TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, August 10, 2004

Using the Tax Code to Fix Health Care

Tuesday, August 10, 2004

Interesting Wall Street Journal op-ed by Susan Lee, A Tax-Code Cure for Ailing Health Care, which follows up on the proposal made in the May 4 paper by R. Glenn Hubbard (Columbia Business School) and two Hoover Institution scholars (John Cogan & Daniel Kessler) to reform health care by permitting all individuals to deduct the cost of health insurance and all medical expenses. In The American Health Care System Is Broken; Here’s How to Fix It, Hubbard, Cogan & Kessler wrote:

We propose a simple change that will fundamentally alter the way people buy health care. All individually purchased insurance and out-of-pocket expenses would become tax deductible for persons who have at least catastrophic insurance coverage. The tax deduction could be taken by persons who claim the standard deduction on their tax returns and those who itemize deductions. All purchases of health care would receive the same income tax treatment.

With a level playing field, workers will no longer have a tax incentive to take their compensation in the form of expensive health insurance with low copayments and will shift to health plans with higher deductibles and higher coinsurance rates. Market forces will ensure that the insurance premium savings will be passed on to workers in the form of higher money wages. Just as workers have borne the burden of rising health care costs, so will they reap the benefits when costs are brought under control.

Lee agrees with this analysis:
The expansion of tax deductibility would have two effects. First would be the commonsense -- and perverse -- impact of increasing consumption and costs. Expanding tax deductibility would lower overall health care prices to consumers and thus increase demand. But the second effect goes the other way, reducing heath-care consumption and costs. Currently, by making employer plans cheaper than individually purchased ones, the tax exclusion creates a bias toward employer plans and away from direct purchase. So extending the tax exclusion to direct purchases of health care would level the playing field.

Incentives to offer employer-provided insurance will not disappear, because insurance companies will continue to find risk-pooling attractive; but the coverage offered will shift from high deductibles and high copays to low deductibles and copays. For both the self-employed and those with employer-provided insurance, making out-of-pocket costs deductible will lower the price of direct health-care purchases relative to purchases made through insurance. Thus, insurance with higher deductibles and coinsurance, and fewer covered services -- that requires lower premiums -- will become more attractive. The shift will reduce the consumption of health- care services and reduce costs.

Lower premium prices are the key to this shift. When out-of-pocket costs are reduced by the proposed tax deduction, it will make less economic sense to pay the higher premiums charged for high deductible, high coinsurance policies. And, as it turns out, premium costs are very sensitive to the level of deductions and coinsurance.

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» Using the Tax Code to Fix Health Care from Zmetro.com
Interesting ideas, certainly worth discussion:We propose a simple change that will fundamentally alter the way people buy health care. All individually purchased insurance and out-of-pocket expenses would become tax deductible for persons who have at l... [Read More]

Tracked on Aug 10, 2004 9:43:31 PM

» Using the Tax Code to Fix Health Care from Zmetro.com
Interesting ideas, certainly worth discussion:We propose a simple change that will fundamentally alter the way people buy health care. All individually purchased insurance and out-of-pocket expenses would become tax deductible for persons who have at l... [Read More]

Tracked on Aug 10, 2004 9:44:56 PM

» A Not So "Brilliant Deduction" from The Lowest Deep
Cogan, Hubbard and Kessler propose to "fix" the tax-related issues surrounding health care by expanding tax subsidies for medical expenses. There are so many problems with their propsal that I hardly know where to start. Their proposal, in brief, is ... [Read More]

Tracked on Dec 8, 2004 11:04:01 AM

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