The Insurance Problem - Part III

Most people would agree that we should have the same tax treatment for those who buy their insurance as individuals as those who receive their insurance through employer contributions. This means that either you pay normal income taxes on any premiums paid on your behalf by your employer or that the folks in the individual market get to deduct their insurance costs.

Keeping employer contributions untaxed and expanding the deductibility of premiums to individuals is certainly the politically expedient thing to do since polls have shown that most people don’t want their benefits taxed. But adding a new deduction cuts tax revenue, and cutting tax revenue without cutting a like amount of spending only adds to the deficit, shifting the a larger tax burden onto our children and grandchildren. And we will still have the problem of the paying for the 45 million uninsured. If we, as a people, want insurance for all, we are going to have to increase taxes. The logical way to do this is to treat employer paid health insurance premiums as any other compensation. Everyone would buy insurance with after tax dollars.

So what “insurance reform” turns out to be necessary?

1.)Remove the regulatory burden on individual insurance market to allow market innovation as proposed by John Cochrane. (Solves preexisting conditions and medical underwriting issues plus encourages cost effective plan designs and competition)

2.)Allow sales of individual health insurance across state lines. (At least partially resolves state mandate burden)

3.)Delink health insurance from employment and tax group and individual policy premiums the same at the individual level. (Assists portability and funds insurance for all Americans)

The only issue not dealt with is that of “free riders.” These are the individuals, not eligible for Medicaid or Medicare, whose annual income is $50,000 or more and who choose not to purchase insurance. What happens when the need to medical attention and can’t or won’t pay? Their unreimbursed costs get built into health care providers charges just like the under reimbursements from Medicaid and Medicare. They become a hidden tax on all of the insured. Some form of individual mandate is one solution to this problem, but mandates are politically difficult to implement.

There are probably many other improvements in the way we could insure ourselves against unforeseen medical expenses. The free market would undoubtedly discover them if the heavy hand of regulation were lifted.