The Economics of Healthcare in America #3: Why Are Pre-Existing Conditions Even a Problem? (Part 2 of 4)

Click here to read the original Cautious Optimism Facebook post with comments

4 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff looks at tax policy proposals to end the pre-existing conditions insurance coverage problem— starting with two noble but faulty plans that have little chance of either working or passing through Congress.

“The tax deduction should go to the individual, not the employer… Until the government removes the double tax deduction that encourages employers to provide insurance—not to mention the mandates forcing them to do so—corporations will retain the real leverage in healthcare finance. Only when the individual wields the power of the purse will his needs come first.”

-Myron Magnet,
 “The Original Mistake That Distorted the Health Insurance System in America”
  (Los Angeles Times op-ed)

https://www.latimes.com/opinion/op-ed/la-oe-magnet-health-insurance-reforms-20170328-story.html

If you aren’t familiar with the history and economics of the health insurance tax deduction, the Economics Correspondent strongly recommends reading Part 1 of this installment via the following URL. (it’s impossible to understand the needlessness or cause of the pre-existing conditions crisis without it)

http://www.cautiouseconomics.com/2019/11/healthcare04.html

In 1943 the federal government made employer-paid health insurance a tax-deductible business expense, and in doing so instantly created the pre-existing conditions problem that still plagues us today.

This is no secret to economists and health policy wonks. It’s been acknowledged as a decision fraught with bad consequences for decades. America’s government-constructed dependence on employers for health insurance has been referred to as “insane” by many policy analysts and for good reason. Even some politicians who publicly browbeat about the evils of greedy health insurers and drug companies privately know that the pre-existing conditions problem has been largely created by perverse government-engineered incentives.

(Hillary Clinton is an example of an intelligent politician who understands the core problem yet chooses instead to publicly blame big insurance companies for not covering pre-existing conditions)

Subsequently, a great deal of discussion in academia, think tanks, and Washington has focused on how to undo the “job dependency” problem, but most can be quickly deemed unworkable with just a little analysis.

III. POLICY PROPOSALS THAT ARE UNLIKELY TO PASS OR EVEN WORK: GIVE INDIVIDUAL INSURANCE PLANS SAME TAX-CREDIT STATUS

One proposal, offered mostly by Congressional Republicans, has been to simply give individual health insurance premiums the same tax-deductible status as employer-sponsored health insurance. “Why not level the playing field and put both individual and employer health insurance at the same level?” they ask. And in fact Obamacare has allowed very low income households to write off a fraction of their healthcare premiums but only for plans purchased within the lousy government exchanges (the so-called Premium Tax Credit or PTC).

Unfortunately neither the PTC nor the proposed wider tax break for individual insurance premiums will solve the pre-existing conditions problem.

Why? Because even with the tax break, the moment a business offers a job with free or, in the 21st century, heavily subsidized and hence still cheaper health insurance, workers will still drop their “at cost” individual plans to hop on board with their employer-based plan. Why wouldn’t they? It’s a perfectly rational decision that saves them a lot of money.

Of course the moment they make the switch to save money, they instantly subject themselves to the vulnerability of losing their insurance if they lose their job, and if they’re sick at the same time no other insurer will pick them up.

(note: The COCEA acknowledges the existence of COBRA legislation that requires employers to offer continuous health benefits for several months after employment ends, but COBRA is extremely expensive and has a short shelf-life, thus falling far short of a real solution and even then still had to be forced through by law).

IV. TAKE AWAY THE EMPLOYER HEALTH INSURANCE TAX CREDIT

Another proposal, suggested by Milton Friedman near the end of his life, was to simply repeal the tax credit that caused the problem in the first place. In other words, just take away the tax credit for employer-sponsored health insurance. The theory was that without the enticement of free or near-free medical coverage at work, people would naturally move back towards buying their insurance on the individual market where they would be covered continuously regardless of employment status.

While this outcome is quite probable, in fact nearly certain, it’s unworkable in reality because it underestimates the political consequences that make it a nonstarter.

Health insurance remains extremely expensive in America. If any politician stood up and told Americans “we’re ending your free/near-free employer health insurance and you now have to pay for it all yourself” there would be proverbial riots in the streets regardless of the long-term continuity benefits.

Consider a working parent paying $400 a month for an employer-subsidized policy that covers a family of four. With the repeal of the tax credit that worker loses their coverage at work and “goes it alone” on the open market finding a plan that costs $1,500 without employer subsidies. Even with a nice tax credit, the cost increase would squeeze households so badly that many would simply have to go without.

Americans have become so used to getting their health insurance cheaper at work that trying to get them off it is political suicide. Any doubts can be dispelled by imagining any Republican candidate for office making such a proposal and being slammed by his/her Democratic challenger (with plenty of help from the press) that “my opponent wants to take away your workplace healthcare and force you to pay tens of thousands of dollars a year more… all to line the pockets of big business and greedy insurance companies.”

Much to the frustration of knowledgeable policy wonks, the employer insurance tax credit is a problem much like a fishing hook: easy to dig into the public but extremely painful to remove.

However in Part 3 we’ll discuss the innovative proposal that actually can solve the pre-existing conditions problem and find acceptance with enough politicians to have a chance, at least in a Republican controlled Congress.