The Subsidy for Employer-Provided Health Insurance
Because wages are taxed, compensation in the form of health insurance in lieu of wages reduces government revenue. In fact, it reduces it a lot: $250 billion per year. Just to put that figure in perspective, $250 billion is almost half the Medicare budget. It is more than 3½ times the average annual cost of the Affordable Care Act’s low-income health insurance subsidies. Employer-sponsored health insurance is among the most subsidized types of health insurance in America, almost as subsidized as Medicaid.
Austin Frakt at his blog.
Considering that there is no real control over vertical markets like healthcare, it’s not surprise that they need to be heavily subsidized.
I found the chart he used citing income growth as a cause for increased health spending to be interesting.
This is just a large mess…How is the average American going to afford health care?
For years health economists have argued that part of the reason the United States spends more on health care than other countries is because our wealth is greater. Another reason is that we pay for medical care in inefficient ways.
If the govt got out of subsidizing everything, we might be able to lower taxes, and add a little stability to the tax code.
The exemption for health insurance is the largest tax exemption, far surpassing the deductions for homeowner interest and retirement plans.
Employers spend about $2 for health insurance for every $1 they spend on retirement and savings.
Don Levit
Subsidies raise prices. If an employer is willing to pay $100 for an employee health plan, with a 50 percent tax deduction, the employer will be willing to pay as high $200. The employer’s net cost out of pocket is still $100. Insurance companies knowing that an employer will get a tax deduction will raise their prices to $200.
Eliminating the tax deduction will lower insurance prices and the expected government revenue will disappear.
The parties most affected are those who cannot avail themselves of the tax deduction. They face a real out of pocket cost of $200. Removing the subsidy (or allowing everyone to deduct health insurance costs) will actually make insurance more affordable to those without employer health insurance who are taxed differently than employers and cannot take the deduction.
Market place prices are affected by subsidies.
Milton, great point.
Subsidies also increase quantity demanded. This translates into higher demand for healthcare which will raise prices. This will impact supply of insurance and vice versa, but the next effect will still be higher pries.
I agree, Devon. Spending more does not necessarily mean better quality. In spite of the fact we spend a greater percentage of our GDP on healthcare than any other countrym, our quality of care remains inferior.
Milton, one thing you should consider is that employer-provide insurance is subject to ERISA/HIPAA rules. Individual underwriting is not allowed, and there are various mandates on coverage. For a level of coverage available to a young, healthy individual for $100, I don’t think its unreasonable to expect an employer plan to cost $200.
So after the tax exclusion, employer-paid coverage is roughly a wash for healthy individuals, but a windfall for those with pre-existing conditions.