Here is the bottom line on how employers and employees together can maximize what they get from government. Many employers who don’t provide insurance today will probably just choose to pay the tax ($400-per-employee under one scenario in the Senate Finance bill) for not carrying health insurance. Some small employers might be enticed back into the market by yet another subsidy they would get. Large employers will react by outsourcing more low- to middle-wage jobs and switch more workers from full-time to part-time employment. Such incentives toward a two-tiered labor market, partly segregated by income, aren’t new, but they will expand under this type of reform.
Health care reform along the lines being contemplated currently faces too many constraints.
1. The average cost per family of the sort of health insurance that Congress wants us to have is $15,000 a year.
2. Even for families above the median income level, $15,000 seems like a lot. Hence, Congress wants to subsidize families up to relatively high income levels.
3. Congress cannot possibly hand out these subsidies to everyone. Therefore, it wants to deny subsidies to people with employer-provided health insurance.
The result is a Rube Goldberg scheme of penalties and inducements, creating a system that is ripe for gaming. For example, many workers may find it to their advantage to change their relationship with their firms from “employee” to “independent contractor” in order to enjoy the subsidy. Others, particularly high-income workers, may be better off keeping their employee status.
As the system gets gamed, the costs will be much, much higher than CBO is estimating.
The obvious solutions, which are politically infeasible, include:
1. Change the concept of insurance to something closer to real insurance. See Crisis of Abundance if you do not know what I am talking about. Real insurance would pay only in the event of an illness that is going to require large cumulative expenses over a period of years. As with fire insurance, claims would be rare but large, and premiums would be affordable.
2. Change the way that government subsidizes health insurance. Remove the tax subsidy for employer-provided health insurance, and instead replace it with health care vouchers. The vouchers could be determined by a formula that reflects income and medical history. Vouchers would eliminate the gaming that will take place as people choose their employment status to optimize the benefits they receive from different regulatory regimes.
READER COMMENTS
R. Richard Schweitzer
Nov 12 2009 at 12:42pm
Where is the necessary question:
How are prices – yes, prices, not costs – determined in this area of economic services?
R. Richard Schweitzer
woupiestek
Nov 12 2009 at 1:17pm
If subsidies where reverted from subsidizing buying health care to subsidizing producting health care, wouldn’t the market reduce health care costs on its own?
Dan Weber
Nov 12 2009 at 1:41pm
I think Rube Goldberg would be embarrassed by our health care system.
How about this:
1. A government-run plan that everyone is eligible for. No means testing or anything. Newborns and legal immigrants are automatically signed up. If you lose your job you can easily switch into it. Its total cost is limited by statute and the technocrats run it as best they can given that dollar limit. It’s not super-awesome care, but it’s decent enough.
2. If you don’t like the government plan, you get your own. The government gives you a small tax credit or a voucher to thank you for getting off of their roles.
We could probably run #1 reasonably well with the existing $600B allocated to Medicare and Medicaid. The tax credit could then be around $1000 a head.
Partisans on each side will complain that it doesn’t meet their ideal, but we won’t have the sick incentives present in our current system, or the one proposed by Congress.
Mr. Econotarian
Nov 12 2009 at 2:56pm
“1. A government-run plan that everyone is eligible for…
2. If you don’t like the government plan, you get your own.”
This is the UK NHS vs. private system in a nutshell. Except for this part:
“The government gives you a small tax credit or a voucher to thank you for getting off of their roles.”
That never seems to happen!
Floccina
Nov 12 2009 at 4:10pm
Congress cannot possibly hand out these subsidies to everyone. Therefore, it wants to deny subsidies to people with employer-provided health insurance.
This breaks Floccina’s laws:
You cannot subsidize the middle-class.
Bill
Nov 12 2009 at 6:52pm
Why is the voucher solution infeasible, I wonder? The insurers should like it, since it will raise demand for their products. Employers should like it, since they will be able to close down one part of their HR department and not worry about health insurance any more. Providers should like it, since it will reduce the number of uninsured. Even gvt bureaucrats should like it, since they will have eternal employment managing the risk adjustment system.
Who hates it? Unions, because it cuts down on one dimension they are good at getting compensation on? High income people, since their taxes will rise more? The HR consulting industry?
Simon K
Nov 12 2009 at 8:36pm
I don’t think you need to do (1) as long as you do (2). The only reason we pay for health care through pseudo-insurance is because its tax efficient. Remove that incentive and people suddenly become aware of the fact that its expensive and inefficient in every other way.
Fenn
Nov 12 2009 at 8:44pm
is that 400 dollar/employee tax penalty per month?
Matt C
Nov 13 2009 at 12:44am
The average cost per family of the sort of health insurance that Congress wants us to have is $15,000 a year.
In Mankiw’s earlier article he seemed to be saying it was 20K/year for a family of 4. At any rate, it’s high.
We buy our own insurance out of pocket (self employed) and we pay closer to 5K/year for a family of four.
I suspect few people who buy their own health insurance pay 15-20K a year (they’d do without or get a job with coverage instead).
If reform results in a levelling of insurance rates (which seems plausible), people like us will be looking at around $1000 a month in increased expenses because of the stroke of a pen.
Without subsidies, I think this “reform” would basically destroy blue collar and pink collar self employment in the U.S. As it is, I’m going to be very attentive to what the subsidies are and how they work if this ridiculous plan passes. Let the games begin indeed.
Norm
Nov 13 2009 at 12:45am
Dan Weber’s solution is what I believe would work best. It is simple, limits expense naturally and allows freedom of choice. This is the first time I have seen anyone else suggest it. Now there are at least two of us.
tjames
Nov 13 2009 at 8:57am
Norm, Dan – as I see it there are some problems with this scheme.
First, there won’t be real freedom of choice. You will either have to be on the government plan, or on a plan that is a superset of it, i.e. it covers at least all the government plan items. This will be so people do not opt for very minimal coverage, then fall back onto the goverment plan when their own plan becomes inadequate to their needs.
Given my first premise, all optional plans (i.e. non-government) will presumably cost more than the goverment plan, since they must cover at least as much and may not be able to operate with the legal force and purchasing power of the US government. Add to this taxation of “Cadillac” plans and it follows that only “the rich” will be able to opt out. Everyone else gets the insurance/care the government decides is standard. This a a problem, since quite a few people have said they do not want to be in this type of system. To be fair, a lot of people seem OK with this type of system too, but it’s certainly not a political slam dunk.
Perhaps you are suggesting a very minimal government system, which might be superior to the complete lack of insurance many folks now have. Such a system might have a cost point low enough to make real alternatives viable. But such a system is unlikely to ever be enacted since the entire point of this exercise for many people is to extend “affordable”, comprehensive, and in some cases egalitarian, coverage (and care) to very large portions of the population, never mind the actual system-wide costs and consequences.
Dan
Nov 13 2009 at 12:04pm
A couple of questions about possible market distortions:
1. Does this mean a single person will be less expensive to employ than a person with five children?
2. If the husband and wife both work, which employer pays for the family’s health insurance? Or do they split it? If so, does this not mean there will be greater financial incentive for both spouses to go to work, since people with working spouses cost less to ensure and can therefore be paid more and/or are more likely to be hired?
Bruce
Nov 13 2009 at 12:37pm
I agree with this post, which means I disagree with Simon K’s premise that you don’t need to do (1) as long as you do (2).
I have what I believe to be a fairly close analogy to the current healthcare financing system in the US and it points to its inefficiencies. Here it goes:
When I got out of college I rented an apartment in a building that had 72 total units. I paid a flat rate per month and utilities were included in the rent. It was in Arlington, Virginia, which can be pretty miserable in the summer. So, what did I do with my air conditioning? I ran it all day, even though I was at work for 12 hours a day, so that when I got home from work my apartment was a very comfortable 72 degrees. I know, I know, Al Gore should strike me dead.
Why did I do this? Because, in essence, 71 other people were helping me pay for my air conditioning. I was not bearing the direct cost of my decision to run my air conditioner all day because my rent included utility costs. Of course, assuming the other 71 tenants behaved in the same rational economic manner that I did, then I paid for each of their use of air conditioning. The landlord wasn’t paying for the air conditioning. He priced the rent so that he made money even if we all ran our air conditioners all day long. So, in the end, I ended up paying as much implicitly as I would have if I paid directly for my air conditioning use. However, if I paid directly for my own air conditioning use there is no way I would ever run the a/c for the 12 hours I was away at work. So, in the end, the 72 of us way over-consumed a product relative to what we would have if we had been forced to pay roughly the marginal cost of our decisions.
Now notice there was no heavy hand of government here to cause the distortion. Also, what if the landlord had instead said that you can structure your rent in one of two ways? You can pay $1,000 per month with utilities included or you can pay $900 per month with no utilities included plus you can buy a utility rider for $100 per month that allows you unlimited use of utilities. It should be obvious that if I chose the second option my behavior would have been the same. In either case I would still be paying the bill, but still misusing the product. The reason is that the marginal cost of my decision to run the a/c (because 71 other people are helping me pay for it) is much less than the marginal utility (no pun intended) I get from running it. That is not a pre-tax versus after-tax distortion. It is a fundamental economic distortion.
I think this describes the fundamental distortion that exists in our healthcare system today. We all pay for healthcare over the course of a year, lifetime, whatever, in some fairly direct proportion to our consumption of it. This is through explicit premiums or lost wages or whatever. However, the marginal cost we bear each time we consume healthcare is quite small relative to the marginal utility of that healthcare. So, in the end, we over-consume and end up paying more than we would otherwise if we made a case by case decision whether to avail ourselves of healthcare resources. I know people will counter that no one consumes healthcare as a “luxury” as I did with my a/c, so therefore the analogy is not appropriate. However, I am not sure about that. As a father of 3 boys I know that we consume our pediatrician’s time differently by only paying a co-pay than we would if we paid full freight for each visit.
The only way to get rid of that distortion is to “outlaw” first-dollar insurance and only allow catastrophic insurance in healthcare. For those of us who don’t like the idea of the heavy hand of government dictating what kind of insurance we can buy, well I guess it can be rationalized by the fact that the government has a pretty heavy hand in it already.
PQuincy
Nov 13 2009 at 3:47pm
It does seem that the President’s feeling he had to promise, while campaigning, that “no one will lose the health care they have now” has produced highly Rube-Golbergish consequences in the design of health care finance reform.
This was a purely political promise, one made to forestall the predictable taunts from the other side about “socialism!!!”, “You will be forced into an evil government program,” “Keep the government out of Medicare” and similar nonsense.
It seems to have become a promise that, for better or worse, the Democrats plan to keep in good faith, even though it leads to bizarre and dysfunctional results. Politics, in short, has stuck its usual disruptive nose into the process of fixing what is already a bizzare dysfunctional system. Several better pathways forward are imaginable, including the catastrophic insurance/everyday self-insurance model, the single-payer model, and others. Each has winners and losers, advantages and disadvantages — but the current state of politics has removed all of them from the table. That’s a pity.
Norm
Nov 13 2009 at 8:17pm
What I have in mind is a system in which the government provided care is limited by whatever is appropriated for it. Trustees (I would like them elected by state) decide what is covered, for whom. They might use income, quality of life prospects , likelihood of the treatment being effective, whatever combination of politics, economics and technical inputs they (we) choose. Their limit is they can only spend what is appropriated specifically for public health care. Anyone with enough money can purchase their own care or insurance.
Maybe vaccines are available to all and so cheap in the public system that private systems don’t even provide them, but addiction treatment is only provided to poor folk. Then private insurance would offer some plans that cover addiction treatment and others would leave that up to direct private payment as needed.
The trustees would have to cope with the decisions whether to provide marginally effective, but expensive, treatments. Similarly they would decide whether to provide optional care like fertility treatment or Viagra. Now these decisions are made by legislators who don’t directly cope with the costs.
So yes someone might go back and forth, although the private plans would not likely take back an uncovered individual who has developed an expensive condition. The disadvantage to the public care is that some treatments might be fairly basic. This would encourage private care, but still give those who can’t afford it, basic care.
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