Obama vs. his economic advisors, Part I

Barack Obama says his health care reform “strengthens employer–based coverage.”  But the government’s favoring employer-based coverage has had terrible consequences.  Just ask Jason Furman, one of Obama’s economic advisors.  In an article published in Health Affairs he wrote:

The tax exclusion effectively reduces the price of employer-sponsored insurance relative to insurance purchased through the individual market. As a result, it increases the take-up of employer insurance and reduces the take-up of individual insurance. The upside of this preference is that it can help resolve the market failures associated with adverse selection in the individual market by pooling various risks.* The flip side, however, is that it reduces competition and choice for enrollees that could otherwise lead to better-designed insurance plans. In addition, employer-sponsored insurance, in the absence of universal coverage, can promote job lock, inhibiting workers’ mobility and reducing productivity. …

More of an incentive for higher-income workers than for lower-income workers. The value of the tax exclusion is larger for higher-income workers than for lower-income workers. … This not only is unfair, it also leads firms with disproportionate numbers of lower-income workers to be less likely than others to offer insurance or to pay a large fraction of the premium, both of which lead to less insurance coverage for lower-income workers. If the goal of the tax subsidy is to increase the number of Americans with insurance, then this form of provision is inefficient because the current subsidy is evidently too small to encourage low-income people to demand insurance and is likely higher than it needs to be to ensure that high-income people are covered.

More of an incentive to spend on health care. The exclusion and other tax benefits for health care reduce the after-tax cost of that spending, leading to more spending on health care and less spending on everything else than would be the case without these incentives. The design of the current tax incentive magnifies this effect because the combination of the employer exclusion with the general lack of a tax deduction for out-of-pocket expenses leads to insurance plans with lower copayments and deductibles and thus higher spending. Two studies suggest that eliminating the tax exclusion for premiums could result in a 41–65 percent increase in the coinsurance rate, which could lead to a 9–38 percent reduction in health spending by the privately insured. Both economic theory and evidence from the RAND Health Insurance Experiment (HIE) and other studies suggest that such a reduction in spending would result in little if any worsening in health outcomes.

* More on risk pooling here, and group coverage through membership organizations could accomplish the same thing w/o risk of losing coverage w/ job loss or change.  I’d be interested in learning of any national or state-level laws that stand in the way of this.  – BTS

(Hat top, Greg Mankiw.)

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Filed under insurance, tax code, HSAs

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