Thoughts on Obamacare (2)

Holman Jenkins has a nice op-ed piece in today's WSJ on the fundamental problem with trying to reform healthcare, and it got me to thinking about why the current system has everyone in a tizzy. It's all about the tax code. "... tax reform, in the American context, is health-care reform."

If we just changed the tax code so that either everyone could deduct the cost of healthcare, or no one, then businesses would not feel obliged to buy health insurance for their employees (the current system almost forces everyone to get their health insurance from an employer, since it is tax-free to the employee, and the employer can deduct it as a compensation expense). Employers could pass the money they are spending on to their employees, and everyone could buy their own. That solves the portability problem (you can take your insurance with you whereever you go), and it would encourage everyone to think about whether they were spending their money on a policy that made sense for them.

The biggest problem this would solve is the "third-party-pays" problem. Currently, those who use healthcare are not the ones who pay for it. To understand why this is a problem, consider the following thought experiments:

I give my child a credit card when he goes to college, telling him that it is for emergencies and for special purchases such as books and supplies. What are the chances that he will use it for all manner of things, since I am the one paying the bill? How careful will he be about his purchases, even if for legitimate purposes? How likely am I to be shocked at how much he ends up spending each month?

The government decides that no one should go hungry, and that it is not fair for the rich to be able to eat more than the poor or middle class. Everyone should have access to affordable, quality food. To that end, the government gives everyone a "food card," modelled after popular healthcare plans, and paid for by everyone's employer. Those with the card can buy all the food they want, but they do have a $15 co-pay every time they go to the market. What are the chances that a decent number of people will end up buying more food than they really need? How much food will go rotten sitting in people's refrigerators? What will prices matter to those with cards, if a pound of filet effectively costs the same as a pound of hamburger? How long will it take before stores run out of filet? What are the odds that the cost of the program chronically exceeds the government's estimates?

Jenkins writes from the point of view of an historian looking back on the huge changes that followed from tax reform that put everyone in charge of spending their own money on healthcare:

Eyes newly opened, they demanded cheaper insurance options, covering fewer services (cancer wigs, family counseling, in-vitro fertilization), and opted for plans with higher deductibles and co-pays in return for much lower monthly rates.

Because consumers were now spending their "own" money on health care, doctors and hospitals found it necessary to publish and even advertise their prices. A hospital that specialized in heart surgery, performing thousands of procedures a year, found it had both the highest quality and lowest cost -- and now marketed itself as such. Ditto specialists in cancer, diabetes and other conditions.

For the first time, Americans spent less and got more. Spending fell overnight by 13%, which happened to be exactly what economists had predicted if the price tags were restored to health care and consumers were allowed to see clearly what they were getting (or not getting) for their money. As predicted, too, spending thereafter rose only in line with incomes.

What's more, many fewer people remained voluntarily uninsured now that health insurance was no longer a gold-plated extravagance affordable only by those in the top brackets who could slough off 40% of the cost on other taxpayers. Existing programs for the needy, in turn, could be downsized and revamped into voucher programs. The federal budget benefited twice over -- from fewer claimants and from medical care that was less costly. Fiscal wreck was avoided.

In order to reform healthcare, we first need to reform the tax code. It's that simple. No amount of late-night tinkering by senate and house committees can possibly come up with a better or cheaper solution than can the American consumer turned loose in a truly free healthcare market.