Health Reform & Standards for Equal Justice

The Urban Institute’s Eugene Stuerle is not very happy with the health care expansion legislation that is likely to be passed into law. Stuerle argues that the legislation violates the standards of equal justice.

Of course, families in this income bracket pay far more than $14,700 for health care. They get hit by uninsured expenses or covered expenses they have to share-perhaps an average of $5,100 with the $14,700 policy just noted. They also pay fairly large amounts of tax to cover others, such as retirees. In fact, Americans spend about 24 percent of monetary income (wages and interest and the like) on health care. Using a more familiar metric, the total comes to 16 percent of the gross domestic product (GDP), though GDP includes many items that aren’t typically reported as income (such as the rent you save by owning a home).

Congressional health reformers believe that most households shouldn’t pay that much. They propose something closer to tithing. That way, no more than a tenth or an eighth of household income would go to purchase health insurance. This has a nice political ring to it, but here’s the reality: the 24 percent burden is rising and can’t drop without lower cost growth. Congress can only change who pays or temporarily borrow more from China and other creditors.

The problem gets serious when these arithmetical contradictions get woven into legislation. And we’re already on a slippery slope there.
Take the Senate Finance Committee efforts at health reform that have garnered so much attention. Under one version, households with $54,000 of income would get a subsidy of almost $10,000 toward the $14,700 health insurance policy that Congress has decided that they can’t afford. The first catch 22 is that since these subsidies are so expensive, Congress plans to exclude from getting the subsidy those households that get health insurance in lieu of higher cash wages from their employer.

This is unfair. It violates the fundamental principle of equal justice. People in similar circumstances should be treated similarly under the law.

The notion of justice here that Stuerle is referring to is often called horizontal equity and holds that people in similar circumstances should be treated similarly. In this case they are not.

There is also the distorting effect that related penalty on not providing health insurance for workers. There is a $400 cap on the penalty in one case. Could this lead to employers who are in that situation dumping their workers health care and taking the penalty? And, if you have less than 50 employees you are exempt from the penalty, and this provides a subisidy to small businesses.

Then there is the tax subsidy for employer provided benefits.

Here’s yet another complication. Congress is holding fast to today’s regressive tax subsidy for employer-provided health insurance, which can be worth $2,000 to $6,000 per family. This benefit, an exclusion from tax of compensation received as health insurance, would be valuable enough to some employers—especially those with highly paid employees who aren’t eligible for the new individual subsidies—to keep them from dropping insurance coverage. It is also probably one reason why the Congressional Budget Office estimated that a Senate Finance Committee version of health reform would cause a drop of only about 3 million in employer-provided coverage over the next 10 years. John Shields and Randy Haught of the Lewin Group, in a study for the Peter G. Peterson Foundation, estimated that when fully implemented, this same Senate Finance bill would cause one set of employers to drop insurance coverage for 19 million people but another set to add coverage for 12 million.

Considering the new and old subsidies together gets complicated. Still, many low- and middle-income earners paying through an employer by accepting lower cash wages would lose out big time. They would get thousands of dollars less in subsidy than families making an equivalent amount of total compensation in cash and then getting insurance from the type of insurance exchange that the reform bills would establish.

All in all, the current legislation is going to have many bizzare incentives and it could very well result in less desirable outcomes. For example, what if small employers who grow over time simply never offer health insurance like large employers today? If the penalty is not sufficiently large then these firms will essentially be getting a subsidy as will the workers. A wealth transfer from those who do work for employers who provide health care benefits to those who do not.

And the current legislation completely fails to address the issue of cost. So when President Obama stated,

Soaring health care costs are unsustainable for families, they are unsustainable for businesses, and they are unsustainable for governments, both at the federal, state and local levels.

It wasn’t serious enough to actually warrant addressing. And if one were to look at history we see that government has a rather bad record when it comes to health care and costs. As my co-blogger Dave Schuler has noted, for the past several years Congress has failed to reduce Medicare reimbursement rates. Also, the U.S. takes up the health care issue, legislatively, about once every decade or two. So the idea that the issue of costs will be addressed later is not very reassuring considering it might be 15 years later. At which time we can probably expect health care to be consuming at least 20 – 25% or GDP and who knows how much of our federal budget. And given the inability of politicians to reduce spending it will likely add to our already large debt and growing deficits. Or to put it differently, the trillion dollar deficits? Get used to them. You thought Bush was a spendthrift, you ain’t seen nothing yet.

This is why I don’t consider the legislation passed by the House of Representatives and what the Senate is working on to be health care reform. It will expand and entrench our current system. A system that people have already agreed is broken. Will it be easier to reform the cost side of the issue when you take the current system and expand and further entrench it? Such thinking is simply delusional. Refroming any system will create losers as well as winners. My guess is that the winners will be more motivated, a smaller group, and have better funded lobbyists.

So I agree with Eugene Stuerle when we rights,

Done the right way, I believe that Congress could get more equal justice, higher levels of basic insurance coverage for Americans, and lower costs all in the same package.

I agree from a theoretical perspective this is possible, but from a politically feasible standpoint I’m more inclined to think it is impossible.

FILED UNDER: Bureaucracy, Economics and Business, Government, Health Care, US Politics
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.

Comments

  1. Steve Plunk says:

    Unintended consequences. Why is it legislators proceed full steam ahead when they know those unintended consequences await pretty much every law they pass? Now apply that concept to a bill like this one and it’s easy to see the risks we are taking.

    Small steps, measurable outcomes from those steps, and the ability to reverse course are essential for good legislation. This is not good legislation. We are seeing Pelosi/Reid/Obama playing craps with the future of this country. Their version of “reform” will destroy our current health care insurance system for the hope that the new system will work. It does not inspire confidence.

  2. sam says:

    This is why I don’t consider the legislation passed by the House of Representatives and what the Senate is working on to be health care reform. It will expand and entrench our current system. A system that people have already agreed is broken.

    Until–which is probably never–the fee-for-service model is dethroned, our health care system is essentially unfixable without action (read ‘cuts’) that no politician, of any persuasion, would dare to legislate.

  3. steve says:

    Health care will bankrupt us even without reform, it is just a matter of time. Your last statement nails it. It is not feasible politically to approach the cost issue. There are many working models that can cut costs, but it would be political suicide to copy one of those models. To engage in a large scale change on an experimental basis, no matter how sound the theory, entails big risks. For example, breaking down barriers for interstate insurance companies may just give us large monopolies. Please see our finance sector for how this works.

    OTOH, there is some cause for hope. From the very beginning the issue of how to pay for this reform has been a part of the discussion. This is a departure from how things have been done in the past. It is not just an attempt to buy the votes of the elderly and it is not just being financed by borrowing.

    BTW, the small steps meme going around would seem to preclude any of the large systemic changes needed to control costs I would think.

    Steve

  4. odograph says:

    I think there is a move afoot to make healthcare so unwieldy that it must be overhauled.

    I don’t approve.

  5. Health care will bankrupt us even without reform, it is just a matter of time.

    I don’t think so. Health care is not a boolean all or nothing commodity. People will continue to buy what they can afford. The only way “we” can be bankrupted by it is by the government forcing us all to pay for whatever they decide we can have. Health care won’t disappear without reform. The issue so many have is envy, and dare I say it, class envy in the sense that if everyone can’t have it than no one can.

  6. PD Shaw says:

    if you have less than 50 employees you are exempt from the penalty, and this provides a subisidy to small businesses.

    Well, yes and no. Most small businesses are not going to be able to afford the new, higher priced health insurance. Or at least they can’t spread the cost across their labor pools to avoid drastic changes. If we forced small business to buy the same health care insurance as big business, most small businesses would simply fold, or at least fire those with the lowest incomes.

  7. Herb says:

    The political reality is that too many people in this country lack the necessary perspective to tackle this problem in any meaningful way. Instead, we hear all this prattle about liberty dying and expensive labor and equal justice. (And on the fringe, nonsense about socialists and nazis.)

    I have yet to see any coherent positive arguments from conservatives about how to lower costs or make the health care system better. Tort reform? A drop in the bucket. The status quo? Guaranteed economic disaster.

    And the elected Republicans in congress? Thinking about the midterm elections. (Unless you mistake Boehner and Cantor’s theatricality for sincerity.)

    Sure, the health bill is going to have unpleasant side effects. Chemo is unpleasant. But cancer is much, much worse.

  8. PD Shaw says:

    I should add that the fact that health care insurance is taxed differently as between corporations, small business owners and self-employed, is a long-standing equality problem.

  9. Herb says:

    Not to be too overly confrontational, but my previous comment applies to stuff like this from Charles Austin:

    “Health care is not a boolean all or nothing commodity. People will continue to buy what they can afford.”

    Tell that to a quadriplegic. Or a cancer patient. Or someone in a catastrophic accident.

    “The issue so many have is envy, and dare I say it, class envy in the sense that if everyone can’t have it than no one can.”

    No. It’s not. The issue is that anything above and beyond routine medical care is fraught with costs the average person cannot pay. Not will not pay because they’re cheap, cannot pay. As in, impossible. As in, not gonna happen. As in, I’m filing for bankruptcy because I was diagnosed with Type II diabetes and I can’t afford daily insulin injections.

    Class envy has nothing to do with it.

  10. Drew says:

    To be completely confrontational……..

    That’s complete and total bullshit, Herb

    If health “insurance” was really insurance, and not the pay-all health maintenance scheme it has morphed into, the catastrophic health conditions you cite could be insured against quite adequately.

    But if one’s definition of “health insurance” is that it pays for just about all heath care service expenditures, then by definition it is nothing but a casino-like cost shifting exercise.

  11. Drew says:

    “I have yet to see any coherent positive arguments from conservatives about how to lower costs or make the health care system better. Tort reform? A drop in the bucket.”

    More crap from Herbie. Coherent arguments are everywhere. They include returning the system to real insurance, to exposing the consumer to price, to eliminating the cost shifting to the uninsured…..

    And as for the tort reform canard: Ask any physician to cite the top 3 line item costs of running his or her practice. You know, rent, equipment, people etc. Malpractice insurance almost invariably is cited.

    “The status quo? Guaranteed economic disaster.

    The only thing Herbie gets right. So now let’s get serious, and skip the current legislative garbage.

  12. sam says:

    If health “insurance” was really insurance, and not the pay-all health maintenance scheme it has morphed into

    I’m curious–how did this morphing take place?

  13. Steve Verdon says:

    “The status quo? Guaranteed economic disaster.

    The only thing Herbie gets right. So now let’s get serious, and skip the current legislative garbage.

    Right.

    Herb,

    The current legislation will do nothing but expand and entrench the status quo. As such, your own words indicate you do not and can not support such legislation.

    I’m curious–how did this morphing take place?

    My guess, bundling health care with employment compensation. Lets just run some simply hypothetical numbers:

    You pay Rick $10,000 and you, as the employer have to pay an extra 10% in Social Security, Medicare, etc. So now Rick costs you $11,000. Rick also has to pay 20% in taxes so his take home pay is $8,000. From this he pays $1,000 for health care. Now suppose you can pay him his current wage less his health benefits. Now Rick gets $10,000, of which $9,000 is take home. Now his taxes are $1,800. From your perpective as the employer you can point out that he shouldn’t get a raise that year, you’re paying for his health care and he’s getting a $200 reduction in his taxes (lets assume inflation is zero, but if we wanted to be messy we could factor in cost-of-living adjustments based on inflation).

    Now, next time raises come around there could a negotiation:

    1. More take home pay,
    2. More health care benefits,
    3. Some of 1 & 2.

    Since health care benefits are essentially untaxed income I can see health care benefits expanding over time…at least until the costs start rising faster than inflation. Then benefits would start to be cut.

    That’s my guess as to the dynamic.

  14. PD Shaw says:

    sam, the morphing took place when health care coverage was exempted from treatment as compensation under tax laws (I believe in the 40s or 50s). Therefore, giving employees compensation with prescription eye glass, annual check-ups and teeth cleanings is cheaper for the employer and the employee than straight cash.

  15. PD Shaw says:

    I guess steve beat me to it.

  16. sam says:

    Yeah, all that makes sense, guys. Thanks.

  17. PD Shaw says:

    I think it needs to emphasized that the employer pays the salary that keeps the employee. So a larger employer that can negotiate healthcare benefits unavailable to a smaller employer is going to have a relative advantage in the labor pool.

    Plus, the government aids this by providing tax benefits for healthcare insurance only through the employer. If “Rick” decides to leave to open his own business, he will find his insurance benefits essentially taxed 15.3% for social security and medicare. So not only will “Rick” not be able to find comparable health insurance at the price he got at “Too Big Too Fail,” he’ll find that he’s paying a tax that he didn’t have to pay before.

  18. Drew says:

    Sam –

    Mr. Verdon and Mr. Shaw beat me to the punch. In fact, the root causes of this “unintended consequence” were in the wage controls under good old FDR.

    Said another way, previous government meddling – implementing policy at odds with basic economics – has resulted in this mostrosity. The only questions are: 1) why is anyone surprised and 2) why any sane person would look to the very same government for a fix?

    One definition of intelligence is not making the same mistakes over and over. Well…….

  19. Herb, you need to stop imagining that you, President Obama, or anyone else can play God and stop bad things from happening. Otherwise please make sure everyone gets a pony too!

  20. sam says:

    In fact, the root causes of this “unintended consequence” were in the wage controls under good old FDR.

    Well, OK. But I dunno. What I do suspect is that, if you go far enough back in the history of most institutions that are somehow influenced by government actions, you’ll find some decision that now has unintended consequences. I mean, come on guys, there’s got to be some limit to how we wield the “untended consequences” thing, right?

    Just sayin’.

  21. Drew says:

    sam –

    FDR restricted wages during the war. This was like trying to repeal the law of gravity. Businesses found another way to compete for labor: benefits. Not only that, benefits were a tax advantaged form of compensation.

    I do not teach economics like, say, Steve V. But I suspect any first year micro student who actually understood the material could have predicted this.

    This leaves me anyway, with a question: do government policymakers understand basic economics, or do they not care? I suspect its the latter, and I further suspect the current crop of Washingtonians are of the same stripe. Hence, I desire to leave as little policy to them as possible, and I am not generous in giving them a pass.

    Its just as wicked as it seems.

  22. Steve Verdon says:

    Well, OK. But I dunno. What I do suspect is that, if you go far enough back in the history of most institutions that are somehow influenced by government actions, you’ll find some decision that now has unintended consequences. I mean, come on guys, there’s got to be some limit to how we wield the “untended consequences” thing, right?

    Why does there have to be a limit? If the answer is, “Yeah, but government intervention often has unintended consequences,” I don’t see why we should say, “But we can’t really complain about that.”

    Seems to me the more reasonable position is to note that government intervention often has unintended consequences, take a look at the proposed internvention and try to see what those unintended consequences are. In many cases they are obvious. Gene Stuerle has a list of them for the current legislation. But what the f*ck lets pass it anyways and fix it later. Like that really works.

    For example, what do you think a firm who offers its employees health insurance at $2,500/person will do if they find out the penalty is $400/person? If I were running that business I’d drop that insurance faster than I’d drop a hot rock. I’d tell everyone–sorry, but due to rising costs our health care package will be terminated on x-date. But don’t worry you can sign up with the government plan.

    Funny, I brought this up about 6 months ago, but nobody responded to it then.

  23. sam says:

    Seems to me the more reasonable position is to note that government intervention often has unintended consequences, take a look at the proposed intervention and try to see what those unintended consequences are.

    Rather

    take a look at the proposed intervention and try to see what those unintended consequences are might be.

    But I take your point. What I was trying to say is that it’s really too much to fault a government, or a business, or indeed, any institution, for not determining (or guessing) what the effects of its current decisions will have on the state of the economy (or whatever) 70 years hence, which is what I take the criticism of FDR, eg, to amount to. We might be able to get a sighting on the consequences of an action in the near term, but the farther out we go, I think, the less secure we can be in saying that X will happen as a result of Y.

  24. Drew says:

    Sam – I just couldn’t disagree with you more. You say:

    “But I take your point. What I was trying to say is that it’s really too much to fault a government, or a business, or indeed, any institution, for not determining (or guessing) what the effects of its current decisions will have on the state of the economy (or whatever) 70 years hence, which is what I take the criticism of FDR, eg, to amount to. We might be able to get a sighting on the consequences of an action in the near term, but the farther out we go, I think, the less secure we can be in saying that X will happen as a result of Y.”

    This is the whole effing point !!! It IS predictable. The “laws” of economics may not be quite as tight as those of gravity or momentum, but they are damned close. So government edicts, policies or programs that fly in the face of basic economics are very easily identifiable as doomed. Empirically we see the results. Many people identify them as losers.

    As I said earlier…..one definition of intelligence is not to make the same mistakes…….

    But then we have the left……

  25. Yeah, the effects are only unintended because the people causing them are too stupid or willfully ignorant of reality, human nature, or other frequently very well understood aspects of the human condition, thinking their good intentions and pure hearts override everything else. Frankly, it is why I despise activists of all stripes because their self righteous myopia tends to make them blind and obnoxiously hostile to the legitimate interests and needs of anyone they oppose.

    On occasion something happens that no one could have predicted, but it happens much, much less often than you think.

  26. Herb says:

    “If health “insurance” was really insurance, and not the pay-all health maintenance scheme it has morphed into, the catastrophic health conditions you cite could be insured against quite adequately.”

    Which is exactly my point.

    Health insurance is NOT insurance. Health “insurance” is a cost-sharing mechanism. It sucks, but that’s how it is. (And how it will be for the foreseeable future, thanks to the “healthcare reform is socialism” crowd.)

    Tell me again how NOT reforming healthcare is going to deal with that problem…

    “Coherent arguments are everywhere. They include returning the system to real insurance, to exposing the consumer to price, to eliminating the cost shifting to the uninsured…..”

    No doubt, these are coherent arguments. But they are not the arguments being made in Congress.

    Here’s the coherent arguments from our oh-so-competent Republican pols:

    “The four-page Republican health care outline lays out a plan that would allow states, associations and small businesses to pool together to offer health insurance. It would give tax credits to low and modest income Americans to help them buy health insurance. It would also let dependents under twenty-five stay on their parent’s health insurance.”

    All the coherent arguments made on blogs, in comment sections, on talk radio, on street corners across the country don’t mean anything if the people who can actually influence the debate do not embrace them.

    Keep voting Republican though! That’s the ultimate goal!

    “The current legislation will do nothing but expand and entrench the status quo. As such, your own words indicate you do not and can not support such legislation.”

    I am not a big fan of the legislation, you’re right. But that’s only because the evil Pelosi-Reid-Obama axis of evil didn’t ram a more robust reform effort down the throats of all the squealers.

    Another case of trying to please everyone, and pleasing no one.

  27. sam says:

    This is the whole effing point !!! It IS predictable. The “laws” of economics may not be quite as tight as those of gravity or momentum, but they are damned close.

    You know what that is Drew? That’s rightwing Marxism. Rightwing economic determinism. I’m not sure you guys realize how close you are in temperament to most fervent Marxist when you assert that, armed with the “laws of economics” you, too, can stand astride human history and foresee its unfolding. But I think you and Marx make the same fundamental mistake in conceptualization. If you want to pursue the physics analogy, you folks have a Newtonian conception of capitalism. But I believe the truth of capitalism, because of it dynamism, is that the reality it creates is more akin to quantum physics in its indeterminacy.

  28. Dave Schuler says:

    It might help if we were to define insurance. An insurance system is one in which risk is spread over the members of the pool, those having insurance. So, for example if you’ve got ten people in the pool and 9 are assessed to have a risk of $1 each while the 10th has a risk of $9 dollars and the cost of administration of the pool is $2, then all can be insured for $2 each. If everybody’s got the same risk there’s no point in insurance since the cost of participation is bound to be lower than the risk plus the administration.

    What we’ve got isn’t insurance. It’s something more akin to a pre-paid maintenance plan. The various perversities of the defective market in healthcare ensure that costs will rise out of control. The worst of these perversities is that Party A is telling Party B what to consume and Party A is paid by Party C.

    As steve above said, there are plenty of ways to correct this. However, so many of the stakeholders see themselves as benefiting from the current system that they’ll fight tooth and nail to prevent rationalization of the system as they drive the system off a cliff. “A cliff” is when so much of resources of the economy are sucked into healthcare that it stunts the growth of everything but healthcare. I think that’s already happening and will only get worse under plans in which we increase the concentration of funds spent on healthcare (which all bills currently on the table do).

  29. floyd says:

    Wouldn’t ya think that “political suicide” would be more common if candidates actually ran for public office to serve the common good?

  30. floyd says:

    “”For example, breaking down barriers for interstate insurance companies may just give us large monopolies. Please see our finance sector for how this works.””
    “”””””””””””””””””””””””””””””””””””””””””””””””

    Steve ;
    Perhaps not, but should one glean from this that a government unable to regulate healthcare ought to be given the the reins to run it outright?

  31. Franklin says:

    What we’ve got isn’t insurance. It’s something more akin to a pre-paid maintenance plan.

    Yes, but the insurance companies have either discovered or at least think they’ve discovered that well-maintained people cost less in the long term.

  32. Zelsdorf Ragshaft III says:

    This bill is like government telling me I must buy a fully equipped Lincoln rather than the focus which fills my needs. In fact if I do not buy the Lincoln or pay the penalty for not buying something I may not want or need, I can be incarcerated. This is exactly the thing our founders risked their lives to prevent.

  33. An Interested Party says:

    What’s this!? Big government doesn’t lead to totalitarianism? Who knew…

  34. Steve Verdon says:

    Yes, but the insurance companies have either discovered or at least think they’ve discovered that well-maintained people cost less in the long term.

    Uhhhmmm no. See the history of rapidly rising costs for the U.S. and other countries.