Tax Health Care Benefits

Dominic Pino at NRO Capital Matters reports on some great analysis:

Michael Cannon of the Cato Institute argues in a new study that the root cause of U.S. health-care problems is the exclusion of health benefits from the income tax. That might sound strange at first glance, but it’s really a classic story of unintended consequences.

It doesn’t sound strange to us. If it doesn’t seem obvious to you then be sure to read all of Dominic’s post. We have been on this issue for some time. And no, we don’t reference ourselves because WordPress gets in a tizzy. We’re not sure why somebody would think it sounds strange. Even John McCain, deep thinker that he wasn’t, was on (near?) this path fifteen years ago:

The McCain health plan tackles the fundamental problem in the current system: the tax treatment of health insurance. Equalizing the tax treatment and financing of health care is the first step in realigning the incentives in the system to provide consumers with better quality care at lower cost. 

John was right. Michael is right about the analysis. The difficulty is finding a solution. Well, to be more precise, the difficulty is enacting the solution. The solution is to tax health care benefits as they should have been taxed for all these decades. The problem with enacting a such a tax is lots of people get health care benefits. According to the Census Bureau:

Of the subtypes of health insurance coverage, employer-based insurance was the most common, covering 54.3 percent of the population for some or all of the calendar year, followed by Medicaid (18.9 percent), Medicare (18.4 percent), direct-purchase coverage (10.2 percent), TRICARE (2.5 percent), and VA and CHAMPVA coverage (1.0 percent). [Emphasis added.]

Increasing taxes on 54.3 percent of the population doesn’t look like an election winner.

Sidebar: we need time to do more research but it is not getting done today. Our research staff is out on summer break (satire alert). It seems likely to us that what the 44th president called “Cadillac Plans” is a much smaller percentage. In such plans the employer foots much or all of the bill for employee health insurance. We suspect that a significant part, if not a majority of the 54.3 percent of the population covered by employer-based insurance are largely paying out of their own pocket. End Sidebar

So Michael comes up with an alternative solution to create a special kind of money:

[Michael] isn’t arguing that health coverage should be taxed [too bad]. Instead, he proposes that the money employers currently spend buying group insurance be given to workers in individual, tax-free health savings accounts.

Better to do nothing about the problem of taxing health care benefits than to do what Michael suggests. Michael’s plan still has the incentive to get lots of tax free money from employers.

Michael is right that tax-free employee provided health care benefits is the root cause of American health care problems. The best solution is to tax all health care benefits just like wages. The second best solution is to tax some of the health care benefits. Michael’s solution is a step in the wrong direction.

Comments Can Be Interesting

Our last post on generational wealth inspired by Scott Lincicome at the Dispatch and Economist Writing Every Day led us to do something we rarely do. We ventured into Scott’s comments with our keyboard on. And even more surprising we had a very good experience with Cynthia W. over a couple of days. People can respond to each other rather than spout talking points. Even better one of her comments got us thinking about loyalty.

The exchanges might interesting to others because we respond to each other’s comments. The discussion moved into health insurance. We both seem to be market fans so we have some common ground for discussion. They are not full fledged posts but just comments. Here are our exchanges (so far):

MWG:
The wealth chart by generations is no surprise. It reflects the incentives from the reduction in defined benefit pension plans. Employees don’t want to be tied to employers.

Cynthia:
Employers don’t want to be tied to employees, either. That’s why many of them overpromised and underfunded the pensions and then shrugged when they couldn’t pay, leaving the employees to take whatever the PBGC offered. Pretty much only government employees are offered defined benefit pensions now, because it is imagined that the taxpayers can be forced to pay up.

MWG:
Yes it is nice when both side of the market agree. Governments can underfund pensions without going bankrupt. It will be interesting to see the outcome of the massive underfunding of pensions in some states and localities.

Cynthia:
There was once a fairly strong expectation of loyalty for both employers and employees. Now there is pretty much no such expectation on either side. I don’t see any ethical problem with this as a concept. Employees agree to do a job for the agreed wage/salary for as long as they think it’s the best option for them. Employers agree to pay the employee the agreed amount for as long as they think it’s the best option for them. There are elaborations such as contracts with an agreed time period or contracts that have tradeoffs such as, “We will pay for your degree, and then you will work at the agreed price for three years.”

Because the expectations have changed, other things need to change, including the historical linkage of pensions and health insurance to the employer. The pension link is largely gone, replaced by 401K contributions by one or both parties. The health insurance link is still there, and it’s a disaster.

Regarding pension underfunding, it will be interesting. The states or other entities may not be able to generate the revenue needed when it’s time to make the payments. They can raise tax rates, but residents can leave the state/locality. [Emphasis added]

MWG:
Yes, the health insurance link for employees and employers is a disaster. The solution is easy one sense but really impractical in terms of the politics. Governments should tax fringe benefits including health insurance.

Cynthia:
I would prefer that everyone received their wage or salary and then purchased health insurance in a genuinely free market. There would, separately, have to be a handout version of medical services and products – no fiction about its being “insurance” – for the already ill, and probably a subsidy for low-income people.

Super complicated!

MWG:
My point exactly. Taxing fringe benefits makes a free or at least freer market possible.

Cynthia:
Are you envisioning a series of events where first, the law would be changed to tax fringe benefits. Then, workers would demand salary instead, since it’s taxable, then, workers would demand insurance or cost-sharing features such as interstate insurance availability, alternative insurance groups, and other reforms that have been proposed over the years?

MWG:
Absolutely. Once fringe benefits are not tax advantaged compared to wages then employees will not prefer health insurance provided by the employer. That will create competition in the insurance market. We will find out if folks prefer the comprehensive or “Cadillac” plans they demand now in lieu of taxable wages. I suspect that risk preferences vary and that different folks will prefer very different plans.
The problem is getting there. Making fringe benefits taxable tomorrow will cause significant hardships for employees with big fringe benefits. Taxing a few extraordinarily rich people is often popular. Taxing lots of fairly rich people is not.

Big Pharma Is Better Than Socialism

Big Pharma isn’t perfect. David Harsanyi in NRO’s The Corner has an amazing tweet from one of our socialist elected officials, The Bernie. He also has a great piece of snark when he refers to Stephen Colbert as a former comedian. Here is Bernie’s quote on Twitter:

We talk about being a divided nation. In many ways, that’s true. But, in some ways, we are absolutely united. For example, we all hate the drug companies.

Astounding. Gobsmacking. Hate? As David points out there is only Big Phama because of the costs and risks of creating new drug products. We, and especially conservatives, probably don’t love them because they are big but we think that only a few folks HATE Big Pharma. In fact, most of us have good stories to tell about Big Pharma and of course they (yes this is an overstatement) saved the world from COVID. And a second yes, The Donald’s administration increased the probability of success by creating safe harbors and such.

Here are two stories from our family. Almost a score of years ago the Lady de Gloves had a stroke. It was a serious one. The doctor asked if we wanted to take the risk of tPA. We said yes and in a matter of a few hours she went from an invalid to fine. We are now closing in on twenty useful years from that single tPA injection. And then there is the cost savings. Instead of years of physical therapy, wheel chairs, ramps, etc. there is a one-time fee for the tPA. We know that tPA isn’t always that effective but it was a miracle for us.

Our second story is that a few weeks ago we had Septicemia. As it says at the link, the death rate is up to 50 percent. Fortunately, antibiotics worked for us. We don’t know how much longer we will have on the right side of the dirt but we are happy to be here. We are not suggesting that Big Pharma is perfect. We are not even suggesting that it is perfectly organized. But there are enough competitors that it is far better than a government organized Pharma.

Quality: An Excellent Idea

Kevin D. Williamson, at the NY Post, has one of his excellent ideas that he uses as a solution to our health care challenges. We think it is a really good idea for lots of our concerns. Kevin says:

Instead of a sweeping but ultimately futile grand legislative gesture, the GOP should focus on discrete, narrow reforms that link conservatives’ market-oriented model with Americans’ workaday anxieties ….

Of course, you should go read the whole thing. When you do you will notice that we left out the part about health care at the end of the quote above. That is because it applies almost everywhere. In business we call it a variety of names like continual improvement process:

A continual improvement process, also often called a continuous improvement process (abbreviated as CIP or CI), is an ongoing effort to improve products, services, or processes.^[1] These efforts can seek “incremental” improvement over time or “breakthrough” improvement all at once.^[2] Delivery (customer valued) processes are constantly evaluated and improved in the light of their efficiency, effectiveness and flexibility.

The point is that parties, including the government, should always be evaluating their processes to see if they can be improved. This would make conservatives happy because the Congress would have something to do.

We think it directly applies to reforming entitlements like Social Security. We need to means test Social Security but it will be hard to get the accounting right. There is some combination of assets and income, but not necessarily taxable income, that we need.

Sidebar: Why not taxable income? Roth IRAs are an easy example. If your only asset is a billion dollars (unlikely) in your Roth IRA then you will have zero taxable income in the future. Chances are, however, that it would be appropriate to test you out of Social Security. End Sidebar.

Another part to help get it right without much damage will be to phase in the changes. Congress should be doing a variety of things like reforming health care and entitlements on a regular if not continuous basis. We are much (!!!) more likely to get to a good solution but acting and adjusting on results then we are trying to figure everything out. As Kevin points out, the misnamed Affordable Care Act is a disaster because it tried to do it all in one step. As the Wikipedia cite above says PDCA (plan, do, check, and act or adjust). We know it is unlikely to happen in Congress but it is a great idea.

Good Ideas, Bad Ideas, And Bad Claims

The left cannot claim to have all the bad economic ideas.  They have the worst as we see in Venezuela but they do not have exclusive rights to such ideas.  There are lots of ideas out there and some of them are good but to get them noticed folks often make extreme claims.  Thus, good ideas get dismissed because they are not quite as good as the claims suggest.

Our example of a bad idea comes from Cesar Conda at NRO.  He says:

President Trump should propose exactly what President Barack Obama did in 2011: a temporary reduction in the Social Security portion of the payroll tax from 6.2 percent to 4.2 percent.

Cesar Conda is:

a former Bush-Cheney White House domestic-policy adviser and senior aide to three Republican U.S. senators, is founding principal of Navigators Global.

He is writing at NRO.  It is not unreasonable to take him seriously.  We shouldn’t.  Part of his argument is economic growth and we are fans of the growth fairy.  Economic growth is critically important and we believe that governments can influence the growth fairy.  But the way to get the growth fairy on your side is through long-term policies.  Countries with policies that support economic freedom like enforcing the rule of law, having low corruption, low regulation, low taxes, and free trade are highly likely to be visited by the growth fairy.  Going in the opposite direction then the more likely the growth fairy won’t visit.

The best you can hope for with Cesar’s idea is to move growth around.  It was one of many bad ideas from the 44th president.  It is worse now given the deficit and the near insolvency of Social Security.

Sean Maskai Flynn at Market Watch has two really good ideas for improving health care and reducing or limiting the costs.  They are good ideas because they are long-term and make healthcare more of a marketplace than it currently is.  First, we need transparent health care prices:

The first policy—price tags—is a necessary prerequisite for competition and efficiency. Under our current system, it’s nearly impossible for people with health insurance to find out in advance what anything covered by their insurance will end up costing. Patients have no way to comparison shop for procedures covered by insurance, and providers are under little pressure to lower costs.

Absolutely.  And second we need health savings accounts (HSA) that revert to the owner or can be extended into future years.  We don’t agree with Sean that the employer needs to “gift” them and he is surely wrong that it is a gift.   Any such payment is surely part of compensation rather than a gift.  We are not sure of how such a payment would be treated by the IRS.  The tax treatment of HSA need to be part of the solution.  We think the important points are high HSA limits and the opportunity to move amounts among years.

The second policy—deductible security—pairs an insurance policy that has an annual deductible with a health savings account (HSA) that the policy’s sponsor funds each year with an amount equal to the annual deductible.

The details are important but the problem is that the headline says these two changes would reduce health care costs by 75 percent.  Nope.  The text says they will provide $2.4 trillion [yup, trillion] per year in savings.  Since health care spending in 2017 was $3.5 trillion this gets another Nope.  Still, transparent prices and HSA with high limits and methods to move amount into other years or revert to the owners are great ideas.  Temporary tax changes are not.  Realistic claims are another good idea.

 

Stuck In (The Middle?) With You?

Well, Stealers Wheel’s lyrics often come to mind when surveying the political scene.  The first two lines of the chorus are often apropos but the we have never before felt like the last two lines apply to us.  In case you forgot:

Clowns to the left of me
Jokers to the right
Here I am
Stuck in the middle with you

What has got us in a tizzy is Kevin Drum at Mother Jones is reminding us that National Health Care Is Free.  It is silly but we have read it so you don’t have to.  What is worrisome is the jokers on the right.  Paul Mirengoff at PowerLine reports that:

At the recent National Conservatism Conference in Washington, the crowd voted overwhelmingly in favor of a resolution calling for the United States to adopt an “industrial policy.” In so doing, the conservative crowd agreed with Sen. Elizabeth Warren who, as John [Hinderaker at PowerLine] has noted, also wants the U.S. to adopt such a policy.

The idea is for the government, through a set of policies — taxes, spending subsidies, regulation, and tariffs — to protect factory jobs against the forces of globalization and technological change.

Paul links to James Pethokoukis at AEI for an evaluation.  The headline is “GOP’s Stupid Swoon For Big Government.”  We are entirely on board on “Stupid” but this was the National Conservatism Conference rather than just Marco Rubio.  As the link shows, serious people were there.

As we are trying to deal with the level of disagreement on the right, we come across this from Rosie Gray in Buzz Feed News:

It’s an odd feature of American politics today that while the Republican party as an institution has never been more unified, the right has never been more ideologically fluid. Intellectual subgroups have had their moments in the sun: neoconservatives, libertarians. But they, and the Reaganites who have decided conservative dogma since the 1980s, have all diminished as Donald Trump has occupied all of the available breathing room on the right.

We can help Rosie with her confusion.  The GOP is as fractious as ever.  Just like the Democrat party.  The right has always had intellectual subgroups.  Each candidate brings a number of those subgroups together.  The Donald created a new one: NeverTrump.

Oh, back to Kevin and our concerns on the left.  Kevin is trying to convince us that national health care is free and he says:

You see, the vast bulk of health care spending goes to providers. This means that the only way to reduce spending is to pay doctors less, pay nurses less, pay drug companies less, and pay device manufacturers less. This will not happen, and anyone who’s serious about national health care would be insane to try. Why put up an enormous barrier to success, after all? [Emphasis added]

We agree with Kevin on the part we have put in bold.  The only problem is that the part above it is a description of national health care.  It is certain

Sidebar: We often envy writers for their certainty about a variety of things.  The outcome of very few events is certain.  End Sidebar.

that national healthcare will pay doctors less, nurses less, drug companies less, and manufacturers less.  As a small example from the left, there is the Obamacare tax (#10) on medical devices.  The Donald, like many politicians, is upset with drug prices.

Then Kevin explains how it is free:

The one thing we probably could do is get rid of insurance companies, which would save a bit of money—probably about enough to make up for the cost of adding the remaining uninsured to the system. So in the end it comes out even after all.

We did not make that up.  Kevin is saying that moving administration largely from the insurance companies to the government is going to save us money.  Not just a few dollars but enough to add all of the uninsured into insured.  What do you think the probability that the government is more efficient that private enterprise?  To be fair, given the government regulations in health care, the chance is very close to but not exactly zero.

The clowns and jokers seem to be more numerous than ever.  Did MWG really end up in the middle?  How many adjectives or prefix will there need to be to make MWG a conservative? Are you with us?  We have received but not read the other Kevin’s new book.  Perhaps reading that we relieve our funk.  We hope to get around to explaining why George Will’s new book is great but we still feel lonely.

 

 

 

Medical Pricing

Steve Cohen’s article on hip replacement prices in the WSJ struck a chord for several reasons.  We had a family member just get a new hip.  Transparent prices are critical to have effective markets.  Medical prices have always seemed very odd, especially for procedures that are pretty standard.

We often talk about expertise here and we plead guilty to lack of expertise on medical pricing.  Part of this post is to remind ourselves to find out more.

We want to discuss the oddity of medical prices.  In Steve’s article he says that he had both hips replaced and

[T]he hospital had charged $175,000 for my right hip and $180,000 for the left. The insurance company had paid discounted rates of $75,000 and $77,000.

The physicians and other professionals involved in these surgeries have amazing skills but the procedures are pretty standard with a variety of specialists making sure that the surgeon can be efficient.  We saw it in person for eye surgery and we were impressed by the capitalism at work in all the specialization.  Because of part of the specialization was to administer drugs we don’t remember all of the details but we were queued up like planes on a runway and rolled down to operating room for take-off.

The point is they need a full queue to maximize profits with all these specialists.  How does it benefit them to announce a price that is more than double the actual price?  We are sure that there is a reason for the difference but we don’t know what it is.  Our assumption is that essentially all of these procedures are covered, in large part, by insurance.  Perhaps it is a faulty assumption.  When we went in for our procedure we met with the financial person who looked at our insurance and said we don’t need to talk about prices other than this small blue bag you need to bring (we are not making this up).  It cost us a few bucks.  Perhaps the high list price is actually used but our priors are that there is a bureaucratic explanation.  We are open to suggestions and plan to look ourselves.

Healthcare And Incentives

Clark Harvighurst, professor emeritus at Duke, writing at the WSJ Editorial Page has an interesting article related to health-care and taxes.  He mostly addresses it to three CEOs, Bezos, Buffett, and Dimon who he summarizes with BB&D.  We love the ampersand too Clark.  We are 100% in agreement with his point that excluding health-care benefits provided by employers from employee income is major problem with the US health-care system.  We are not convinced, however, that folks react exactly how he describes.

To be clear, when an employee receives health-care benefits paid by the employer it is valuable to the employee but it is not part of gross income as determined by the Internal Revenue Code.  Specifically:

Under IRC sections 105 and 106, employer-provided health benefits, including reimbursement and insurance, are generally excluded from the income of employees.

It is one of those weird parts of the tax law that excluded almost $22,000 in income from MWG tax return a few years ago.  We agree that BB&D would provide a major service if they pushed to treat health-care income as taxable like other income.  We are not convinced that the beneficiaries are acting as Clark says.  Here is his quote:

Because employees don’t pay taxes on employer-paid insurance premiums, most workers assume that—and behave as if—their health-care costs are borne by employers. True, most employees now pay some share of premiums directly, along with copayments and deductibles. But they still unknowingly pay far more in lower take-home pay. When working Americans say they like their health plans, it’s clear they aren’t seeing the whole cost picture.

We don’t see it that way.  It seems to us workers act as if health-care costs are not taxable while wage income is.  Thus, getting a whole dollar of health-care insurance rather than a dollar of wages that are reduced by FICA and income taxes seems rational.  We think they are knowingly taking less take-home pay.  Folks buy way too much insurance (they cover everything they can) because it is cheaper with before-tax-dollars.

Sidebar: Another problem with the current system is that a few folks are worse off under this deal.  An example is the Lady de Gloves who did not take the health-care play offered by her employer because MWG was already covered.  She got nothing while most folks got thousands of dollars worth of insurance.  End Sidebar.

It is also rational for the employer since they pay a dollar in health care instead of a dollar plus FICA.  So we see the current system as a rational reaction to the current irrational tax system.  We do agree with Clark that the current system makes many of us uninterested in that actual costs of medical care.  We entirely agree with Clark that we hope BB&D can change the tax treatment of fringe benefits.  If we can fix corporate taxes then why not this?

Values, Healthcare, and Health

UPI reports on a research study by Matthew Davis from the University of Michigan.  Matthew finds that:

American seniors are getting healthier overall, but the well-educated, rich and white are seeing the greatest gains, a new study finds.

Matthew is amazed that rich and white folks are seeing the biggest gain despite Medicare for older Americans.  He thinks that the solution must come from government policies:

“Policies have to extend beyond just getting people access to healthcare to get at what’s driving disparities. The lack of improvement in health among all groups could imply that public health initiatives are leaving some people behind,” he added in a university news release.

Sidebar One: In the UPI report there are no Asians.  There are only whites, blacks, and Hispanics.  UPI does not link to Matthew’s study so we don’t know about the study and it might be that Asian are not of interest to UPI.  End Sidebar One.

Sidebar Two: Matthew is an assistant professor.  That means he is early in his academic career.  End Sidebar Two.

Matthew and UPI seem unaware that there is lots of discussion about culture and cultural values. Heather Mac Donald has a nice summary of the article by Amy Wax and Larry Alexander and the responses to it.  Of course, Amy and Larry have been called racists.  Here is part of what Heather said.

Today, the consequences of that cultural revolution are all around us: lagging education levels, the lowest male work-force participation rate since the Great Depression, opioid abuse, and high illegitimacy rates. Wax and Alexander catalogue the self-defeating behaviors that leave too many Americans idle, addicted, or in prison: “the single-parent, antisocial habits, prevalent among some working-class whites; the anti-‘acting white’ rap culture of inner-city blacks; the anti-assimilation ideas gaining ground among some Hispanic immigrants.”

Heather isn’t discussing health but some of the behaviors like opioid abuse and anti-social habits will directly have an impact on health while others might connect to health.  Charles Murray has been working in this area for years.  There are two issues: First. there lots of causes of health.  It could be (gasp) that there are genetic differences among races.  It could be that there behavioral causes.  Those behavioral causes might be cultural or they might be something else entirely.

Second, access to health care is not health care and neither of those is health outcomes.  It is possible but not likely that government policies are going to lead to equal health care outcomes for every group of people.

What is amazing to us but not Matthew is that there are lots of potential cultural causes but neither Matthew or UPI even considered them.  There is an astounding amount of discussion about Charles and Amy.  We need to consider adding two and two to get four.  Behavior has an impact on health.  Culture has an impact on behavior.  It seems highly probable that culture has an impact on health.

Markets Versus Business

Veronique De Rugy returns to one of her favorite topics on The Corner at NRO: The difference between being pro-business and pro-markets:

It is unfortunate that so many Republicans, conservatives lawmakers, and pundits conflate being pro-market with being pro-business. These are two separate things. Unfortunately, this confusion has produced thousands of government handouts and privileges to companies in the name of being pro-business — and these companies have developed a sense of entitlement. Worst of all, for many of them, government-granted privileges are an inherent part of their business models.

Our view is that the confusion on the right is limited.  Most of the decisions to abandon economic freedom by the right are made with full knowledge.  Folks see the political advantage in giving up economic freedom.  It is too bad, for example, that Marco Rubio supports sugar subsidies but we believe he understands what he is doing even if he does not admit it.

Where the real problems come is in the debates between left and right.  It is in that comparison that we need to make the distinction between pro-markets and pro-business.  The left is usually pro-business for a limited set of business but are never (can anyone think of a counter example?) pro-markets.  The right always starts out as pro-markets but sometimes some of them ends up as pro-business based on status quo arguments.

We need to understand that the left is anti-markets and the right is pro-markets.  The pro-business stuff comes from different directions too.  The left wants to determine economic winners.  The right, sadly, wants to pick political winners.  Pro-freedom except for sugar (we exaggerate slightly) makes you a senator.  We can’t be content about that but we need to accept that it is currently true.  Economic conservatives, as with the health care bill, need to decide if they can accept some small portion of a loaf as an improvement.  The health care bill will be one of many difficult choices for economic conservatives in the near future.