1 Improving the Tax Treatment of Health Insurance Katherine Baicker Professor of Health Economics Harvard School of Public Health

2 High Costs – High Value? Public and private spending both rising Domestic and international evidence that our spending could go further –Health care dollars not allocated to highest value uses –Wage growth slowed –Greater uninsurance (and less efficient use of care by uninsured) –Increasing pressure on taxpayers (current path unsustainable)

3 Quality Variation Even within Medicare Source: Dartmouth Atlas of Health Care

4 Variation in Medicare Spending Source: Dartmouth Atlas of Health Care

5 Higher Spending Does Not Necessarily Lead to Higher Quality Source: Baicker and Chandra, Health Affairs 2004

6 Why Aren’t We Getting Better Value? Information on prices and quality often not available Public side: Inefficient reimbursement –Medicare reimbursement based on quantity, not quality or value –Resources for the uninsured spent on inefficient modes of care Private side: Unbalanced tax treatment –Two biases ESI vs. individual market Basic vs. comprehensive plans –Neither fair nor efficient Regressive financing Subsidizing low-value plans

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8 Not Progressive Source: CEA

9 Not Progressive Source: Sheils and Haught, Health Affairs 2004

10 Policy Goals Get higher-value care for our health spending –Use health care resources where they do the most good –Continue to promote innovation and highest quality care Reduce inequities –Spread benefits more broadly Make health care more affordable –Make insurance more affordable for the uninsured –Slow cost growth down to keep insurance affordable for the insured (and taxpayers)

11 Proposals for Reforming Tax Code Flat deduction –Everyone covered by qualifying insurance would get a flat (“standard”) deduction amount Flat credit –Everyone covered by qualifying insurance would get a flat, refundable credit –Variants: Variable credit amount (based on insurance premium, age, income) Balance refundable only to HSA Only available in group or non-group market Cap on employer exclusion –Employer premiums only deductible up to a certain amount (or for certain income tax brackets) In each case, employers still pay no taxes on wages or benefits

12 Flat Credit vs. Flat Deduction Value of flat credit is the same for all taxpayers, while value of flat deduction depends on tax bracket Similarities –Same incentive to get at least minimum insurance –Same elimination of marginal subsidy for additional insurance –Same leveling of playing field for different sources and types of coverage Differences –Different distributional implications –Different likely take-up of insurance Cap has very different effects

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15 How Would Different Groups Fare? Uninsured –Financial incentives Individual purchasers –Tax subsidy People insured through jobs –ESI vs. wages – change in benefit packages –ESI vs. individual coverage – potential erosion of offering –Selection issues – differential effects based on health, income Overall –Financing – level and progressivity –Uninsurance rates – estimates vary widely –Growth of health costs – potentially important in long run Great deal of uncertainty in estimates of many effects

16 Reforming the Tax Code: Necessary but not Sufficient Better information crucial to patients and providers Other reforms needed to: –Improve functioning of individual market –Smooth transition, especially for certain populations –Ensure availability and stability of long-run insurance protections Policy problem posed by uninsured sick people very different from problem posed by insured people who fall sick