More on Bush's "Plan"

The NYT's "Experts See Peril in Bush Health Plan" elaborates on some of the points made in yesterday's editorial about the economic distadvantages of Bush's plan.

Unfortunately, the article focuses too much on this year's tax consequences of the plan for various families and only to a lesser extent on the transformation it may initiate in the health insurance markets.

Although economists debate how extensive a shift toward the individual insurance market Bush's plan might create, it clearly will create some shift. The emphasis so far has been on whether employers will now decide to drop coverage (presumably using the money to increase wages) because their employees can then purchase their own insurance on the private market.

This has too problems. First, as already noted, the same insurance is much more expensive on the private market because of adverse selection. Plans that offer decent coverage attract more individuals who think they're likely to need it, and thus are much more expensive than similar plans given equally to all employees of a single business.

Individuals must purchase insurance to get the standard deduction, but insurers will continue to deliberately design plans with holes in areas like mental health that are highly correlated with other types of expensive care to try to convince individuals with high expected costs to choose other plans.

The other problem is that employers may simply drop coverage while providing little or no bump in salary. Even if raises initially offset the costs of catastrophic insurance, there is little guarantee that wage increases will rise at the same rate as insurance premiums. In fact, the predictability and lower rate of increases is precisely why employers may want to stop providing insurance in the first place.