jon gruber on health insurance reform

Jon Gruber on Health Insurance Reform

Via the Economic Research Initiative on the Uninsured (ERIU), here is

an interview with Professor Jon Gruber of MIT, who played a key role

in the recent Massachusetts health insurance reform. Here's his

assessment of the recent proposal by the Administration (with my

emphasis added):

Bush's proposal is a step forward and two steps backward. He's

rightly drawn attention to the largest hidden expenditure on health

care, the $200 billion a year that we spend on subsidizing the

provision of employer-provided health insurance. Basically, people

who get paid wages get taxed on those wages, but individuals who

are paid in the form of health insurance don't get taxed on that

compensation. And if they were, we would raise about $200 billion

more a year in tax revenue. This is a very inefficient use of money

for several reasons. First, it's very regressive; the richer you

are, the bigger tax break you get. Secondly, it's what we call a

marginal subsidy; every dollar an employer spends on health care is

cheaper than that spent on wages, leading to excessively generous,

even gold-plated, health insurance. The third problem is that it

props up the system of insurance being tied to employers, extending

a number of inefficiencies and distortions in how the labor market

works.

However, what the president has done is say 'let's blow up the

existing system by taking away the entire employer exclusion and

rededicating it to an individual tax break where every person, as

long as they were insured, would get an individual tax break of

$7,500 or $15,000 per family.' The reason that is two steps

backward is that it doesn't address the two things you need to

address to get rid of this employer exclusion: 1) he doesn't

acknowledge that this system is devoting most of the money to the

rich. Under his proposal, the system becomes even a little more

regressive than the existing one; and, 2) even more importantly, if

you're going to blow up the employer-based system you need

someplace else where people can go. Bush doesn't do that, and

that's the fundamental flaw. Overall, he has raised an important

issue, but he chose to do it in a dangerous context.

I remain convinced that the first reform is to remove the tax