The tax break for employer-provided health insurance

Remember when I wrote?

…how can a simple relative price, whether a distortion or not, corrupt the cost control practices of an entire industry?  And if government provision of health care is ineffective and costly, isn’t there a positive externality from the purchase of private health insurance?

The tax break for employer-provided insurance is, more or less, thirty percent.  Therefore the cost burdens of employer-supplied health care should not exceed that same thirty percent.  Have you noticed that current problems come in the form of cost escalation at high ongoing rates, and not just from a one-time cost bump upwards? 

If you think the tax break is behind the spiral of rising costs, you need only wait.  Once the sum total of those unnecessary costs exceeds thirty percent, the tax subsidy won’t be worth it, we’ll move to a more rational system, and all will be well, more or less.

That hardly seems believable. 

Consider an analogy with food.  Say my restaurant expenditures were subsidized by thirty percent (remember the tax deductible business lunch?).  They might put too much on my plate, and they’ll start overcharging me.  Maybe.  But once the initial adjustment occurs, it won’t lead to 5-10 percent cost escalation for meals each year.  And if it did, in a few years’ time I would simply switch to the unsubsidized meal sector, thus checking how bad the problem could get.

Addendum: See also Becker and Posner today.


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