Uwe Reinhardt, a highly intelligent and accomplished economist, probably the nearest thing that the profession has to an expert on health policy, manages to display magnificent ignorance in a post today in Economix in the NY Times. Here is how it goes:

As we struggle to reform the health care system, one of the moderate proposals now on the table is to remove the tax exemption on health benefits. Professor Reinhardt makes this case:

Under current law, employers can treat the contributions they make to the premiums for their employees’ health insurance as a tax-deductible business expense. On the other hand, employees do not pay income taxes or payroll taxes on this contribution, though it clearly is part of the employees’ total compensation.

In 2007, this tax preference reduced federal tax revenues by an estimated $250 billion or so. Estimates for 2010 have been as high as $297 billion.

Which is a lot of money, enough maybe to bail out a couple of major banks or to save the Somalis from radical Islam. It is an even more attractive source of revenue to moderates because, unlike say removing the tax breaks for outsourcing, no major corporations are harmed by these changes.

But Professor Reinhardt has economic arguments to back up his position. First tax law increases health care costs:

Making expenditures on any particular good or service tax-deductible lowers the after-tax price from P, the price charged by the vendor, to (1-C)P, where C is the marginal tax rate the buyer pays on income and payroll taxes combined.

That form of public subsidy has two effects that economists find problematic.

First, the price reduction drives up the demand for the subsidized commodity — for example, for generous health insurance packages. It becomes one of several cost drivers in health care.

Now Wonks Anonymous knows some genuinely generous health insurance packages - packages that pay for cosmetic surgery and such - but really what professor Reinhardt is talking about when he says generous is something else entirely. By generous the good professor means a policy that makes most forms of care available with little or no out of pocket expenditure. A policy like the one that Wonks Anonymous, the President, the Congress and likely Professor Reinhardt now enjoy.

This, as opposed to the more efficient policies where the insured is required to pay thousands of dollars out of pocket in order to get medical treatment.

Now this supposes that only thing that stops the consumer from spending his or her life in the doctor's office is the dollar price of medical care. Oh, yes sir, anal surgery is so cheap that I think that I will just take two operations this year instead of the one that I planned on and I do love waiting in my doctor's office and catching up on last year's National Geographics.

This may come as news to the good professor: Most people with good health plans go to the doctor because they have some reason to worry about their health. Sometimes it turns out that it is just a virus, sometimes it is pneumonia or something else serious. Because we are not doctors we cannot tell in advance.

The real problem with efficient health plans with high out of pocket expenses is that they present high barriers to initial care. An ordinary person who has not met the $5,000 deductible, say a union service worker making $30,000 a year, pays $75 to $100 for a doctor's office visit which is something like a week's worth of groceries. Plans like this actively discourage the unsured from visiting the doctor until something is obviously wrong. Indeed they encourage us to act as if we were doctors ourselves and to seek out non medical "cures".

Which, in Wonks Anonymous humble opinion, discourages early, inexpensive interventions to treat chronic conditions. For most chronic conditions, delayed treatment is more expensive and less effective.

While we are studying the cost and impact of various treatments on diseases we might want to fund a study of the vast medical experiment now being conducted by health insurers following the advice of economists. Do people who are covered by high deductible plans really have lower long term medical costs or do these plans just pass these costs on to other payers? Are there any real savings or are we just going to pay it all back with interest down the road?

This post is long enough but that's not all folks.