Topic: Cato Publications

Furmanology

CHICAGO—The only nice thing about being stuck on an airplane (aside from free soda) is the chance to catch up on one’s reading. On this trip, I (finally) turned to Jason Furman’s article “Our Unhealthy Tax Code” from the premiere issue of Democracy. I address Furman’s objections to health savings accounts in a recent paper. (Refreshingly, we actually agree on one or two things.) But Furman also commits what I think is an important error when discussing tax deductions for health care. 

Congress exempts employer-provided health benefits from income and payroll taxes, which costs the federal government an estimated $200 billion per year in lost tax revenue. Furman describes this as the federal government “spending approximately $200 billion annually in subsidizing employer-provided insurance.” But that is flat incorrect. A tax deduction allows workers to keep more of their own income, provided they engage in a desired behavior — in this case, obtaining employer-sponsored health insurance. It is not government spending because the government cannot spend money that it never possesses. Nor is it a subsidy, because to subsidize means to transfer resources, and again the government never possesses those resources. The tax deduction may have the same effect on government revenues (and the economy) as government spending for the same activity. But that still doesn’t make it spending

Suppose I robbed Peter and gave his money to Paul. Suppose alternatively that Peter gave his money to Paul because I threatened to punch him in the nose unless he did. In the first scenario, I would be spending Peter’s money on Paul. But in the second, Peter would be spending his money on Paul.  I wouldn’t be spending anything. I merely would be threatening to assault Peter unless he did what I said. 

A more precise way of describing such tax deductions would be to say that they create price distortions between favored and non-favored activities. If a health insurance policy and a plasma TV each have a nominal price tag of $5,000, the fact that health insurance is tax-deductible reduces its price relative to the TV. (If the price distortion is greater than my preference for the TV, the tax deduction will induce me to consume the less-valued option, creating economic losses.)

The distinction might seem semantic, but it has important normative implications. Furman despises the tax deduction for employer-sponsored health insurance on equity grounds: The wealthy get larger tax deductions than lower-income workers. (I despise it too, for different reasons.) A government spending program that disproportionately subsidizes upper-income workers would be offensive to more people than a policy that merely lets some workers keep more of their own money. The former description suggests (assumes?) that the money belongs to the state, and that the state has the right to spend it on something else at its discretion. The latter suggests (correctly) that the money belongs to the people who earned it, and for the state to spend that money would require a $200 billion tax increase.

To anticipate a predictable objection, I am aware that the federal government itself prefers the former description, and the term tax expenditures. It is hardly surprising that the federal establishment chooses the description that presumptively increases its claim on society’s resources. That it is a convention makes it no less incorrect.

More Evidence on Coinsurance and ‘Skimping’

PHOENIX—In a recent paper on common criticisms of health savings accounts (HSAs), I discussed the concern that, since HSAs encourage greater price-sensitivity, they will encourage patients to forgo necessary medical care. I found that most of the evidence points to the opposite conclusion: Price-sensitive patients do not seem to “skimp” on necessary care.

The latest issue of Health Affairs includes an article that adds more weight to that conclusion. Dana Goldman and colleagues examined the effect of different levels of cost-sharing on privately insured patients with at least two of the following diagnoses: cancer, kidney disease, rheumatoid arthritis, and multiple sclerosis. The out-of-pocket costs for specialty drugs that treat these diseases can be quite high. For example, median out-of-pocket drug spending for cancer patients was $336 dollars (in 2004), but ran as high as $12,000 for some cancer patients.

What was striking about this study was that greater cost-sharing did not cause those patients to cut back on their drug expenditures. According to the authors:

[C]oinsurance did not significantly affect the level of spending at all once a patient initiated specialty drug use. What is most striking about these results is how inelastic demand is — that is, how insensitive patients are to price — in comparison to traditional pharmaceuticals, for which it is not uncommon to see responses of 30–50 percent when copayments double.

For emphasis, the authors include the following figure, which shows pharmaceutical spending among kidney patients as a function of the coinsurance rate:

Effective Coinsurance Rate For Kidney-Related Products And Spending, 2003–04

The coinsurance rate seems to have little effect, which suggests that when patients need medical care, they don’t cut back when exposed to more of the cost.

Despite these results, the authors argue against greater cost-sharing for specialty drugs, both because the drugs tend not to be used by patients who would not benefit, and to protect those patients from financial hardship. Yet that recommendation does not seem to follow from their findings. First, those drugs may not be subject to overuse at present. However, as the authors recognize, the market for specialty drugs is set to expand dramatically, which increases the potential for moral hazard when cost-sharing is low. Second, if those patients are suffering serious financial hardship, it isn’t apparent from this study: They are still able to obtain the drugs they need.

The authors seem to have a preference for pooling the cost of specialty drugs — which is fine. Personally, I’m agnostic: I think consumers should make that choice according to their own preferences. But this study’s empirical results do not illuminate whether it is better to have individual patients bear those costs, or to have those costs borne by the entire insurance pool — an option that could possibly make coverage unaffordable for other patients, whether now or in the future.

Hopelessly Devoted to HIM?

SMU Biblical studies professor Mark Chancey has just penned a study of Bible teaching in Texas Public Schools (.pdf). The report concludes that “the public school courses currently taught in Texas often fail to meet minimal academic standards for teacher qualifications; curriculum, and academic rigor; promote one faith perspective over all others; and push an ideological agenda that is hostile to religious freedom, science and public education.”

Chancey’s most damning charge: “Most Bible courses are taught as religious and devotional classes that promote one faith perspective over all others.” If true, that, of course. would be unconstitutional. (Nadine Strossen, call your office.)

Here’s a thought: Rather than forcing all Americans to pay for a one-size-fits-few government monopoly that inevitably creates legal and cultural conflict over the curriculum, why not institute a school system that would give both parents and other taxpayers real educational choice? This could easily be done by combining and enlarging the existing personal use and scholarship donation tax credit programs that exist in states like Pennsylvania and Arizona. A short exposition of the idea appears here, and a more comprehensive one is available here.

Cato’s Neal McCluskey will be publishing a study of the endless school wars caused by our state-run education monopolies later this year. Stay tuned.

New at Cato Unbound: Veronique de Rugy on Anti-terrorism Spending

In today’s installment of Cato Unbound, AEI resident scholar (and Cato adjunct scholar) Veronique de Rugy argues that the $271.5 billion devoted by the federal government to homeland security since 9/11 has not been well spent.

“Not only are we over-investing in homeland security,” de Rugy argues, “but most times we spend too much money in the wrong way and on the wrong things.”

The consequence is that we are no safer. “Bad security is often worse than no security at all,” de Rugy writes. “By trying, and failing, to make ourselves more secure, we make ourselves less secure.”

Doublespeak and the War on Terror

Last week, Cato published my paper “Doublespeak and the War on Terrorism.” Of course, this has not kept President Bush from using doublespeak. 

In his televised address this week, Mr. Bush said that all members of the U.S. military are “volunteers.” Not so. We do not have the large-scale conscription of civilians, but we do have “stop-loss” orders from the White House, which means soldiers that have fulfilled the terms of their enlistment contracts may not leave military. The men and women who wanted to return to civilian life after serving their term of service are not “volunteers.”  In military circles, the stop-loss order is known as the “backdoor draft.”

Fortunately, more people are calling attention to such misuse of language by government. Go here for a column by Eugene Robinson of the Washington Post. Go here for a column by Dick Meyer of CBS News.

We’ll never be able to stop the government from engaging in doublespeak because the government is constantly engaging in mischief. But if we’re vigilant about it, we can keep the government in check.

Regulation News Pegs!!

In the public relations racket, they’re called “news pegs” — current events that can be used to promote your research. As editor of Regulation, I sometimes get the complaint that my publication is “interesting, but it doesn’t have a lot of news pegs.”

So how about this — two Regulation news pegs in one day!

Peg 1: Should we tax nonprofit hospitals?

Decades ago, Congress awarded tax-exempt status to private nonprofit hospitals in return for the hospitals agreeing to treat indigent patients who would otherwise rely on taxpayer-provided healthcare services. But this “grand bargain” is now under Capitol Hill scrutiny following the discovery that for-profit, non–tax exempt hospitals provide roughly the same amount of free medical care to the poor. Today’s NPR program Marketplace discusses the congressional hearings.

All of this should come as no surprise to readers of Regulation. In the summer issue, Guy David of Penn and Lorens Helmchen of Illinois-Chicago lay out this very problem and ask (pdf), why is the government giving one type of tax treatment to some hospitals and another type to others?

Peg 2: Soft Paternalism

For several years I’ve believed that one of the most important intellectual challenges to libertarian ideas is behavioral economics — the empirical field of study that suggests people often do not act rationally and thus markets do not maximize public welfare.

The current issue of the New Yorker contains an article by John Cassidy on behavioral and neuroeconomics that confirms my view. In the article, Cassidy writes that “most economists agree that, left alone, people will act in their own best interest, and that the market will coordinate their actions to produce outcomes beneficial to all.  Neuroeconomics potentially challenges both parts of this argument.”

The regulatory prescriptions that follow from this research are often described as “soft” or “libertarian” paternalism.  The basic notion is that government should require certain behaviors as a default rule (for example the purchase of health insurance or particpation in 401k saving plans) but allow people to opt out if they prefer.

But government actors appear to be no more rational than economic actors — and it is quite possible that soft paternalism could be more detrimental to public welfare than the private choices studied by behavioral economics. Harvard economics professor Ed Glaeser states this case (pdf) in the summer issue of Regulation.

New at Cato Unbound: Clark Ervin Replies to John Mueller on Terrorism

In today’s installment of Cato Unbound, Clark Kent Ervin, former Inspector General of the Department of Homeland Security and author of Open Target: Where America is Vulnerable to Attack, strongly disagrees with John Mueller’s provocative lead essay, “Some Reflections on What, if Anything, “Are We Safer” Might Mean,” in this month’s issue devoted to “9/11 Five Years After: Reassessing Homeland Security and the Terrorist Threat.”