18 Apr 2007 Hogberg Praises Bush Health Plan

The National Center for Public Policy Research’s David Hogberg participated in a debate at PublicSquare.net over President Bush’s health insurance tax proposal. The first entry was written by Karen Davis of the Commonwealth Fund and the second by David W. Howard, professor at Emory University.

In David Hogberg’s entry (the third and final one), David explained why he is enthusiastic about the Bush proposal:

In 1973, Martin Feldstein published a seminal article entitled “The Welfare Loss of Excess Health Insurance.” He argued that too many Americans were over-insured and, as a result, purchased excess health care. Since then, a bevy of research has reinforced Feldstein’s conclusion. The biggest cause of over-consumption of health insurance is the federal tax subsidy. Since, under federal tax law, an extra dollar of income is taxed at the marginal rate and health insurance is tax-free, as workers move up the income ladder they have greater incentive to have their employer reimburse them with greater health insurance benefits than with higher wages. This leads to gold-plated “comprehensive” policies that impose few, if any, demand restraints on the use of health care.

Bush’s proposal dramatically alters that incentive. Under his plan, an individual gets a standard health insurance tax deduction of $7,500, while a family gets one of $15,000. However, as long as an individual or family purchases insurance, they get the full deduction no matter how much insurance they buy. Thus, they have an incentive to buy policies that cost less than the deduction, since they get to keep the difference tax-free.

This means that people will be inclined to move away from comprehensive policies and more toward ones with high deductibles and health savings accounts (HSAs). With more people paying for more health care out of their own pockets, they will behave more like consumers and discriminate between health care that is truly necessary and that which is not. This, in turn, will put pressure on providers to attract customers and to innovate in ways that will reduce prices and increase quality.

In short, Bush’s proposal seeks to reduce Americans’ demand for health insurance while simultaneously reducing their demand for health care. A reduction in demand will lead to a reduction in the price of health insurance, making it more affordable for both the uninsured and those who are currently covered.

Read it all here.

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Labels: Congress, Health Care, Regulation