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Health-Care Overhaul 2010

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Who Pays for Health-Care Reform, and Is It Fair?

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By Simon Johnson and James Kwak
Tuesday, September 22, 2009; 12:36 AM

No one is against expanding health coverage on principle. As we come down to crunch time, the health-reform debate is all about money.

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Once you accept that health insurance plans must meet some minimal criteria and that everyone has to have one (or pay a penalty), you are left with the issue of funding. If 30 million to 45 million additional people will have health insurance, then someone has to pay for it. But the first thing to bear in mind is that, seen from the perspective of American society as a whole, this isn't money that we lose; it's money that we spend on health care for members of society and that goes to health-care providers who are, by and large, also members of society. In this view, in other words, it's a question of redistribution.

This should not be surprising. Insurance itself is a mechanism for redistribution. Take homeowners insurance: Money flows from people who don't lose their houses to people who do. In homeowners insurance, the general principle is that the premiums you pay should be proportional to your expected losses (the damage you could suffer times the probability of that damage). We generally consider this to be fair; if your insurance premiums are too high, you could sell your house and move to a smaller one.

The analog to this would be to force everyone to pay the expected cost of his health care. This would be "fair" in the sense that each person's costs would be proportional to his expected burden on the system. But it would break down because you cannot trade in your body for a healthier one that is cheaper to insure. As a result, the health-care bills on the table require that insurers charge the same amount to all people of the same age.

But even after taking differences in people's health status out of the equation, the numbers still don't add up on their own. The median household income in 2008 was $50,000. The average family health insurance policy provided through employer coverage cost more than $13,000. About 8 million people in households making $50,000 to $75,000 (and 29 million in households making less than $50,000) are uninsured. Asking them to suddenly start paying $13,000 per year for health insurance -- and potentially thousands more in out-of-pocket expenses -- is not going to work.

As a result, health-care reform has to involve redistribution. But this should not come as a big surprise. Social Security, for example, is a vast redistribution scheme. The amount you contribute depends on how much you make (up to the income cap, which makes little sense); the amount you receive depends partially on how much you contribute, but also on many other factors, most notably how long you live.

The real question is: Who pays? The House bill has the most generous subsidies, reaching up to 400 percent of the poverty level, and pays for them in part through an increase in income taxes for the very rich. Sen. Max Baucus's bill has less generous subsidies, and instead of taxing the rich directly, it imposes new fees on insurers, drugmakers and medical device manufacturers, and also has an "excise tax" on expensive health insurance plans. (It also includes a shockingly stupid provision to tax employers for hiring low-income people if they don't provide health insurance, but let's assume someone in the Senate Finance Committee comes to his senses and they kill that.)

Once you've made health care mandatory, lower subsidies are a tax on the middle class, plain and simple. The individual mandate -- the requirement that everyone have health insurance -- is itself a tax. The difference from Social Security and Medicare -- other redistribution schemes with mandatory taxes -- is that the individual mandate taxes the very people who are supposed to benefit from the program. Subsidies lower that tax but don't eliminate it. So the main people paying for health care reform are middle-class Americans who don't have insurance now and will probably get insurance after reform. Is that fair? It depends on whether you think taxes should be an even trade between taxpayer and government -- you get what you pay for -- or you think taxes are a way of spreading the benefits that government provides to all of society.

Taxing the rich is, by contrast, a tax on people who are most able to pay, but also the people who will benefit the least from health-care reform. Because the marginal utility -- the amount of extra enjoyment gained -- of one dollar is much lower for a rich person than for a middle-class person, it is also the most painless way to generate tax revenue. Is that fair? Again, it depends on how you see the relationship between taxpayers and the government.

The excise tax is more complicated. All other things being equal, it should affect the rich more than the poor. But other things are not equal. Some people need more expensive plans because of their health conditions. Health care is more expensive in some states than in others. So who pays will depend on a lot of factors that most people have little control over. (The one thing we can be sure of is that insurers won't pay; though this is billed as a tax on insurers, they will just pass the costs to consumers.) The excise tax would also have knock-on effects: As employers start hitting the threshold at which their plans become taxed, they and their employees will shift into cheaper plans with higher deductibles and higher copays -- which means that more of the net costs will shift to employees. Is that fair?

The challenge today is that politicians are wary of voting for anything that is called a tax, even though we know we need to pay for health-care reform somehow. In the end, if you think that individuals are responsible for dealing with their problems on their own, you probably see health-care reform as a special interest program for the uninsured and think the uninsured should pay for it (through lower subsidies). On the other hand, if you think that all Americans should have the right to a minimal level of health insurance, you probably think health-care reform is good for America, pure and simple, and favor increasing taxes on the people who can actually pay them.


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