The American Spectator

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Learning to Care About Health Care

By Philip Klein on 8.21.08 @ 12:08AM

(Page 2 of 7)

II

"WE HAVE BECOME SO ACCUSTOMED to employer-provided medical care that we regard it as part of the natural order," Nobel Prize-winning economist Milton Friedman wrote in a 2001 essay for the Public Interest. "Yet it is thoroughly illogical. Why single out medical care? Food is more essential to life than medical care. Why not exempt the cost of food from taxes if provided by the employer?"

Most free market critics of the U.S. health-care system trace our problems back to 1943, when the Internal Revenue Service ruled that workers did not have to pay taxes on health benefits purchased through their employers. With wage and price controls in place during World War II and labor scarce, many employers took advantage of the favorable tax status to attract workers. In 1954, the ruling became a permanent part of the tax code. As a result, by 2006, employer-sponsored plans accounted for 64 percent of coverage in the U.S., according to data from the Kaiser Family Foundation. With government programs covering an additional 30 percent, only 6 percent of Americans actually purchase their own health insurance. Many Americans may have difficulty seeing the harm in the government encouraging employers to offer health benefits, but the unintended consequences of the ruling would only become obvious over time, and they continue to haunt us to this day.

The biggest consequence of an employer-based private insurance model is that, combined with Medicare and Medicaid, it helped create a system in which most Americans are isolated from the ultimate costs of health care, causing what economists call a "third-party buyer" problem. Like teenagers with their parents' credit cards, most Americans have no incentive to shop around for the best deal or to limit their spending to what is medically necessary, as they would with other products or services. In a normal competitive market, it is precisely this process that encourages businesses to innovate, allowing them to reduce costs and improve quality.

"The problem with large buyers is that they inhibit entrepreneurialism," says Regina Herzlinger, a professor at Harvard Business School and author of Who Killed Health Care? America's $2 Trillion Medical Problem--and the Consumer-Driven Cure. "That is why we don't have our employers buy our cars, or our houses, or our clothes."

Friedman noted that though rapid technological advances in agriculture, transportation, and communication have lowered prices in each of those areas, only with medicine has technological change been accompanied by much higher prices--and he attributed this largely to the third-party buyer problem. If health-care spending had continued to grow at the rate it did between 1919 and 1940, prior to the spread of employer-based health insurance and the introduction of Medicare and Medicaid, he estimated that by 1997, per capita medical spending would have been less than half of what it actually was under the current system.

Beyond driving up costs, the employer-based system limits choice, because businesses typically offer only a few health plan options. It makes people afraid to leave their jobs, because they are worried about losing health benefits. And ultimately, the current system is unfair because the favorable tax treatment is not extended to the growing ranks self-employed Americans, who are forced to navigate the inflated individual market.

III

ONE OF THE MOST WIDELY cited health-care statistics is that 47 million Americans are uninsured. But the figure, a key justification for massive government intervention, is deeply misleading. David Gratzer, citing a 2003 Blue Cross Blue Shield report in his book The Cure: How Capitalism Can Save American Health Care, pegs the actual number of "chronically uninsured" at closer to 8 million. That's because the higher figure includes illegal immigrants, people who go without health care for just a fraction of the year while between jobs, and those who are eligible but not enrolled in existing government programs. Perhaps even more interesting, the same report found that roughly one-third of those households without health insurance earn more than $50,000 a year and more than 16 percent earn more than $75,000 (this being the fastest-growing segment among the ranks of the uninsured). That means that there is a substantial number of Americans who should theoretically be able afford health coverage, but choose to go without it. Why would that be?

While the federal government, through the tax code, makes it difficult for individuals to purchase health coverage on their own, some state governments make it close to impossible. The reason is that many states impose onerous regulations on insurers requiring them to provide certain benefits. That means if a person who is relatively healthy wants an inexpensive, basic plan that would cover him in the event of a sudden catastrophic illness or freak accident, he's out of luck. Instead, he'll have to pony up for a comprehensive health insurance plan that pays for doctors he may never visit and prescription drugs he doesn't need. It's the equivalent of mandating that a person who is perfectly content driving around in an old jalopy purchase a Porsche or no car at all. That isn't even an exaggeration.

In New York, a father seeking to buy a typical health insurance policy for his family could lease a Porsche for what it would cost him to pay the monthly premiums. Some would dismiss this as a mere reflection of the fact that things tend to cost more in New York. But that doesn't explain why in neighboring Connecticut as well as in California--two states that rank right up there with New York for the highest cost of living--a family policy costs less than half of what it does in the Empire State, according to average data compiled by online insurance broker, eHealthInsurance.

J.P. Wieske, director of state affairs at the Council for Affordable Health Insurance, helps compile an annual list of health insurance mandates imposed by the states. The number has exploded from a handful in the late 1960s to a staggering 1,961 today. Some of the benefits companies have been forced to cover include in vitro fertilization, morbid obesity treatment, and lockjaw disorders. Some states require coverage of specialists including acupuncturists, pastoral counselors, marriage therapists, and massage therapists. Additionally, several states have imposed so-called "slacker mandates" allowing parents to keep grown children on their health-care policy until the age of 30.

There's no reason to cast judgment on those who value such services, and in a free market, they have every right to seek out and pay for insurance policies that are appropriate for their needs. But is it really fair for other citizens who desire basic coverage to go without insurance because they cannot afford souped-up policies?

"Mandates certainly make health care more comprehensive, but they also make it more expensive," Wieske says. "And we know it drives some people out of the market."

The report that Wieske co-authored estimated that such mandates can add anywhere from 20 percent to 50 percent to the price tag of a health insurance policy, depending on the state and the type of mandate. It's no coincidence that New York, one of the most regulated states, is also among the most expensive.

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