I made the case for creating a national regulatory system to ensure that a competitive national market for health insurance would replace the uncompetitive separate state health insurance markets that exist today. While tearing down the barriers to a national health insurance market would result in lower healthcare costs and insurance prices Congress should also enact both a subsidy to help individuals pay for health insurance and a tax on those who choose to go without it.
That 46 million people in the United States do not have health insurance coverage is a big problem. When a person is not covered by health insurance, in the form of either private insurance or a government programme such as Medicare or Medicaid, he imposes a hidden cost on the rest of society.
If he suddenly becomes ill, he must pay the costs of his treatment out of his own pocket.
But if he cannot, as is all too often the case, he must file for personal bankruptcy, and the government must pay his medical expenses. Currently, the government allocates some of the revenues from the taxes levied on everyone in society to pay these expenses. This imposes on everyone in society the costs of a few of its members’ actions — in this case, the cost of their decision not to buy health insurance. Instead of allowing this situation to continue, Congress should enact a tax on those who go without health insurance to fund the backstop that pays for the medical expenses of those that go bankrupt. Besides funding the backstop for the uninsured, this tax, along with a subsidy paid to individuals who choose to buy insurance coverage, would encourage those without health insurance to buy coverage, thus reducing the number of individuals not covered by health insurance.
But Congress should take one further step in changing the tax code: it should end the tax deduction for employer-provided health insurance. According to the U.S. Census Bureau, 87.7 percent of all people with private health insurance coverage in 2008 obtained it through their employer. Under this arrangement, employers buy a company-wide plan to cover their employees. This situation has a few unintended negative consequences: first, employers merely cut their workers’ salaries or wages by the cost to them of each worker’s insurance; second, an employer has no incentive not to pay extra for wider coverage, since in the end the price is paid by his employees; third, workers have little control over their insurance coverage, and are not able to change plans easily; and fourth, employer-provided insurance ties workers to their current jobs, since if a worker wants to change employers, he would have to change his health insurance as well.
This situation hurts the ability of the economy to reallocate resources in the labour market, as newer and smaller companies unable to provide health insurance for their employees find it more difficult to hire workers away from their current jobs — a worker with his health insurance provided by his current employer would lose his insurance and have to find a new insurance plan on his own if he left to work for a smaller company.
The tax deduction on employer-provided health insurance allows companies to avoid paying taxes on the income that they use to pay for this insurance — thus, an employer has an incentive to buy insurance for his employees and cut his employees’ salaries by the cost of the insurance, as such a trade-off increases his profits by lowering his tax bill.
Scrapping the deduction would discourage companies from offering their employees insurance, leading more companies to drop insurance coverage for their employees and increase their workers’ salaries instead. This would make more individuals responsible for their own insurance, and thus more responsive to the costs and benefits of different insurance plans, since they would know that they, and not their employer, were paying for their coverage.
