There is a strange choreography to State of the Union speeches. To a visitor not tuned in to our language or to current American politics, it must look like some sort of ceremonial calisthenics.
At the beginning, there are usually opportunities for everyone to stand up and cheer. Eventually, though, the process settles down to an established rhythm: The president says something, and half the Congress stands and applauds while the other half remains seated.
Generally, throughout most of the speech, the president’s supporters get to exercise their hands and feet, and the opposition gets to exercise restraint.
President Bush used the idea of “keeping America competitive” to link seven elements of his domestic agenda: tax cuts, budget control, Social Security, immigration, health care, energy and education.
From an economics perspective, a case can be made that the most interesting area of the president’s domestic agenda is health care. By some standards, his proposal is a small one. But it would address a major source of unfairness in our economy and, better yet, it is practical and probably could be done, even in an election year.
There is a significant economic inequity in the present health care system. We have linked health care insurance so closely to employment that it creates a significant, and inherently unfair, distortion in costs between individuals and businesses.
For a person with a job that includes health insurance as an employment benefit, health care is paid for with pre-tax dollars. Because of the way the tax code is written, the cost of health care is a tax-deductible expense for employers and never even shows up in an individual’s income.
If a person loses his or her job, though, and pays for health insurance as an individual, it comes out of after-tax dollars. For individuals, health care insurance premiums are deductible only if you itemize expenses on your tax return, which eliminates many taxpayers, especially those with modest incomes.
Moreover, health care expenses of any sort, including health insurance premiums, are not 100 percent deductible even if you do itemize.
The net result of all this is that, from a health care standpoint, losing your job and its income hits you with a double whammy. Medical insurance is more expensive for an individual to purchase, plus you have to buy it with after-tax dollars. It’s an unintended form of price discrimination. Purchasing the exact same health care coverage costs you more money just when you find it more difficult to afford it.
The president is proposing to level the playing field for medical insurance through Health Savings Accounts. These have been around since December 2003, but they haven’t gained enough momentum to have an impact. If the president succeeds in getting Congress to clarify the tax treatment and improve the portability of these accounts, it would have a dramatic effect on the essential fairness of the system.
The accounts attempt to accomplish two goals. The first is to put individuals, small businesses and large corporations on the same tax basis as far as health care expenses. The second is to restructure health care by focusing medical insurance on big-time, major medical events – shifting the burden of smaller expenses to individuals. The underlying theory is that people would take better care of themselves and spend money on medical care more wisely if in fact it is their money.
In many respects Health Savings Accounts are less than the ideal mechanism for addressing the tax inequity issue. The accounts are a good idea in their own right, and are based on the same pre-tax dollar concept as Individual Retirement Accounts. \
But in this case, it would be simpler and fairer to address the tax inequity by revising the Internal Revenue Code directly and unambiguously, making health insurance premiums deductible for all taxpayers, whether individuals or businesses. Congress could then focus on the other aspects of the health accounts that need improving, such as portability.
The president’s health care agenda also includes improving health information technology, which would help streamline paperwork and might also reduce the number of errors in medical treatment. He also plans to try again to get Congress to pass his medical liability reform legislation, which would place limits on noneconomic damages in malpractice suits.
Health Savings Accounts are not the complete answer to our health care system’s problems. But for a lot of people, they are a reason to stand up and cheer. Medical advisers are constantly telling us to get more involved in our own medical care, and this is one way to combine good medical advice with good economics. And all that standing and cheering is good exercise, too. That can’t hurt.
James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101” monthly for the Snohomish County Business Journal.
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