Economics 101: tax-cuts for health insurance won't make it cheaper

I have been disturbed and confused by the lack of knowledge by GOP Members on healthcare policy (and basic economics) in the past week (I say that having been a previous Hill staffer). One new canard that really drives me nuts is that by making health insurance tax-free for those buying their own plans (not through employer) it will somehow magically make insurance cheaper, and thereby bend the cost curve. Really? This is the level of intellectual discourse?

First, to be clear I think that all health insurance should be treated equally under tax law, whether your employer buys it or you do; treating one a certain way and the other a different way doesn't make much sense. It was a weird historical accident that it became provider by employers to begin with: it was illegal for employers to raise wages during World War II, but the War Labor Board exempted employer-paid health benefits from wage controls and income tax - by the 1960s it was nearly universal. Giving a huge tax break for health insurance makes little sense, so I would prefer to tax it like all other income, and cut marginal rates accordingly, but we can disagree on that - but it should clearly be the same between the two categories.

However, if you do treat them equally under current policy, and in so doing give a HUGE tax break for health insurance for individuals -- that would most likely drive up prices. As a matter of economics, tax expenditures (tax credits/deductions) are analogous to subsidies (or the exact same). And I know some GOP get on their hind legs when Economics 101 says that, "It's OUR MONEY," but that's just silly economically: they are different forms of subsidy.

So if we go from a world now where most insurance plans are subsidized by government (through employer) to all insurance plans being subsidized by government (employer or not), on what world do you think that more demand (in the form of free money) is going to mean prices go down? The consumer's out of pocket costs go down, but that's not the question - we could always make consumer's out of pocket costs go down (just give them a check) but that doesn't solve the actual problem (which is crazy healthcare inflation). If your answer is yes, then why don't we REALLY subsidize bread, milk, and oil? Yes, we do subsidize farming, but not like developing countries do. Yes, we do subsidize oil, but not like Saudi Arabia does. In many developing countries basic food, bread, is nearly free to the consumer, but it's also extremely expensive and inefficient (to somebody). We know that when you subsidize things, whether it be education, food, or healthcare - costs almost always go up, not down; that is simple economics.

I suppose THEORETICALLY, if we subsidize individual health care buying, then people may stop providing it through their employer, making people more agile in the work force. And the more people that are buying individually, if that becomes the dominant model and everyone buys individually, then that would likely be a much better (and cheaper) health system. If that's the goal there are many more effective ways to do it (tax employer health care for example only). But that is not what would happen with this small trick, and that's not what politicians are saying here. When we enter a world where the dominant model is individuals buying their own health insurance it likely would be better and cheaper, but until then (unlikely for decades even with a change in policy) consumers would actually be paying MUCH more money (individuals have less leverage, different pools etc.).

So please, GOP Members using this canard, read an economic blog, hire someone with an Economics degree, stop with the silly-talk. There are lots of reasons to favor equity between individual and employer healthcare, but not ponies and rainbows. The solution to healthcare is to cut the costs, if you want to have a serious conversation, let's begin (I threw some ideas out here that are among the types of ideas that would bend the cost curve). Democrats haven't introduced solid ideas there either and Obamacare didn't succeed in driving down costs (but that wasn't really the goal of it either), so the time is now. It's quite likely there could be bipartisan consensus on many areas to cut costs in healthcare through smart policy.