COLUMN RIGHT / MARTIN FELDSTEIN, KATHLEEN FELDSTEIN : Put a Lid on Subsidized Health Care : The Treasury would profit by billions if employer-provided insurance were taxed.

President-elect Bill Clinton has billed health-care reform as one of the top priorities for his first 100 days. Let’s hope that he doesn’t attempt wholesale revision of our medical care system in that short time frame. But there are things he can do right away to control costs in our health-care system, while preserving individual choice.

The United States spends more on health care as a percentage of income than any other country, yet 15% of our population is uninsured and ineligible for Medicare or Medicaid. That’s wrong, and we applaud Clinton’s goal of controlling costs while extending health insurance.

While too many Americans have no insurance coverage, ironically our tax system creates an incentive for most individuals to be overinsured. The current system subsidizes health insurance provided by employers by exempting health-insurance premiums from taxable income.

A good starting point for reform would be to limit the health-insurance subsidy. If premiums paid by employers were taxed like other income, the Treasury would collect $43 billion of additional income-tax revenue. An additional $30 billion would be collected in Social Security taxes if current health-insurance benefits were counted as taxable income.

Even if only some of these benefits were included in taxable income, it’s clear that such a change would enable President Clinton to extend eligibility for Medicaid benefits to the poor while reducing the federal deficit.

But raising federal revenue is not the only reason for making such a change. Rather, changing the tax treatment of health-insurance benefits would lead to better cost control and more fair treatment of taxpayers.

The primary reason that health care is so expensive in this country is that, for most people, insurance pays the major share of medical and hospital bills. People have no incentive to question the cost of care and no incentive to compare costs of different treatments at different hospitals. For the doctors’ part, there is no pressure from the patient to think about costs when ordering tests or recommending treatments.

Why has employer-paid health insurance developed as a standard business practice? Think about someone who is taxed in the 28% bracket. If her employer pays her an extra $100 in cash salary, she will take home less than $60 after deductions for federal, state and Social Security taxes. If instead the employer spends the $100 on health insurance for the employee, there are no taxes due. So in effect, she can buy $100 of health insurance coverage for $60 in net wages. It’s not surprising that most people do substitute employer-paid health-insurance premiums for a part of their salaries.

The higher your income, the lower the net cost of buying insurance. While someone in the 28% bracket can buy $100 of health insurance premiums for $60 in net wages, the same insurance would cost $73 for someone in the 15% bracket.

Those who gain the most from the current tax rules would fight hard to stop the government from treating all health benefits as taxable income. The politically practical way to cut back on this unfair subsidy would be to put a ceiling on the level of health-insurance premiums that can be excluded from taxable income. That kind of a ceiling already applies to employer-provided life insurance. Any excess over the ceiling would be counted as taxable income.

One possibility would be to establish the cost of a “standard insurance policy” and use that amount as the limit for excluding health-insurance premiums from taxable income.

Although Clinton did not address this tax issue in his campaign, our proposal is compatible with his promise to guarantee everyone a core health-benefits package provided through employers or a public program. That cost of that package could define the taxable-income exclusion limit. Indeed, without making that tax change, the Clinton proposal for mandatory coverage would only exacerbate the lack of cost controls in the current system.

Unlike many ideas for controlling health-care costs, this reform of the tax preference for health insurance would be easy to administer. It would have benefits that go far beyond the several-billion dollars of additional tax revenue that the federal government would collect. Most significant, this plan would introduce cost-consciousness into the choice of health insurance and medical treatment.