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The Los Angeles Times has a three part series looking at the health insurance market in the U.S.
Tags: Cost, Health Insurance, Nongroup plans
What are the tax implications of John McCain’s health care proposal? The key components are that health insurance will no longer be tax deductible but individuals will receive a $5000 credit of purchasing health insurance. Let’s work out some simple math to see how this will impact the life of a typical American.
Example with Max, Rob and Rich
Currently, the deductibility of employer provided health insurance is highly regressive. Let’s look at 3 individuals. One is middle class and his name is Max; the other two are rich and their names are Rob and Rich. Middle class Max has a 25% tax rate, while Rob and Rich pay a 40% income tax rate. Rob has the same $12,000 health insurance package as Max, but Rich has a more generous $16,000 plan. Let’s see how this affects their tax bills.
| Max | Rob | Rich | |
| Tax Rate | 25% | 40% | 40% |
| Health Ins. Cost | $12,000 | $12,000 | $16,000 |
| Health ins. tax liability |
$3,000 | $4,800 | $6,400 |
| Tax liability if ins. tax-deductible |
$0 | $0 | $0 |
| Net taxes w/ $5000 credit | -$2,000 | -$200 | $1,400 |
The tax system as it currently stands is very regressive. Max, Rich and Robert pay the same $0 taxes on their health care benefit regardless of their income and regardless of the size of their health insurance benefit. If health insurance was taxed, then middle class Max will pay less taxes on his health insurance than rich Rob and rich Rich because Max has a lower marginal tax rate. On the other hand, individuals with more generous health insurance packages get a larger tax benefit when health insurance benefits are tax deductible. Even though Rob and Rich are in the same tax bracket, Rich saves more money than Rob when health insurance is tax deductible, since Rich has a more generous health insurance plan. Tax deductibility encourages people to buy more generous health insurance packages at the expense of the taxpayer.
The McCain plan.
Will the McCain plan lead to higher net taxes? In my example, Max and Rob save money under the McCain plan. Only Rich owes more taxes since he is in a higher tax bracket and has a more generous health insurance plan. Of course, health insurance costs will increase over time, so McCain may want to index his health insurance credit to inflation.
Individuals are also worried that if they pay for health insurance themselves, this is a pure transfer of cost. If I support McCain, will my health insurance costs go up by $12,000? or $7000? In reality, if employers stop paying for health insurance and transfer the burden to employees, in a competitive market employers will increase wages to compensate for the loss of the health insurance benefit. Most economic research has found that the cost incidence of employer-provided health insurance appears almost 100% through lower employee wages.
We do have to worry that as individuals start to pay for individual health insurance plans, the problems of adverse selection may worsen. Further, non-group plans are more expensive to administer than group plans. Thus, the shift in the type of plans individuals select may affect the cost, but the direct tax effect of the McCain plan will lead to a reduction or small increase in tax liability from health insurance benefits.
Effect on Employers
Some individual believe that the McCain plan would increase taxes for business. This is incorrect. If health insurance businesses were taxed, individuals would pay the tax. For businesses, health insurance still counts as a labor cost and would reduce their profit and thus tax liability. If individuals would receive a $12,000 health insurance package from work, currently they do not owe any taxes on this benefit. If individuals were taxed on this benefit, then an individual in a 25% tax bracket would owe $3000 in additional taxes. If you are in the 40% tax bracket, you will owe $4800. This means on net, the McCain plan would decrease your taxes by $2000 for the 25% tax bracket and $200 in the 40% tax bracket.
Also, even if the employer paid for health insurance for a group, each individual would be taxed according to the average cost of the health insurance plan per worker (likely weighted by whether it was a family or single plan).
Tags: Health Insurance, McCain, Presidential Candidates, Tax Credit
Health insurance require that all individuals buy health insurance. Most voters views on an individual mandate depend on how you frame the question. If you ask voters: “Should everyone buy health insurance?” Most people will say yes.
If you ask “Should the government compel all individuals to buy health insurance regardless of the cost?” Then the response is much less positive.
Michael Cannon of the Cato Institute is against individual health insurance mandates. Whether you are for or against them, Mr. Cannon make some valid points concerning the drawbacks of health insurance mandates in his “Perspectives on an Individual Mandate” article. Below are some of the highlights.
In an unregulated society, an insurance mandate does not make much sense. If we want to give health insurance to the poor, we should just give them more money through a more progressive tax system and allow them to choose for themselves what type of insurance to buy.
However, in the society we actually live in, the uninsured can use the emergency room as a source of free medical care. This imposes a significant cost on the American medical system. Cannon does note that “One-third of uncompensated care in the United States goes to patients who have insurance but don’t pay their share of the bill.” It could also be the case that individuals who have insurance do not want to wait 2 weeks to see their doctor and will still use the emergency department even if they have health insurance. Nevertheless, it is likely that emergency department utilization will decrease with an insurance mandate. Do the cost-savings from fewer emergency room visits outweigh the cost of restricting individual choice? That is the key issue with individual mandates.
Cannon also makes some other claims as to the drawbacks of an individuals mandates. However, many of these issue do not technically correspond to an insurance mandate; rather they are created when the government legislates a minimum insurance benefits package. For instance,
This is a major issue with a minimum insurance benefit package. However, Canon does not mention some of the benefits. First, with a minimum benefits package, it will be easier to decipher what health insurance benefits are included in your health insurance plan. This should reduce administrative costs from patients and insurers arguing over what is covered. Also, if a minimum benefits package is in place, it would be much easier for consumers to shop for the lowest cost, highest quality health plan.
Then there is the issue of the employer mandate. Cannon accurately demonstrates that the majority of the cost of an employer mandate will fall on small businesses.
“Not only do employer mandates take away the freedom to run your small business how you see fit, but they also put small business at a competitive disadvantage. The cost of administering health insurance is much higher for small business than it is for big business. In a world of employer mandates, big business would have a significant advantage.”
Most people would agree that businesses need to get out of the business of insuring individuals. The problem is that employers provide a decent pooling mechanism. In your workplace, individuals come together for reasons that are (generally) unrelated to health. Thus, employers have been able to offer more generous, less expensive health insurance than individuals could buy in the non-group market due to the benefits of this risk pooling.
So what is the right answer? It is important to realize that most health care proposals have significant pros and cons; weighing the costs and benefits of each proposal is imperative in order to create the best health care system possible.
The Star Ledger reports that “uninsured patients are less likely to visit the emergency department for non-urgent care than insured patients.” The conclusion is based on an article in this month’s edition of JAMA written by Newton, Keirns, Cunningham, Hayward, and Stanley (2008).
The authors examined 127 articles which studied adult medical and surgical care of uninsured patients in emergency settings. They conclude the following:
“Available data support the statement that care in the ED is more expensive than office-based care when appropriate, but this is true for all ED users, insured and uninsured. Available data do not support assumptions that uninsured patients are a primary cause of ED overcrowding, present with less acute conditions than insured patients, or seek ED care primarily for convenience.”
Generally, uninsured patients only visit the emergency room if there is an emergency. Why? The emergency room is expensive and uninsured individuals cannot afford to use the emergency department for simple primary care issues. On the other hand, working individuals with insurance use the emergency room because physician hours are usually during their working day and sometimes the only place to get after-hours care is the emergency room.
The latest edition of the Cavalcade of Risk is up at John Cogan’s Regulating Health Insurance. Mr. Cogan even claimed that I’m “everyone’s favorite graduate student.” Some of my favorite posts include:
Tags: CoR
Information technology has the possibility of greatly increasing the efficiency of health care. EMRs can reduce the cost of accessing patient information. New technologies can make medical devices more effective.
But is there a cost to increased medical technology? GigaOM wonders
“...will widespread diagnostics increase the burden on healthcare? Somewhere between 10 and 50 percent of autopsies reveal diseases other than the one that killed the patient. If consumers test themselves, then tell their doctors, the medical system could wind up treating 50 percent more diseases than it does today — even those that wouldn’t have killed the patient.”
Will treating diseases before they appear increase health care quality or just drive up costs? On the future will reveal the answer.
Tags: EMR, Health IT, Technology
The Wall Street Journal reports that China is aiming for Universal Health Care. The Chinese hope to cover 90% of the population within 2 years, and provide health coverage for all Chinese by 2020.
“This all stands in contrast to China’s current system, which provides little government funding to government hospitals and requires patients to pay heavy out-of-pocket expenses. The WSJ notes that out-of-pocket payments made up more than 60% of health spending in China at the end of the 1990s…The plan doesn’t address how the government would pay for its nationalization program if hospitals are restrained from earning more and tax collection mechanisms remain weak.”
Are you craving more detailed information about health care in China? The Lancet, Peking University Health Sciences Centre and the China Medical Board have conducted an in-depth study of health system reform in China. The series examines topics such as preventive care, public health identification of communicable diseases, health insurance, and patient cost sharing. The full collection of articles is available here or you can check out the a BBC News summary of The Lancet’s China series.
China is a country of great inequality. The International Herald Tribune reports that “While life expectancy in Shanghai is 78.1 years, that figure is 66.1 in Gansu, one of the poorest provinces.” Physicians are often poorly compensated and secure most of their income by over-prescribing lucrative pharmaceuticals to their patients. ”While the country was plagued by infectious diseases before 1990, chronic illnesses are now the main health problem and accounted for 74.1 percent of all deaths in 2005, up from 47.1 percent in 1973.”
Tags: China, Pharmaceuticals, Prevention, Reform, Systems
The New York Times has an revealing article on Henry Cisneros. Mr. Cisneros was the U.S. Secretary of Housing and Urban Development (HUD) under President Clinton. In an attempt to expand home ownership rates, especially among low-income households, Mr. Cisneros loosened mortgage restrictions. ” Families no longer had to prove they had five years of stable income; three years sufficed…lenders were allowed to hire their own appraisers rather than rely on a government-selected panel.”
The article portrays the fallout from HUD reforms under Cisneros. Lago Vista is a Cisneros development in San Antonio and was supposed to be a beacon of hope for low income households. Now, “scores of homes have been foreclosed, including one in five over the last six years on the community’s longest street, Sunbend Falls, according to property records.”
Conflicts of Interest
Mr. Cisneros later capitalized on his experience at HUD. “[H]e joined the boards of a major builder, KB Home, and the largest mortgage lender in the nation, Countrywide Financial — two companies that rode the housing boom, drawing criticism along the way for abusive business practices.” Later, Mr. Cisneros became a developer himself and built up the now impoverished Lago Vista development.
Government intervention towards the noble goal of increased home-ownership rates for the poor, has had the unintended consequence of exacerbating the housing crisis.
Tags: Housing Crisis, HUD, Mortgages, Unintended Consequences
In recent years, economists have examined the phenomenon of offshoring. Offshorable service jobs are characterized by a number of factors. Jensen and Kletzer note that offshorable jobs have little face-to-face customer contact and work processes that can be monitored via the internet. Thus, data entry is easily offshorable whereas barbershop services are not.
A paper by Alan Blinder reveals a troubling observation: economists are easily offshorable! The occupation of “Economist” had an offshoreablitily index of 89%. This ranks economists as the 37th most offshorable profession of the 291 occupations studied. A presentation by Lori Kletzer at the UC Labor Economics workshop claimed that economists are the 15th most offshorable profession of the 457.
Why are economists so offshorable? Economists write frequently, conduct data analysis and think a lot. All of these tasks can be done anywhere in the world (assuming you have a laptop and an internet connection). Looks like American economists aren’t indispensible after all.
Tags: Economics, Offshoring
What is AIG doing with the bailout money it has received from the federal government? The Wall Street Journal reports that AIG is “…using taxpayer money in its effort to soften new federal controls over the mortgage industry.”
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