Puzzled About a Claim

Could someone please explain this statement from a Washington Post op-ed by James Klein and John Sweeney to me?

With rising health costs burdening businesses and families alike, does anyone really believe that employers or workers lack incentive to hold down costs? The tax treatment of health benefits no more contributes to high health-care costs than the deduction for mortgage interest is responsible for housing costs. Clearly, both are affected by far more complex factors.

They double down on the claim here:

While some argue for setting a limit on the tax exclusion, it bears noting that the entire exclusion equates to about 10 percent of the nation’s staggering $2.4 trillion annual bill for all health-care expenses. That confirms at least two irrefutable facts. First, the tax exclusion is not responsible for high health costs. Second, for an amount that is roughly equal to one-tenth of the country’s health tab, enlightened tax policy makes possible essential health-care coverage to more than 160 million Americans.

Contrariwise, I think that that it’s patently obvious that the tax treatment of health benefits and the mortgage deduction contribute to high healthcare costs and housing costs, respectively. Not to mention sprawl in the latter case. Simply because something isn’t the only cause of something doesn’t mean it’s not an important cause or the most significant cause.

The effect on costs of deduction is precisely because of what they’re pointing out rather than despite it. The value of the deduction exceeds its cost and, consequently, motivates consumers to consume more than they otherwise would.

Why isn’t their claim fallacious?

11 comments… add one
  • PD Shaw Link

    I’ve always thought the main problem with the deduction was it depressed wages. Not merely that benefits offset wages, but the fear that leaving the job might leave one without healthcare insurance coverage gives employers certain advantages in retention.

    Do employers lack incentives? My wife’s healthcare coverage went up this year considerably, but it included new coverages, including a prescription eyeglass benefit. It’s a large corporate plan, with different options for deductibles etc., but not an option to opt out of specs. My wife and I both wear glasses, but would have opted out of this plan if we could.

  • In all likelihood your wife’s company is self-insuring. In practice that means that what they pay is significantly less than what it would cost to buy such a plan on the market. Nonetheless, it looks pretty good on your wife’s annual benefit statement.

  • Drew Link

    I do not know who Klein and Sweeney are. But after reading those paragraphs, I don’t think I care. “Fallacious” is a more diplomatic term than I would have used: AFU.

    Their observation that businesses have incentives to reduce heath care benefit costs is banal. Further, using this observation to make a case that taxation is not a variable in business and consumer behavior is illogical. Businesses attempt to reduce all costs, no matter the tax treatment.

    They miss the crucial point: when FDR imposed wage controls way back when, businesses sought to compete for talented employees on the basis of benefits they could offer. The fact that benefits had preferential tax consequences for the employee simply meant that subsequent compensation increases in the form of benefits were favored over wages. But it does not follow that benefits compensation is not a focus of cost control.

    BTW – It seems to me that PD’s observation is the poster boy argument against the third party payment system. “We would have opted out….” he says. Hence, a first hand doctor-patient relationship would have resulted in a different economic result. But PD had no choice. ………..sub-optimal. And on it goes.

    Back to Klein and Sweeney. I love the “taxes don’t matter” crowd. They are clueless. The impact of the subsidization of health care benefits is as obvious as the nose on your face. Because of tax considerations, people got a disproportionate increase in comp in the form of health care bennies rather than wages that could be spent outside health care. A case study in PD’s “we’d have opted out.” Well……………..anyone born yesterday? Apparently K&S.

    But separately, in the investment business, we see the same illogical thinking. Taxes do not affect investment decisions, they say. So increase the cap gains tax rate. Its a honey pot. Yet, after all the “soft” considerations, investors discount cash flows to price things. And a highly taxed discounted cash flow ain’t the same as a lightly taxed cash flow. It’s smaller………..by, uh, er, well, you see……the discounted tax differential.

    Just look at the last 9 months and the effect that the increases in loan interest rates and equity requirements had on pricing and activity. It made a huge impact. And taxes are no different. They matter. Alot.

    A few weeks ago (maybe at OTB) there was a discussion of the relative worth of an Ivy League degree. Klein-dope and Sweeney-doofus may be just such Ivy grads. Columbia journalism, perhaps? In my profession I’ve worked with all kinds of people: Ivy’s, Ivy-like, State, High School etc, etc.

    The Ivy’s are great for the network. And they love to career on their credentials. But in my experience the notion that they are somehow superior is simply empirically false. And I don’t think it takes a great mind to arrive at that conclusion, just common sense and experience.

    Sermon over…………

  • Klein is an employee benefits advocate and Sweeney is the head of the AFL-CIO.

  • Drew Link

    Then their biaes are self evident.

  • PD Shaw Link

    Drew (or Dave), did you see the chart showing the increase in the price of health care for pets and for people rising at the same rate during the last 20 years?


    You can probably read too much into it, but it does suggest that third party payment effects can be exaggerated.

    Since the issues marries two favorite blogging topics for Dave, I’m surprised that I haven’t seen him touch on it.

  • I saw it and thought it was amusing. The problem is one of scale: human healthcare is three orders of magnitude more expensive than that of pets. If human healthcare spending were a thousandth per capita what it is now, we wouldn’t be panicking about it any more than we’re panicking about pet healthcare.

    On the other hand, I’d rather be treated by my vet than by my primary care provider. My vet is smarter than my internist (vet school is significantly more selective than med school), our relationship is more collaborative, and I’m treated with more respect.

  • Drew Link

    “On the other hand, I’d rather be treated by my vet than by my primary care provider.”

    I surely hope that’s tongue in cheek hyperbole, Dave.

    I saw your previous comment about a 6 week lead time to see him/her. Now this?

    Dave – you know my background. I have pretty good practical experience, and horse sense, on physicians. If its as bad as you say, take a suggestion from a cyber-friend: call the DuPage Medical Group. Offices in Glen Ellyn and Naperville. 30 to 45 minutes from you. You owe it to yourself if your current situation is as bad as you claim.

    They are decidedly not poor sister substitutes for vets. In addition, if you really believe this is the state of our primary care universe, how do you justify your repeated calls for more lax admissions standards to bulk up the supply??

  • I probably should change over to the internist my wife is seeing now (if she’ll take me). We used to see the same one and my wife left in disgust. Over the period of the last 25 years I’ve been changing internists every couple of years due to bad experiences. It’s not something isolated and it’s not just me.

    I don’t believe in lax admissions standards. I believe in admitting anybody who meets the admissions standards to med school and having the schools expand to fit.

  • Drew Link

    Dave –

    Perhaps this is too personal………..but…..

    You clearly have a hard on for medical practitioners, and the current state of medicine. What gives? What are the bad experiences that form this view?

    Maybe I’ve navigated the medical waters more successfully (and I’ve had my fair share of issues), but I wouldn’t share your dour view. My guiding light has been an admonition my dad gave me years ago. And its ridiculously simple. Find out who the doctors are that doctors go to.

    Its been all good.

  • Drew Link

    Oh, and. Entrance standards aside, if the graduate pool is failing to perform in your opinion – as is – how will expanding the pool help?

    Is it more abundant mediocraty?

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