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Thinking about Life Sciences: Expanding Health Coverage to the Uninsure...

Thinking about Life Sciences

Thursday, September 20, 2007

Expanding Health Coverage to the Uninsured: How to Pay for it - the

Health Impact Tax

As everyone knows – from Michael Moore to President Bush and all the various presidential candidates in
between – our nation has a huge problem with the roughly 46 million who lack basic health insurance. This is
both a humanitarian and economic problem which affects all of us. The basic premises of this proposal
cover the following points:
1. Government covers the aged (Medicare) or poor (Medicaid) and to some extent children (SCHIP).
2. Business typically covers the working population
3. Of course, many of the uninsured are among the working public and the consensus is that somehow
business should cover the cost of the uninsured
4. Proposals for a gross-receipts tax (such as recently done in Illinois) have failed in this regard
5. Instead, it is proposed that a health impact tax (apportioned to different businesses according to a
general estimate of the overall impact – positive or negative - of their operations on the health of
the population)
6. This tax would be similar to a carbon tax that is assessed on the basis of a businesses projected
environmental impact
7. This proposal would apportion responsibility for coverage of the uninsured fairly
8. The program would be nationally based in order to enable freedom of movement and administered
by the federal government as an extension of the Federal Employees' Health Benefits Program
Most of these points are pretty well accepted with the exception of the major problem – namely how one will
pay for such a program. This is outlined in points #5 though #7 above and discussed in more detail below.
Jim Cramer: ‘Vice vs. Virtue’
On March 2, I saw a fascinating segment by Jim Cramer on CNBC’s “Mad Money”. Most of you may be
familiar with Cramer’s wild and fiery style. This episode featured an intriguing study of “vice versus
virtue”. Cramer presented a study in which 10 “vice” stocks (e.g. the “bad guys” such as tobacco,
gambling and alcohol stocks) convincingly beat out a group of 10 “virtue” stocks (e.g. good corporate
citizens such as IBM, Motorola, Green Mountain coffee and so forth). While not a definitive analysis by
any means, the results – even discounting Cramer’s flamboyant presentation – were compelling.
The “bad guys” gave an equal-weighted return of 35.7 percent over the past year as compared to the “good
guys” who were flat over the same period. Cramer argues that if you want to do good – and even this
bastion of unabashed capitalism agrees that this is admirable – you are better off making money on sin
stocks and then donating your proceeds to your favorite charity.
Are corporate returns (and, by extension, the stock market) truly reflective of a free market? Do the “bad
guys” truly have to pay all costs related to their businesses? In economics, these costs – which are
typically unaccounted for – are called externalities. These externalities can be positive when an external

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Thinking about Life Sciences: Expanding Health Coverage to the Uninsure...

profit or benefit is created or negative when an external cost is paid for by others (e.g. by society rather
than by the company). As an example with the tobacco industry, efforts through the courts and class-
action suits have attempted to correct these externality costs. This has been largely ineffective and at best
inefficient. While “sin” taxes also exist, these do not necessarily cover, for example, the externality costs of
second-hand smoke or drunken driving. What would the comparative returns of “vice versus virtue” be if
all costs were truly paid? While I would speculate that the “bad guys” may still do better, they certainly
wouldn’t by as much.
A More Efficient Health Care Tax
Most Americans – with economists at the University of Chicago especially so – would like to have a
free-market system. Though they are steeped in a deeply humanitarian tradition, even doctors balk at the
prospect of socialized medicine.
Most state-based proposals to expand healthcare coverage are based on some form of across-the-board
business tax. However, the concept of an across-the-board business tax does raise important questions
and concerns as to whether this is the most efficient way to pay for universal health care. If one considers
that some businesses create more of a health care burden (e.g. an externality) than others, it would appear
that apportioning these taxes along these lines would be a more efficient and fair way to pay for universal
health care. Here’s the proposal. It is simple.

For the purposes of funding health care for the working (or employable) uninsured (which is not the
same as universal healthcare), businesses should be taxed according to their respective health care
burdens on society.
This does not refer to the actuarial health care risk of a company’s employees – this is reflected in the
company’s own health insurance rates – but rather the projected impact of the company’s activities and
operations on the health of all citizens. The tax wouldn’t necessarily be equivalent to the estimated health
care burden but rather proportional (relative to other companies) to that impact. Of course, one can
counter that a vast bureaucracy would need to be created to validate and document such “health care
burdens”. There is certainly enough health-impact data to make rough assessments for the purposes of
taxation. One does not need to overanalyze in order to be efficient, and as a first step, identifying the
“good, bad and ugly” should be fairly straightforward.
It is important to note that such taxation systems to account for externalities are not new. The “carbon
tax” concept successfully implemented in many countries can serve as an example paradigm for such a
system. In 1993, the Clinton administration proposed a BTU tax which ultimate was not adopted. Indeed,
there is debate (and one may debate the debate) over whether global warming is real. There is no debate
on how many uninsured we have in this nation and its adverse impact on our nation’s health and economy.
In order not to be unfair for the “unhealthy” companies – namely to avoid a double penalty – higher taxes
for these firms should also come with legislated immunity against health-related class-action suits. While
there should always be room for individual claims, many have argued that class-action suits of this sort are
relatively ineffective and inefficient.
Under a proposal for increased health care taxes for “vice” companies, one can certainly argue in the face
of a class-action suit that these companies are indeed paying their due to society. On the flip side,
companies that actually contribute to the overall health of society should not necessarily be penalized by
having to pay a health care tax that is equivalent to a company that generates a large illness burden. Such
companies – such as hospitals, biopharma and medical technology companies – may end up paying very
little or no such tax. The exact apportionment obviously needs to be calibrated to the mix of “virtue” and
“vice” companies in the state as well as the overall funding needs of a comprehensive coverage plan for
the uninsured.
A Healthier United States?
There is also another very favorable consequence to this proposal. If we were to implement such an idea,
we’d have an interesting scenario in which “unhealthy” companies would have additional incentive to

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minimize the adverse health impacts of their operations or even be encouraged to set up business outside
the country. Certainly out-sourcing is a fact of life; while not necessarily friendly to other nations, at least
many Americans may find agreeable the concept of outsourcing unhealthy businesses.
The U.S. could literally become healthier and more environmentally friendly. And instead of a vicious
cycle that an anti-business blanket tax would cause, we would experience a virtuous cycle that would be
healthy for businesses and citizens alike.
Benjamin Franklin once famously said: “In this world, nothing is certain but death and taxes.” Still, that
doesn’t preclude optimizing (and not necessarily increasing) the latter in order to minimize the former.
Ogan Gurel, MD MPhil

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