Tin-Plated Health Insurance
By Amy B. Monahan
President Bush has recently proposed ending the favorable tax treatment provided to employer-sponsored health insurance, and instead providing all Americans with a standard deduction for health insurance premiums, regardless of employment status or health insurance provider. This, the White House argues, will allow each family and worker to “choose the balance of wages and health insurance that is right for them, without the tax code distorting their decisions.” It is true that our current system distorts such decisions. By providing an exclusion for employer-provided health care without a corresponding exclusion for individually-purchased health insurance, our system favors the purchase of “overly expensive, gold-plated” employer-provided health insurance.
But the Bush plan doesn’t cure distortions in health insurance purchasing decisions, it just creates new ones. Bush’s proposal would encourage individuals to purchase the lowest cost insurance available. This is because the proposed standard health insurance deduction ($15,000 for family coverage, $7,500 for individual coverage) would be available, in full, to anyone who purchases health insurance, regardless of the cost of that insurance. As a result, the economically rational decision would be to seek the lowest priced health insurance policy. The amount by which the standard deduction exceeds the actual health insurance premium becomes a bonus tax deduction. The individual, meanwhile, ends up with a “tin-plated” health insurance plan that will generally require either a high deductible, high levels of cost-sharing, or limited coverage for services.
Why would the administration favor a tax policy that creates such incentives? It’s part of the broader ownership society health care movement, which aims to introduce individual responsibility and market incentives into health care. By creating this incentive to buy the lowest price health insurance policy available, the administration is encouraging the purchase of high deductible health insurance policies, which can be used in conjunction with tax-favored health savings accounts.
While touted as contributing to health care reform, ownership society health care policy also functions as a tax shelter for the wealthy. Under the President’s proposal, assume that a wealthy individual can buy high deductible health insurance for her family for $7,500. She can then deduct the full $15,000 standard deduction for health insurance. In addition, she can establish a health savings account and take an additional deduction of up to $4,500 each year. It ends up being a great tax break - provided she can afford to meet a high deductible each year. Lower-income individuals, on the other hand, faced with the same incentive to buy cheap insurance, may face out-of-pocket costs they cannot afford. Thus, under the Bush plan, the wealthy will get a tax break, while lower-income Americans will be encouraged to underinsure.
Amy B. Monahan is an associate professor of law at the University of Missouri-Columbia.