The Case against John Kerry's Health Plan
Arbitrary Subsidies
In the current system, government subsidies for private health insurance are already arbitrary and unfair. Rather than attempt to correct this problem, however, Sen. Kerry is proposing a raft of new subsidies that would be even more arbitrary and more unfair.
A. The Current System.
"Current system: Tax subsidies equal almost half the cost of employer-provided insurance for middle-income families."
Federal and state government tax subsidies for health insurance - mainly employer-provided insurance — currently total about $190 billion per year. However, most of the assistance goes to those who need it least. Although the average tax subsidy is worth about $1,482 per family, households earning more than $100,000 per year receive $2,780 per year, on the average. By contrast, those earning between $20,000 and $30,000 receive only $725.21 [See Figure IV.] One reason is that those earning higher incomes are in higher tax brackets. For example, a family in the 40 percent tax bracket potentially gets a subsidy of 40 cents for every dollar spent on their health insurance. By contrast, a family in the 15 percent bracket potentially gets a subsidy of only 15 cents.
Another inequity arises because different people get different amounts of tax relief, depending on how they acquire health insurance. For example, when employers pay health insurance premiums rather than taxable wages, this fringe benefit escapes income and payroll taxes. Figure V shows what this means for a typical middle-income family. With employer provided coverage, the family gets a tax subsidy equal to almost half the cost of insurance. By contrast, middle-income families who purchase their own insurance get virtually no relief under the tax law.22 [See Figure V.]
B. Making the Current System More Arbitrary and Unfair.
Rather than create a fairer system that treats equals equally, Kerry would create dozens of new subsidies, making the system even more arbitrary. Among the artificial distinctions are the following
"Kerry plan: A worker in a 49-person firm could receive four times the subsidy as one in a 50-person firm."
Size of Business. Sen. Kerry proposes a generous subsidy for firms with fewer than 50 employees if they contribute at least 50 percent of premium costs, agree to cover all employees and purchase insurance through the managed competition system.23 The employer would receive a 50 percent refundable tax credit for the first 50 percent he contributes and a 25 percent credit against any additional contribution. The employer would receive the full credit for poverty level workers ($9,310 for an individual; $12,490 for a family of two). The credit then phases out gradually and is exhausted at 300 percent of the poverty level ($27,930 for an individual or $37,470 for a family of two). However, since the subsidy would be unavailable to employers of 50 or more, employees with identical incomes are treated very unequally. For example, consider an employee of a 50 person firm who pays no income tax, but whose wages are subject to a 15 percent (FICA) payroll tax:
- On the employer-paid share of premiums (assume 50 percent), this worker and his employer enjoy a 15 percent tax subsidy (because premiums are excluded from taxes) both under the Kerry plan and under the current system.
- However, if this same worker works for a 49 person firm, Kerry’s refundable tax credit (worth 50 percent) would bring the total tax subsidy up to 65 percent.
- The tax subsidy available at the latter firm is four times the size of the subsidy at the former one.
Age. Individuals aged 55 to 64 years who do not qualify for Medicaid and whose employers do not offer health insurance could buy coverage from the managed competition system. Those earning up to 300 percent of the federal poverty level would receive a 25 percent refundable tax credit to do so.24 However, this subsidy — available at age 55 — is not available to a 54-year-old with the same income.
Place of Work. The current system makes different tax subsidies available to different workers. Kerry’s plan would not only continue the practice, but make it much worse. For example:
- Individuals who buy into the managed competition system on their own would pay a subsidized premium — capped at 6 percent of their income at the poverty level and gradually increased to 12 percent of income at 300 percent of poverty; individuals with employer-provided insurance do not get to pay these rates.
- The self employed could deduct their premiums (as under the current system); other individuals, such as employees of firms that do not offer coverage, could not.
- Low-income unemployed workers would get a 75 percent subsidy, compared to 25 percent for those ages 55 to 64, 50 percent for employees of small firms and none for employees of larger firms.
No Horizontal Equity. As a result of the above, people at the same income level would receive vastly different subsidies, depending on their age, how they obtain insurance and where they work. This violates the well-known public finance principle of horizontal equity: People with the same incomes should be treated equally.
No Vertical Equity. Most of the subsidies in the Kerry plan are targeted toward lower-income workers and families. However, the catastrophic insurance subsidy — which is more than one third of the total — has the opposite distributional effect.25 Higher income workers tend to be enrolled in more lavish employer plans, which would receive more of this subsidy. More than two-thirds of the subsidy would go to firms with 500 or more employees. These large employers are more likely than small firms to have generous benefits and higher than average pay. They pay workers an average of $22.04 ($32.54 per hour with fringe benefits), and spend $2.34 per hour on health benefits. By contrast, only about 12 percent of the subsidy is targeted to small firms employing fewer than 100 workers. These firms pay lower wages ($14.46 per hour; $19.47 including fringe benefits), are less apt to offer health coverage, and spend less when they do ($1.13 per hour).26
These inequities extend to specific occupations. For example:
- Nonmilitary government employees earn an average of $20.13 per hour and under the Kerry plan their employers would receive $550.55 in health subsidies per worker per year.
- In the construction and mining industries, by contrast, the average hourly wage is somewhat less, at $17.60; but these employers would receive only $127.20 per worker per year.
- The average wage is much lower in farming, fishing and forestry, $9.71 per hour, but employers in those fields would receive only $68.45 per worker.27