It is a well known economic policy rule that if you want less of something you tax it, and if you want more of something you subsidize it. Policymakers frequently follow this rule to influence behavior. This is why there are “sin taxes” on things like alcohol and cigarettes, and also why “cap and trade” taxes carbon. This is why there are subsidies for education and for “green” technologies. If taxes and subsidies make any sense at all, they make sense when used to tax “bad” things and subsidize “good” things.

Given this basic rule, can you guess which of these are being subsidized and which taxed in the Reid Health Bill currently in the Senate?

  1. Innovative Medical Companies
  2. Medical Devices, such as prosthetic limbs, wheelchairs and pacemakers
  3. Over-the-counter medicines
  4. Privately funded medical care – including private health insurance plans, private medical expenses paid out-of-pocket, and employer-provided care

(answers below the fold)

All of these are being taxed.

Innovative Medicine Companies: (Page 2010/Sec. 9008): $2.3 billion annual tax on the industry imposed relative to share of sales made that year.

Medical Devices Like Prosthetic Limbs, Wheelchairs, and Pacemakers: (Page 2020/Sec. 9009): $2 billion annual tax on the industry imposed relative to shares of sales made that year. (Exempts items retailing for less than $100).

Over-the-counter medicines: (Page 1997/Sec. 9003): Outlaws use of pre-tax dollars (HSA, FSA, or HRA) for over the counter medicines, except insulin – essentially imposing a new tax on them.

Privately Provided Medical Care:

  • Private Medical Expenses: (Page 2034/Sec. 9013): Increase of the minimum medical expenses required before being able to take a deduction (the “haircut” for the Medical Itemized Deduction) from 7.5% to 10% of AGI (waived for taxpayer 65 and older in 2013-2016 only).
  • Prescription Drugs for Retirees: (Page 2034/Sec. 9012): Elimination of tax deduction for employer-provided prescription drug coverage for retirees.
  • FSA Cap: (Page 1999/Sec. 9005/$14.6 bil): Imposes cap on FSAs of $2500 (now unlimited). Hence there will be a new tax on medical expenses above this cap. This will most hurt families of special-needs children, who tend to use outsized FSA deferrals.
  • Health Insurance Premiums: (Page 2026/Sec. 9010): $6.7 billion annual tax on the industry imposed relative to health insurance premiums collected that year.
  • Comprehensive Health Insurance Plans: (Page 1979/Sec. 9001): Starting in 2013, new 40 percent excise tax on “Cadillac” health insurance plans ($8500 single/$23,000 family), affecting those with high medical expenses as well as those in high-cost areas.

Given the choice to tax these areas, it only seems reasonable to assume that Obama wants to see less private medical care. Although he has frequently said that he wants to “promote competition” in the health care industry, he has also occasionally admitted that the advantage the government programs must have over the private sector will likely lead to the reverse. Indeed, taxing them in addition is the way to squeeze them out.