This year’s State of the Union speech was preceded by much talk about the president’s vanished political capital.
Political capital is defined and measured about as precisely as high school popularity.
While pundits, wonks and hacks speak of “spending” political capital, there is no real accounting for it. You know when it is there, but it arrives and departs on its own schedule, without pattern or advance notice.
But if President Bush had no political capital to spend at this time, he also had none to lose. It probably wasn’t an accident, then, that he chose this time to propose a health insurance plan that was, almost by definition, unpolitical in the sense that while it addresses a real problem, it lacks a constituency.
The president’s proposal is directed against the unfairness of the tax code’s treatment of health care insurance payments. As things stand now, when an employer pays a monthly premium for a worker’s health insurance, it is a tax-deductible expense. If an individual pays that same premium, though, in most cases it is not deductible.
The unequal treatment seems most unfair when a worker is laid off. The former employer stops paying the health insurance premium, and the worker has the option of continuing coverage by paying the same monthly amount under the COBRA (Consolidated Omnibus Budget Reconciliation Act). Unlike the employer, though, the worker gets no favorable tax treatment for the monthly premium payment.
The newly proposed plan would change this by modifying the Internal Revenue Code to include a new standard deduction for health insurance costs. Any employer benefits received would have to be declared as income, but health insurance costs of $7,500 for individuals and $15,000 for families would be exempt from both payroll and income taxes, regardless of who pays the premiums.
The president believes that this will not only lower taxes for those who receive employer-paid health care insurance but also “level the playing field for those who do not get health insurance through their job.”
From an economics standpoint there are some good things about this proposal – and some unknowns. It will bring more effective demand and more competition into the market for individual health insurance. This would very likely lower the costs of individual coverage and bring it into line with costs under an employer-sponsored plan.
What we don’t know is the effect this tax proposal will have on employer-based health insurance programs. For many firms, there is little joy or benefit derived from their health insurance programs. Their rising costs continually collide with budget constraints, and efforts to rein in soaring premiums – through reduced coverage and higher co-payments – become the source of misunderstanding and discontent, transposing a benefit into a management liability. A sizeable number of businesses have dropped their medical insurance benefit plans because they were unable to absorb the costs.
An expanded, more efficient market for individual coverage might offer businesses a powerful incentive to offer workers a pay raise equal to the current premiums and cut them loose to swim on their own in the health insurance market.
In the past, insurance companies have not made it easy for individuals seeking health care coverage. In addition to its being very expensive, it is usually difficult to find a company that will actually issue a health insurance policy to one person. Whether their distaste for the business is based on their bad underwriting experience with individual coverage or the administrative costs associated with these policies isn’t clear.
All of that would change, though, if the president’s proposal were enacted. Millions of people would be entering the market, as individuals, changing the entire economic structure of the health insurance market.
Administrative costs would be important, and we would reasonably expect that Web sites would be used to process most applications, payments, and claims. As individuals became more responsible for their own health insurance costs, they would adopt a more consumer-like approach, and the Internet in general would probably play a large role in both the information and the competitive aspects of the health insurance market.
Of course, at this time, the change in health care is only a proposal, and a proposal without a constituency at that. Still, it is encouraging that we are finally addressing the unfairness of the existing system and taking a hard look at the increasing inefficiency, of our employer-based system.
Their clothes and their music are different, and they call it political capital instead of popularity, but Congress is still a lot more like high school than anyone likes to admit. So, while the health care proposal makes sense from an economics standpoint, its fate depends on what the popular kids decide to do.
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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