Comments on Cogan and Furman Emmett Keeler February 29, 2008

Keeler Feb-08 Cogan Hubbard Kessler 2008 They have a clever idea to estimate the impact of tax breaks on insurance and spending –Look at people just over the limit for Social Security taxes -- with 12% dip in marginal tax rate –I think their estimates of this effect are a little high.

Keeler Feb-08 Cogan Hits the Jackpot This is a 24% decrease!

Keeler Feb-08 Two other reasons estimate seems high Increase is only in the largest 1/2% of spenders. –in HIE, no effect of insurance on top 1/2% of spenders (probably due to cap of oop spending) –so their log elasticity estimate more plausible Small effect on insurance –2% more families with managed care – if MC saves 50% get to 1% less spending

Keeler Feb-08 Furman Introduction Current tax treatment of ESI encourages spending. Tax policies are inconsistent in –premiums versus out of pocket spending –Employer versus individual policies He argues giving more tax breaks won’t help with –high medical costs –uninsured people –low value care from diminishing returns

Keeler Feb-08 Plan A to level the playing field Eliminate the tax subsidy for ESI “Optimal” coinsurance rate rises dramatically –using RAND HIE estimate of.22, spending falls by 7-11% but insurance plans without a limit on spending are not close to optimal, see Buchanan et al. Man Sci 1991 –Finkelstein general equilibrium estimates of effects of coinsurance are factor of 3 larger. I am skeptical of her estimate -- she got lucky just as CHK did. Example of the benefits of less insurance: 70%+ of Singapore’s spending is out of pocket and they spend only 4% of their substantial GDP on health care. –Life expectancy there is 80 which is higher than ours.

Keeler Feb-08 Plan B: CHK 2005 Make out of pocket spending tax deductible. If coinsurance went up enough, i.e. if (1-t)C final > C initial, spending would fall –but the reduced waste is small and uncertain –and new tax expenditure ~ t* 280 Billion, and sure.

Keeler Feb-08 Plan C: extend tax breaks to individual plans Furman notes three problems –ESI drops, especially in small businesses –less pooling, more selection against sick new entrants, higher loads in individual market –no automatic enrollment in individual market –so number of insured paradoxically might fall He makes valid points, but ESI has advantages besides the tax break, and so the number dropped is probably modest.* –lower price, easy enrollment, less selective pooling. –still these modest changes are not good, and tax cost is high. *Marquis et al. HSR (39) ,2004, also Polzer and Gruber.

Keeler Feb-08 Furman’s plan: Fixed tax credit for having ok insurance Furman recommends dropping the tax exclusion of ESI premiums (Plan A + a carrot). (as has Pauly, others) Works on the no insurance---> some insurance margin –this margin is where the health gains come –RAND HIE showed few gains in health with free care over cost-sharing plans More incentives for poor to get coverage than the President’s proposed fixed deduction from income. Mandatory coverage, or automatic enrollment with opt outs would get even more people covered. Would need incentives for better pooling in individual market