Answering Some Questions on the Tax Treatment of Health Insurance

Tue, 29 Dec 2009 15:25:06 +0000

I'd like to address two comments on recent posts -- one by Michael and one by Jonah -- regarding the "tax" on "Cadillac" health plans.

As a matter of tax policy, I favor eliminating the exclusion of health insurance premiums from taxable income.  So does Jon Gruber.  I think economists can agree on this because of the reasons indicated in the original articles and comments -- it promotes spending on health care that may be wasteful.  We could finance quite a lot of expansions in coverage with a chunk of the $200 - $250 billion in foregone tax revenue.  We would also make the tax code more progressive in the process.

What I am criticizing in these posts is a proposal to selectively eliminate it for the most expensive health insurance plans without regard to whether the expense is due to the design of the plan or the expected health expenditures of the insured population based on their health status.

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It is true that the income tax exclusion of the health insurance premiums does tend to favor those with high expected health expenditures, but the way to address that issue is through a comprehensive system of ex post risk adjustment for the premiums, as I discuss here and here with regard to the House and Senate bills.

Jonah also asks why I favor Medicaid-for-all rather than Medicare-for-all as the backstop to the individual mandate.  There are a couple of reasons.  First, Medicaid is the less generous of the two plans.  I have no desire to see people leaving private insurance for government insurance in large quantities.  That will happen less with Medicaid.  Second, Medicare exists in a fiscal environment in which it runs large deficits as a matter of course -- no one has yet faced its true costs and paid for them.  Medicaid is run at the state level, and although it receives federal funding, politicians have had to deal more straightforwardly with its cost growth.