Monday, August 10, 2009

What's your fair share of the nation's health care bill?

Are you paying your fair share of the nation's health care bill?

And what is that fair share, anyway?

Last year, the total health care bill for the US was about 2.5 trillion dollars. Long division by a population of roughly 300 million works out to a cost per head of $8,333. For a family of four that's over $33,000 in average costs.

Of course, most families don't confront that full average cost directly, even though they may be effectively paying a lot of it.

Who is paying those costs?

Right now, the federal government is paying about 35% of the total health care bill in the US through Medicare, Medicaid, VA medical benefits, etc. (And that doesn't even include the federal government contribution to health care costs via subsidies built into the tax system.) State governments and, in some cases, local governments are paying a significant chunk as well.

But ultimately, "governments" don't pay those expenses--the taxpayers pay them!

(Increasingly, the government has been "solving" its part of the health care finance problem by foisting it off on unsuspecting future taxpayers in the form of growing deficit spending--and when interest rates rebound to more typical levels, it isn't going to be pretty! But, sooner or later, expenses paid by the government will fall squarely on the shoulders of taxpayers.)

Employers also "pay" a significant chunk of health care costs under our current system--but again, economists don't believe it is ultimately the employer who pays. Even if the paycheck stub shows the employee is only responsible for a contribution of say, 20%, economists believe that the employee typically bears the full burden of the employer contribution in the form of lower cash wages than he would otherwise receive.

Are you paying your fair share? More? Less?

I repeat: What is your fair share, anyway?

It's such a crazy quilt system that many people with similar incomes and health care needs are contributing vastly different amounts to paying for the health care system.

A lot depends on whether you are lucky enough to have your wage compensation come from a large employer who offers a generous health benefit plan excludable from your taxable income or whether you have to pay out of pocket from your after-tax income for your own individual policy (which could disappear or have its rates skyrocket astronomically whenever your insurer decides you're no longer worth insuring at current rates.)

The average family sees the tip of the iceberg if they have employer-provided coverage. They typically have co-pays, deductibles, and coinsurance. And they might see some payroll deductions labelled health insurance on their paychecks.

Most families don't realize how much their employers are paying for their coverage--at least not until they get laid off and see what COBRA will cost. The amounts they see deducted on their paychecks might run 15% or 20% of the total cost their employer pays for health insurance. But most economists believe that the worker is actually bearing the employer share of the cost--in the form of lower cash wages. There's no such thing as a free lunch. If an employer is paying $8,000 in his share of health care benefits per worker, then the worker's wages are likely to be $8,000 lower than they otherwise would be. Effective, the worker is paying the full cost of the employer's subsidy in the form of lower wages.

They also might notice that they are paying 1.65% of their wages in Medicare, and they see that amount directly deducted from their paycheck. What they might not realize is that their employer is also kicking in an additional 1.65% of their wages to Medicare, and, again, economists believe that the true incidence of both halves of the Medicare tax actually falls on the workers, in the form of lower wages than they would otherwise receive.

In addition, a good-size chunk of what you pay in federal and state taxes goes to fund health care in one form or another (Medicaid, Child Health Plus, Veteran's health benefits, generous policies for federal and state employees, etc., etc.)

Are you paying your fair share?

What IS your fair share, anyway?

Whatever it is, as a nation, we have not been paying enough in taxes to cover all government expenditures, including health care. And health care costs have been growing faster than inflation, so we are falling farther and farther behind.

This isn't sustainable forever. Somebody has to pay more.

Who should it be? Increasing taxes on the rich is part of the solution, in my opinion, but even the most left-leaning liberals don't think taxing the rich will be enough.

Young and healthy middle-income families already pay more in premiums and taxes than they actually consume in health care expenses. And the reality is that they will likely need to pay even more if the country ever gets its fiscal house in order.

Is this fair?

In my opinion, it's only fair if there's a clear and rational health care policy in place which will be there for that family when they really need it. A policy that guarantees they won't have their policy rescinded if catastrophic illness strikes at some point down the road. A policy that will provide for their health care needs when they are in poor health, elderly or disabled and unable to work.

What do we tax? We have to tax something! No matter what it is that we tax, it won't be popular. We have to tax someone! No matter who it is that we tax, it won't be popular.

You know the old saying: "Don't tax me! Don't tax thee! Tax that guy behind the tree."

The guy behind the tree, whoever he is, can't pay the whole bill. The answer is that we need to tax all of us, ourselves, in a more rational way in order to get our fiscal house in order. We haven't been taxing me, thee, or the guy behind the tree enough to pay the bills we've been running up for health care or anything else.

I don't like paying unnecessary taxes any more than the next person, but I would certainly be willing to pay a significant amount in taxes in return for knowing that I would always have access to lifetime health insurance with affordable premium schedule relative to my current income, insurance that would not be cancelled if I were laid off, had a forced cutback in hours, changed jobs to another employer, or developed a health care problem that made me uninsurable.

So, if I were in charge, how would I raise the taxes to pay for health care (as well as to keep deficits from ballooning)?

First, I'd get rid of or at least reduce a lot of the so-called "tax expenditures" built into our tax code by the special interests. To reduce the pain and allow people to make adjustments, especially during our current economic downturn, I would recommend phasing these tax expenditures out gradually over an extended period of time, several years or more.

Second, I would raise federal income tax rates at least modestly, perhaps back to where they were during the Clinton years, for everyone with income over $100K. Taxing the rich just isn't enough to raise the amount of revenue needed, especially since the wealthy are adept at managing their affairs to minimize their tax burden.

Third, it's not just conservative economists like Greg Mankiw who are members of the Pigovian tax club. I'd look for opportunities to raise revenue by taxing negative externalities such as pollution, congestion, etc.

Many people have noted that a number of European countries finance their health care systems with broad-based Value-Added Taxes, which is a form of sales tax. I don't think this is a good source for additional federal tax revenues in this country. State and local governments already rely heavily on sales taxes, and they may need to increase this reliance in the future. In addition, broad based sales taxes are regressive, and can cause considerable hardship when they fall on necessities.

However, I would not object to carefully chosen federal excise taxes on items that are NOT necessities. Excise taxes on sports cars, expensive jewelry, yachts, non-nutritive junk food and soda, and other non-necessities don't strike me as the worst taxes in the world. They are less of a hardship than a broad-based VAT might be, because families who want to avoid such taxes can easily cut back their spending on such items without sacrificing any of the essential necessities of life. And raising at least some of the needed money via taxes on such non-necessities might reduce the amounts that need to be raised via income tax rate hikes, which create economic distortions of their own.

There are no perfect tax regimes. All taxes create distortions and deadweight losses, and we need to think long and hard about the details, administrative practicality, and more, but we do need to face the reality that we can't keep running up deficits indefinitely, and current health care cost trends are not sustainable.

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