Monday, November 15, 2010

The problem with healthcare (cont.)

This post adds to yesterday's post on the fatal flaws of ObamaCare, and is an update of a post from a year ago. It's valuable information which deserves dissemination.

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 (2008), 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 1940s, when the government agreed to allow companies to circumvent war-time wage controls by giving their workers tax-free health insurance; companies could deduct the cost of the insurance, and 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 in aggregate for consumers to shop around. That explains the notorious lack of price transparency in the healthcare market, and helps explain why costs have risen at a rate much higher than inflation.

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. Without the distortion of tax incentives, companies would eventually turn the healthcare purchase decision over to employees. That in turn would restore the proper incentives to consumers, allowing market forces and competition to make healthcare more efficient and more affordable.


Colin said...

Yes, yes, yes -- amen. Any genuine health care reform has to include elimination of the tax preference as its centerpiece.

Public Library said...

Our country needs to flat out rewrite the tax code in simple + plain language.

Flat + lower rates, no deductions, and call it a day. It would unleash massive amounts of capital and entrepreneurial spirit.

John said...

Your post is misleading. The percentage of out-of-pocket payment has diminished as health care costs have skyrocketed and wages have remained flat.

Plus, we pay for insurance. It's not a handout from a third party. Doctors didn't make a lot of money until insurance came along.