No Silver Bullet

Three noted economists writing in The Wall Street Journal this week claim to have found the silver bullet to solve the problems in the health sector. The answer, they write, lies in allowing ?all health care expenses – employee contributions to employer-provided insurance, individually purchased insurance and out-of-pocket spending? to be tax deductible to everyone. Click here to read the commentary (registration required).

The three authors have sparkling credentials: John Cogan was deputy director of the Office of Management and Budget and is now at the Hoover Institution; Glenn Hubbard was chairman of President Bush’s Council of Economic Advisers and is now dean of Columbia Business School; and Dan Kessler is a senior fellow at Hoover and professor at Stanford.

But their silver bullet misses the mark. While reforming the tax treatment of health insurance is much needed, full tax deductibility would not produce fairness, as they claim, since the progressive income tax system automatically builds in unfairness.

For example, someone in the 15% tax bracket who spends $1,000 on health care would get a tax deduction worth $150. Yet a more affluent person in the 35% bracket who spends the same $1,000 would get a tax break worth $350 — more than twice as much.

That means tax deductibility is based on a philosophy that these more affluent Americans — who also can afford to spend more on health care — will get a better deal from the tax man.

Free-market advocates can do better than this. A better idea is to provide refundable tax credits to the uninsured. A tax credit of $1,000 is worth $1,000 to that person in that 15% tax bracket, giving him more resources and a bigger boost to purchase health insurance.

Nonetheless, we expect this idea to be front and center when Washington tackles tax reform and simplification. A deduction does little to help those who simply don’t have the resources to purchase health insurance, and it will give a greater incentive to affluent Americans to push up health costs by heavily subsidizing every dollar they spend on health care and health insurance.

Another idea that was floated earlier this month, which we hope has been quashed, is to eliminate the tax deduction for companies that provide health insurance.

Businesses provide health insurance as a form of compensation to their workers. Whether you call it health insurance or wages, it should be deductible to the company as a cost of doing business.

Eliminating the employer deduction for health insurance is a sure way to throw millions of Americans off the insurance rolls. (How about that for a laudable policy goal?) Employers will simply cash-out the value of health insurance and turn it into wages because the wages would still be tax deductible. The market just isn’t ready for this. (See our earlier newsletter for more on health insurance and taxes.)

The Health Policy Consensus Group meets regularly to talk about these issues. As you know, one of the organizing principles of the group is offering policy proposals that will help the uninsured. For more than a decade, we have been proposing refundable tax credits to the uninsured to help them purchase health coverage. Since both presidential candidates and many members of Congress have tax credits as part of their health policy plans, we believe that the idea has new traction.

The Consensus Group hopes to produce a conference next year to fully explore the value of credits vs deductions. It’s crucial that the right policy decisions be made here to provide meaningful help to the uninsured.

Grace-Marie Turner

P.S. We hope you received our holiday greeting email yesterday. We would appreciate being considered in your end-of-year giving to help support our work to advance free-market ideas.



? Are drug price controls good for your health?

? Patient data could lead to scientific insights

? Means-testing in Medicare

? HSA road rules

? The most affordable cities for family health insurance



Authors: John A. Vernon, Rexford E. Santerre, and Carmelo Giaccotto

Source: Center for Medical Progress at the Manhattan Institute, December 2004

New drugs generate immense social benefits by saving, improving, and extending lives, but government interference in pricing is resulting in lost R&D and therefore lost lives, as documented in a new study for the Manhattan Institute by John Vernon, Rexford Santerre, and Carmelo Giaccotto of the University of Connecticut. They argue that increasing the growth of government’s share of total spending on pharmaceuticals induced lower R&D expenditures. ?Estimates suggest that the government’s indirect influence on drug prices has led to a cumulative capitalized loss of $188 billion in pharmaceutical R&D from 1960 to 2001,? write the authors. ?Because this ‘lost’ R&D means ‘lost’ drugs, we estimate that 140 million life years were never realized because of the indirect influence that the government has had on drug prices.? With the passing of the Medicare Prescription Drug, Improvement and Modernization Act (MMA), the ?impact of price controls on Medicare drug purchases would be significantly greater in a much shorter period of time ? applying current price controls to MMA purchases would reduce present value R&D spending by a further $372 billion, costing 277 million life years in the United States because of forgone discovery of new drugs.?

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Author: Scott Gottlieb, M.D.

Source: The Wall Street Journal, 12/03/04

?When it comes to drug safety, we don’t need a new drug safety monitoring board or bigger offices inside the FDA, or more personnel,? writes former FDA official Scott Gottlieb, now of the American Enterprise Institute, in response to an earlier commentary by the Hoover Institution’s Henry Miller calling for regulatory reform in the FDA.

Rather than adding ?cost effectiveness? and ?comparative effectiveness? requirements for approving new drugs, drug safety should instead ?place more emphasis on learning about new medicines in the post market ? by aggregating the collective experience of the millions of patients who take medicines every day, and recording this information and using it to draw meaningful scientific insights.? The information collected from these ?real patient experiences? could be used ?for things like drug label changes inside the FDA and quick payment decisions by Medicare. That would align everyone’s incentives, insurers and drug developers alike, to work harder to learn more about new technologies more quickly after they are approved rather than waiting many years for veiled truths to emerge.?

Full text (subscription required):


Author: Mark V. Pauly

Source: Health Affairs Web Exclusive, 12/08/04

Wharton Professor Mark Pauly proposes ?a strategy in which future Medicare beneficiaries with higher incomes will pay for cost-increasing but quality-improving new technology, possibly with prefunding that begins before retirement.? The Medicare Modernization Act of 2003 introduced for the first time means-testing for the Part B premium and the Part D drug benefit. Pauly argues that additional means-testing could improve Medicare’s financial future, particularly in helping to fund the cost of new technology which, he argues, ?cannot be supported in the future for all seniors at current tax rates.? He concludes that the ?key to saving Medicare? is obligating non-poor seniors to ?pay for their own costly improvements in technology: out of pocket, through supplementary coverage (for traditional Medicare), and through supplementary premiums to private plans that cover it.?

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Author: Dan Perrin

Source: The HSA Coalition, 12/07/04

Dan Perrin, president of The HSA Coalition, has prepared a valuable new guide for consumers, employers, insurers, banks, and others to help clarify how Health Savings Accounts work. ?HSA Road Rules was written to condense the guidance issued by the U.S. Treasury into key rules, and do it in as plain and clear language as possible,? according to Perrin. The publication contains a great deal of information including: universal HSA principles, eligibility road rules, allowable expenditures, allowable investments, and road rules for employers, health insurers, and trustees.

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Source: eHealthInsurance, 12/07/04

eHealthInsurance has released a new study ranking the largest cities in the U.S. with the most affordable health insurance options for families. With plans as low as $171.86 per month, or $43 per person for a family of four, Kansas City, MO, is the city with the most affordable health insurance nationwide. Other cities ranked in the study, with premiums ranging from $180 to $212 per month for a four-member family plan, include Los Angeles, CA, Columbus, OH, and Phoenix, AZ. Cities with the most affordable health insurance offered a large number of options available for families – the top-ranked cities have at least 43 plans available on ?Health insurance is surprisingly affordable for families in most of America’s largest cities,? concludes the study, but ?the more state mandates on health insurance plans in a state, the higher the prices tend to be.?

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Follow-on Drug Development: Wasteful Imitation or Productive Competition?

American Enterprise Institute Health Policy Discussion

Wednesday, December 15, 2004, 9:15-11:00 a.m.

Washington, DC

For additional details and registration information, go to:


Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at

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