11 August 2009

Healthcare Boondoggle

Most casual observers have no concept of the real cost of our current, primarily employer-based, health care system. There are the structural and competitive “costs”, such as the inability to change jobs without fear of losing coverage (or not having “pre-existing conditions” covered). This obviously limits our overall productivity as a society, because individuals are not always truly free to move from one employer to another in order to raise their income or to work in a new position that would enhance their productivity vis-à-vis the economy as a whole. It also punishes entrepreneurialism, as smaller companies do not have the same purchasing power as larger ones. Also, since experts often cite small businesses as the main engine driving job creation, this system inhibits overall job growth.

Important as these points are, they still do not address the massive transfer of money from certain individuals to others that occurs in the employer-based healthcare system. You've probably heard protestors decrying the proposed “government takeover” of healthcare, along with their demands to not have any of their tax dollars spent to pay for someone else's healthcare. But there's the rub: When it comes to employer-based health insurance, our tax dollars already are being spent for others' healthcare, and to a mind-boggling degree.

When a company pays for health insurance premiums for its employees (in whole or in part), that payment, that benefit to the employee, is not taxed. That is, the employee is earning a benefit (health insurance) in exchange for his or her work, but those earnings are not being taxed as they would be if the employee were simply earning cash. Other individuals who purchase health insurance on their own (i.e., not through their employer) do not enjoy this same tax subsidy. (There are some tax deductions available for some self-employed persons, and the cost of insurance can sometimes be included in itemized deductions, but these situations are limited.)

Put another way, if your company paid you more money, and in exchange you had to go purchase your own health insurance, you would have to pay taxes on those extra earnings. Conceptually speaking, when some individuals in our society pay fewer taxes than they might otherwise (if there were no special benefits or deductions written into the tax code), the rest of us have to pick up the bill for the unrealized taxes – and by “the rest of us” I mean either us right now in order to balance the budget, or some future “us” down the road in order to pay off accumulated deficits.

The bottom line is this: Because of our current employer-based healthcare system, I as a taxpayer am already subsidizing the health insurance costs of everyone who receives health insurance through their employer. That's right, my tax dollars (and yours too) are helping to pay for the “private” health insurance of millions upon millions of Americans. How much does this subsidy cost, you might ask? According to a report published by the Congressional Research Service in late 2008 (drawing on calculations done by the Joint Committee on Taxation), the estimated calendar year 2007 tax expenditures for the employer coverage exclusion were $143.3 billion for the federal income tax and $100.7 billion for FICA (Social Security and Medicare) taxes, for an annual total of $244 billion. Note that this is only the federal tax subsidy; there are also tax benefits to be had under state and local income tax laws.

What's more, this tax subsidy disproportionately benefits the wealthiest individuals in our society, because the higher your marginal tax rate, the more benefit you gain from the non-taxability of employer-paid health insurance contributions. That's right, my taxes and your taxes help pay for the super-premium health insurance plans of the top executives in the land.

This system hasn't always been around; in fact, it was only through changes to the federal tax code in 1954 that this system became cemented in our laws. While some would argue that we shouldn't change anything about our healthcare system because everything seems to work so well the way it is, I would argue that the tax exemption of employer-based health insurance results in a perverse manipulation of healthcare funding, and is a ridiculous boondoggle whose time should now be brought to an end.

Mind you, I'm not arguing (here, at least) about whether we should replace the current system with a robust public option, a full-on single payer system, or a network of private insurance providers. Adding transparency and making consumers aware of the true costs of their healthcare would most likely yield overall healthcare cost savings, but that's only a corollary benefit in my mind. I'm simply saying that we need to remove the current tax boondoggle and shift toward much greater transparency in the health insurance system.

1 comment:

Michael said...

Another great blog, Dan. Have you seen Sicko? It is very good. I've showed it recently to my in-laws and to my family. They've all appreciated it and it even helped open my conservative brother's mind somewhat on the healthcare debate.
Personally, I think we should go to a single-payer system (HR676), but hopefully we'll get a strong public option out of Congress this year.