Unbiased Analysis of Today's Healthcare Issues

How to pay for health reform: Taxes

Written By: Jason Shafrin - Jul• 10•09

The New York Times is reporting that “to pay for a sweeping overhaul of the health care system, House Democrats will propose a surtax on individuals earning $280,000 and up and couples earning more than $350,000.”  Now, taxes in and of themselves need not be distortionary.  Let us assume that your employer takes $10,000 from your paycheck currently to pay for your health insurance.  If the government would no provide you with health insurance, you would receive $10,000 in extra wages from your employer and you pay a tax of $10,000 to the government for health insurance.  In this cases, taxes are not distortionary.

This scenario of course assumes that government and private health insurance are of equal value.  If private health insurance is of higher quality, this could result in a decrease in efficiency; if government health insurance is of higher quality, this could be an efficiency improvement.

However, taxes are charged according to health insurance demand or even in a lump sum fashion.  Instead, the rich will pay more in taxes than they will receive from government health insurance benefits and the poor will pay less in taxes than they will receive in health insurance benefits.  Further, since the proposed tax is only on those individuals earning $280,000 or more, the tax will almost certainly be distortionary in some manner.  Although this progressive tax will create some distortions, it could cure others.  For instance, government health insurance could help to reduce labor market inefficiencies caused by Job Lock and Job Stretch.

I wonder how many doctors will support health reform now?   A public plan will increase their revenues as more of their patients receive insurance, but a higher percentage of their profits will be taken by the government due to the proposed surtax.  As any economist knows, life is full of tradeoffs.

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One Comment

  1. anon says:

    “A public plan will increase their revenues as more of their patients receive insurance”

    Nonsense, I expect better from you. For this FP, my career has been marked by a constant race to the bottom among various third party payers, most recently abetted by Medicaid and Medicaid HMOs, to see who can get away with paying me less for services rendered. A public plan would reduce my reimbursement from vocational to avocational levels. I would continue to lose money on each visit, but would make it up in volume, right? Now insurance companies, they will make a killing servicing 50 million new clients, with some of that money going towards hiring the last remaining FPs chased out of practice for administrative tasks.

    “I wonder how many doctors will support health reform now?”

    I know I still do, but that is irrelevant to your post. “Reform” implies improved efficiency in matching the value of value-adding services to reimbursement; what you are discussing is entitlement expansion, an entirely different issue which basically means doing the same only moreso. The only “reform” I have heard of is the regulatory change in reimbursement from imaging to cognition recently announced that has the Cardiologists and Radiologists up in arms. (having your fees arbitrarily cut guys and gals? Welcome to the party!)

    A conservative 1/3 of my time is spent on value-adding activities that are both mandated and not reimbursable with the constant threatening enforcement drumbeat from CMS, DEA etc… in the back ground. True reform would address both these issues.

    The iceberg of the retiring baby boomers is so close the only way to provide a workforce to fill their wants is a polar reversal in the reimbursement relationship of procedures to cognition without onerous documentation requirements. I am not saying this would happen or that it is wise (actually wise left town with the MMA 2004) only that it the drastic measure that would “change the game” and provide the needed resources to care for that generation in the way they think they need.

    Raise my taxes to pay for that and I might not emmigrate to practice in Costa Rica at the age of 50……maybe.

    For those of you who bemoan the role of money in medicine, find an FP or Internist who takes private insurance and rest assured they are only practicing for the joy of it. See Dr Rich’s series on the demise of primary care in the Covert Rationing blog for the best review on the subject.

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