• Chart of the day: Nearly half of health spending for richer Americans is tax-financed

    Below is a pre-publication version of a chart that appears in Chris Conover’s The American Health Economy Illustrated.

    pct hlth paid by gov

    How do individuals with incomes 400% or more of the federal poverty level get so much taxpayer assistance? The biggest single source is the exclusion from taxation of employer-sponsored health insurance. Medicare is the second biggest source. Additional detail in Exhibit 4 of the paper by Seldon and Sing, from which the data in the above chart were taken.

    @afrakt

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    • From your comments, I can tell that you believe people making below 200% of poverty level should be spending less than 30% toward their own healthcare.

      And if the largest contributor towards the 400% category is the exclusion from taxation regarding costs of health insurance, have you thought about the type of recession we would experience if those benefits were suddenly taxed? We would have a lot more people suddenly in the middle 2 columns.

      • “From your comments, I can tell that you believe people making below 200% of poverty level should be spending less than 30% toward their own healthcare.”

        Huh? Stop putting words in my mouth. These are just data. You’re bringing the judgement.

        • I’ve been reading this blog intermittantely for the last 9 months. Posts aren’t made just to put out data. There are opinions behind them.

          • You may guess all you like, but you are wasting your time and mine. Quote me all you like, but I will not entertain putting words in my mouth. I consider it rude. If you want to comment here, don’t do it.

    • I vote that we stop trying to subsidize the rich and middle class (I do not think that it can be done because the rich and the middle class pay the bulk of the tax that funds the subsidy). If we minimize the subsidies to the rich and middle class (SS and Medicare are the biggest) we can help the needy much more even while lowering the overall cost.

      The the exclusion from taxation of employer-sponsored health insurance seems like a good idea at first glance but it tends to distort things more and more as we spend a large portion of our income on medical care. Also I am sure that part of the subsidy is captured by the providers.

    • Get rid of the tax exclusion and you will get rid of employer-based coverage. How will the healthcare system look then?

    • I probably should be able to figure this out, but any idea how that stacks side by side with tax progressivity in general?

    • (You note it in the chart but it is worth emphasizing that this data is over 10 years old.)

      What is unclear from the underlying source is whether under the Medicare category the research includes people that are realizing more than 400% FPL once on Medicare or if that was their income while working. In general, once on Medicare — to the extent you can control it — you hold down your income no matter how much you earned when working. (Some of the most well-off retirees you know may be in the 200%-399% FPL bracket whereas conversely some really hard-up seniors may be struggling to get buy on the same income as the rich senior recognizes.)

      This research also appears to count as “public outlay” the money the Medicare beneficiary pre-paid into the A and B trust funds while working as well the money he or she is paying into the B trust fund once on Medicare.

    • For a family of four 400% of the Federal poverty line is $94,200. Decidedly middle class range, and not at all surprising that the subsidy essentially is the federal income tax exclusion for “employer provided” health insurance. It would be interesting to see the number for a family whose income is 4,000% of the Federal poverty line. Probably the same in terms of subsidy vs. expense. It is interesting to think of this subsidy in relation to the backward shifting of the cost of employer “paid” health insurance on wage incomes. That “burden” would seem to be highly regressive, i.e., the higher your income in excess of the value of the health insurance, the smaller the impact of the backward wage shift on your total after tax income. Looked at another way, lower and middle class families with employer paid health insurance make a greater sacrifice for this benefit, if you accept the backward wage shift phenomenon, than do their much wealthier counterparts.

    • Tax-deductible employment benefits are income, but they aren’t really tax-financed. “I didn’t take some of your lunch money away today, ergo, I bought your lunch.”

      Medicare is tax-financed, but at least on the right-hand side of that graph, it’s tax-financed by the same people who are taking the benefit; it’s an accounting mechanism much more than a redistribution.

      A more interesting graph would be the percentage of health care expenses that are passed on to other people, versus those that are coming out of the individual’s own economic productivity (health benefits, pre-ACA) or that are paid for from the individual’s payroll taxes, whether now or in the past (Medicare, for the richer half of the distribution.)

    • Eliminate the duplicate systems, Medicare, Medicaid, VA, State, Federal health care coverage and eliminate the emloyer based health care system totally. Remove it from the backs of ALL businesses and institute a Medicare for all at birth paid for by a split payroll taxe just like Medicare is paid for now. It will increase Medicare FICA taxes from 1.45% to around 3.5%, maybe 4% but will make our businesses that provide health care benefits much more profitable OVERNIGHT, increase jobs, exports, and probably wages too giving a huge boost to our economy. It will also create one single entity to curtail the costs of health care.

      • Gary

        I think you need to check the math on this claim:

        “Eliminate the duplicate systems, Medicare, Medicaid, VA, State, Federal health care coverage and eliminate the emloyer based health care system totally. Remove it from the backs of ALL businesses and institute a Medicare for all at birth paid for by a split payroll tax just like Medicare is paid for now. It will increase Medicare FICA taxes from 1.45% to around 3.5%…”

        — Per another recent post on this blog and many other sources (particularly MedPAC), Medicare taxes paid by both employees and employers (which really means they are paid by employees) pre and post retirement cover less than half of a senior’s healthcare costs. Seniors have to make up the difference out of pocket (OOP)
        — Per other research (and don’t hold me to the exact percentages), employer contributions to ESI-based insurance cover about 65% of the non-Medicare-age person’s healthcare costs while the person pays 35% via both payroll deductions for premiums and OOP

        Most Medicare recipients no longer work so they aren’t going to add anymore to the pool. And you can’t cover all those costs by simply increasing the income tax on non Medicare recipients by a few percentage points. (I think you are saying that business would have no costs under your plan?)

        Looking at MassCARE, the Massachusetts version of this idea, it appears that sales, income and business taxes would have to double–net of current payroll-based premium contributions–not just go up a few percentage points.

        (In addition, the VA is very different than everything else in your list because it actually does deliver health care. Employers don’t.)

        • I am getting a little disconnected from who is trying to prove what, so let me backtrack into my own certainties:

          – Employer payment of health insurance premiums is the secret sauce that preserves the American provider systems.

          – Medicare taxes are less than Medicare payouts, even in Part A and from the beginning in Parts B and D.

          – Medicaid is funded solely by income taxes on the better off. There is a rough justice here, in that wealthy persons benefit a lot from low salaried dishwashers and nannies and gardeners.

          – These cost shifts or sudsidies are little understood.

          – Any attempt to convert these hidden subsiides into open payroll taxes must deal with big sticker shock.

          Sp Dennis is right. I just took a while to say so.

          bob hertz, the health care crusade

          • Bob, I was not arguing one way or other but would just like to see Gary’s math that would only raise the Medicare payroll tax a few percentage points and eliminate all other healthcare insurance premiums — including the employer contribution. That was not the case when I ran the numbers on the MassCare proposal a few years ago.

            Point of information though, when it comes to Medicare:
            — Part A payouts ARE in fact totally funded by the Medicare payroll tax (and a very minimal amount of beneficiary premiums); that’s the trust fund you hear about that is going to run out in 2016 or 2024 or never depending on your political persuasion
            — Parts B and D are the Parts of Medicare that are not at all funded by any dedicated tax but in theory are funded 25% by beneficiary premiums
            — I say “in theory” because low income beneficiaries get free Part B and Part D (and free drugs); how that happens is complex (naturally) with the free Part B coming from Medicaid and the free Part D coming from Social Security funds
            — And there is actually a separate trust fund for an under-65 person on Medicare (a person on disability) and that trust fund will run out sooner than the vanilla Part A trust fund (whenever that is)

    • 1. The big issue is not whether health insurance premiums are tax deductible to the employer. Many employers pay little or no taxes anyways, such as government agencies, churches, most hospitals, etc.

      The issue is whether the premiums are taxable income to the employee.

      If $800 billion in employer-paid premiums were taxable to employees,
      federal tax revenue would go up by about $120 billion a year, maybe $160 billion tops.

      But remember, this is ‘phantom income’ — the employee has no income with which to pay the extra tax. It is like a homeowner paying property taxes. It will hurt.

      A middle class family with a nice secure health plan that is paid for by their employer would have to add about $15000 to their taxable income, and pay an extra $3000 in taxes.

      That $3000 hit would translate into less consumption of food, gas, movies, fill in the blank.

      I think it would darn near cause a depression. Look at what happens when gas prices soar, and that is a lot less than a $3000 tax hit.

      Increasing taxes in this manner will not work.

    • Thanks Dennis, you are spot on.

      I have a conflict, in that I like the idea of single payer but I also study
      health care spending in detail. You cannot beat the Statistical Abstract of the US.

      Anyays, here is the chain of numbers that I use regarding the math of single peyer.

      Step One:

      Take the total amount of spending on insurance premiums and out of pocket costs by persons under age 65.

      Call that $1 trillion a year.

      Add in medical bills that are forgiven, plus care that is never accessed due to self-ratrioning by the patient in the face of high deductibles.

      Now we are at $1.2 trillion or so.

      Step Two:

      Subtract all the profits and reserves of insurance companies, who would disappear under single payer.

      Also subtract some of the administrative costs of in hospitals and doctors offices who struggle with insurance companies to get paid.

      That leaves us at about $900 billion a year, and I am being generous to the cause of single payer.

      Step Three:

      Look at all payrolls of all firms. That total is about $6 trillion a year.

      Step Four

      To raise $900 billkon, you need a 15% payroll tax. And no exceptions.

      By coincidence, this is about the same payroll tax as in France and Germany, with several qualifications.

    • I like the fact that you have an approach, Bob, which is better than I have ever seen here in Massachusetts vis a vis MassCare. (I would not say I like the idea of single payer but I have nothing against it except that I have never seen the numbers come out in any way that makes sense. I think the fraud,m waste and abuse in Original Medicare indicates that fraud, waste and abuse in a single payer system for those under 65 would be just as bad.)

      And I think your numbers look as shaky as Gary’s.I thought the gold standard for healthcare spending stats was the National Health Expenditure Charts from CMS. Here’s the link (http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/index.html?redirect=/nationalhealthexpenddata/ ). Post the link to your source.

      CMS says the US spends $2.7 trillion a year but that counts Medicare spending and senior OOP. So maybe looking at it your way it’s down to $1.7 trillion but not $1 trillion. Which if true means the number is not going to come out to 15%. (By the way, I assume you are not wheeling us seniors over the cliff so I need to add your 15% to the current 3% Medicare payroll tax, right? And also the percentage of all general taxes that goes to Medicare today?)

    • Thank you for the link to CMS!

      You are correct, in that my single payer Math 101 would add a 15% payroll tax to the existing 3% Medicare tax, plus the 4-5 % of AGI that goes to Part B and Part D of Medicare and also to Medicaid.

      So the overall total is over 20%.

      Not inconsistent with the total tax burden for health care of France, Germany, or Canada for health care, when you add in VAT and other taxes.

      Of course, these other nations have infinitely smaller militaries.

      So the real budget choice in the future is defense or health, I am starting to think.

      p.s. let me know your email, I can send you some of my longer writings.