Wednesday , August 21 2019
Home / EconLog Library / Health care subsidies are almost impossible to reform

Health care subsidies are almost impossible to reform

Summary:
Imagine if the government gave people a subsidy of 00 each time they bought a new car. That would be inefficient, encouraging the excessive purchase of new cars. Now imagine that the subsidy was 40% of the price of the car, up to a price of 000. That would be even more inefficient, encouraging the excessive purchase of cars, and also encouraging the purchase of cars of excessively high quality. Now imagine a 40% car subsidy that had no upper limit. That would be extremely inefficient. That last option, a “Cadillac subsidy”, is a good description of our health care system. The government effectively pays roughly 40% of the cost of private health insurance, via tax subsidies. That means if you buy a health care plan that costs ,000/year, it actually only

Topics:
Scott Sumner considers the following as important: , , ,

This could be interesting, too:

David Henderson writes Reinhardt’s Misleading Data on Drug Price Differences

Scott Sumner writes Should we discourage medical malpractice lawsuits?

Scott Sumner writes Why both liberals and conservatives will lose on health care (in the short run)

Pierre Lemieux writes Prescription Drug Prices: Retaliatory Socialism

Imagine if the government gave people a subsidy of $5000 each time they bought a new car. That would be inefficient, encouraging the excessive purchase of new cars. Now imagine that the subsidy was 40% of the price of the car, up to a price of $25000. That would be even more inefficient, encouraging the excessive purchase of cars, and also encouraging the purchase of cars of excessively high quality. Now imagine a 40% car subsidy that had no upper limit. That would be extremely inefficient.

That last option, a “Cadillac subsidy”, is a good description of our health care system. The government effectively pays roughly 40% of the cost of private health insurance, via tax subsidies. That means if you buy a health care plan that costs $20,000/year, it actually only sets you back roughly $12,000/year. This subsidy encourages people to consume too much healthcare.

By far the best aspect of the Obama healthcare bill was the “Cadillac tax” on expensive health care plans. The best way to think about this “tax” is that it essentially removed the 40% subsidy on health insurance premiums, above a certain level. It’s analogous to going from a 40% subsidy on all new cars, to a 40% subsidy on only the first $25,000 spent on a new car.

In my previous post I discussed the awesome power of the health care industry. According to this article, tomorrow we may see an example of that power in Congress:

Congress will be voting Wednesday on a repeal of what is known as the “Cadillac Tax”—a provision of the Affordable Care Act which would place a 40% tax on employer-sponsored health care plans which provide excess benefits.

Think tanks and industry advocates have been fighting the implementation of the tax for years, and successfully delayed it until 2023.

The tax was supposed to be a funding source and would include 40% on anything greater than the value of health insurance benefits surpassing approximately $11,200 for individuals and $30,150 for families in 2022, according to the Tax Foundation. . .

And now it seems like it’s headed for the chopping block.

Needless to say, any repeal is unlikely to be offset by tax increases or spending cuts in other areas. We’ll just add the bill to the tab that we are already leaving to the next generation. The deficit will continue to reach unprecedented levels for a period of peace and prosperity.

Is there any constituency for sensible economic reforms, in either party?

Health care subsidies are almost impossible to reform

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

Leave a Reply

Your email address will not be published. Required fields are marked *