Bush’s Health Care Plan

Greg Mankiw and Arnold Kling discuss Bush’s health care proposal.

Bush’s health-care proposal would use tax breaks to make it easier for people who do not have employer-provided health insurance to buy coverage on their own. The tax incentives would be similar to deductions used by homeowners for the interest on their mortgages, Bush said.

But the program is intended to have no effect on government revenues because the cost of the tax breaks would be offset by changing the way health insurance is treated in the tax code, according to a senior administration official who described the proposal to reporters.

The current health system relies primarily on employers to provide health-care coverage as a fringe benefit. Employees are not taxed on the benefits but the Bush plan would set a cap on the amount of coverage that could be offered tax-free.

Anything above that would be taxed as income, the administration official on condition of anonymity.

When I first heard that Bush was going to be presenting a health care proposal during the State of the Union I was dreading that it woud be some sort of ginormous give away like the Medicare Prescription Drug Balck Hole. However, this is actually pretty good in that it looks at health care as an actual part of an employees compensation package and not some sort of freebie/obligation from/by employers.

The big question though is will it generate bi-partisan support? This is a test for many on the Left side of the political spectrum, IMO. Are they serious about addressing some of the problems with health care or are they going to become completely unhinged with “gotcha-politics”? After all, who is most likely to benefit from the currently tax-exempt statust of health care? Those who have “gold plated” health care packages, to use Arnold Kling’s term. And who is more likely to have such packages? Certainly not the insured poor, the uninsured poor, etc. That is, those at the upper ends of the income distribution.

My guess though is that the Left will fail on this one. Kevin Drum thinks this is puny, why? Who knows, probably because it isn’t “free” health care for everybody. The thing is that, the health care tax deduction for those who don’t have employer provided health care will work very much like the mortgage interest deduction. Thus, people who are currently deciding not to purchase health care may well decide to purchase it. Will it mean 100% coverage? No. Will it increase the percentage of people with coverage? Yes. Will it lead to more spending? Well…hopefully not. With Bush you never know, but this is supposed to be revenue neutral.

Further, the tax on those health care policies that are over the cap would mean that people with policies that cover things that shouldn’t really be covered would become more expensive. This could reduce health care spending on the under 65 crowd. What does this mean with an actual example? How about a health care policy that provides for child birth. Why is that part of any insurance policy? Insurance policies are supposed to be about protecting us from “the bad state”. Car insurance works that way. Your insurance doesn’t cover oil changes, tune ups, and new tires. What it covers are un-anticipated bad outcomes such as a collision. Having a baby isn’t usually thought in the same terms as a car accident. Arnold Kling calls these kinds of policies health insulation.

The health coverage most Americans have is what I call “insulation,” not insurance. Rather than insuring them against risk, most families’ health plans insulate them from paying for most health care bills, large and small.

Having child birth covered under a health insurance plan is basically a subsidy to have children. It spreads the cost of having children from those making the decision to have a child to those who decide not too. In short, child bearing becomes a kind of fiduciary externality. That is, another couple’s decision to have a child has an impact on a third party’s income. After all, employers are concerned about total compensation. When health insurance costs go up, employers are going to want to offset that with less of an increase in wages. Here is how Arnold Kling puts it,

Real insurance would pay for treatments that are unavoidable, prohibitively expensive, or for illnesses that occur relatively rarely. Instead, insulation reimburses even relatively low-cost services, such as a test for strep throat or a new pair of eyeglasses. Insulation pays for treatment even if it is commonplace or discretionary.

Part of the problem with health care is that we have to get away from the idea that health care/insurance is insulation, and instead return to the idea of it being insurance. Would it solve all of the problems? No, but it would be a step in the right direction. Bush’s policy, if this is indeed how it is to work, could be the first movement in that direction.

Update: Mark Thoma over at Economist’s View provides us with a sizeable chunk of Paul Krugman’s take on Bush’s plan. There is more discussion below the fold.

What is amazing is how much of a political hack Krugman has become.

Mr. Bush is also proposing a tax increase … on workers who, he thinks, have too much health insurance. The tax code, he said, “unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need.”

Again, wow. No economic analysis I’m aware of says that when Peter chooses a good health plan, he raises Paul’s premiums. And look at the condescension. Will all those who think they have “gold plated” health coverage please raise their hands?


What’s driving all this is the theory, popular in conservative circles but utterly at odds with the evidence, that the big problem … is that people have too much insurance — that there would be large cost savings if people were forced to pay more of their medical expenses out of pocket. …

Really? How about we turn to Jason Furman, an economist and frequent advisor to Democratic candidates.

if your employer pays $1,000 in premiums to your insurance company, that money is effectively tax deductible to you. But if your employer raises your salary by $1,000 and you use the extra money to pay for medical bills, you generally will not get a tax deduction. As a result, many people end up with more-generous health insurance plans than they would otherwise choose to have. These plans have lower deductibles, lower co-payments, and lower co-insurance and are often focused around providing first-dollar coverage for routine medical expenses, rather than genuine insurance.

Why this Jason Furman must be nothing more than some sort of conservative pig-dog…if we believe Paul Krugman. In reality, Jason Furman was an economic advisor to President Clinton, he was the economic director for the Kerry-Edwards campaign and a senior fellow at the Center on Budget and Policy Priorities.

As to whether or not Mark Thoma accepts Krugman’s nonsense is unclear since he merely posted chunks of Krugman’s screed without comment.

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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. jeff b says:

    This is roughly the worst idea ever. The end effect will simply be to funnel a huge amount of taxpayer money to these “insurance” companies who aren’t actually insurers. A better idea would be to fund universal free health care where it makes sense for public health and worker productivity reasons (e.g. child immunization, setting broken bones, treating other injuries, basic dental work, vision, etc.) Then we could at least expect an economic benefit resulting from a healthy population.

  2. Dave Schuler says:

    I’m a little surprised at the vehemence with which universal coverage is being pressed these days. Note that universal coverage, single payer, and a British National Health-style system are three different things.

    The Massachusetts and California plans seem to be mostly targetting universal coverage and it will be interesting to see how they perform. I suspect they will have the perverse effect of increasing costs.

    That’s almost inevitable: if you have more people consuming more services without an expansion of the supply of services prices will rise. I presume that the hope is that by enabling people to use relatively less expensive pediatricians and internists as primary care physicians rather than relatively more expensive emergency rooms it will tend to control costs.

    That was the idea behind TennCare and it succeeded in that: people covered under the plan used emergency rooms less. However, Tennessee has kicked the system out because costs were out of control.

    Single payer is (to my mind) a meat-axe approach to achieve cost control by cutting insurance companies out of the picture. It’s a one-off and can only achieve a 10-15% reduction in costs best case. At the present rate of increase that savings will be absorbed in a couple of years. That’s not enough of a savings to stave off the meltdown that’s ahead of us.

    Practically nobody is pitching a BNH-style program. When people talk about an emerging consensus on healthcare this isn’t it.

    So why the vehemence? I can only guess that there’s an alliance among employers who want to get employee and retiree healthcare costs off their backs, folks who want universal coverage for “social justice” reasons, folks who believe that single payer will solve more problems than it actually will, and folks who want a BNH-style system for reasons I won’t even guess at.

    The goals of these groups are so different I can’t imagine the alliance being too durable.

  3. Dave Schuler says:

    Did I mention people who want to get something for nothing as part of the alliance? They’re certainly in there, too.

  4. I like the idea, though I think it would also be a good one to tie to transportable health coverage. If you leave the job, you can take your health care with you. It would seem treating it as a deduction would be in line with treating it more as something belonging to the employee.

    If I understand this, you would have the health care costs provided by your employer (and I assume pension plan) taxed. But everyone could deduct a certain level of health care costs from their taxes no matter who payed. Those who are paying their own health insurance get a break and those who have plans costing in excess of the deduction would see a slightly higher tax rate.

    One thing I would have liked to see is how an estimate on how many have “gold plated” plans and how many have health insurance that they can’t deduct (e.g. own your own business and you may be able to deduct it that way).

    On the insulation vs insurance, I think a step would be to differentiate between routine and extraordinary health expenses. A baby that goes into intensive care would be pretty hard for any one to deal without the cost having been spread via insurance. And lawyers like Edwards have helped run up the cost of ‘routine’ birth with extra tests/procedures to ward off lawsuits. My health insurance specifically excludes pregnancy from the coverage. If I want to have that covered, I have to pay a larger premium. I can live with that.


    Perhaps you should take a look at Mass example where their “free” health care estimates went up by about 1/3 as they start dealing with real world situations. As far as some of the things on your list, child immunizations are required to go to school in our state and “free” ones are provided by county health departments (actually they are paid for by tax payers). Go into any emergency room and they will set your broken bone in our state. If you can’t pay, the hospital gets the money by overcharging other patients or a local hospital tax on property. About the only thing that Texas doesn’t have on your list is the free dental/vision. But then, many health insurance plans don’t have those. Are the current ways of delivering the ‘free’ service the most efficient? No, but the way things are set up you have to really need the ‘free’ service before you go that route.

  5. jeff b says:

    Yetanotherjohn: The costs of providing the health care are easy to tabulate but the benefit is externalized. How many worker sick days could be eliminated if every person was entitled to have an annual physical exam on the taxpayers’ dime? An annual dental checkup? And so forth.

    The fact that many of these programs already exist underscores my point. We, as a society, have concluded that it is better to pay for schoolchildren to have their vision checked, because that heads off the enormous social problem of ill-educated people with bad eyesight. And we’ve decided that immunization is important enough to socialize. So all we need to do is expand our thinking a bit to encompass all of the various kinds of health care which could give us a positive socioeconomic return on investment.

    Throwing an enormous amount of money at health insurance firms is not exactly out-of-the-box thinking.

  6. pinao says:

    I swear, some of you guys sound like you walked right out of a Dicken’s novel.

  7. TJIT says:

    Jeff b,

    You should do a google search on Canadian medical treatment wait times.

    The vaunted universal health care system you desire consistently treats patients worse and makes them wait longer for critical diagnositc tests and treatment then the US system does.

    Your faith that the government could do things cheaper and better is touching. It also indicates you have never had first hand experience with how government programs actually work once implemented.