Unintended Consequences

I think I have mentioned before that one of my graduate school mentors (Richard Hirth who is now a full professor at the University of Michigan) sometimes  referred to health economics as the study of unintended consequences.  On so many occasions in the history of health economics in the United States, a policy was made without fully anticipating how stakeholders in the health care system would respond to the change.  After a policy changed, people changed behavior in ways that were not expected and more research was needed to understand what went wrong.

On Friday of last week, I commented on the idea of taxing generous health insurance plans.  I want to spend a little more time on that topic.  There was a New York Times article published yesterday on the issues around the idea of taxing generous health insurance plans.  Since this information is out there, if the bill passes as is (unlikely) we will not be able to say we were unaware of the consequences.  They may even be fully intended.  The key is that they are not unknown or unanticipated and that is usually part of how we would define unintended consequences.

Since employer-provided health insurance plans receive favorable tax treatment, one way of thinking of the plan to tax generous insurance policies is that this would simply represent realigning the tax incentives so that the are less favorable and there will be less distortion of the system than there is at this time.

While that is a legitimate economic argument, people are used to having the favorable tax treatment.  What the article points out is that while the plan is labeled as "targeting the most generous plans" it may capture any number of those who consider themselves middle class and who are getting only "good" plans rather than really excellent plans.  There are three reasons:

(1) A "one price fits all" policy across the nation is often a problem.  Some people face higher prices for medical care and live in areas where medical care is practiced more aggressively.  Both of these will result in higher insurance premiums.  An interesting distributional question is whether everyone  should face identical thresholds or whether they should be adjusted for local circumstances.  We do some of each in public policy.

(2) The possibility that the threshold for premiums for policies that will be taxed may not keep up with inflation and, over time, more people will end up paying the tax.  This is similar to the alternative minimum tax that was originally intended to affect only those with high (often non-wage) income.  However, because of a lack of adjusting the threshold for this tax over time, this tax now affects more people.

(3) From the description in the New York Times piece, it appears that anyone with a cafeteria style flexible spending account may have the entire value of their flexible spending account  rather than only their health insurance included in the calculation of whether the premium is high enough for the individual to be taxed.  Robert Hansen was quoted on the second screen of the article.  I had not seen that anywhere else.

In short, while my economic logic may favor making people who spend the most face the true cost of their choices, this type of policy must carefully consider not who is the intended target but who actually ends up paying more as a result of policy change.  This policy would affect a lot more people than I'd considered when commenting on Friday.  That does not change the theory or the rational response.  Just the distributional implications.  And that is a political question.