How to Cure the Health Insurance Crisis

Key Democrats have already announced that the president’s plan to use the tax code to encourage more Americans to obtain health insurance is dead on arrival on Capitol Hill. They complain that this is just one more scheme to give tax breaks to people who don’t need them, while continuing to deny essential health care to the most vulnerable.

The president’s plan deserves a more serious look. The health insurance problem is two-fold: Too many Americans, some 47 million, lack basic health insurance; and the rising cost of health care makes even those with insurance at risk of being unable to afford good care.

About 175 million Americans receive insurance through their jobs. Under the current system, they don’t pay taxes on this benefit, even on the portion of the premium that is paid by their employers, and they also don’t get a deduction for the portion of the premiums they pay out of pocket. 

When an employer looks to hire someone, he calculates the total cost of that employee: salary, employer payroll taxes and benefits, including health insurance premiums. In terms of the true cost to the employer, a dollar paid for insurance for the employee is no different than a dollar paid in wages.

But to the employee, the health care coverage is worth much more than its equivalent in cash, because the former comes tax-free, while the latter gets taxed. Under the president’s plan, insurance premiums for employer-provided health insurance would be treated like any other income, as they should be. However, this would be offset by a new tax deduction.

The president proposes to allow a standard income and payroll tax deduction of $15,000 to every family ($7,500 for an individual with no dependents) for health insurance. Since the average family policy costs about $11,500, this would benefit most people who receive insurance through work (everyone would get the same standard deduction, regardless of the cost of their insurance).

But the real winners would be the uninsured and those who choose insurance policies with lower premiums but higher deductibles. The uninsured would now be able to use the money they would have paid Uncle Sam to put toward purchasing health insurance. For someone in the 30 percent tax bracket, that would be $4,500 they could use to pay for health premiums. The working poor, who pay little or no income tax, would still receive a break on their payroll taxes, though not enough to pay for most current insurance policies.

Potentially, even those who have employer-provided policies might have an incentive to push for lower-cost plans, since they will be taxed on the value of the premiums. If they’re relatively healthy, they might prefer higher deductibles for routine care, or they might want only catastrophic insurance to pay for some unexpected illness, injury or hospital stay.

The real question is: Would new forms of insurance spring up to meet a new demand for lower-premium policies? In a free market, there’s no reason to believe they wouldn’t.

We already have such a system in other forms of insurance. When you buy auto insurance, you can choose to pay lower premiums but accept higher deductibles on any claims. When you purchase life insurance, you determine how much coverage to buy, and pay premiums accordingly, as you do for property insurance.

And there might even be some other benefits if individuals were paying directly for their own health insurance, rather than having a third party pay. Safe drivers get breaks on their auto insurance because the company isn’t as likely to have to pay out claims as it is on a reckless, accident-prone driver.

The same goes for life insurance. A slim non-smoker who doesn’t engage in risky hobbies would pay lower life insurance premiums than a chubby, pack-a-day amateur skydiver would.

Maybe if more Americans had to pay their health insurance premiums directly, they’d be more likely to follow their doctors’ advice to lose weight, quit smoking and engage in moderate exercise, because their premiums would go down accordingly.

But the Democrats’ only alternatives to the current system are to force more employers to provide ever more expensive plans to expanding groups of workers — or have government pick up the tab.