PERSPECTIVE ON HEALTH CARE : Who Will Take ‘Tough Medicine’? : Limiting tax exclusions for health insurance will penalize consumers without affecting the source of soaring costs.
Economists and pundits like to say that we need tough medicine for tough problems. That’s a fair premise. But it can confuse toughness with effectiveness.
The latest tough medicine is taxation of employees’ health benefits. After President-elect Clinton told the Wall Street Journal that he was “inclined to agree” with advocates of limiting that tax preference, he was praised by the New York Times for endorsing the “political dynamite” that “could mean successful health-care reform.”
It’s dynamite because any limit on the preference raises the effective price of insurance. But the Progressive Policy Institute, the economists who designed the managed competition idea and others have rushed to declare taxing benefits the measure of a serious plan. Even the Congressional Budget Office is reported to have prepared a draft calling a tax on some benefits a “critical element” of health-care reform.
Unfortunately, they are advocating medicine for the wrong symptom. The argument is that because employees don’t pay taxes on the income that pays for insurance, they buy more extensive coverage than they would otherwise, and therefore consume more services. Eliminating the tax benefit would give consumers, in Stanford economist Alain Enthoven’s words, “the incentive necessary to drive them to lower-cost insurance alternatives.”
Persuading consumers to worry about health insurance costs is not exactly a problem right now. Employers are desperately slashing benefits to reduce costs, and employees are frightened by rising co-payments, contributions to premiums and risks of losing insurance altogether. Consumers know that health insurance is expensive. They are already being driven to lower-cost insurance.
Raising the price of insurance further is tough medicine indeed for the disease of higher prices. It would be nice if lower-cost insurance were more efficient, but taxing the benefit does nothing to ensure that. It just raises the price.
Even so, the advocates misstate the savings. Martin and Kathleen Feldstein, for instance, wrote that revenues would be $73 billion higher if there were no tax exclusion. But they and the other advocates only propose limiting the tax break to the cost of a basic and decent benefit package. Since everyone would agree that coverage of most expenses is necessary, taxing only the “excess” reduces savings dramatically. The Congressional Budget Office in 1992 estimated that its own version of such a proposal would save a more modest $16 billion in the next fiscal year. That is not small change, but it’s not enough to pay for covering the uninsured, or to make much difference in the incentives driving an $800 billion health-care industry.
Proposals to tax benefits should be part of the policy debate. We, like every other developed country, must decide what constitutes a decent level of health care that we wish to guarantee to all our citizens. Like the others, we will have younger, healthier and better-off citizens subsidizing the rest (we already subsidize the elderly substantially). So we must choose what medical costs should be socially shared and what marginal care can be left to the market and therefore be rationed by income. Having drawn the line, we will want a subsidy structure that fits that decision. Since tax preferences are worth more to people with higher incomes and the coverage is best afforded by more successful companies, our current system gives larger subsidies to the more fortunate. That makes little sense.
But whether we tax benefits has little to do with cost control. That depends more on controlling providers (who have more influence than patients on medical demand), limiting new technology and eliminating the administrative waste created by our system of insurance competition. Taxing benefits is a tough issue, but it is not the “tough medicine” needed to manage our health care costs.
Why, then, is it getting so much publicity? Partly because policy types fight the last battle. At one time, companies did not pay so much attention to insurance costs, but that time is past. More important, insurers emphasize the tax preference for health insurance to imply that misguided customers are the problem. If we can reduce costs simply by making them more painful, then there is no need to do things like move toward a single-payer system that could reduce administrative costs by as much as $50 billion. The hidden issue is not what “tough medicine” will work, but who will have to take it. The insurers want it to be you, not them.
