Breaking the Tax Break on Health Insurance

In his book, The Cure, David Gratzer points to a specific date in the early '50s when a tax break given to companies to cover employee health insurance was written into law as one of a handful of crucial dates that have led to our current health care situation. I've come to agree that the ingrained notion that employers, not individuals, are responsible for providing health insurance is a bit illogical and is a major roadblock on our way to real progress in health reform.

It strikes me as great, then, that today I have read two different proposals to reform health care that both include breaking the employer/insurer link. The first one I encountered was in the Economist, where it discussed two similar bills making their way through each chamber of Congress. Now, to be sure, these are universal health-care proposals in the vain of the Massachusetts plan, which has its positives and its negatives.

Both versions of the bill require individuals to buy their insurance, and
include insurance-market reform and subsidies to make sure that all Americans
can do so. They also end the current tax break for health insurance provided by
employers, which should break the link between insurance and employment by
making coverage portable.

The other thing I read today was from a Wall Street Journal op-ed by Allan B. Hubbard, director of the National Economic Council under President Bush. He argues that the way to fix health insurance is through the tax code, which currently has skewed the incentives on insurance:

Under today's tax code, people who are fortunate enough to get health insurance
through their jobs get a big tax break -- but those who have to buy coverage on
their own get no tax break at all. That is not fair, and it is not wise.

His remedy - or rather the President's - is a flat $15,000 standard tax deduction for health insurance. Though he does not go so far as to say the administration's plan would eliminate the corporate tax break, it does move responsibility to individuals, and eventually the tax break would probably have to go.

I don't know what the right size for such a deduction would be. A one-size-fits-all deduction may encourage people to continue the common practice of being over-insured, which would do nothing to drive down costs in the long run. However, using the tax code to reward a positive behavior like having insurance seems a better step than the government mandating me to buy something.

Ultimately, though, breaking the employer/insurer link alone would be a huge step forward and would cause a dramatic change in how people view insurance. Currently, because insurance is so tied to jobs, it is really seen as an entitlement, and that is the worldview framing this debate. Let's change our worldview and see what new ideas come out of that.