as prices drop, demand goes up)
Andy Kessler makes a hell of an argument in Running Money that when this happens you have, his words, a waterfall in demand. This happens over and over again in health care.
Example: knee surgery Not so long ago no one had knee surgery--you just limped. It was expensive (50K), dangerous (lots of infections), time consuming (lots of rehab), etc. Then the orthoscope was developed. Prices dropped by a factor of 25. What happened--demand went through the roof and so did the $$$ going into health care.
This has happened over and over and is going to get worse. Look at the stuff in the pipe line over the next 10/25 years.
My favorite: new teeth from stem cells. We are almost there. Look at the demand for that product/service, world wide--6 billion customers and growing.
To me, it is irrational to suggest that "health insurance" pay for these kinds of products and services. We are going to have to use free markets to allocate scare resources. Some people will choose a new car and some people new teeth. This doesn't cause me to loose sleep at night.
The only rational approach to health care is to eliminate both health insurance and employer provided health insurance. The government should provide as a single payor catastrophic coverage for risks that can strike anyone--cancers, heart, certain mental illnesses that are really physical illnesses, certain infections, perhaps aids--it will be a long list but ultimately a limited list.
Beyond that, only the market will be able to allocate limited dollars between the unlimited demands for teeth, cartilage, bone, plastic surgery, hair, skin---I could go on, and on, and on.
Posted by: Moe Levine at January 6, 2005 07:10 PM
Robotize medical care.
The U.S. economy needs stimulation in a non energy intensive industry. Rather than channel federal dollars into the stock market through a false SS reform, channel federal dollars into a world robot race to cure all economic ills along the lines of the "space race" in the 50's and 60's.
Japan and Korea are rapidly developing new robot models.
Though China and India have no need currently, soon aging populations throughout the world will need assistance.
Forget Mars, lets create a robot race.
Posted by: Winslow R. at January 6, 2005 07:21 PM
Moe, I hate to intrude on your religious faith in the markets with some facts, but the new teeth thing is a non-starter. Why? Dental insurance is a joke. It wouldn't cover anything like that any more than it covers anything beyond the basics now. What I find amusing about the preaching of free marketers is that they never question the cost to the overall economy of what they'd like to do. How efficient a worker is that person who gets along with the limp and the pain? In a world where the skilled jobs are ones that place demands on the mind and require focused concentration what is the cost of the distraction caused by that pain? You speak of catastrophic illness insurance and ignore how much more catastrophic illnesses would be because people would avoid the doctor because of the cost of that visit. What if we try something unique and attempt to come up with better ways to deliver health care? M(edical)-Prizes, anyone?
You fall into the trap that's all too common to modern conservatives, which is "All hail Free Market, the omniscient and omnipotent One!!".
Posted by: Jim S at January 6, 2005 08:54 PM
Don't Moe Levine and Sam Taylor agree? It is only that Sam mentions in passing the need to debate the extend of universal coverage, and Moe gives examples of things that should not be covered.
This way or another, we need rationing and price controls. A sick person all to often cannot do comparative shopping, so normal market principles do no apply. HMO gave the rationing and price controls for a while, now, under a lot of pressure, they largely relented and we have
double digit medical inflation.
Posted by: piotr at January 6, 2005 09:03 PM
Moe, so before knee surgery one just limped?
Before knee surgery perhaps one was in constant pain. Perhaps one became deeply depressed because of it. Perhaps it made it very difficult to sleep and/or exercise and one's general health deteriorated as a result.
Sure, people lived with it when they had to. Personally I would prefer that no one have to anymore.
Posted by: Deborah at January 6, 2005 09:21 PM
Let me suggest that we are looking at health care pricing and funding backward.
I think the reason we have an explosion in health care costs is not because people are profligate in getting sick or entirely because of technological advances, but rather that the system we have provides no financial incentives to keep people healthy. The existing financial incentives, rather, reward care for a large number of chronically ill people. Furthermore, it rewards ever more expensive care and expanding the number of the chronically ill. And that is exactly what we have.
Posted by: Randolph Fritz at January 7, 2005 12:42 AM
What 95% of the public discussion about healthcare insurance reform is missing is a candid assessment of why healthcare spending is only poorly associated with improving or protecting health status. This is like arguing massively about how to make skyrocketing auto insurance costs more equitably distributed in Massachusetts without addessing whether, by gum, there are many more accidents than the national average and that, indeed, this accident rate be can managed downward.
Insurance -- healthcare or auto -- is typically discussed without regard to the underlying cost drivers. This is bizarre.
In workers compensation, where costs vary hugely among states, there is thank god some level of inquiry about the cost drivers, so there is some productive public public debate.
With regard to healthcare costs research by Wennberg and others suggests that only 20% of healthcare costs today meet these two criteria: there is concensus among clinicians as to how to treat, and the patients have a good understanding of the problems and in particular their role, which is often critical. the problem conditions -- where health status and helathcare costs are way too much poorly managed -- are chronic conditions, in which -- in contrast to a comment by another, there is massive underteatment, massive overtreatment, and very inconsistent health outcomes.
Economists do not read healthcare research on treatment patterns. They should. it owuld remarkably improve the public debate, to have more reference to the underlying dirvers of costs and health status.
Posted by: Peter R at January 7, 2005 04:32 AM
Like so many others, my employer's health plan has been steadily increasing deductibles and copays the past few years.
Last December my son was complaining of a 'bad headache' and he said it hurt to look down. Because of the fear of meningitis, we took him to the pediatric emergency room, where they administered a spinal tap.
Including the deductible our bill was over $600, which is a lot of money to us, a middle class, single income family.
I imagine that this kind of bill changes the outlook of many parents on 'bad headaches' that might be meningitis.
I think that lots of kids are going to die if we go much further down this road.
Posted by: wetzel at January 7, 2005 06:21 AM
"Just a question: Can anyone tell me if they have met a healthy person who visits the doctor too often because they are not properly incentivized to NOT go to the doctor too often.
"Follow up, if you please: Can anyone tell if they know someone who is chronically ill who visits the doctor too often?"
Thank you, John Thullen.
Posted by: anne at January 7, 2005 06:29 AM
"Just a question: Can anyone tell me if they have met a healthy person who visits the doctor too often because they are not properly incentivized to NOT go to the doctor too often."
I'd consider myself to be such a person. I'm a healthier-than-average 50 year old man. If I had to pay the $75 or so for each doctor visit out of my own pocket, I'd be a lot more selective about the minor aches and pains of middle age that I see my doctor about. But Blue Cross is picking up most of the tab, so...
Posted by: RT at January 7, 2005 06:47 AM
The responses to my post make it clear that one thing that cannot happen in America is a rational discussion about health care.
I support univeral, government as single payor coverage, for risk (hardly different from John Kerry) and I am called a conservative.
Posted by: Moe Levine at January 7, 2005 08:34 AM
You know how they say, "If you have chest pain, go to the ER because every minute counts"?
What they forget to mention is, many insurance plans will now charge you the full freight for that ER visit ($10,000+ with the full round of cardiac tests) if it turns out you're NOT having a heart attack. Because then it wasn't really an emergency.
So tell me, punk - do you feel lucky? Are you SURE you're having a heart attack?
It's kept me out of the ER, and I'll bet I'm not the only one.
Posted by: Susie from Philly at January 7, 2005 08:42 AM
Peter R wrote, "What 95% of the public discussion about healthcare insurance reform is missing is a candid assessment of why healthcare spending is only poorly associated with improving or protecting health status."
I've commented here and there on weblogs how the entire debate is fixated on the issue of insurance, leaving the entire question of whether there are inefficiencies in the actual delivery of care unaddressed. Unfortunately, no one seems to be interested in this question. The vision seems to be "we'll fix insurance, provide more incentives for consumers to look for the right care, meanwhile leaving doctors and patients to sort the rest out."
This is just bizarre. There are enormous information hurdles in health care. Neither patients *nor* many doctors are fully equipped to make appropriate "Bayesian" style decision theoretic judgements. Then you've got doctors doing things which from a public health perspective are just abominable. (Primary example: full-body radiological scans, not based on any other clinical signs, which often result in enormous false-positive rates.)
My own opinion is that there are two obstacles to making health more efficient: patients won't like rationing, and doctors won't like the concommitant loss of autonomy. In a rational system where care is delivered using evidence-based medicine and Bayesian style cost-benefit analysis, patients would be told that certain tests and procedures just aren't worth it from a health outcomes perspective, and likewise doctors are going to be told not to go down certain procedural pathways. I don't think either will like that.
Posted by: liberal at January 7, 2005 02:35 PM