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Experts: Change Health Tax Breaks Carefully

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Economists today warned members of the Senate to be careful when trying to redesign the U.S. health insurance tax incentive system.

The Senate Finance Committee invited the economists, Jonathan Gruber of the Massachusetts Institute of Technology and Katherine Baicker of Harvard University, to talk about the economic concepts affecting health reform efforts.

The Bush administration has proposed replacing the current tax exclusion for employer-sponsored health coverage costs with a tax deduction that would go to anyone with private health coverage. The proposal would, in effect, cap deductions of employer-sponsored health insurance costs.

Sen. Max Baucus, chairman of the Senate Finance Committee, said during his opening statement that reforming the U.S. health finance system will be easier said than done.

“We’ve … learned from past attempts at health care reform that too much disruption can backfire,” Baucus said at the hearing, according to a written version of his opening statement. “Too much change for those who already have health coverage can cause a backlash…. We need to fix what’s broken, without breaking what’s working.”

Gruber, who has written articles contending that public health coverage programs are more efficient vehicles for expanding access to health coverage than tax breaks are, noted that no health expert today would set up a health system that offered a large tax subsidy only for employer-sponsored health coverage.

But, because individual purchasers of health coverage face medical underwriting, removing the tax exclusion could create a new set of uninsured people who cannot afford health coverage, or cannot buy health coverage at any price, Gruber said.

Gruber praised Massachusetts’ requirement that residents who can afford health coverage have health coverage.

The Massachusetts mandate has helped cut the number of uninsured in half while expanding the risk pool and helping to hold prices down, Gruber said.

If Congress wants to subsidize employers, “a credit that focuses its spending on those firms below 25 employees and in firms with average wages below $30,000 per year would be most effective in expanding coverage,” Gruber said.

Baicker, who has written in support of the Bush administration’s attempt to replace the current exclusion for employer-sponsored coverage with a flat credit or deduction for anyone with health coverage, said the current system tends to favor higher-paid employees, and employees who have richer plans rather than more basic plans.

A flat credit or deduction for all could greatly expand access to health coverage, Baicker said.

But an increase in take-up among the currently uninsured “might be partially off-set by decreases in employer insurance coverage,” Baicker said. “The potential for employer erosion poses a serious transition problem.”

One strategy policymakers should take is to separate risk-sharing issues from health coverage affordability issues, Baicker said.

The government should use “social insurance,” or income transfer, to help individuals with health problems pay higher rates for health coverage, rather than artificially limiting premiums for individuals with health problems, Baicker said.

If the government wants to ensure that sick people and healthy people have roughly the same level of access to health coverage, it could create risk-adjusted vouchers for low-income, high-risk people to help those people pay for coverage, Baicker said.