Blair House Summit: Focus on Tax Cut

Political theater as it is, President’s Obama’s call for a health reform summit to be held on February 25^th at Blair House presents an opportunity to publicly air the need for one critical ingredient.

Health insurance exchanges would give consumers information about and a choice among health insurance policies—if they work, a very big if.  Democrats want to require states to set up exchanges, while many  Republicans would encourage them without making it compulsory.

Insurance marketplaces face an uphill battle of adverse selection. People who expect to have expensive health problems buy policies, while the young and healthy don’t—high costs and a small customer base guarantee that the insurance will be very expensive, a problem further exacerbated by government mandates that the policy cover every medical service under the sun. All this just about dooms the exchanges.

Democrats propose to force the young and healthy on to the exchanges by making insurance mandatory. Funny, this love of mandating. The medical entitlement debate brings to mind the old adage about the Soviet Union: whatever was not forbidden was compulsory.

But there is another way to make exchanges viable, one that should be prominently on the table at Blair House: offer a tax break. Some Republicans like Tom Coburn of Oklahoma and Paul Ryan of Wisconsin propose a refundable tax credit for buying insurance.  This can be linked to exchanges.

Since employer-provided health insurance has a huge tax advantage, the only way a market is going to develop outside employer-mediated insurance is to level the tax field with a proper tax incentive. It also happens to be fair, since a growing number of people work for themselves and hence are discriminated against in being forced to pay higher taxes compared to those who benefit from the employer health insurance tax break.

With a significant – say $3,000 a person – and permanent tax cut, exchanges have a chance of attracting enough customers. Justice and economic logic both demand this tax break.

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