Monday, December 28, 2009

The problem with healthcare



If you could only use one chart to illustrate the fundamental problem with healthcare in the U.S. today, this would be it.

As of the most recent data (2007), consumers paid for only 12% of their healthcare expenses out of their own pocket. Back in the days before WW II, consumers paid for the vast majority of their healthcare expenses out of pocket. That began to change in the early 1950s, when the government agreed to allow companies to circumvent existing war-time wage controls by giving their workers tax-free health insurance; companies could deduct the cost of the insurance, while it wasn't considered income to the workers. This significant feature of the tax code has finally taken us to its logical conclusion: consumers now get almost all of their healthcare paid for by an employer, since this is highly tax-efficient. The 12% that is still paid out of pocket likely consists mostly of payments by individuals not covered by employer policies, and co-pays by individuals that are covered.

Since the vast majority of healthcare expenditures are not paid for by those receiving healthcare services (but rather by a third party insurer or the government), there exists little or no incentive for consumers to shop around. There is a notorious lack of price transparency in the healthcare market, and costs have risen inexorably at a rate much higher than inflation.

To understand why this is all quite predictable (and thus easily avoidable and easily corrected), consider the following:

Suppose the government created a new category of nontaxable compensation for employees that would allow employers to offer "food insurance" to their employees. Employers could deduct the cost of the food insurance, and employees would enjoy a considerable tax-free benefit. Eventually just about every employer would offer a plan that might look something like this: for a co-pay of $15 everytime you visit the supermarket, you could walk out the door with almost anything you wanted, provided it fit into a shopping cart. Those with special needs (e.g., birthday parties, anniversaries, large families) could petition their insurance company for an exemption to this restriction, and insurance policies would undoubtedly carry lifetime food allowance limits that would cover the reasonable needs of just about everyone.

What do you suppose would happen to the cost of food? Would filet mignon be in scarce supply relative to hamburger meat? Would anyone buy lettuce by the head, or would it all be sold chopped up in bags and ready to eat? Would stores bother to put prices on the cans and boxes of food? Would stores bother to advertise the fact that their prices were lower? How much more food would be thrown out uneaten by U.S. households? Would food become more available or less? Would everyone become outraged over how much it cost to buy food insurance policies?

To fix most of what is wrong with healthcare, we simply need to fix the tax code. Either allow everyone to deduct the cost of healthcare, or no one. That would quickly restore the proper incentives to consumers, since almost everyone would end up paying for healthcare insurance out of their own pocket or choosing not to buy policies.

HT: Coyote Blog

8 comments:

Colin said...

Exactly. And yet President Obama -- who vowed to take on the special interests, take bold action, have a new kind of politics, etc -- is attempting to make insurance even more central to the health care system, when what is needed is the opposite.

When presented with such graphs you almost have to wonder what the reaction of the Obama Administration is. It seems their quest for state-run health care is almost religious in nature, impervious to facts. Quite simply they have decided that government is the solution, and will not rest until it has an absolute strangehold on the health care industry.

Scott Grannis said...

Colin: you are very right. Healthcare reform has taken on a religious quality, and the same holds for global warming. The Democrats don't want to be bothered with the facts, they are absolutely sure they are doing the right thing. One distinguishing characteristic of the modern liberal mindset is a belief in the ability of government to do good.

Benjamin said...

Okay, if the feds absolutely strangle everything, how does one explain our flourishing agricultural sector, which is extremely regulated, guided and subsidized by the federal government, and also many state governments?

US farmers routinely brag they are the best in the world.

Our military is widely regarded as extremely competent and efficient--and is totally a creature of our federal government, taxpayer-financed, with spending completely controlled by Congress.

So, when it comes to healthcare, we can assume the feds will totally flop?

Or (and this is my wish), will the right wing bash federalized health care, AND bash any more federal involvement in the ag sector, AND start to seriously question federal military outlays?

My guess is no such scrutiny of favored right-wing programs is forthcoming from the right-wing--and that is why the right-wing, like the left-wing, will never balance the federal budget.

W.E. Heasley said...

Mr. Grannis:

The graph in your post depicts out of pocket payments at 12%. The 12% will surely shrink further because by 2011, the under the Senate bill, flexible spending accounts (using tax free money for health expenses) will be capped at $2,500. The bill also addresses health savings accounts (HSA’s) and puts new restrictions upon withdrawals.

Paul said...

"Our military is widely regarded as extremely competent and efficient--and is totally a creature of our federal government, taxpayer-financed, with spending completely controlled by Congress."

The military is great at kicking ass, a disaster when it comes to cost overruns, accounting, and pork barrel allocations by Congress. I don't know who you're talking to that says the military is "efficient." It's about as efficient as every other government endeavor, including health care.

Colin said...

Okay, if the feds absolutely strangle everything, how does one explain our flourishing agricultural sector, which is extremely regulated, guided and subsidized by the federal government, and also many state governments?

US farmers routinely brag they are the best in the world.

Our military is widely regarded as extremely competent and efficient--and is totally a creature of our federal government, taxpayer-financed, with spending completely controlled by Congress.


That US agriculture is the best in the world is false. Both the New Zealand and Australia are among the most efficient producers and receive very little government assistance. The US is better relative to Europe, but they are subject to more government intervention than we are so that isn't surprising.

The Department of Defense is rife with waste and abuse. We might be the best, but compared to what? All militaries are government-run. Even in war our screw-ups have been notable. In WWII the invasions of Iwo Jima and peleliu were bloody messes that many historians regard as unnecessary. Our forces were caught unaware by the Chinese in the Korean War. Vietnam was full of disasters. Likewise in Iraq. No one in their right mind regards the military as efficient.

And I write this as a military brat.

Or (and this is my wish), will the right wing bash federalized health care, AND bash any more federal involvement in the ag sector, AND start to seriously question federal military outlays?

Well, that's my wish too. I am against federal involvement in the first two and think that an axe should be taken to DOD, which is currently viewed as beyond reproach. Any serious attempt to get the deficit under control has to include a serious look at the military.

Scott Grannis said...

Colin: Regarding your statement that "Any serious attempt to get the deficit under control has to include a serious look at the military.

In the current environment, where non military discretionary spending has literally exploded, the military component of the federal budget is quite tiny, about one-sixth of the federal budget. You could cut military spending to zero and the budget deficit would still be double what it was in 2008. I would argue that military spending is the least of our worries at this point.

Colin said...

Scott,

For FY2009 spending on the GWOT and the Defense Department accounted for about $660 billion out of 1.2 trillion in discretionary spending. I simply don't know how we get to balanced budget without taking a hard look at the military. I also think that one-sixth of the entire budget is actually a pretty good chunk.

Of course, in the long-term the real killers are entitlement programs -- and that long-term is getting nearer every day.