Politics & Policy

Calling Doctor Rudy

Last week, Mitt Romney explained how he would reform health care if he were president. Rudolph Giuliani had earlier offered his own proposal. Neither Fred Thompson (who is not yet officially a candidate) nor John McCain has outlined his health-care policy. We commend Romney and Giuliani for putting some ideas on the table. And while we prefer either to the proposals being offered by the Democrats, Giuliani’s looks superior to Romney’s.

The centerpiece of Giuliani’s plan is the proposal, first made by President Bush in January, to change the tax treatment of health insurance. The tax code currently encourages people to get health insurance through their employers rather than to get higher wages and to pay for their insurance themselves. It provides a larger tax break the more expensive that insurance, encouraging people to choose policies that offer greater coverage. Bush, and now Giuliani, would extend the tax break to individuals who purchase their own health insurance. They would provide the same tax break regardless of the cost of the insurance, so that purchasers would have more incentive to shop around.

Romney proposes different changes to the tax code. He would make all out-of-pocket health expenses deductible against income taxes. That change would reduce one distortion of the economy: People would no longer have as great an incentive to get insurance to cover routine medical expenses rather than to pay for them out of pocket. But there are two problems with this proposal. First: Judging from the work of his principal health-care advisers, Romney’s plan would still give employer-provided plans an advantage, as they would be exempt from both income and payroll taxes. Giuliani’s plan would level the playing field more; individual ownership of health insurance would no longer be penalized at all.

Second: The new tax break for out-of-pocket expenses could funnel more money into the health-care sector and increase costs. Some health-care experts think that the net effect of both changes-reducing the bias toward employer-provided health insurance, on one hand, and increasing the bias toward health spending over all other types of spending, on the other-would be to make health care more affordable. But the Giuliani plan is a surer bet, since it caps the tax break for health care.

Neither Giuliani nor Romney goes as far as Bush in one important respect. State governments have imposed onerous mandates on insurance, pricing many people out of the market. Bush has endorsed a bill to allow people to bypass their states’ regulations by purchasing health insurance out of state. States would, in effect, have to compete with one another to adopt reasonable regulatory regimes. So President Bush’s tax plan increases people’s incentives to enter the individual insurance market, while his regulatory agenda would give them cheaper individual-insurance products to buy once they’re there.

Giuliani says he would let people buy out of state, but only if the state’s regulations were shown to make health insurance unaffordable. That’s an unnecessary level of red tape. Presumably the main reason people would go out of state in the first place is to avoid mandates they cannot afford. Romney would use federal money to encourage states to deregulate their markets. But federal carrots and sticks could easily be redeployed for worse ends. Establishing a rule of competition instead would allow the marketplace to reduce regulations without increasing federal power.

The report card: an A- for Giuliani, a solid B for Romney, and an incomplete for Thompson and McCain. But we should also note that Romney’s plan is far lighter on regulation than the plan he got enacted in Massachusetts. So if there is an award for “most improved,” he would get it.

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