More on taxing cosmetic surgery, subsidies, and tax simplification

CPA Stacie Clifford Kitts replied to my last post with more thought-provoking questions:

Given the current economic state, and the need for our government to find revenue sources, I worry what source will be next.

Indeed, governments at all levels are "digging into the sofa cushions for loose change" with creative ideas for raising revenue. New York State, for example, recently came up with the idea of forcing everyone in the state to buy brand new license plates next year, even though the old ones are perfectly good.

If we as taxpayers don't want more taxes, then we as taxpayers also have to send a clear signal to our politicians as to what we don't want the government to be spending our money on.

Are we now to accept that any government subsidized product or profession is subject to this excise tax? If this is your position, then be wary, there are hundreds of thousands of government subsidies in all types and forms.

Indeed there are hundreds of thousands of government subsidies all over the place, and an important "sofa cushion" for our government to look under is to re-examine the public justification for each of those major subsidies.

Tell me - are we now to explore the background of every product that we buy and determine if the government ever subsidized research or provided tax breaks?

In many cases, what makes the most sense is just to ELIMINATE the subsidy in the first place rather than continuing the subsidy and then excise taxing the subsidized product to undo the subsidy.

And I will now take this as an invitation to get on my favorite soapbox.

Many times those subsidies we should consider eliminating are delivered through the tax code, so eliminating the subsidy just means eliminating a special interest tax break (what I call a "bed buffalo").

The Reagan tax reforms of 1986 did exactly that, eliminating many special breaks to broaden the tax base which enabled tax rate schedules to be lowered while raising the same amount of revenue. It wasn't easy to get rid of all those bed buffaloes at once, but somehow he managed to pull it off. I was teaching public finance at the time, and I remember thinking to myself: he'll never be able to do this--I must be dreaming--this is what public finance professors have been pushing for decades, but it's politically impossible.

But President Reagan did somehow manage to pull it off (a bit like pulling off a bandaid--best to do quickly and in one fell swoop) and the result was a substantial simplification of our tax code (for a while....until those bed buffaloes started creeping back in, one by one. I have all our tax returns going back to the late 70s. I can see the bed buffaloes that left in those Reagan reforms....income averaging, deduction of credit card interest, exclusion of fellowship stipends, to take a few that applied to us...and I can see the many new bed buffaloes that have crept in, one by one, to take their place.)

The Reagan tax reforms of 1986 were a landmark achievement in tax policy. Can we do it again? I don't know.

President Obama clearly hopes so. He appointed Paul Volcker to head a tax reform simplification panel. Paul Volcker gets credit for another remarkable achievement that happened on the Reagan watch, taming a rampaging double-digit inflation that threatened to explode out of control in the early 1980s. But can Paul Volcker and his commission tame the tax code? The early signs don't look promising. When President Obama set up the commission last March, they were charged with the responsibility to issue recommendations by December 4, this Friday. But they've announced a delay. I'm not holding my breath.

But I was wrong in 1986. I thought it would never fly. And it did. So I can hope I'll be wrong this time too.

How soon do you think it will be before it becomes "public policy" to tax all of our choices, in products, or services, or lifestyle? Moreover, who gets to decide which items are wicked enough to be taxed first.

I don't think cosmetic surgery is wicked, but that doesn't mean I think our tax dollars should subsidize it. In my area, there are a few saintly doctors who treat the poor and make considerable financial sacrifices to do so, accepting the relative pittance that Medicaid pays or even volunteering their services for free. I don't begrudge a single penny of the taxpayer money spent to subsidize their medical training. But we live in a time when the federal government is spending over a quarter of the GDP (see the CBO graph at the top of my blog), with a very large chunk of that money going to the health care sector. The public, through its elected officials, has the right and the duty to examine what kinds of services it wants to prioritize for subsidy. Under our current system, we are saddling our children and grandchildren with debt, which includes the financial responsibility for paying for the medical training of today's cosmetic surgeons.

It's high time the government took a careful look at whether there are better uses for much of the money it spends on subsidizing this, that, and the other thing.

So again, I ask, why did cosmetic surgery win the tax lottery, why not the treatment of acne? After all dermatologists went to medical school too, their education was also subsidized. The answer is clear, because taxing little pimple faced teenagers for their acne treatment would tick people off. It doesn’t matter that this procedure is also elective and even vanity driven.

Hmmm, good question. There's often a grey line rather than a black line.

Our existing tax code already makes a distinction between its treatment of cosmetic surgery (which is not tax-deductible on Schedule A, nor is it eligible for tax-excluded flexible spending account use) and treatment of acne (which is, I believe, eligible for both tax breaks.) But you haven't complained about that distinction in existing tax law?

How many distinctions do we want the government making about our decisions to use health care for various purposes? How much intrusion do we want the government to have into our private decisions--whether it's cosmetic surgery, acne treatment, orthodontia, Viagra, or birth control.

Sometimes plastic surgery is needed for a disfiguring condition, for example, cleft palate, in which case it's tax deductible. Some kinds of severe acne are also clearly disfiguring as well.

Do we really want the IRS to be making such decisions in audits: "Hmm, let's see those before-and-after photos? Exactly, HOW disfigured were you before?"

All good questions, no easy answers. And there are certainly grey areas.

But those questions are not just about new taxes, they are about the priorities and bed buffaloes already embedded into our existing tax code.

Exactly how much do we want the IRS--or the government in general--to be intruding into our lives?

There are no easy answers here, but simplifying the tax code to eliminate a lot of bed buffaloes would reduce the kinds of such intrusive questions the IRS needs to ask.

However, people who elect to have cosmetic surgery are perceived as vain, spoiled, overindulged, and sinful.

Honestly, I don't see people who make such choices in that way. I feel very blessed and fortunate that I don't have a body excessively endowed in a way that causes stares or a nose that might make me feel extremely self-conscious. My body isn't perfect, I'm blessed to have one I can feel happy about living in. I'm also grateful that I'm oblivious enough to social conventions not to notice that I was supposed to dye my hair when it started turning gray. (Silly naive me--it took me years to figure out that virtually every other woman my age was dying her hair. I just thought I was one of a very few graying prematurely! But I'm used to it now.)

Do you see how letting our government tax our life choices even when those choices are not harmful to the public welfare creates a morality clause in our tax system by giving lawmakers the power to tax those items or services that they believe are wrong?

I'm perfectly fine with the idea that our society offers people who want them options for dealing with unwanted gray hair or aspects of their bodies that may make them unhappy, but it's not the highest priority use for subsidies from my taxpaying dollars--or the highest priority use for the debt our children and grandchildren will need to pay back. If there's an easy way to eliminate such subsidies upfront, say, by making cosmetic surgeons repay the subsidized cost of their training, let's do it. If not, there's something to be said for taxes and/or "user fees" after the fact.

It's analogous to airport fees. The government provides flight control services and other airplane safety services and captures some of that back in the form of user fees or taxes charged on tickets. I'm not enough of an expert on aviation policy to know if it's the "right level" or a convenient "cash cow."

I don't think that air travel is "sinful," but I think there's a case for making sure that airline passengers are not subsidized by the general taxpaying public.

Similarly, I don't think that cosmetic surgery is "sinful," but I think there's a case for making sure that it's not subsidized by the general taxpaying public.

Interesting questions on health insurance

Megan McArdle has some trenchant questions on health insurance reform:

Interesting questions remain. Will the health-care co-ops be exempt from the tangle of state regulations that have resulted in near-monopolies in many areas? I presume that Democrats still want guaranteed issue and an individual mandate, but aren't these the parts that are actually going to anger constituents? In Massachussetts, more people seem to think they've been hurt by the plan than helped by it. Meanwhile, the costs are skyrocketing, and control has so far been elusive.

The core problem is this. You have four groups of uninsured people:

Immigrants, who probably aren't going to get insured anyway. This is presumably why Massachussetts spending on the uninsured has only fallen by 40%, even though the number of uninsured people has plunged about 80%.

Young healthy people who don't need much health care

Working poor sick people

Affluent people who are uninsurable because of some pre-existing condition

Advocates of reform believe that the number of people in Groups 3 and 4 who are not receiving needed care is large. The idea of a mandate, combined with guaranteed issue, is to force Group 2 into the insurance pool. This is supposed to pay for the care of the people in Groups 3, 4, and (arguably) 1. But the people in Group 2 don't have that much money; most of them are working marginal jobs, which is why they don't have insurance. They're also Obama voters who think that health care reform will give them cheap health insurance, not force them to shell out $500 from a meager paycheck to cover someone else's high-risk pregnancy.

That means we have to dip into the pockets of Group 5: people with insurance. Either they have to pay higher premiums, or they have to pay higher taxes, or they have to get less stuff. This makes them anxious. Unfortunately, most of them are satisfied with their insurance, so the only thing that you can offer them is the relief from the fear that they'll lose their job and their insurance coverage. That's not nothing. Options are valuable. So is peace of mind. But is it worth hundreds of dollars a month to the average family?

Good questions.

A big part of why it's hard for the average family to know whether health insurance reform will make them better off or worse off is that so much of the costs of the current system are hidden.

The cost of health care in this country averages over $8,000 per person, but many people don't realize how much of those costs they are already paying under the current system, because our health care pricing system is so opaque.

The costs of health care are borne in many insidious and invisible ways--it's not just the tip of the iceberg that people see explicitly deducted from their paychecks in the box labelled "payroll deduction for health care premium." That's just the employee's share. The employer's share is typically much greater--and economists believe that workers actually bear that cost in the form of lower wages than they would otherwise get. In addition, people pay for health care in countless other ways. There are the Medicare taxes they pay quite visibly, but there's also the employer's matching contribution to Medicare as well (again, the burden is ultimately probably borne by the worker.) Then there's the significant share of income taxes, property taxes, and sales taxes that goes to pay for other government health programs--everything from health care for the poor (Medicaid) to health care for veterans (the VA) to health care for government employees and retirees.

more on How much does health care REALLY cost?

You may think your employer is paying for your health care, but in fact your company’s share of the insurance premium comes out of your potential wage increase. Where else could it come from?

Let’s say you’re a 22-year-old single employee at my company today, starting out at a $30,000 annual salary. Let’s assume you’ll get married in six years, support two children for 20 years, retire at 65, and die at 80. Now let’s make a crazy assumption: insurance premiums, Medicare taxes and premiums, and out-of-pocket costs will grow no faster than your earnings—say, 3 percent a year. By the end of your working days, your annual salary will be up to $107,000. And over your lifetime, you and your employer together will have paid $1.77 million for your family’s health care. $1.77 million! And that’s only after assuming the taming of costs! In recent years, health-care costs have actually grown 2 to 3 percent faster than the economy. If that continues, your 22-year-old self is looking at an additional $2 million or so in expenses over your lifetime—roughly $4 million in total.

Would you have guessed these numbers were so large? If not, you have good cause: only a quarter would be paid by you directly (and much of that after retirement). The rest would be spent by others on your behalf, deducted from your earnings before you received your paycheck. And that’s a big reason why our health-care system is so expensive.

The excerpt quoted above above comes from this thoughtful article. The author's figures are in roughly concordance with my own calculations.

The author makes a number of provocative observations:

Consider the oft-quoted “statistic” that emergency-room care is the most expensive form of treatment. Has anyone who believes this ever actually been to an emergency room? My sister is an emergency-medicine physician; unlike most other specialists, ER docs usually work on scheduled shifts and are paid fixed salaries that place them in the lower ranks of physician compensation. The doctors and other workers are hardly underemployed: typically, ERs are unbelievably crowded. They have access to the facilities and equipment of the entire hospital, but require very few dedicated resources of their own. They benefit from the group buying power of the entire institution. No expensive art decorates the walls, and the waiting rooms resemble train-station waiting areas. So what exactly makes an ER more expensive than other forms of treatment?

Perhaps it’s the accounting.

and another provocative observation:

What amazed me most during five weeks in the ICU with my dad was the survival of paper and pen for medical instructions and histories. In that time, Dad was twice taken for surgical procedures intended for other patients (fortunately interrupted both times by our intervention). My dry cleaner uses a more elaborate system to track shirts than this hospital used to track treatment.

Not every hospital relies on paper-based orders and charts, but most still do. Why has adoption of clinical information technology been so slow? Companies invest in IT to reduce their costs, reduce mistakes (itself a form of cost-saving), and improve customer service. Better information technology would have improved my father’s experience in the ICU—and possibly his chances of survival.

But my father was not the customer; Medicare was. And although Medicare has experimented with new reimbursement approaches to drive better results, no centralized reimbursement system can be supple enough to address the many variables affecting the patient experience. Certainly, Medicare wasn’t paying for the quality of service during my dad’s hospital stay. And it wasn’t really paying for the quality of his care, either; indeed, because my dad got sepsis in the hospital, and had to spend weeks there before his death, the hospital was able to charge a lot more for his care than if it had successfully treated his pneumonia and sent him home in days.

Of course, one area of health-related IT has received substantial investment—billing. So much for the argument, often made, that privacy concerns or a lack of agreed-upon standards has prevented the development of clinical IT or electronic medical records; presumably, if lack of privacy or standards had hampered the digitization of health records, it also would have prevented the digitization of the accompanying bills. To meet the needs of the government bureaucracy and insurance companies, most providers now bill on standardized electronic forms. In case you wonder who a care provider’s real customer is, try reading one of these bills.

For that matter, try discussing prices with hospitals and other providers. Eight years ago, my wife needed an MRI, but we did not have health insurance. I called up several area hospitals, clinics, and doctors’ offices—all within about a one-mile radius—to find the best price. I was surprised to discover that prices quoted, for an identical service, varied widely, and that the lowest price was $1,200. But what was truly astonishing was that several providers refused to quote any price. Only if I came in and actually ordered the MRI could we discuss price.

Several years later, when we were preparing for the birth of our second child, I requested the total cost of the delivery and related procedures from our hospital. The answer: the hospital discussed price only with uninsured patients. What about my co-pay? They would discuss my potential co-pay only if I were applying for financial assistance.

Keeping prices opaque is one way medical institutions seek to avoid competition and thereby keep prices up. And they get away with it in part because so few consumers pay directly for their own care—insurers, Medicare, and Medicaid are basically the whole game. But without transparency on prices—and the related data on measurable outcomes—efforts to give the consumer more control over health care have failed, and always will.

The author's answer is a thoughtful prescription--the article is well worth reading in its entirely.

US health care costs discourage small business compared to countries with government funded health care?

Center for Economic and Policy Research (via Mark Thoma)

Contrary to popular perceptions, the United States has a much smaller small-business sector (as a share of total employment) than other countries at a comparable level of economic development, according to this new CEPR report. The authors observe that the undersized U.S. small business sector is consistent with the view that high health care costs discourage small business formation, since start-ups in other countries can tap into government-funded health care systems.

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.

How much does health care REALLY cost?

The Wandering Tax Pro Robert Flach noted:

Last year a small business client paid over $15,000 in health insurance premiums to cover himself, his wife and a high-school age son.

Well, our country spent about 2.5 trillion dollars last year to provide health care for 300 million people, which works out to an average of about $8.3K per capita, or $25,000 for a family of three, so in that context $15K looks like a pretty good deal.

I recently posted about a New England Journal of Medicine article which computed that the average working family covered by employer-provided insurance pays about 25% of its total compensation for health care, when all is said and done. The part they see is only the tip of the iceberg.

Of course, the total cost of health care actually paid by Robert's client was not $15K. It might be more or less, when all is said and done.

Since he's self-employed in his own small business, Robert's client has some tax breaks available to him.

First off, he can deduct that $15K as an adjustment to income and reduce his federal, state, and local (if any) income taxes. Depending on the client's tax bracket, that could easily reduce the net after-tax cost of the coverage to below $10K.

But wait, there's more, as they say on late night television.

If his spouse is an employee on the payroll, he can actually provide family coverage to her (and the whole family, including himself) as an employee under a Section 125 HRA Cafeteria Plan, which would allow him to deduct the expense on his Schedule C. That's an even better deal than deducting it as a subtraction from AGI, because deducting it on his schedule C reduces his self-employment FICA taxes. Depending on the amount of his business profits and thus his tax bracket for FICA and income taxes, the combined savings in federal, state, local, and FICA tax could potentially reduce the net cost of his premium by as much as 50%.

This all looks like a pretty good deal so far--and it is a good deal, compared to his neighbor who might have the exact same pre-tax income but who happens to work as an employee for an employer who doesn't provide health benefits. If that neighbor can purchase the same $15K policy as an individual policy, it's going to cost him the full $15,000, with none of the tax breaks I outlined above. He can't reduce his AGI or his payroll taxes by the $15K. (If he itemizes, his neighbor MIGHT get some tax benefits, after taking into account the 7.5% of AGI limitation as well as the loss of the standard deduction, but they won't be as good a deal as Robert's client can get.)

On the other hand, he and his neighbor are probably paying more for health care than just the cost of his premiums. In most policies, there are copays, deductibles, and coinsurance provisions, as well as costs for medical expenses that insurance doesn't reimburse. (Of course, he can soften that cost burden as well by running such costs through a Section 125 HRA Cafeteria Plan for his spouse, if he has one.)

In addition, despite the tax breaks I mentioned above, Robert's client is also probably paying a significant amount for everyone else's health care through all the taxes he pays. To begin with, you can figure the amounts he pays in Medicare payroll taxes for himself (and his wife, if she's on the payroll.) In addition, a significant chunk of his federal and state income taxes are paying for other people's health care.

Of course, Robert client's neighbor, the guy who makes the same pretax income but works as an employee for an employer who doesn't provide benefits is paying even more of the cost of everyone else's health care, because he doesn't get all the tax breaks that Robert's client gets.

(And their neighbor on the other side, who maybe gets even more generous full coverage entirely paid for by his employer--perhaps one of those gold-plated Cadillac plans for Goldman Sachs employees--might be getting an even better health care deal, once all the tax benefits of that coverage are factored in!)

Should insurance premiums be equalized?

The Wandering Tax Pro Robert Flach writes:

I do not want “socialized medicine”, nor do I want a new Medicare-like government run regime. What I do want is for insurance premiums to be “equalized” throughout the US so that I do not pay more in NJ for the same coverage than someone in the same situation in Kansas

Without "socialized medicine," equalization is not going to happen. In a free market system, insurance companies, just like any other businesses, are going to charge different prices in different places because their costs of doing business are different in different places--for all kinds of reasons.

To take just one kind of reason, if houses, groceries, or heating oil cost more in NJ than in Kansas, then physician and other health care provider salaries will be higher in NJ, which in turn means health care costs will be higher in NJ.

To take another kind of reason, Atul Gawande has written that the efficiency of the health care delivery system is much greater in some places than in other places. I don't know about Kansas, but it appears that Minnesota uses expensive medical procedures much less frequently than other places, with no apparent adverse effects on health outcomes.

Medicare, a government insurance system, can charge the same premium everywhere, because they are under no obligation to deliver a profit, or even to break even.

Private for-profit companies are obligated to maximize shareholder profits. If the costs of doing business in NJ are higher than the revenue from those "equalized premiums," then private insurance companies owe it to their shareholders to refrain from operating in New Jersey.

Even private non-profits are obligated to break-even. Under the "equalized premium" system proposed by the Wandering Tax Pro, thrifty Kansas or Minnesota citizens would have an incentive to start up their own non-profit health care coop insurance company in their states, so they don't have to pay premiums that reflect the high costs of doing business in those other states. In a private system, why should Kansans pay for the high housing costs of New Jersey doctors? In a private system, why should Minnesotans pay for the more expensive interventions prescribed by New Jersey doctors?

Anyone who wants equalized premiums everywhere effectively wants socialism, whether they realize it or not.

A private system will not deliver equalized premiums.

And, to be perfectly honest, it's not clear why equalized insurance premiums across regions are per se desirable, anymore than equalized heating oil costs, equalized fresh produce costs, equalized electricity costs, or equalized anything else costs would be. Even under a socialized public system, it might be economically appropriate for insurance premiums to vary by region. A socialist system CAN equalize premiums across the country, but it doesn't HAVE to do so.

NYT Primer on the Details of Health Care Reform

Some excerpts from the New York Times Primer on Health Care Reform:

[T]he federal government already holds sway over the health care system through Medicare, Medicaid and various insurance programs for children, veterans, military personnel and other federal employees. The federal government will account for 35 percent of the expected $2.5 trillion in health spending this year, and that does not include subsidies built into the tax code.

Most Americans do not know the full cost of their employer-sponsored insurance. And it is easier for Democrats to paint insurers as greedy than to explain the complex math that shows current health care spending is unsustainable.

Update:

Sue asked in the comments:

Mary, Do you agree with their assessment in the second paragraph? Seems to me that insurers add a big layer of wasted spending (even if they aren't greedy) that would go away under single payer.

Sue, I totally agree with you that private insurers add a big layer of administrative costs that would go away with single-payer. Those costs include all the costs that physicians and other providers must incur in time spent figuring out how to deal with all the different kinds of paperwork and different rules that different insurance companies use. Costs that would go away under single-payer also include all the time that insurance companies spend trying to figure out why a DIFFERENT insurance company should pay a particular bill (e.g., arguing over whether a bill should be paid by workers comp, an auto insurance policy, an employer's policy, a spouse's family policy, a parent's family policy, primary vs. secondary coverage, etc.) Costs that would go away under single payer also include all the costs of processing long and detailed applications to screen out bad risks, since single payer would cover everyone.

However, I also agree with the NYT's assertion that current health care spending trends are unsustainable, even if we eliminate all administrative costs and industry profits.

Medicare has low administrative costs but it is projected to grow at rates that will exhaust the Medicare trust fund within a decade, due to a combination of two important demographic factors (baby boom reaching retirement age plus elderly living longer in general) as well as a growing amount of expensive new technologies, not to mention the inadequately funded Part D drug coverage. The projected costs of Medicare are not sustainable without tax increases that the public seems unwilling to countenance.

Very large employers run their own self-insured plans for their employees and retirees and have strong incentives and economies of scale to minimize administrative costs, but they also find the medical cost burdens to be growing, especially in organizations that have large numbers of retirees compared to current employees.

Most small businesses do not self-insure, but rather purchase health coverage from an outside firm. Usually their premiums are "experience-rated," meaning that if usage by their employees goes up one year, the firm's premiums will rise a lot the following year, or the renewal may be declined. I know a worker who worked for a small business who felt obliged to leave it because the health care costs for his family (which included a child with very expensive health care needs) was causing the firm's premiums to skyrocket to the point where other workers couldn't afford their share of the insurance premiums. Even if there had been no administrative costs included in the premiums, it would not have been sustainable for the firm to continue to offer coverage.

So bottom line, yes, I do agree that current health care spending trends are unsustainable, even if we get rid of all administrative costs, unless we are prepared to face some hard mathematical realities. Cutting costs is, at best, a one-time savings, but the underlying growth trends in health care spending, even under current programs, are not sustainable indefinitely, even if it were possible to eliminate all administrative costs.

Personally, I would like to see a system with single payer and universal coverage decoupled from who your particular employer happens to be.

France and Canada aren't perfect, but they are better than the patchwork that most people under 65 have here and now.

Most people under 65 with private insurance are only a layoff away from losing it. (Actually, it doesn't even take a layoff. Just having an hours cutback below the level required to qualify for benefits is enough to lose insurance.) Finding a new job of any sort in this economy is a challenge, finding a job with health benefits is an even greater challenge.

But the public needs to come to terms with the true cost of their health care, which most people haven't been forced to confront up until now. Cutting administrative costs isn't enough to make the system sustainable. Much of the cost of health care is hidden from view, beneath the surface.

It's going to take tax increases that people may not be willing to accept unless they are willing to do the hard math of figuring out what we are already paying. And, realistically, it's not enough just to tax the "millionaires" or just those earning over $250K. There are fewer of those people than there used to be, and many of those who still exist aren't making as much as they used to make.

Tax collections are down, deficits are up, and the reality is that much of our current health care spending is coming out of government borrowing. In the past year, the world has been falling all over itself to lend us that money at phenomenally low interest rates. That situation is not sustainable indefinitely, even if it were possible to cut out all the administrative costs.

CBO: preventive care may add to costs

The Congressional Budget Office (CBO) estimates that more preventive care may not result in budgetary savings.

Preventive medical care includes services such as cancer screening, cholesterol management, and vaccines. In making its estimates of the budgetary effects of expanded governmental support for such care, CBO takes into account any estimated savings to the government that would result from greater use of preventive care as well as the estimated costs of that additional care. Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.

That result may seem counterintuitive. For example, many observers point to cases in which a simple medical test, if given early enough, can reveal a condition that is treatable at a fraction of the cost of treating that same illness after it has progressed. But when analyzing the effects of preventive care on total spending for health care, it is important to recognize that doctors do not know beforehand which patients are going to develop costly illnesses. To avert one case of acute illness, it is usually necessary to provide preventive care to many patients, most of whom would not have suffered that illness anyway. Judging the overall effect on medical spending requires analysts to calculate not just the savings from the relatively few individuals who would avoid more expensive treatment later, but also the costs of the many who would make greater use of preventive care.

Of course, just because a preventive service adds to total spending does not mean that it is a bad investment. Experts have concluded that a large fraction of preventive care adds to spending but should be deemed “cost-effective,” meaning that it provides clinical benefits that justify those added costs.

CBO Director Elmendorf's blog post on prevention and wellness costs

CBO response to Congressional questions about possible cost savings from prevention

Paul Krugman on government role in health insurance markets:

Health Care Realities

The key thing you need to know about health care is that it depends crucially on insurance. You don’t know when or whether you’ll need treatment — but if you do, treatment can be extremely expensive, well beyond what most people can pay out of pocket. Triple coronary bypasses, not routine doctor’s visits, are where the real money is, so insurance is essential.

Yet private markets for health insurance, left to their own devices, work very badly: insurers deny as many claims as possible, and they also try to avoid covering people who are likely to need care. Horror stories are legion: the insurance company that refused to pay for urgently needed cancer surgery because of questions about the patient’s acne treatment; the healthy young woman denied coverage because she briefly saw a psychologist after breaking up with her boyfriend.

And in their efforts to avoid “medical losses,” the industry term for paying medical bills, insurers spend much of the money taken in through premiums not on medical treatment, but on “underwriting” — screening out people likely to make insurance claims. In the individual insurance market, where people buy insurance directly rather than getting it through their employers, so much money goes into underwriting and other expenses that only around 70 cents of each premium dollar actually goes to care.

Still, most Americans do have health insurance, and are reasonably satisfied with it. How is that possible, when insurance markets work so badly? The answer is government intervention.

Most obviously, the government directly provides insurance via Medicare and other programs. Before Medicare was established, more than 40 percent of elderly Americans lacked any kind of health insurance. Today, Medicare — which is, by the way, one of those “single payer” systems conservatives love to demonize — covers everyone 65 and older. And surveys show that Medicare recipients are much more satisfied with their coverage than Americans with private insurance.

Still, most Americans under 65 do have some form of private insurance. The vast majority, however, don’t buy it directly: they get it through their employers. There’s a big tax advantage to doing it that way, since employer contributions to health care aren’t considered taxable income. But to get that tax advantage employers have to follow a number of rules; roughly speaking, they can’t discriminate based on pre-existing medical conditions or restrict benefits to highly paid employees.

And it’s thanks to these rules that employment-based insurance more or less works, at least in the sense that horror stories are a lot less common than they are in the individual insurance market.

So here’s the bottom line: if you currently have decent health insurance, thank the government. It’s true that if you’re young and healthy, with nothing in your medical history that could possibly have raised red flags with corporate accountants, you might have been able to get insurance without government intervention. But time and chance happen to us all, and the only reason you have a reasonable prospect of still having insurance coverage when you need it is the large role the government already plays.

Facing reality head-on

“There is no way we can pay for health care and the rest of the Obama agenda, plus get our long-term deficits under control, simply by raising taxes on the wealthy,” said Isabel V. Sawhill, a former Clinton administration budget official. “The middle class is going to have to contribute as well.”

Quote from Obama’s Pledge to Tax Only the Rich Can’t Pay for Everything, Analysts Say in the New York Times

Health care and taxes

The US is able to run large budget deficits for the moment, because the entire world is currently willing to fall all over itself to lend us money at phenomenally low interest rates.

This is not sustainable indefinitely. The day of reckoning will come when the rest of the world decides there are better places to invest its wealth.

Whether or not the US decides to extend universal coverage, it needs to get its fiscal house in order, and health care costs--even under existing programs--are the biggest single issue contributing to expected future deficits.

According to the CBO:

The federal government’s budgetary commitments to health care (including both spending programs and tax preferences) total more than $1 trillion in 2009.

That's one trillion dollars of government spending on health under EXISTING laws. (And that doesn't even count the large amounts of state and local government spending on health care. Our county, Schenectady, for example, spends over 10% of its budget on its share of Medicaid costs alone.)

Where's it going?

The US has three big federal government expenditure programs to provide and/or subsidize health care.

Two of them are highly visible "entitlement" programs: Medicare and Medicaid. Medicare provides coverage for the elderly. Medicaid provides coverage for the poor.

The third big program is not very visible to most people: its what the CBO calls a "tax expenditure." It's an implicit subsidy of roughly $250 billion per year that goes to people fortunate enough to have employer-paid health coverage, and most of the benefits go to the highest bracket taxpayers.

Especially in the current economy, an increasing number of people DON'T have employer-paid health benefits. Many people who had employer-paid coverage have lost it. Some have lost jobs that had benefits and the only stop-gap jobs they've been able to find do not include benefits. Some might have kept their jobs but had their hours cut to the point where they no longer qualify for benefits.

Consider two families, the Jones family and the Smith family.

Mr. and Ms. Jones have a combination of jobs that earns them $90K in cash wages as well as a family medical insurance policy provided by Ms. Jones' employer. That policy might cost her employer $10K per year, due to group discounts, etc.

Let's compare them to Mr. and Ms. Smith, who have managed to cobble together a patchwork of multiple jobs without benefits that earn them $100K in cash wages per year, but no benefits. In our state, the cheapest HMO policy available to a non-group purchaser will cost over $25,000 per year in premiums. No matter where they live, it's virtually a certainty that their non-group policy will cost more than $10K for coverage comparable to what the Jones family gets from its employer, so the Smith family is considerably worse off than the Joneses.

But even though the Smiths are much worse off than the Jones, their tax bill will be much higher.

To keep things simple, let's assume both couples have two young children and take only the standard deduction. We'll also assume they have no other income aside from their wages, so the Jones AGI is $90K and the Smith AGI is $100K.

We can use the NBER TaxSim model to figure their tax bills for 2009.

The Jones family will pay $9,700 in federal income tax,

The Smith family will pay $12,300 in federal income tax.

Both of them are earning compensation that cost their employers $100K, but the Smiths are taxed on all of it, while the Jones are taxed only on 90% of it. And, to add insult to injury, if the Smiths want the same health care coverage the Jones' family has, they will have to purchase it on the much more expensive non-group basis.

Bottom line: the Smith family is considerably worse off than the Jones family, but the Smiths face a federal income tax bill which is 27% per cent higher than the Jones family's bill!

To add further insult to injury, the Smiths will also pay higher payroll taxes (Social Security and Medicare) and, in most states, higher state income taxes as well.

Our current system of taxation is asking families like the Smiths to bear a much larger share of the burden of federal taxes than it asks of the Jones family.