2007 January 21 Sunday
Bush Wants Tax Deduction On Personally Bought Medical Insurance

George W. Bush wants to give those who buy their own medical insurance the same sort of tax avoidance that employees get on employer provided medical insurance.

WASHINGTON, Jan. 20 President Bush intends to use his State of the Union address Tuesday to tackle the rising cost of health care with a one-two punch: tax breaks to help low-income people buy health insurance and tax increases for some workers whose health plans cost significantly more than the national average.

While tax deductibility would be lowered for employees who get medical benefits from their employers it would come into existence for those who pay for their own medical insurance.

The basic concept is that employer-provided health insurance, now treated as a fringe benefit exempt from taxation, would no longer be entirely tax-free. Workers could be taxed if their coverage exceeded limits set by the government. But the government would also offer a new tax deduction for people buying health insurance on their own.

I see political problems with this proposal. On the one hand, I've worked for multi-year stretches paying my own medical insurance using after tax dollars while people in jobs with medical benefits got their medical insurance paid in pre-tax dollars. So the status quo on tax deductibility of medical insurance has always struck me as an unfairness in the labor market that works to the advantage of established companies and against individual entrepreneurs and contract workers.

Yet cutting back on the tax deductibility of existing employee medical benefits is likely to be unpopular among smarter and better paid workers who work in companies that provide better health plans. Also, on average it'll effectively be a tax on relatively higher income workers to pay for benefits for lower income workers. Since higher income workers already pay more in taxes and at higher tax rates they aren't likely to see this as fair.

But the tax deductions under the soon-to-be-proposed plan are so high that most people currently covered by medical insurance through their employer will not pay higher taxes as a result.

President Bush will propose a tax deduction of $7,500 for individuals and $15,000 for families regardless of whether they buy their own health insurance or receive medical coverage at work.


Because of this, about 80 percent of people with employer-based plans will actually see their tax liability fall because their insurance policies cost less than the deduction, he said.

But those who have very high monthly premiums (say $1000 per month - and this does occur) are at higher risk due to a pre-existing condition would pay more taxes under this scheme.

Of course the medical expenses of the lower income workers are already being borne by higher income workers . Currently higher income workers pay taxes to fund Medicaid and other programs that pay the medical expenses of less skilled, less intelligent, and lower income workers. Also, hospitals and other medical providers raise rates on services charged to insured patients in order to get the money to pay for those who do not pay their medical bills. If you have medical insurance for a family it probably costs nearly $1000 a year more in order to pay for the medical expenses of poor people.

The medical costs problem is a result of a few trends. One is the aging of the population. More people are old and with assorted illnesses. Another is technological advance. Diseases with no treatment are cheap to treat. But we have many more treatments and so more expenses. A third is growth of the population of lower intelligence and lower skilled workers who aren't worth enough on the labor market to cause employers to offer them medical insurance.

All these problems make each other worse in a serious negative synergy that keeps building in a vicious cycle. As more people lose medical insurance the health care providers shift more of their costs onto those who are still covered and that drives up medical insurance premiums. The higher insurance premiums cause more employers to drop medical insurance as a benefit for their employees. Also, as the population ages and Medicare costs for the old rise the federal government cuts back on payments to hospitals and doctors for services provided. Again, the providers raise prices with the privately insured but in this case they do so to make up for lower payments from treating old folks. So up go private medical insurance premiums even higher.

As well paid workers shrink as a percentage of the total population and low skilled immigrant groups and old folks rise as percentages of the total population the medical costs problem will keep getting bigger and bigger. Part of this worsening problem shows up as growth in the cost of Medicare. Part shows up as higher costs for Medicaid. But rising health insurance premiums also are partially a result of both the aging and dumbing of the US population.

In a way Bush's proposal amounts to moving the chairs around on the deck of the Titanic. We need more radical changes in policy to address the medical costs problem. First off, we can't prevent the aging of the population yet. But we can stop letting in immigrants who aren't going to become high wage earners and deport the illegal aliens who are already here. We need a First World population to support First World levels of medical care and other services.

Second, we might gain advantages of greater market forces in health care if tax advantages that now flow toward paying health insurance premiums instead flowed to a combination of health savings accounts and higher deductible insurance premiums. Higher deductibles would give buyers a bigger incentive to be frugal in their use of health services and drugs. Under current tax law the structure of tax advantaged medical spending accounts only works for highly predictable medical expenses because the money has to get spent by the nd of the year. Unless one is a non-employee with a Health Savings Account there's no way to put away money pre-tax to save for unpredictable illnesses.

Third, the US government should offer prizes for innovations that allow medical cost reductions. For example, how about multi-million dollar prizes for robots that can do various types of surgeries?

Fourth, the US National Institutes of Health or Medicare should fund a lot more clinical trials that compare existing standard treatments against less expensive and less frequently used treatments. Find out where medical practitioners are choosing more expensive treatments because specialists want more revenue.

Fifth, at some point we are going to have to address the practice of providing unlimited medical care for those who have incurable diseases. The huge costs racked up in the final few months of life are paid for by taxpayers. Lots of treatments tried at that stage provide little or no benefit at enormous cost. Those treatments are hard to justify. We are going to reach a point with a swelling populaton of retirees makes the current practice unsustainable.

Sixth, while technology currently drives up costs that will not always be the case. Eventually stem cell therapies, gene therapies, and other rejuvenation therapies will so reduce the incidence of diseases that medical costs will drop. If we push biotechnology ahead faster we will sooner reach the point when medical costs drop.

Share |      By Randall Parker at 2007 January 21 12:07 AM  Economics Health

diana said at January 21, 2007 5:23 AM:

"Second, we might gain advantages of greater market forces in health care if tax advantages that now flow toward paying health insurance premiums instead flowed to a combination of health savings accounts and higher deductible insurance premiums."

Randall, The whole issue of market forces in health care is such a...well, excuse me, crock. You can't have market forces in a system that's completely controlled by the state (and rightly so, IMO). For example, the supply of health-care providers doctors is heavily regulated. You have to go to college, med school (or nursing school, etc.), then go through a socially approved form of apprenticeship. And so on. (Let's not go into what it takes to make medications.)

I could understand the market forces argument if we were speaking about aromatherapists, or some bullshit thing like that, where anybody can just print up a card, but when you are speaking about a tightly controlled guild, which dispenses controlled substances, it's heaping nonsense on nonsense.

Randall Parker said at January 21, 2007 7:46 AM:


Look at plastic surgery. It is a market to a far greater extent than most of the rest of medicine. So is eye care for the most part. Both have a lot more price competition and innovations to reduce costs. Same is true of dentistry.

As for regulations on the supply of doctors: It is not clear to me that we'd get cheaper health care if the supply of doctors was bigger. In fact, in areas with higher medical costs (adjusted for age) the supply of doctors is higher.

Ned said at January 22, 2007 5:09 AM:

A surgical robot currently exists - the Da Vinci system. Its only present use is prostatectomy, where it allows better preservation of the nerves that control urination and erection. It costs $1.5 million, which is a lot for a device with only a single application. And it does require a specially trained, skilled surgeon to operate. New robotic surgical applications will be developed, but the robots will be expensive, so there won't be any cost savings, although outcomes will be improved.

Randall Parker said at January 22, 2007 6:41 PM:


The costs of the robots will drop. They've gain the ability to do far more too. Plus, total cost isn't as important as cost per use. If it is used long hours every day of the week costs per use falls. So it could be more cost effective in urban areas with high population densities.

As surgical robots gain more capabilities they'll be able to get used more hours per day. So costs per use will fall for that reason. Also, prices will fall.

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