Private Insurance Is Public, Too

Jim Hufford

First published 4/14/11 on Organon

There are lots of ways to set up a system of health insurance. You can involve the government to varying degrees in regulation and payment, and to the extent that the government takes it upon itself to bear the population’s major health risks, you have a system of public insurance. To the extent you allocate risk through market mechanisms, you have a system of private insurance. But either way, at bottom the concept of insurance is about distributing risk through a population. That’s what gives insurance its social utility, and it’s the reason people buy insurance. And so in an abstract sense, all insurance is public insurance. It is people pooling money through premiums or taxes to cover their collective health risk.

Obviously people have different opinions about what sort of system distributes risk more efficiently and fairly. But our political debates have a tendency to get clouded over by the public vs. private question, which is more often than not a distraction. “Public” and “private” are not good stand-ins for fairness and efficiency (or efficiency and fairness) and, here in the U.S. of A., we have mixed and jumbled public and private elements in just about every government insurance program and every health-insurance market there is. Even in the market for employer-sponsored plans where about 160 million Americans have “private” health insurance, Ezra Klein reminds us, government’s role is massive:

Most of the people who have health-care insurance and don’t get it from Medicare, Medicaid or the military/veteran’s systems are getting it from their employer. And the reason they’re getting it from their employer is that health-care benefits — unlike wages — are tax deductible. That ends up being a huge subsidy for people who get health care through their employers. Between 2010 and 2014, the Joint Committee on Taxation estimates that this break will cost the Treasury about $660 billion. It’s the single most expensive tax expenditure in the entire tax code.

The employer exclusion was worth about $100 billion in 2009, when, according to CMS, private insurance premiums were about $800 billion. (And the JCT estimates apparently don’t capture the full value of the exclusion, which also provides a significant break in payroll taxes.) But the problem with the exclusion is not that it injects government into the private market; the problem with the exclusion is that it is unfair and inefficient. It is unfair because, as a blanket exclusion from employees’ income, it delivers a higher value tax benefit to those in higher income brackets; and because it transfers wealth from the uninsured who pay taxes but don’t get an exclusion. Compounding the problem, the exclusion probably incentivizes inefficient and overgenerous coverage, as compensation in health benefits is worth more to employees than the equivalent compensation in taxable wages.

Jim Hufford is an attorney living in San Francisco. He writes at Organon.