Code Red: Two Economists Examine the U.S. Healthcare System

June 22, 2009

Tax Deductibility Redux

Filed under: Health insurance,Tax deduction — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 6:53 am

William White:


If one believes the new CBO scoring for the Kennedy-Dodd bill , proposed health reforms could be on track to be hugely expensive without much impact on access.  (Reported estimates suggest when fully implemented, the net impact would be about 16 or 17 million more insured at a cost of $1 trillion for 2010-19). As commentators have been quick to point out, the CBO scoring doesn’t consider possible additional measures such as Medicaid expansions or a public insurance option.  These could lead to greater access but would also increase costs.  Meanwhile, the administration is talking about reducing government reimbursement and pushing comparative effectiveness analysis at the same time that providers are complaining about payment cuts and Republicans are raising the hoary specter of “Socialized Medicine.”

I am not sure reform initiatives are is at an impasse yet, but my question is this.  At least as a fallback, does pushing for a partial reduction of the tax deductibility of private health insurance make sense?  I think so.  At a minimum, this would raise some revenue to help support other aspects of reform and dampen the fiscal impact.  It is also likely increase the price sensitivity of shopping for health insurance and revive interest in HMO and other forms of managed care.  This sounds same old, same old and there are, of course, the concerns that the private system could unravel.  As we have already discussed, as long as reductions in deductibility are moderate, I suspect they are unlikely to trigger a mass exodus from private group coverage.  There remains the risk that consumer backlash could paralyze private cost containment efforts.  However,  plans have become more nuanced in recent years, while partly eliminating deductibility could create an impetus that hasn’t been there before.


David Dranove:


This is getting exciting.  Curtailing the tax deduction seemed dead a few days ago, but after the CBO report, the tax deduction is back on the table.  Congress is at its wits’ end.  Democrats can’t figure out if curtailing the deduction will be seen as a middle class tax hike or a way to fund coverage for the uninsured.  Republicans can’t figure out whether to view it as an increase in the size of the government or a boon to free markets.  Curtailing the tax deduction would be all of these things and more.

Some of our friends on the right hope that eliminating the tax deduction will help high deductible health plans.  But the plans that really stand to gain are the HMOs.  Thirty years ago, Alain Enthoven wrote how HMOs could end the health care cost spiral, if only we had a level tax playing field.  Perhaps we will finally have a chance to see if Alain was right.

Would you buy shares in HMO stocks right now?


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