In a 2008 paper, the new Chairman of the Council of Economic Advisors says that the ideal way to encourage private insurance is by means of a refundable tax credit. The explanation reads like it could have been written by John McCain or by yours truly. If only the president had listened three years ago.
The most promising way to move forward in all three dimensions ― coverage, cost, and long-run fiscal situation ― is to replace the employer exclusion with a tax credit…Firms would still be allowed to deduct the cost of their contributions to employee premiums, just as they can deduct wages and other expenses today for the purpose of calculating taxable income. But workers would now have to include employer contributions to health insurance in their earnings for the purpose of calculating taxes…workers who purchased qualifying insurance would get a refundable tax credit…
The impact of such a proposal on health spending by the insured is largely independent of the details. Requiring workers to include employer contributions to premiums would reduce health spending by the insured for two reasons. First, it would eliminate any subsidy at the margin to purchase more generous health insurance. This would encourage people to purchase of more non-health consumption goods and spend less on health insurance. And unlike HSAs, this change would be neutral about how exactly individuals reduce their premiums. Individuals would be free to spend less by engaging in more cost sharing, but they would also be able to spend less by choosing health plans that have more managed care features that reduce utilization.
Second, at the margin the plan would level the playing field between premiums and out-of-pocket expenses by eliminating the tax subsidy for both sets of purchases. This would be expected to give individuals an incentive to purchase plans with higher cost sharing. As discussed above, this would reduce aggregate health spending by at least 7 percent taking into account the partial equilibrium effects of higher coinsurance on individual spending decisions.
Using the Cogan, Hubbard and Kessler parameter assumptions spending would be reduced by 26 percent ― four times the spending reductions they claim under their plan.
Pointer from Phillip Swagel.