Bush Health Care Plans

President Bush trying not to be out compassioned by the Left has floated the following ideas,

Health and Human Services Secretary Mike Leavitt said Bush wants to spend more money to enroll children in government-funded health programs, give tax credits to individuals and companies that purchase insurance and build more community health centers.–link

I find these kinds of policies/programs highly annoying. All these things do is add new regulations, more bureaucrats, and in the end gets very little if nothing done. These kinds of policies are found all over the government with the poor, housing etc. Why not just use a voucher that decreases as income increases. The voucher would allow each family to shop for the best deal, and we wouldn’t have to bother with nearly as many regulations and far fewer bureaucrats.

And the tax credits will have an indeterminate effect on the number of people who have insurance. Further, research indicates that tax credits are a poor way to induce people to purchase insurance.

To reach this conclusion, the authors examine what happened to employee take-up decisions when tax subsidies were given to federal workers in the Federal Employee Health Benefits Program (FEHBP). Roughly one-half of all employees in the United States pay their insurance premiums with pre-tax dollars. But until 1994, virtually all of the federal employees insured through FEHBP paid their insurance premiums on a post-tax basis. Then, in 1994, employees of the postal service, representing roughly one-third of all federal workers, were given the right to pay their insurance premiums on a pre-tax basis. The remaining federal employees were given this right in October 2000. This saved them tax dollars, significantly reducing the cost of taking up insurance coverage; for a typical worker in Washington, DC, the cost of taking up health insurance fell by about $1000.

These changes provide Gruber and Washington with an excellent laboratory for learning about the impact of a sizeable reduction in the after-tax price of FEHBP insurance on the take-up of that insurance by federal employees. But they find that this sizeable reduction had essentially no impact on the rate of take-up of insurance by federal employees. Their central estimates suggest that for each 10 percent that health insurance premiums were tax subsidized, take-up went up by only 0.2 percent, a very small reaction. These results confirm other papers’ findings that employees are not very sensitive to health insurance contribution rates in their decision to take up health insurance coverage.

Moreover, Gruber and Washington find that subsidizing insurance coverage caused federal employees to choose more expensive health insurance plans, when they did choose coverage. This further raised the cost to the government of this intervention.

The authors conclude that “subsidizing employee premiums is unlikely to be a cost-effective avenue for increasing insurance coverage.” They estimate that these new tax subsidies cost the government roughly $700 million in revenues. And they have prompted only 11,000 to 20,000 new persons — a tiny percentage of the total number of federal employees — to take up the insurance coverage. So the revenue cost for each newly insured person was $31,000 to $83,000.

So we get a mish-mash of policies that will probably do nothing. A fairly simple voucher would probably be far more effective, but of course we can’t have something that might actually work. And avoucher would itself come with its own problems–e.g., it would have to be paid for with either higher taxes now, or deficits now and higher taxes in the future, and this would mean reduced incomes that would probably have the effect of reducing either the quality of insurance coverage for some and/or opting for no insurance. Still, it would seem to be the most straight forward manner of addressing the issue.

Hopefully the Post article is correct and the Bush Administration is just throwing these policies out there to look good, but not much will really happen.

FILED UNDER: Economics and Business, Health, , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.


  1. ken says:

    James, the study you cite is worthless unless it takes into account the number one reason people chose to opt out of group health insurance: they are covered already by a spouses’ plan which they judge to be either cheaper or better or both.

    Federal employess who did not take FEHBP with after tax dollars had no more reason to take it with pre-tax dollars since the reason they opted out in the first place was so they did not pay for essentially the same doctors visits or medical care twice.

    The doctor gets the same 120 dollars per office visit whether it comes from the husbands insurer or from the wifes insurer. So both of them paying for health insurance coverage, subsidized or not, just doesn’t make sense.

  2. ken says:

    Steve, my apologies for confusing you with James in my post above.

  3. Just Me says:

    I like the idea of vouchers.

    I remember dicussing this with somebody, and saying that half the reason government programs cost so much, is because of the built in bureaucracy that comes with the programs.

    I figure a cheaper method would be for the government to just contract with existing insurer’s, but doing the voucher thing, and letting people choose their insurer is probably even better, since it would encourage competition in the private insurance industry, and eliminate most of the bureacracy.

  4. Steve says:


    The study is not worthless even with the issue of spouses employers providing coverage. That would lower the uptake rate, but that doesn’t mean this is worthless in that it at least provides an upper bound. Having an upper bound is better than being completely ignorant.

  5. Dave Schuler says:

    There’s no way to stem the skyrocketing costs of health care by subsidizing its consumption. In fact I think I’d argue that subsidizing health care causes a positive feedback situation that will cause costs to rise farther and faster.

    That having been said there’s also no way to stem the skyrocketing costs of health care solely by concentrating on reducing demand, either. Reduce the number of procedures performed and, in order to maintain revenue levels, health care providers will raise their prices for the procedures that are still performed.

    You’ve got to address both the supply and the demand sides of the equation. And such a complete overhaul of the system will require a crisis. Experts are saying that such a crisis is three to five years away.