In today’s Washington Post, Martin Feldstein offers a way out of the health reform impasse.
Let’s scrap the $220 billion annual health insurance tax subsidy, which is often used to buy the wrong kind of insurance, and use those budget dollars to provide insurance that protects American families from health costs that exceed 15 percent of their income.
Remarkably, Feldstein’s proposal would dramatically expand access to health insurance, eliminate a distortion in the tax code that exacerbates cost growth, and there would be money to spare.
My calculations, based on the government’s Medical Expenditure Panel Survey, indicate that the budget cost of providing these insurance vouchers could be more than fully financed by ending the exclusion of employer health insurance payments from income and payroll taxes. The net budget savings could be used to subsidize critical types of preventive care. And unlike the proposals before Congress, this approach could leave Medicare and Medicaid as they are today.
Feldstein identifies two potential flaws and he identifies solutions for them.
First, how would families find the cash to pay for large medical and hospital bills that fall under the 15 percent limit? While it would be reasonable for a family that earns $50,000 a year to save to be prepared to pay a health bill of, say, $5,000, what if a family without savings is suddenly hit with such a large hospital bill? Second, how would doctors and hospitals be confident that patients with the new high deductibles will pay their bills?
The simplest solution would be for the government to issue a health-care credit card to every family along with the insurance voucher. The credit card would allow the family to charge any medical expenses below the deductible limit, or 15 percent of adjusted gross income. (With its information on card holders, the government is in a good position to be repaid or garnish wages if necessary.) No one would be required to use such a credit card. Individuals could pay cash at the time of care, could use a personal credit card or could arrange credit directly from the provider. But the government-issued credit card would be a back-up to reassure patients and providers that they would always be able to pay.
One potential pitfall of this approach is that household income is volatile. Just as the various Democratic reform proposals recall new enforcement resources for the IRS, this approach will pose a serious challenge to tax collectors. Moreover, the 15 percent threshold creates an implicit marginal tax, though the effect is less egregious than with sliding scale subsidies.
Overall, I like this idea, though there are many questions that remain. Feldstein makes no mention of a mandate or coverage for pre-existing conditions or purchasing pools. What happens if a family doesn’t actually purchase health insurance coverage with the voucher? We could imagine a Nudge-like decision to default all households into a high-deductible plan.
And cost control is still an issue. While the deductible would provide some spending discipline, it doesn’t have much effect on big-ticket expenditures. I’d like to see Feldstein’s approach combined with a publicly-chartered reinsurance program designed to foster delivery-system reform.
I can imagine that some will consider Feldstein’s proposal insufficiently generous. But what it does it distribute the $220 billion annual health insurance tax subsidy more equitably. It’s certainly true that some families will continue face high costs, but no families will face bankruptcy over medical expenditures.
I’d love it if we could get some actual elected officials behind this. Scrapping the tax subsidy is, I realize, a political non-starter, and the transition would be difficult. But this is the kind of reform we need.