Contemplating Health Care Reform

Thursday, August 20, 2009

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.


  1. I agree with your suggestions for reform. As for the "freerider" problem, simply allow them to suffer the consequences. No treatment unless it is for life saving. If they do not pay, then the amount owed stays with them + cannot be discharged by bankruptcy (like student loans). Their paychecks get garnished as well as social security.

    If the state mandates were removed, people could buy simple catastrophic, high deductible insurance (which is what it should be + not prepaid medical care) for relatively little - maybe $100/month or a little more depending on age.

    My feeling is if they still prefer to be a freeloader, then they have to suffer the consequences. It's called personal responsibility.

  2. FIRST: Free-riding is a non-issue, a mere 2.8% of health premiums. That is a proportionately smaller problem than uninsured motorists in car insurance.
    See for example:

    By the way, if the statists really feel they can force everyone to buy health insurance, how come they have failed so badly with car insurance?! And with car insurance they have control of registration, licensing etc. Just another government fail.

    SECOND: Please do not repeat false numbers on uninsured. Only a fraction of the number ever claimed are truly "uninsured." We must exclude illegal aliens, those making over $75k, the healthy who refuse to join unfair actuarial pricing, and those already eligible for government help who are to indolent or incompetent to just sign up.

    Also, whenever we do mention the 8 million or so who might be deserving, we must always put it in the context of the 270 million now happy with their arragnements. That shows how ridiculous the Obama proposals really are -- harm the 270 to maybe help the 8.

  3. Excellent posts. I always enjoy your comments at cafehayek as well. Keep up the good work.