October 24, 2015

TAX WHAT YOU DON'T WANT:

Uniting Behind the Divisive 'Cadillac' Tax on Health Plans (N. GREGORY MANKIW and LAWRENCE H. SUMMERS, 10/24/15, NY Times)

Let's start with the basics. Health insurance should be an ingredient of every family's financial plan. Medical expenses are necessary and unpredictable, and they can be large. When a family receives an adverse health surprise, the emotional toll is unavoidable, but the risks of financial insecurity, personal bankruptcy and forgone essential care are not. Health insurance solves these problems by protecting people from the cost of expensive treatments.

But as with a glass of red wine with dinner, too much of a good thing creates new problems. If people have insurance that pays for too much, they don't have enough skin in the game. They may be too quick to seek professional medical care. They may too easily accede when physicians recommend superfluous tests and treatments. They may not try hard enough to buy services from the lowest-cost provider. Such behavior can drive national health spending beyond what is necessary and desirable.

An optimal insurance policy strikes the right balance. It protects people against large financial risks but still has them pay enough to be smart consumers. That's why most insurance policies include deductibles and co-payments.

Here is where the tax code enters the story. Compensation in the form of wages and salaries is subject to the income tax and the payroll tax. But compensation in the form of employer-provided health insurance is not subject to either. If a firm gives a dollar in wages to a typical worker, the worker keeps only about 65 cents; if the firm gives a dollar in health coverage to the same worker, the worker keeps the full dollar.

This asymmetry tilts the playing field in favor of paying workers in insurance rather than in cash. As a result, people end up with insurance that is excessive and wages that are too low. The nation ends up spending too much on health care.

The Cadillac tax helps level the playing field by curbing this subsidy for the most generous insurance plans, which do the most to drive up health costs.

The key to health care reform is reducing consumption.



Posted by at October 24, 2015 12:20 PM
  

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