Thursday, April 28, 2005

Taxing Employer-Paid Insurance Premiums

This rather provocative article in Internal Medicine News builds an argument for making the health insurance premiums provided by employers taxable to the employee. Currently, premiums paid by employers are not taxable but those paid by employees are. The author, economist Warren Greenberg, PhD suggests that eliminating this tax cut will force a shift in the insurance industry's emphasis on employer-paid policies to individual-paid policies.

Why is this important?

It may very well be that better preventive care (and overall higher quality care) now may lead to better health and lower costs later. Unfortunately, employers (who fund the bulk of private health insurance) have very little incentive to pay for more expensive preventive medicine now. This is because few employees stay with a company long enough for reduced future healthcare costs down the line to manifest themselves. Greenberg cites an average 12 to 16% rate of employee turnover.

Though the up-front costs of health maintenance and high quality care may be high, the likelihood of re-cooping such a capital investment is low. Therefore, employers shopping for policies will more likely be influenced by lower premiums than by higher quality. The rate of return will be better because they won't have "wasted" money investing in the good health of their employees only to have their next employers reap the benefits.

Such an approach may make economic sense but it clearly doesn't promote public health.

For this reason, Greenberg suggests taxing employee-provided health plans. Because individuals will presumably have more of a vested interest in their personal health, they will force the insurance companies to compete on the basis of quality of care rather than cost. Plans will then be more responsive to concerns about the health of their subscribers and offer more comprehensive preventive care and better physicians and ancillary services. Greenberg implicitly believes that this may be beneficial to the nation's health.

I have several problems with this line of thinking.

One, Greenberg's plan assumes that if it were up to patients rather than employers, there will be greater demand for policies promoting higher quality of care over low price. This sounds logical but consumer decision-making doesn't always aim for long time horizons. (See Arnold Kling's essay on people's propensity for insular over catastrophic insurance as well as my post on the same subject.) Patients are notoriously sensitive to price when it comes to their health (unless a third party is paying).

Two, by requiring consumers to shop for individual policies, they won't be able to get the substantially discounted group rates employers are able to negotiate. Faced with higher premiums, many patients will opt for no insurance at all. Again, review the two links above for some insight on this behavior.

Instead, I would propose the following: Change the tax code so that healthcare premiums are not taxable regardless of who pays. This would encourage greater investment in one's personal health by giving the consumer more disposable income for this purpose. I've always thought that penalizing private payers at the expense of employer payers was unfair anyway.

Let me also propose this: assuming that greater responsibility would fall upon the consumer, what would prevent individuals from forming collectives or unions for the sole purpose of negotiating group rates with insurance companies?

Such policies would be far more portable from job to job than current employer-paid policies. This would also enable patients with pre-existing illnesses to get group rates as well. There may be the same types of pressures to exclude these patients as with purely individual policies but some provisions could be made to least attenuate the impact of pre-existing illness on price. Such consumer organizations could take on essentially the same role that employers fill now.

Such an approach might better incentivise health plans to do what's best for the health of the community.

There is one other point that should be made. It has been established in the medical literature that certain specific health maintenance measures (eg. controlling hypertension) will improve clinical outcomes. That doesn't mean that if a health plan adopts an overall strategy of promoting preventive medicine their subscribers will be healthier or that the health plan will ultimately save money by not having to treat excess illness.

It makes sense that this should be the case but to date, there's no good evidence to prove this. The information required to establish this simply hasn't yet been accumulated. Surprising huh?

14 Comments:

Blogger Fred said...

You wrote, "Faced with higher premiums, many patients will opt for no insurance at all."

State Assemblyman, Ray Haynes, mentioned in his Monday Morning Memorandum some time ago, that for every 1% increase increase in premiums, 40,000 people end up dropping their health insurance. I think that's the figures he mentioned, anyway.

You also wrote, "Change the tax code so that healthcare premiums are not taxable regardless of who pays."

Exactly!!! Well said.

As an aside, I always find it interesting that those who claim to have so much concern over other people's health (our state and federal legislators, for one) never consider anything but increased taxes and control to deal with health care. It seems like pulling teeth to get them to consider writing off health expenses from your taxes.

A few years ago I thought I had a heart attack (I didn't). I didn't have health insurance at the time. The trip to the emergency room cost over $1200, I believe. The only reason I was able to pay it off all at once was that we'd just refinanced our home and had cash left over.

I was thinking that at least I could save a little by deducting that from my taxes. Wrong. Not one penny would be allowed as a medical expense unless it was over $10,000 or thereabouts, I was to find out layer from my accountant.

I would think it would be beneficial to allow people, especially self employed types like me, to get some kind of tax credit for health insurance premiums paid. I understand they've just made some changes in that area but am unsure what they are.

I don't get it: If health insurance is so important that some pundits and legislators feel health care should be taken over by the government [even more than it already is], then wouldn't it make sense to have all their health insurance premiums,or at the very least those paid out of pocket, deductible from their taxes?

April 28, 2005 9:01 AM  
Blogger The Medicine Man said...

Fred, if you're self-employed, you might qualify for a Health Savings Account (HSA) which allows you to deduct healthcare costs. They're a bit complicated but you should talk to your accountant about it.

Perhaps some of the insurance experts who comment here can help you eg. insureblog.blogspot.com?

April 28, 2005 11:10 AM  
Blogger Fred said...

Thanks. I just made an inquiry as to HSAs a few days ago with the guy that used to handle my IRA.

As yet another aside, we start coverage on our first health insurance coverage (since we've been self employed) May 1, if all goes well. This is almost a miraculous development.

My wife and I have been self employed for over ten years. Neither of us had health insurance and I didn't see how we could afford it. I was scared to death about it as we were both in our late forties at the time and I knew something had to happen to one of us soon. About a year and a half ago my wife was diagnosed with Lymphoma. You can imagine what a disaster that can be to the uninsured. Heck, even if you ARE insured it's a disaster.

To make a long story short, after liquidating our retirement accounts and ending up on the MediCal program, I figured that was it for us financially as you can only have so much money to still qualify for MediCal.

But, things worked out well. The wife handled chemotherapy well. The doc believes she might be in remission and, lo and behold, she managed to get a job (in my opinion she wasn't qualified for) from a former customer of hers that has a health benefit. Should start in a couple days.

I was worried that with prexisting conditions they might take every penny she made for her premiums,assuming they would accept her at all. I've heard they can do such things but we just filled out the form and it appears we pay what everyone else does so I guess it might just work.

My CPA says that's why the employment health plans cost so much: They pretty much accept anybody regardless of conditions.

April 28, 2005 1:35 PM  
Blogger Henry Stern, LUTCF said...

.
You rang, sir? ;-))

Actually, I've just spent the better part of the last hour and a half fisking Dr Greenberg's white paper. I'm hoping to have it up on the blog later this evening.

As for Fred, I'd be happy to offer some ideas. First, you'll need to spend some time addressing how to handle your spouse. I mean her health insurance. She is uninsurable for individual major medical, which limits her choices. There are a few, but they're not pretty. If you're in decent health, then piecing this togther is possible. Your best bet is to get with a professional, independent agent who specializes in health insurance, and has at least 5 years experience.

I'll be back later to add a bit.

April 28, 2005 2:30 PM  
Blogger Henry Stern, LUTCF said...

.
Okay, I've re-read Fred's (2nd) comment, thoroughly this time, and would respectfully request that everyone disregard (most) of my comments above; they're irrelevant.

Sorry!

Fred: Congrats on the wife's new job, and on obtaining needed health coverage! I certainly hope that everything continues to work out well for you both. More importantly, I'm REALLY glad that she's responded well to the chemo, and hope that she continues her remission.

Lagniappe: group insurance is very different from individual. For one thing, providing that one jumps thru all the proper hoops, one cannot be declined for group coverage. Nor can one be charged an extra amount; nor can one's pre-ex conditions be excluded.

Her plan at work is, of course, determined by her employer and, if you choose to be on it, so is yours. It's possible, tho unlikely, that an HSA option is available; unlike MSA, one need not be self-employed to go the HSA route.

If it's not available, and you're still interested, you may opt out of her employer's plan, and purchase an HSA plan for yourself. There are advantages to this, but there are also drawbacks.

The most important thing to take from my previous comment is that you should hook up with an insurance pro (if you go the individual route). This is a high-turnover business, and the laws change constantly, so you want someone who knows what they're doing.

If you live in OH, GA or TN, I can refer you to one such.

Have a great evening!

April 28, 2005 5:55 PM  
Blogger Henry Stern, LUTCF said...

.
/Channeling Columbo: "Oh, just one more thing..."

Doc: I think you've done an admirable job of deconstructing Dr Greenberg's thesis (I've gone a bit further at my blog). There are, however, one or two points with which I disagree:

First, the term "low group rates" is an oxymoron. Group rates are based on the overall health of the group, the industry, the size of the group, and, often, the group's "experience" (previous claims history). Most group insurance is more expensive -- per person -- than individual.

Second, there are a number of laws which would have to be changed in order to promote the idea of individual folks banding together to buy coverage. For example, it is currently illegal (by federal law) for them to do so.

And there is this: group insurance works, to some extent, because there is a common billing entity to whom the insurer can send the bill. If I'm part of a group of folks from Ohio, Nebraska, and Oregon, to whom will the premium notices go? If you answer, "well, to each of us," then you're going to drive the admin costs back up to current levels, thereby defeating the purpose.

Finally, I especially like your final line, demonstrating that the Emporer is, indeed, bare.

April 28, 2005 6:06 PM  
Blogger The Medicine Man said...

Henry. I'm surprised: "Most group insurance is more expensive -- per person -- than individual."

Is that true, that most individuals could negotiate a better premium rate than a group? Is there no economy of scale? Wouldn't an insurance company offer a better per person rate to a group of people then to each member individually?

Also, I'm curious (and ignorant, hence the question) what law prevents a group of individuals from negotiating with an insurance company for a better rate? Who is being protected by such a law?

I could understand antitrust law preventing insurance companies from conspiring to fix rates. But consumers?

April 28, 2005 8:59 PM  
Blogger Henry Stern, LUTCF said...

.
Maybe one at a time, Doc? ;-))

Group rates are almost always higher than comparable indvidual rates because of two major factors:

1) Underwriting: with some exceptions, carriers must issue coverage to even unhealthy groups, and cover pre-ex conditions.

Individual coverage is medically underwritten, which means carriers can charge higher premiums, and/or exclude certain conditions.

2) Mandated benefits: both individual and group plans are subject to federal and state mandates, which require certain types of coverage. But individual plans are subject to fewer of these.

The most obvious -- and expensive -- of these would be maternity, which is almost always covered in group plans, and almost never covered under individual policies.

Whew!

I don't recall offhand the exact wording of the law...I'll try to look it up tomorrow.

Basically, it prohibits forming a "group;" i.e. x number of folks banding together, with no common employer or purpose other than to purchase insurance.

I'm sure there's a perfectly good reason for this ;-))

Actually, part of the answer is in my comment above:

(G)roup insurance works, to some extent, because there is a common billing entity to whom the insurer can send the bill. If I'm part of a group of folks from Ohio, Nebraska, and Oregon, to whom will the premium notices go?

April 28, 2005 9:33 PM  
Blogger Fred said...

I know that earlier on, before the wife got her current job, we were given some quotes on a couple Blue Cross plans that came out at around $800 a month for the two of us (without considering Lymphoma and whatever other pre existing conditions applied). The one we signed up for now costs over $1000 a month, I believe, from looking at the plan online. But, we only pay around half that, maybe less, and the employer pays the rest. Most of the premium is just coverage for me. Hers is almost all paid for by the employer.

I'll have to go back up to their page and get the exact figures one of these days but I remember thinking it looked like for around half her paycheck, instead of all of it like I originally feared, we got some insurance.

April 29, 2005 7:09 AM  
Blogger Henry Stern, LUTCF said...

.
we got some insurance

Wonderful! Based on the lymphoma, it would be unlikely that she'd find adequate coverage outside the group arena.

Without a whole lot of other info, it's impossible for me to say whether or not the $$'s you quoted are good, bad, or indifferent. The only way to be sure -- if it really matters to you, which I'm not sure it should -- would be to look around for a quote for coverage for yourself only (DO NOT mess around with the wife's coverage, she ABSOLUTELY should stay with the group).

Have a great weekend!!

April 29, 2005 7:47 AM  
Blogger Fred said...

Agreed and I was considering checking out other insurace policies but, quite honestly, I feel since we're the "problem children" in the group, I might as well let them take a bit more from me as I'm sure future expenses for them will likely be much more than we pay in.

Yet another aside, although a bit off topic for this thread, I just received this news bite from the National Center for Policy Analysis. NCPA has a daily news digest they send out Mon- Fri. Usually five or six items each day on different issues. I recommend subscribing. It is free. One of the items today was on uninsured in the country. Their synopsis with links to the original article is below:

UNINSURED AND UNLAWFUL
------------------------------------------------------------------------

The Census Bureau's Survey of Income and Program Participation found
that 19 million Americans go without insurance for a full year. Many,
however, are illegal immigrants, says Investor's Business Daily (IBD).

States with the highest concentrations of uninsured tend to be the
border states with Mexico and their neighbors, and other states where
there are large populations of illegal immigrants (New York, Florida,
Illinois).

Those who count say there might be as many as 11 million illegal
immigrants in this country. Of the 19 million (or whatever figure is
chosen for the point of argument) who go without insurance for a full
year, how many of them are undocumented workers? It's impossible to know
exactly. But in any case, it would be a large share, says IBD.

What we do know is uninsured undocumented workers are breaking local
governments:

o In Southern California they have contributed to the $1.2 billion
deficit that is plaguing the Los Angeles County Health
Department.

o Last year alone the county spent $340 million to treat uninsured
patients while the state was saddled with $1.4 billion in
unreimbursed health care costs.

o Texas spent $850 million for the same reason, while in Arizona,
the price tag was $400 million.

How to solve this? One answer is to deny treatment to patients who
cannot prove their citizenship or show that they have health insurance.
That is likely to prove to be politically impossible, explains IBD.

A better answer is to secure our borders and to put a lot of pressure on
Mexico to fix its economy. As long as opportunities here are so much
better than opportunities there, desperate people will take the risk to
cross illegally. And our health care problem will only get worse, says
IBD.

Source: Editorial, "Uninsured And Unlawful," Investor's Business Daily,
April 29, 2005; and Survey of Income and Program Participation, U.S.
Census Bureau, July 8, 2004.

For text:
http://www.investors.com/editorial/issues.asp?v=4/29

For Census survey:
http://www.census.gov/hhes/www/sippdesc.html

For more on Those Who Lack Health Insurance Health Issues:
http://www.ncpa.org/iss/hea/

April 29, 2005 8:11 AM  
Blogger Bob Vineyard, CLU said...

Might as well weigh in here . . .

As for Fred's wife on group insurance, Hank got it mostly right(unless I overlooked something). The wife will be accepted into the group plan, assuming she applies within the qualifying period. But considering (if I read this right) she has been without coverage for 10 years, she has no HIPAA rights. Granted, CA could be (and usually is) quite liberal in the way they approach almost everything. So maybe CA has managed to turn the bulls loose on HIPAA and granted EVERYONE a free pass. Baring anything unusual, Mrs. Fred will be subject to pre-ex for the first year under the plan.

Actually this applies to both since neither had coverage prior to the group insurance plan.

May 01, 2005 1:19 PM  
Blogger Henry Stern, LUTCF said...

.
Dang! I missed that! You did mention that this is your first insurance coverage in a while, so there'd be no creditable coverage to buy down the pre-ex wait.

In Ohio (and possibly elsewhere), if the plan is an HMO, then there is no wait for pre-ex: coverage is immediate. I've never quite understood this, but who am I to argue? Be worth your while to inquire whether this is relevant to your situation.

Have a great week!!

May 01, 2005 6:38 PM  
Blogger Bob Vineyard, CLU said...

Apparently CA has a more liberal approach to pre-ex (no surprises here). As Hank indicated, an HMO cannot impose a pre-ex . . . part of the enabling legislation that created HMO's.

If the coverage is a more traditional plan seems like the CA statute limits pre-ex to 6 months under the plan.

May 02, 2005 5:06 AM  

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