So far this year, I’ve visited my dentist and optometrist once each for routine checkups. As most people know, the Ontario government does not pay for routine dentistry and optometry for most people. Or at least this is what we think. Indirectly, the government shoulders a significant portion of the cost. In other words, most of you chipped in to pay for my teeth to be cleaned.
How did you end up paying? My private health insurance plan reimburses me for dentistry and optometry, as well as prescription drugs and other health care services. But health insurance premiums aren’t taxed the way the rest of income is. In Canada, when a partnership or corporation pays for health insurance, the contributions are taxed neither in the employer’s hands nor in the beneficiary’s hands.
Consider this scenario. If an employee in the highest tax bracket purchases a health insurance policy that costs $2000, that premium would represent about $3700 in pre-tax income. In other words, this employee would pay $1700 in income tax and have $2000 left to buy health insurance. But if the employer pays the $2000 premium and gives the employee $1700 in cash, the employee pays only about $800 in income tax. This means the government has to collect $900 more from everyone else.
Several economists have told me that this is very bad tax policy. First of all, it results in people receiving private health insurance for things they don’t really need (e.g., chiropractic, naturopathy, massage, etc.) because it is cheaper for employers to provide bloated private health insurance than it is to pay higher wages. Second, the “tax expenditure” is bigger for those with high incomes than it is for people with low incomes. If the government decided to make income tax rates 40% for the poor and 10% for the rich, most people would feel that was very unfair. But “tax expenditures” such as the private health insurance subsidy have a very similar effect.
People without private health insurance – most taxi drivers, house cleaners and nannies, for example – are disadvantaged the most by the private health insurance subsidy. They have no private health insurance themselves, yet they still end up subsidizing everyone else’s coverage.
Of course, the private health insurance subsidy does result in more people being covered for prescription drugs and other health care than would otherwise be the case. This is undoubtedly a good thing. But the cost is high – the federal government alone left more than $3 billion on the table in 2011 by not taxing private health insurance contributions made by employers.
I have brought this issue up, in passing, in both a newspaper article and in a peer-reviewed paper published in the Canadian Medical Association Journal. Many others have discussed the private health insurance subsidy too. Yet the issue doesn’t seem to get much attention. I am not sure why, but I have two theories. The first is that it is too complicated. Even writing about it makes my head spin, and I always wonder whether I’m getting some of the details wrong. The second is that there are no powerful interest groups with an interest in eliminating the private health insurance subsidy.
But that doesn’t change the fact that subsidizing private health insurance the way we do in Canada is almost certainly not good public policy.