Saturday, September 26, 2009

Tax Health Care Benefits

Under current tax law, employer-provided health care is a tax free benefit for the employee. This should be changed. Employer-provided health care should be taxed as ordinary income to the employee. Treating this benefit as tax free is the reason that employer provided insurance is not really insurance at all. Instead, employer-provided health care insurance is inevitably some form of "comprehensive insurance," which provides payment for "predictable" normal and routine health care services.

What this means is that employer-provided insurance is similar to a car insurance plan that pays oil and gas purchases, tire changes, inspection fees, and routine car maintenance as well as accident and liability coverage. No rational person would purchase a "car insurance" plan that includes all of these routine, predictable expenses. Instead, they would purchase "catastrophic" insurance and pay the routine, predictable expenditures on their own. How do we know that? Because that's what folks do when they pay for their own car insurance, because Americans pay directly, not indirectly for their automobile insurance.

Employees, if they pay for their own insurance would never buy insurance that covers routine and predictable expenses. Why? Because it is cheaper in the long run to pay predictable expenses on your own. The only need for insurance is for large, unpredictable expenses. That's what insurance is. Insurance "insures" you against the unknown, not the known.

Eliminating the tax exempt status of employer-provided health care would push the cost of health care onto the employee (the employee currently pays it anyway in lower wages, but the employee doesn't realize that). If the employee pays for their own health care insurance directly, instead of indirectly, they will buy catastrophic policies instead of comprehensive policies. That reform alone would dramatically slow the pricing pressure in health care.

Coupled with tort reform and removing the restrictions on interstate insurance sales, eliminating the tas-free status of employer-provided health insurance would solve the vast bulk of problems with our current health care system. A government take-over, the Obama solution, will simply make our health care system emulate the worst of our public schools at catastrophic expense to the taxpayer.