The Left’s Reaction to Bush’s Health Care Proposal

On Saturday President Bush outlined a new plan to help deal with the problem of people who don’t have health care insurance. It is expected to be discussed in tonights State of the Union Speech. The other day I indicated that my feeling was that the Left would take a negative view of Bush’s plan, and based on the posts linked at Unpartisan.com (a blog aggregator) that looks to be the case.

At the top of the Left column of blog posts is this post from Watching Washington. Right off the bat there is a somewhat misleading statement,

If you have health insurance through your job — President Bush wants to tax you for it. Those taxes would then pay for tax breaks given to people who buy their own health insurance.

Uhhmmm no. You would only be taxed for your health care benefits if and only if it exceeded the cap on health care benefits an employer provides. Thus, if the cap is say, $5,000 for an individual and you have a plan that costs $6,000 then you’d get taxed on the $1,000 (at least that is my understanding of how it would work). But think about what Mr. Turner is implying here. If this were income, the same logic would apply. Mr. Turner, in his eagerness to bash this plan, sounds like…well, like a Republican/conservative. If you make too much money, those pesky Republicans (or Democrats or whatever political party) wants to tax you! Those jerks! After all, health care benefits from an employer are part of the employees compensation package. Why should the wage protion be taxed, but the health care benefit be exempt?

Lets be clear about this, the employer doesn’t one wit how the employee is paid. If it is all wages, wages and benefits, or anything else. All the employer cares about is that it costs $X to hire an employee and in the current situation $X is comprised of wages and benefits. The only reason to provide health care benefits is that it has a tax preferred status. The following example can help highlight the situation. Suppose we have an employee who is paid $35,000 in wages and $5,000 in health care benefits. The employee also pays say a 25% tax. That means the employee pays $8,750, and he gets $31,250 in consumption/savings. The last number is (0.75*$35,000) + $5,000. The $5,000 is the health care benefit. If the employer paid in cash the value of the health care benefit the employee would have $30,000 for consumption/savings. Thus, the health care benefits could very well be more attractive to the employee. This is why we tend to see health care insulation vs. health care insurance. Now if we treat health care benefits as we do income, then this tax benefit disappears and we’d see less incentive for health care insulation and more incentive for health care insurance.

The White House thinks it can reduce rising health care costs by forcing Americans to give up plans that cover everything — in favor of bare bones health insurance.

Well…yeah. Suppose I tell you that your oil changes, tune ups and tire costs are now going to be subsidized so each item will cost $5/$5/$20. Do you think that people will be getting more or less oil changes, tune ups and new tires or less? One could argue that such a subsidy would result in better care for our cars and thus less costs in terms of accidents, break downs (e.g. traffic in some areas) and so forth and that the subsidy is a good idea (traffic caused by accidents itself is a good example of an externalities). But, we could also be over-subsidizing and end up with higher consumption and perhaps other problems like more pollution, higher oil consumption and so forth. The idea behind Bush’s plan is to try to get people to pay for some health care out-of-pocket. This will reduce consumption to some degree. Will it solve all of the health care problems? No. Add on that there is a tax subsidy for the poor, and it helps even more.

Frankly, I find this kind of post simply amazing. The Left uses this rhetoric all the time. “Bob has lots of money, so we are going to take some of it to help out John, who doesn’t have lots of money.” Same thing here, but now that Bush is proposing it…well it is bad, bad, bad.

Here is the second post from Unpartisan.com which simply regurgitates Krugman’s baloney. Never mind that Krugman has already backtracked in some regard.

What conservatives in the “consumer-directed” health movement believe, however, is that the big problem is “moral hazard” – people consume too much medical care, because someone else pays for it.

Now, this isn’t entirely wrong. People probably do undergo expensive surgery with questionable effectiveness, and so on, because it’s not out of pocket.

Of course, Krugman is also complete nuts now, the Ann Coulter of the Left. Consider the following passage,

The whole consumer-directed thing is, in my view, just an attempt to avoid facing up to that failure [of HMO/managed care]. Rather than admit that private-sector institutions aren’t any good at rationing, conservatives now say that patients should be induced to ration their own care by being forced to pay more out of pocket.

That last line is pretty disquieting, IMO. Another word for “private-sector institutions” is “a market economy”. We have plenty of examples where “public-sector institutions” do a pretty bad job as well. In England they are instituting mandatory wait times for various procedures to curb the flow of red ink. In Canada, you’ll have longer waits for access to an MRI machine. France seems to do a good job, but then again people there pay a not insignificant amount out of pocket from what I’ve read. And, it isn’t clear that we can do on a national scale what the VA has done for veterans and that it is actually going to be cheaper.

No More Mister Nice Blog calls the plan pathetic. Why? Because it doesn’t solve the entire health care problem in one fell swoop. The belief here seems to be that universal health care provided by the government is the only thing that will work and if you advocate anything other than that, why you’re just a piece of human excrement.

Ezra Klein is the only person on the Left that I have found so far that actually thinks this could be a good thing.

Early response from many on the left is lukewarm, at best. And, to be sure, dismissing this as useless incrementalism is a fair attack. Bush’s plan will do nothing to salve the deeper dysfunctions of the health care system. It will not keep insurers from discriminating on grounds of health and history, it will not subsidize low income workers, it will not create universality, or widen the risk pool, or aggregate buying power, or end the employer tie, or do most anything else that needs to be done.

But so far as incrementalism goes, this is supportable. The full deductibility of employer-based benefits has had nothing but pernicious consequences for the health system, creating and strengthening a structure that traps Americans in jobs, giving employers absurd control over their workforce’s health security, and penalizing the entrepreneurial and unemployed alike. And every taxpayer, whether they have insurance or not, is forced to subsidize this unjust, inefficient structure. It’s crazy. Progressives should indeed support efforts to sever the Gordian knot tying insurance to employment and, now, with Democrats in control of Congress, should see this proposal as a starting point atop which a yet-more progressive tax change can be constructed.

Except for the last part about more progressive tax changes I agree with Ezra. This is at least a good starting point when it comes to addressing health care issues.

Update: Well, Ezra Klein has changed his mind. Now he doesn’t like the plan. I haven’t had a chance to fully read Klein’s post, hopefully I’ll have some time later and will update again.

More below the fold.

Update: Well I’ve read Klein’s objection to Bush’s policy and my reading of it is this. An individual gets a $7,500 deduction for health care from his income tax. If that individual spends say $2,500 on a policy then that person would get a percentage of the $5,000 back.[1] Klein’s objection is that now it actually pays to look for a cheap policy that will still meet one’s needs. This, he argues, will lead to people having inadequate insurance when they need it. And I’m somewhat sympathetic to this argument. As I’ve noted before, people tend to be really bad at estimating risk and making “rational” decisions about risk.[2] Still, the whole point of allowing people to claim the whole deduction is to give them an incentive to not “gold plate”. If we use the example below and change it to allow people to deduct only the cost of their health care then it becomes much, much less of an incentive.

Greg Mankiw also has another post on this and argues that the tax deduction is not nearly as good as a tax credit that is same for everyone and points to an editorial in the Washington Post.

Update: Arnold Kling also has another post on this as well. Kling looks at Jonathan Zasloff and has a rather harsh response,

Zasloff writes:
Bush plans to pay for [his proposed health insurance deduction] not by efficiencies, but rather by restricting the benefit packages of the already insured, through the deductibility cap.

Kling Responds:
Paying for something with efficiencies is nothing but a scoundrel’s refuge for policymakers. It’s like saying you’re going to balance the budget by getting rid of waste, fraud, and abuse. Of all the criticisms one could make of the Bush health plan, this is the least persuasive.

Arnold also writes,

I am not proposing to outlaw health plans that insulate consumers from costs. However, I am suggesting that the public policy case for treating health insurance as a “merit good” (something for government to subsidize) stops with catastrophic health insurance. If consumers want to go further and get pre-paid health plans that relieve them of having to calculate costs and benefits of individual medical decisions, then so be it. You can pay for the luxury of insulation, just as you can pay for a fancy sports car.

Hmmm, I have a feeling that last line is going to cause some people to be unhappy with Arnold, but I have to agree with him. Having health care that insulates people from virtually all out of pocket expenses save for a $5, $10 or $20 co-pay just isn’t going to be feasible. If you want that kind of insurance/insulation then you had better expect to pay for it. To implement it for the entire nation, expect some pretty undesirable outcomes like more and more of the government’s budget and our national output to go towards health care.

For example, as James Hamilton notes, Medicare is growing at a rate that is 3.1% faster than GDP. If left unchecked by 2050 federal spending will be pushed up to 32% of GDP. In the past 50 years federal spending has hovered around 20% of GDP. By 2150 federal spending will be 370% of GDP. Of course, we’ll never actually get to that point. The point of bringing up the 370% is to emphasize how the current growth path is unstable. Eventually something will be done, and the longer we wait the harder it will be to fix and also possibly more likely that the fix will be nasty–e.g. just terminating Medicare or cutting it to the bone.
_____
[1]He wouldn’t get the full $5,000 since it is a deduction from his income, that is the $5,000 would lower the individual’s taxable income. Here is a simple example (with some made up numbers to show how it would work in theory, not in reality):

Income: $35,000
Health Insurance: $2,500
Deduction for Health Insurance: $7,500
Tax rate: 25%.

Now, based on this this person’s taxable income is $27,500. The taxes paid would be, $6,875. Thus after paying his taxes and purchasing health insurance this individual would have $25,625 left for savings and consumption. With out the deduction the person would have, $26,250 if they bought no health insurance and $23,750 if they did buy health insurance. One might wonder why purchase insurance? Well, if one does actually need insurance for large expenses and doesn’t have it, they will still get treatment, but their credit will be ruined for years and they might have other unpleasant things like wage garnishment, etc. Basically under a Bush type policy in our little fantasy world one could get a $2,500 for only $625.
[2]The problem is that people aren’t irrational in that they are crazy, they just tend not to make use of all the relevant information that they have. How many people go to older relatives and try to get an idea of any possible risks of various genetic diseases? Do they look at their medical reports and say, “Hmmm, that blood pressure is a bit high, either I need to alter my life-style to go with the cheaper policy or go with the slightly more expensive policy”?

FILED UNDER: Economics and Business, Health, 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. M1EK says:

    It’s often said that there are two distinct groups of uninsured Americans:

    Group 1: Simply can’t afford premiums

    Group 2: Chooses not to enroll (generally high-income healthy people) – thinks premiums not worth the cost?

    Is there any evidence at all that adding a tax deduction (whose value depends on the marginal tax rate) is going to help Group 1? Sure, it’s going to help Group 2 a lot – but did they need the help?

    Group 2’s marginal rate might be 33% or thereabouts.

    Group 1’s marginal rate is likely to be 15%, 10%, maybe even 0%. The value of the deduction is therefore minimal to Group 1.

  2. Triumph says:

    Ezra:

    It will not keep insurers from discriminating on grounds of health and history, it will not subsidize low income workers, it will not create universality, or widen the risk pool, or aggregate buying power, or end the employer tie, or do most anything else that needs to be done.

    Steve:

    Except for the last part about more progressive tax changes I agree with Ezra.

    Ezra is calling out the “plan” for what it is: clearly ineffectual in improving health care and basically half-assed.

    Is this what you agree with?

  3. Steve M. says:

    No More Mister Nice Blog calls the plan pathetic. Why? Because it doesn’t solve the entire health care problem in one fell swoop.

    It leaves 89%-94% of the uninsured uninsured, by administration officials’ own estimates, as I note. It doesn’t just fail to “solve the entire health care problem in one fell swoop’; it’s barely a drop in the bucket.

    The belief here seems to be that universal health care provided by the government is the only thing that will work and if you advocate anything other than that, why you’re just a piece of human excrement.

    Hyperbole much?

  4. Tano says:

    What is this “The Left” that you refer to Steve?

    Its like you are dealing with some foreign country that you know so little about that you have to construct the crudest imaginable categories. You link to two very obscure blogs, and Ezra Klein, who you basically agree with.

    You undermine the sense of seriousness that might attach to your work with this stuff. Here is a simple rule for you. Erect categories that are neither under- nor overdescribed. Sweeping overdrawn generalizations are usually used for cheap rhetorical effect, but have no real value except to highlight the intellectual laziness of the user.

  5. Steve Verdon says:

    Is there any evidence at all that adding a tax deduction (whose value depends on the marginal tax rate) is going to help Group 1? Sure, it’s going to help Group 2 a lot – but did they need the help?

    A universal health care plan would help these people too. Or are you saying it should be “universal health care except for those rich SOBs, who can just FOAD.” Have I got your position correct M1EK? Just curious, because your position is just not internally consistent.

    Triumph,

    Ezra’s description in the part you quote is accurate, and it highlights why this policy wont be a cure-all. However, if that is all you took away from Ezra’s post then your completely blinkered.

  6. Steven Plunk says:

    This plan will help. Like Steve Verdon alluded it will not solve the problem but looking for a single magic cure is foolish. It takes many small steps to solve problems these days and this is such a step in the right direction.

    Criticizing because it’s not enough is the Left’s retort? It’s never enough for them.

  7. Kent G. Budge says:

    You quote Watching Washington:

    If you have health insurance through your job — President Bush wants to tax you for it. Those taxes would then pay for tax breaks given to people who buy their own health insurance.

    and interpret this as

    Mr. Turner, in his eagerness to bash this plan, sounds like…well, like a Republican/conservative. If you make too much money, those pesky Republicans (or Democrats or whatever political party) wants to tax you!

    I read it a little different:

    If you have health insurance through your [underpaid working-class] job — President Bush wants to tax you for it. Those taxes woud then pay for tax breaks given to [rich indolent] people who [can afford to] buy their own health insurance.

    Still repulsive, just not in the same way.

    Reading between the lines is an art.

  8. madmatt says:

    So if I have the money to pay for insurance, and opt to pay for it I get a tax break…if I can’t afford insurance then I am still screwed…that seems like the bush policies in action once again. Last year 2 trillion dollars were spent on medical care in the US for 300 million people, that is about $6666 per person and yet 20% of the people don’t have any access to medical care. I think we can find a way to make this work for everone, why the resistance to universal healthcare which every other country on the planet has…are you for waste, mismanagement and rapacious profits?

  9. M1EK says:

    “A universal health care plan would help these people too. Or are you saying it should be “universal health care except for those rich SOBs, who can just FOAD.” Have I got your position correct M1EK? Just curious, because your position is just not internally consistent.”

    That’s a really loathsome way to try to initiate some dialogue.

  10. Anderson says:

    Criticizing because it’s not enough is the Left’s retort? It’s never enough for them.

    One gets the feeling that this would be the response to someone complaining about the insufficiency of lifeboats on the Titanic, if Bush were the responsible Cunard official.

    Sometimes “it’s not enough” is actually a valid complaint.

  11. Dave Schuler says:

    My concern about healthcare reform proposals generally is that

    1. Any plan which increases consumption is likely to increase costs, too.

    2. Any plan which solely targets reducing consumption is likely to increase costs.

    3. The real source of concern is that healthcare costs are too high.

    We need to address both the supply and demand sides of the equation simultaneously.

  12. Steve Verdon says:

    1. Any plan which increases consumption is likely to increase costs, too.

    2. Any plan which solely targets reducing consumption is likely to increase costs.

    Then we are well and truly screwed since just about any plan is going to have to address the consumption.

    3. The real source of concern is that healthcare costs are too high.

    We need to address both the supply and demand sides of the equation simultaneously.

    But why are costs too high? You say supply side is part of the problem. Okay. You point to the number of doctors graduating from med school and say it has been fixed. But, the solution doesn’t strike me as being more government, but less…get government out of the way when it comes to training/schooling people who want to be doctors. Right now the AMA and the restrictions it places on licensing, schooling, and so forth reduces supply. Monopolies or monopoly power is usually found wherever the government is present.

  13. ken says:

    Health care demand is not dependent upon price. You either need heart surgery, chemotherapy, kidney dialysis, etc – or you don’t.

    Unlike what Steve Verdon and Dave Shuler may think, the decision to ‘buy’ medical care is not in any way shape or form like the decision to buy a set of towels at the department store.

    Price does not regulate the demand for medical treatments the same way price can regulate the demand for other items. A reduction in price for gasoline, for example, many increase the demand for gasoline beyond its need for basic work related transportation as people start taking drives just for pleasure and enjoyment.

    But a reduction in the price of the cancer killing chemicals used in chemotherapy will never increase the demand for these drugs beyond their need. This is true of virtually all medical care.

    This is so basic and so obvious I am surprised that I need to constantly educate people like Steve and Dave on this simple fact.

    I think Steve’s mistake is in his confusing *health insurance* bought from a health insurance company and *health care* itself. They are not the same. Both Steve and Dave have a sophomoric understanding of economics which they will not grow beyond unless they start looking at the world as it really is instead of through their conservative ideological filter.

  14. Steve Verdon says:

    Ken,

    Your whole premise is completely flawed in that it takes what is true of a certain class of medical treatments and applies it to all classes. As such, your conclusions are also flawed.

  15. ken says:

    Steve, lets look at the others, beside chemotherapy them. The major medical categories fall into doctors specialties – internal medicine, oncology, surgery etc.

    Please tell us all where you will find people who decide to ‘buy’ medical treatment that is not needed?

    You don’t know what you are talking about. But it is never to late to learn.

  16. Dave Schuler says:

    Steve, if we got government out of the way the number of doctors graduated from medical school every year would fall. The only reason that the number of medical graduates doubled between 1965 and 1980 was the deal cut between the federal government and the AMA through which the federal government agreed to subsidize every medical resident.

    The AMA will not voluntarily surrender its power and the only power that can cause it to do so is the government.

  17. Kent G. Budge says:

    Steve,

    I just want to emphasize that I spell my name with a “t”.

    Ken-without-a-t,

    You can sometimes get away with being an arrogant, condescending twit — if you are on absolutely rock solid ground with your facts and arguments.

    You seem to be saying that demand for health care is completely inelastic. I think this view is disconnected from reality. There are a great many conditions, including some expensive ones, where there are several treatment options, and some are hideously more expensive while being only somewhat more effective. Folks who are completely insulated from health care costs have no incentive not to jump to a costly treatment that is marginally more effective.

    Giving everyone gold-plated treatment isn’t an option. The gross national product won’t support it. So the question is how to ration. The market is one rationing mechanism whose behavior is fairly well understood. Another rationing mechanism is the queue; people tend to drop out of long lines, dead or otherwise. We have witnessed this in countries purporting to guarantee health care.

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  19. ken says:

    Kent, what about is it about you guys who think you can apply department store economics to health care?

    The demand for health care is absolutely inelastic, up to a point. When you need to stay at a hospital, for surgery, for example, the regular charge might be, let’s say, $400 dollars a day. Treatment protocol now says that patients should be up and about as soon as possible, so lets say the anticipated stay is four days.

    Now even if they were to drop the price to $200 per day there is no reason in the world why a person would want to stay in the hospital longer than is necessary.

    Unlike a stay at a hotel where demand is indeed elastic and where you might chose to extend your stay, medicine has a kind of self regulator where people want to get better and get out as soon as possible. Medicine, in other words, is not a consumption item like any other.

    Your example of choices between treatments of roughly equal values but extremely differing costs is a marginal to the issue of demand because here you are usually talking about new treatment regimes that are tested and resolved by the medical community either developing new treatment protocols or deciding to stick with the older, cheaper one. Sometimes it works the other way, with the newer treatments saving money and being more effective as well.

    Today for example you would not have an entire shoulder cut open and stay a week in the hospital just to repair a torn cartilage. It is done as an outpatient with micro-surgery instead.

    Likewise you would not want to ‘treat’ high blood pressure the old fashioned way with just good advice to watch your diet, quick smoking and get some exercise. In addition to the medical advice you would also need some medication to reduce the blood pressure.

    The point you guys don’t seem to get is that while it might be reasonable for someone to consume a few extra gallons of gasoline a week when the prices drop, it makes no sense to think that same person will consume a few extra blood pressure pills just because he is now paying for generics instead of a branded product.

    Really, how hard is this for you guys to understand?

  20. DL says:

    I still have serious problems with the government trying to alter your personal behavior with the tax code -but then I’m a throwback to the brighter ages. It is rather flattering to be so “European” in our quest for utopian perfection however.

  21. Kent G. Budge says:

    Really, how hard is this for you guys to understand?

    I could have asked you the same thing. You really believe demand for health care is “absolutely inelastic”? … Oh, but only “up to a point”. What point? Do you know?

  22. Derrick says:

    Great fisking, ken. This issue seems to bring out the worst in some people’s ideology. Conflating this as some pure econ problem completely ignores some of the major issues with health-care in this country. For one, studies comparing our system to other universal systems show that at least 30% of our costs are tied up in additional “administrative costs” due as opposed to around 15% for other countries to our complex and mangled system. That is a real problem that requires solutions that a tax-break doesn’t even begin to rectify. As well, anyone who has been around someone who has had health issues knows, getting insurance in most states is simply impossible. It would be great if Kent G.’s market solutions proved effective there, but insurance companies won’t even provide high deductible/high-cost insurance to those at greater risk. They basically just say sorry, better luck next time.

  23. ken says:

    Kent, Up to a point? What point?

    Is this not obvious? The upper limit on medical use is need.

    General Mills can send out thousands of coupons and some people will respond by buying an extra box of cereal, even if they don’t need it, just because the price has dropped.

    Pfizer can likewise send out coupons but it is foolish to think people will react the same way. If people use the Pfizer coupon it is because they have a need for the drug. People who don’t *need* the drug will NOT be buying any. Hence the limit of demand is set by the need.

    And the demand is fixed irrespective of price.

  24. Steve Verdon says:

    Dave,

    Steve, if we got government out of the way the number of doctors graduated from medical school every year would fall. The only reason that the number of medical graduates doubled between 1965 and 1980 was the deal cut between the federal government and the AMA through which the federal government agreed to subsidize every medical resident.

    Ummm actually, I think we need to get rid of the AMA too, or at least their monopoly control. If you are going to have the government do anything have them go after that cartel.

    Derrick,

    Great fisking, ken. This issue seems to bring out the worst in some people’s ideology. Conflating this as some pure econ problem completely ignores some of the major issues with health-care in this country. For one, studies comparing our system to other universal systems show that at least 30% of our costs are tied up in additional “administrative costs” due as opposed to around 15% for other countries to our complex and mangled system.

    I don’t buy this. Government’s job is to create administrative red tape. That is what it does and it does it damn well. The idea that we’ll have less administrative costs because we’ll have more government is simply unbelievable without some pretty decent evidence. For example, why do we have such high administrative costs, and are you really measuring the same things. People keep reciting this number but never ever back it up with any evidence that it is true, that costs in both cases are comparable, and with any justification that a government run system would produce less administrative cost/red tape.

    It would be great if Kent G.’s market solutions proved effective there, but insurance companies won’t even provide high deductible/high-cost insurance to those at greater risk. They basically just say sorry, better luck next time.

    No kidding, and the reason for this that is how insurance works. If you have a high risk, or are certain to have a given medical condition, then you are in trouble. Those people may have to be helped via the government. But for the rest of us, there is no reason to give them anything and everything they want. Even in European and other countries that provide universal health care ration things. You need to have a non-life threatening procedure? You might have to wait a long time, as in 6 months. But hey, its “free”, right? That extra pain costs nothing right? Bullshit.

    ken,

    Pfizer can likewise send out coupons but it is foolish to think people will react the same way. If people use the Pfizer coupon it is because they have a need for the drug. People who don’t *need* the drug will NOT be buying any. Hence the limit of demand is set by the need.

    And here is where you fall down ken. Some people who have the need don’t buy it. Some because they can’t afford it, others because there might be other ways to deal with the issue (e.g. diabetes and weight). But telling everybody there will be no immediate out of pocket expense, and whatever out of pocket expense there is will be shared amongst millions of other people (most of us call these people tax payers) means you’ll get an increase in consumption. Some treatments will have only one option, and in those cases you are right. But this does not mean we can’t try to introduce incentives not to over-consume in those areas that are prone to it. This is why your premise is flawed and hence why your conclusions don’t hold.

    Right now the growth path of that consumption is just not feasible for even the next 20 to 30 years. Are you prepared to start cutting other spending such as gov’t spending on helping the poor with food, housing and education? If you answer anything other than yes you are simply not being serious and being a fool.