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