Monday, June 19, 2006

Furman on Health Insurance

Economist Jason Furman, a frequent adviser to Democratic candidates, has a new article on health insurance that is well worth reading. In this excerpt, Jason points out that our tax code leads to excessive use of health insurance:

if your employer pays $1,000 in premiums to your insurance company, that money is effectively tax deductible to you. But if your employer raises your salary by $1,000 and you use the extra money to pay for medical bills, you generally will not get a tax deduction. As a result, many people end up with more-generous health insurance plans than they would otherwise choose to have. These plans have lower deductibles, lower co-payments, and lower co-insurance and are often focused around providing first-dollar coverage for routine medical expenses, rather than genuine insurance. As a result, individuals in the health system are often spending someone else’s money, which is never a recipe for cost consciousness. Unfortunately, ultimately it is not really someone else’s money: the cost is paid in higher premiums, which in turn are reflected in lower wages.
Most economists agree with this analysis (see my previous post on health insurance).

Jason suggests several policy responses, such as limiting the amount of health insurance that is tax-deductible. That proposal has my vote.