SOTU Healthcare

[bobman0330]

Bush made reference in his speech to a tax-based effort to reform health care. So far as I can tell, the plan has two components:
-Inclusion of employer-purchased insurance in income
-A standard deduction of $7500 for health insurance.

The first part is, I think, excellent policy. This income exclusion is absurd from a theoretical perspective, and from a policy perspective, all it does is subsidize extravagant healthcare spending for those who don't need it. In addition, it really makes people dependent on their employers for health insurance.

The second point seems just as dumb. The point of a deduction is completely lost if it's unmoored from the activity it's supposed to incentivize. If you receive a $7500 deduction without regard to your actual spending, it doesn't affect your incentives at all. A much better system would be to make health insurance deductible up to $7500 (or more).

Of course, needed as this reform is, it doesn't really address the structural problems of health insurance. In particular, decoupling health insurance from employment creates a potentially severe adverse selection problem. I'm not sure I really see a way out of this, apart from universal gov't-provided insurance or giving insurance cos. carte blanche to set rates individually, neither of which seems like a desirable outcome. Anyone else have thoughts on the President's plan or HC in general?