Sunday, December 13, 2009

Catastrophic comparison, Part 2.1

Now, where as I? Ah, yes. Before getting side tracked into my Five Health Insurance Issues series I was discussing three proposals for government-paid or government-provided catastrophic health care. As I said in my previous post:

So all three proposals are designed to make individuals see clearly what they are paying for their own health care because, the authors believe, that will result in careful decision making about what treatments are really worthwhile and which doctors and hospitals provide the best value which will in turn result in less spending on health care. At the same time all three writers want to make sure everyone has access to care and no one is financially destroyed by medical costs. Their goals are the same; the methods differ.

The question for today is: Are these plans paid for? Please note that this is a different question from whether we can afford them, either nationally or as individual taxpayers. Here I’m just examining whether the income streams they depend on are sufficient to cover the costs of the health care they must pay for.

Let’s start with Martin Feldstein's proposal since there’s no math involved. Feldstein proposes that the government give everyone a voucher to buy catastrophic health insurance from a private insurance company. The catastrophic amount would be 15% of the individual’s or family’s income. He would pay for this by taxing employer health insurance payments. He does not address the issue of low income individuals; that is, those with employer-paid health insurance and low incomes.

I simply don’t see how Feldstein’s plan can possibly be paid for. I said in my earlier post that I discuss his plan with trepidation because it makes no sense to me and that’s even more true when it comes to the question of paying for it.

Feldstein relies on taxing employer health insurance payments to pay for the vouchers everyone is going to get:

My calculations, based on the government's Medical Expenditure Panel Survey, indicate that the budget cost of providing these insurance vouchers could be more than fully financed by ending the exclusion of employer health insurance payments from income and payroll taxes.

But surely the value of employer health insurance payments will drop like a rock under his plan. Employer health insurance payments are based on the value of the coverage: the better the coverage, the higher the payments. Yet Feldstein himself anticipates - indeed, hopes - that the value of coverage will be squeezed from the bottom:

Because employer payments for health insurance are tax-deductible for employers but not taxed to the employee, current tax rules encourage most employees to want their compensation to include the very comprehensive "first dollar" insurance that pushes up health-care spending.

Clearly Feldstein anticipates that once employer payments for health care are being taxed, the plans will become less generous. In fact, he counts on this effect to reduce overall national health care spending. But less generous coverage - the higher deductibles he hopes for - means lower employer premium payments which means less revenue from taxing those payments. So based just on Feldstein’s own anticipated consequences for his plan, the revenue stream he’s counting on is already reduced.

Even worse for his revenue stream, the value of coverage has - by definition - been squeezed from the top. Right now an employer-paid health plan must cover the possibility of extremely large health care costs; the higher the possible health care costs, the higher the premiums; the higher the premiums, the more money you collect when you tax them. Under Feldstein’s plan, employer-paid health insurance plans will never have to cover more than the catastrophic deductible: no more than 15% of payroll. The possible health care costs go down, the premiums go down, the money you collect when you tax them goes down. Now not just Feldstein’s hopes for less generous coverage but the economic reality of such coverage will erode his proposal’s own funding base.

Furthermore, I can see employer-paid health insurance disappearing completely under Feldstein’s proposal. Once employer-paid health insurance is taxable (both income and payroll - ouch) it’s rational for employees to decide they’d rather have the money as salary. They can spend it on health care if they need it but if they don’t it’s available to them for other purchases. This would completely eliminate the money Feldstein is counting on to fund his catastrophic insurance plan.

As I’ve now said twice, I fear I’m missing something since the problems in Feldstein’s plan seem so obvious. Unless someone can explain what that something is, however, I consider Feldstein’s plan unworkable and will not consider it further.

In the next installment, I’ll look at whether DeLong’s plan is paid for.

No comments: