One way to evaluate government subsidies is to ask: What do taxpayers get in return? The Kerry reforms claim to reduce the number of uninsured; and one can certainly argue that taxpayers have an interest in that goal, since they often pay the cost of health care for the uninsured. But what can the taxpayers expect in return for the extra burdens Kerry is asking them to bear?

A. Medicaid Expansion.

As noted above, the expansion of Medicaid and SCHIP in the 1990s significantly increased taxpayer burdens. But because private insurance contracted as public insurance expanded, little was accomplished. The conclusion: Medicaid expansion and SCHIP expansion are very inefficient ways of insuring the uninsured. Yet Kerry would extend that inefficient approach — in spades. As Figure VI shows:

• If Medicaid expansion induces a 30 percent contraction of private insurance (as Kerry assumes), the cost of insuring each new person, on net, will increase by more than one-third.
• At a more realistic 50 percent crowd-out rate, the cost almost doubles - reaching $4,466 per newly insured person or $17,864 for a family of four.
• At a 75 percent crowd-out rate, the cost of each newly insured person reaches $8,623, or $34,492 for a family of four.
• And at a plausible one-to-one crowd-out rate, there will be no reduction in the number of uninsured in return for a huge increase in government spending.

B. Private Insurance Subsidies.

Most of the private insurance subsidies would go to employer plans rather than to individuals. Even Kerry estimates that most of the spending will be on people who are already insured. As Figure VII shows, by Kerry's own estimates:

• By 2009, when the plan is fully phased in, small business subsidies will cost $2,800 per newly insured person, or $11,200 for a family of four.
• Subsidies for workers between jobs will cost $3,478 per newly insured person, or $13,912 for a family of four.
• Catastrophic insurance subsidies will cost a whopping $14,190 for each newly insured person, or $56,760 for a family of four!

Large as these numbers are, they likely err on the low side. Employers of workers who earn less than 300 percent of poverty will typically find it in their self-interest to drop employer-provided insurance once their employees have the opportunity to buy health insurance through the system of managed competition at artificially low premiums. Consider, for example, a family of four with an income equal to 200 percent of poverty, obtaining insurance from a small business:

• Kerry would offer this family a small business subsidy of $2,013 if they have insurance that costs about the average ($8,051) purchased by federal employers.
• Assume the employer drops the coverage and pays higher wages instead and that family is able to buy the same insurance individually, subject to a premium cap; the family's subsidy now rises to $3,770 — a good deal, even if the (FICA) payroll tax is applied to the higher wages.

Of course, many of the families who lose their employer coverage will pocket the extra income and forego the individual insurance, especially if no family member has a serious health problem. And those who do purchase individual insurance through the managed competition system will have an incentive to choose the highest-priced plans, rather than average-priced ones, because the premium cap will allow them to do so at no extra cost. (See the discussion on “Incentives to Spend More” below.)

C. Kerry vs. Bush.

In an earlier publication, we compared the Kerry and Bush health plans based on assumptions made by each camp about its own plan. As Figure VIII shows, the Kerry plan costs more than twice as much as the Bush plan, per newly insured person. 28 The reason why the Bush plan was so much more efficient (although insuring far fewer people) was that the Bush refundable tax credit was targeted to people who most need assistance.

In his State of the Union message, however, President Bush proposed a new tax relief plan: an above the line deduction for people who purchase Health Savings Account plans on their own. This subsidy is not as efficient because it will be claimed by many people who are already insured. Bush had three objectives in making this proposal, however: (1) increase the number of people who have insurance, (2) create tax fairness and (3) encourage efficient health insurance choices.

As noted above, under the current system people who purchase their own insurance get virtually no tax relief, even though people who obtain insurance through an employer are generously subsidized. An exception is a tax deduction that became available in 2004 for deposits to Health Savings Accounts. The Bush proposal would give the same tax relief to premium payments for HSA plans. This would create a level playing field on which people could choose between self-insurance (through HSA deposits) and third party insurance (HSA plan premium) without the distortions of tax law. In addition, the proposal offers comparable tax relief to people who purchase their own insurance and to those who receive employer-provided health insurance.

Professor Thorpe has produced estimates of the Bush package as a whole and concluded that the cost per newly insured person is the same for both Bush and Kerry. But that comparison is misleading, because it ignores the fact that Bush achieves two other goals - tax fairness and unbiased subsidies - whereas Kerry achieves neither of them.

D. Ignoring the Middle Class.

Strangely, the one group that Kerry completely ignores is the most discriminated against under the current system and would most likely respond to a tax subsidy: middle-income families who earn more than 300 percent of the poverty level. Indeed, once the Kerry plan is implemented, middle-class families who do not get insurance through an employer are the ones most likely to be uninsured!

It is widely thought that the uninsured are almost always low income families. Over the past decade, however, virtually all the growth in the uninsured has been among families who make more than $50,000 a year. By contrast, the uninsured rate among families who earn less than $25,000 actually declined. 29

In general, families who earn $50,000 a year or more get up to a 50 percent tax subsidy if they obtain insurance through an employer. Yet they get virtually no tax relief if they purchase insurance on their own. Other than provide an opportunity to buy into the system of managed competition (with government subsidized catastrophic insurance), Kerry’s health care plan does little to assist this group - even though they are the ones most likely to bear a disproportionate tax burden to fund it.