You propose a set of tax reforms that would encourage people to spend less on insurance premiums and more on direct health care expenses. Explain how these changes would cut costs, increase consumer choice and reduce the number of uninsured people.
As somebody who’s studied health care markets for a long time, I’d like to see us return more to patient-centered medicine, where doctors and patients are making decisions. But you can’t do that if the patient is not at the center of choice. And in the United States, five out of every six dollars that are spent on health care are spent by somebody other than the customer. Insurance is the big reason. During World War II, health insurance benefits from an employer were made tax-exempt. That’s continued, and what it’s done is distort the [cost] of insurance that your employer buys and not give you the same subsidy if you buy it on your own or if you decide just to go to the doctor on your own.
So you wind up with very expensive Cadillac coverage, and that’s important for two reasons. One, in health care it’s driving up costs, because you have excess demand. Also, for a worker, you might prefer to have higher wages but lower health insurance, but it’s not your choice. If [we] did some tax reforms that said it’s the same tax subsidy whether your employer buys your plan, you buy a plan on your own or you go to the doctor on your own, you might go to your employer and say, “I’d rather have a little bit less health insurance and a little more wages.” Dan Kessler and John Cogan and I estimate that could cut health care costs significantly by making consumers better shoppers.
Partly this is about portability. One thing that can tie you to one employer is the fact that you may get health insurance. You may want to take another opportunity, but are you going to get insurance? Insurance should really follow the individual, not the company. I think if we had these reforms, you would see people buying more policies in the individual market.
Can you briefly describe the changes you would make to the tax code?
What we would do is start out by basically making a level playing field for tax policy. Currently, when your employer buys insurance, you don’t pay tax on that. But how about having it be that if you go to the doctor on your own, that’s also tax deductible. Or if you decided, “I don’t want to buy this plan; I want to buy that plan,” that’s tax deductible.
So that’s the first tax piece. The second is to expand health savings accounts, which are already in the law — to make you able to have this deductibility arrangement in the context of a health savings account. So you could put money in but carry it over from year to year. There are all kinds of reasons why people might want to do that, and it gives them greater flexibility.
The third reform would be to have tax income credits for low-income families who don’t benefit from tax savings currently. I think fairness suggests they should get a benefit.
You note that insurance regulation at the state level drives up insurance costs by 5 to 15 percent. Who would benefit most from your proposal to allow insurance companies to offer coverage on a nationwide basis?
Interestingly, the least well off among us. Currently, most people who have high incomes tend to work for large employers, and any large employer is in the federal marketplace already. Lots of states have benefit mandates. In the old days, there were a handful of benefit mandates across the 50 states; now there are hundreds of them. They cover things ranging from mandatory childbirth coverage to psychiatric to chiropractic. I don’t mean to say any of these aren’t worth covering, but why should everybody be forced to buy that coverage that they may not have any interest in whatsoever?
The Congressional Budget Office says state regulation raises the cost of insurance by as much as 15 percent. And then we wonder why so many people are uninsured. It’s interesting that a third of the uninsured make more than $50,000 a year, which means they’re voluntarily deciding not to buy health insurance — it’s not that they can’t afford health insurance. And the reason is that in the individual market, if you work for yourself or if you work for a small employer who’s not in an ERISA plan, insurance is prohibitively expensive.
What we proposed was not to tell states what to do, but we said we’re going to exploit competition. We’ll offer a side-by-side federal product that’s stripped of mandates. And so if you wanted to buy a low-cost plan that didn’t mandate chiropractic and psychiatric coverage, you could buy it in the federal market. I believe that discipline will force states to get in line — otherwise they’ll lose the healthy people to the federal market.
What kind of protection would your plan offer to chronically ill patients, who are not well served by competitive insurance markets?
This is a really important problem, because the economics of insurance are being violated in a couple ways. One is that employer-provided insurance is mostly prepaid health care. True insurance in the classic sense is against very large, catastrophic risk. You don’t have car insurance to buy gasoline; you have insurance in case the car is wrecked. But that isn’t how health insurance works. That’s the first departure.
The other is the chronically ill. Insurance is about catastrophe — it’s about big, one-time events. Chronic illness isn’t insurable once it’s known. What we propose is a fairly significant public subsidy to the chronically ill to take these people out of private risk pools, because as it is, they’re raising the cost. My fear is that’s driving up insurance costs and making people go without insurance. I’d rather cover those people straightforwardly through a public subsidy.
You propose reforms in three other areas where health care markets are not functioning effectively: information, anticompetitive behavior and medical malpractice. How would your reforms in these areas benefit consumers?
Your first two questions were about the supply and demand factors — that health insurance for individuals isn’t easily available and people don’t necessarily want to buy it because public policy’s pushing them in the wrong direction. But even if those markets were working, people need better information. Now, you don’t have much information about the quality of providers. Partly it’s tradition, but partly it’s the fact that litigation has stopped people from sharing information about mistakes. There are some litigation reforms that would make it easier and give consumers better information.
Normally, when I talk about health care to big audiences, doctors in the room are with me for most of the conversation, and when I start talking about competition, that’s where they get off the bus. I believe that we have significant competition-policy problems in health care. I think there are some specialist societies that are behaving blatantly anticompetitively, and I think there are some hospitals that are using market power that we don’t usually tolerate. This would require no change in the law, simply for the Justice Department or the Federal Trade Commission to enforce the law.
Medical malpractice is actually pretty serious, because the cost of medical malpractice is between 7 and 10 percent of individual health insurance premiums, and it significantly discourages people from buying insurance. We propose a set of litigation reforms that essentially would cap [awards] at economic damages — the actual damages — and some different dispute-resolution mechanisms that could really lower costs.
There is no silver bullet in health care reform. But what we could do is actually give markets a chance to work, and in order to do that you have to make these changes. But in no way do I think that even doing all of these would be a silver bullet. It doesn’t exist.
Glenn Hubbard is dean of Columbia Business School and the Russell L. Carson Professor of Finance and Economics.
Read the Research
"Healthy, Wealthy, and Wise: Five Steps to a Better Health Care System"