Health Care Flashpoints, Part III

Taxing insurance benefits and health care equity

Over the next few months, health reform will succeed or fail based on a few major flashpoints that will shape any new program, including the financing of health insurance and access to medical care itself. This is the third of a series of occasional posts that will explore these flashpoints, and how the media is explaining them to the public. The entire series is archived here.

It looks more and more likely that workers will be taxed on some portion of the health insurance benefits they get from their employers. A year ago, Candidate Obama derided Candidate McCain for advocating such a tax; President Obama may have to take a second look if there’s going to be enough money to subsidize the uninsured who’ll be forced to buy health insurance under the schemes currently on the table. Congressional Budget Office Director Douglas Elmendorf has suggested “significantly limiting” the tax-free treatment of health coverage. That approach, along with pressuring doctors and hospitals to lower their costs, Elmendorf told Senate leaders, could directly lower government costs and indirectly reduce private spending.

The economic argument for taxing benefits goes something like this: “When you tax an activity, you get less of it. When you subsidize an activity, you get more. We’re subsidizing health insurance.” That’s what Harvard economist Katherine Baicker told NPR. The pro-tax crowd hopes that employers will eventually offer less-generous coverage. If good health insurance coverage suddenly becomes mediocre health coverage or worse, people will use fewer medical services and voila—health care costs will drop and bend the proverbial “cost curve.” Studies have shown that when people must pay more themselves for care, they tend to use fewer services. Baicker isn’t alone in her beliefs; other economists argue that, too. Yes, that’s right—if people don’t go to the doctor or get MRIs, those costs won’t show up on the tab for national medical expenditures.

The equity argument goes something like this: If workers no longer get generous coverage, what they will get will be more in line with what other workers get. Health insurance will become more equitable—or, looked at another way, more people will have mediocre or poor plans. That’s a concept that has been forgotten and missing from the reform debate, which has up to now focused on efficiency. But, then, equity is more important if the government provides the service, and efficiency is more important if the free market does. Reform proposals this year rely heavily on the free market.

Increasingly, we are learning that modest or less-than-modest coverage results in families being underinsured and forced into medical bankruptcy when serious illness hits. A recent study by researchers from Harvard and Ohio University reported in the American Journal of Medicine found that about 62 percent of all bankruptcies filed in 2007 were prompted by medical bills; three-fourths of those debtors had health insurance.

Is that the kind of health care equity we want? Some bloggers seem to think so. In his first column for Kaiser Health News, Jonathan Cohn argued why higher taxes will improve health—and, in the long run, accomplish the goal of guaranteeing insurance for everyone. A few days later, Merrill Goozner of Gooznews asked the pertinent question: Are there really a lot of Cadillac plans out there? Goozner argued that there is only one compelling argument for the tax—it’s a form of progressive taxation. OK, but what does it do for the bankruptcy problem? Here’s where journalists come in, and they need to dial into DOT CONNECTION mode real fast. All this taxation talk comes at a time when three recent studies point to serious problems people face when they have too little coverage.

The American Journal study reinforces earlier work showing that most bankruptcies in the U.S. are due to financial consequences of serious illness. A study reported in early June in health policy journal Health Affairs found that employer coverage may not be much of a guarantee against medical poverty. Research showed that sick people with modest incomes are probably underinsured, even with employer-based coverage. Out-of-pocket spending grew more than one-third from 2004 to 2007, the study said. The news was equally worrisome from the actuarial firm, Milliman, which released its fifth annual Milliman Medical Index.
The Index measures the average yearly medical spending for a typical family of four with employer-provided insurance. This year, the total amount this prototypical family spends on medical care will increase by more than $1000 from 2008—the third year in a row that there has been a double-digit percentage increase in the amount employees spend for health care.

There were a number of workmanlike stories explaining the math behind the Milliman index, such as those done by and Reuters. Ditto for stories that reported the bankruptcy study and underinsurance findings. For example, a post by Tara Parker-Pope on her New York Times blog, Well, clearly discussed the key findings of the American Journal study. But there wasn’t much dot connection in this crop of reporting. It’s fine to report studies—but in the middle of a contentious health reform debate, context is super important.

Right now, proposals for taxing benefits, which could ultimately leave more people vulnerable to the kinds of things these studies found, cry out for dot connection. Can’t leave this one up to the economists.

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Trudy Lieberman is a longtime contributing editor to the Columbia Journalism Review. She is the lead writer for The Second Opinion, CJR's healthcare desk, which is part of our United States Project on the coverage of politics and policy. She also blogs for Health News Review. Follow her on Twitter @Trudy_Lieberman.