Healthcare and the Government Part I

Well, it seems all but assured the messy bill they came up with in Washington is going nowhere.  Nor should it.  This is a national topic, but not altogether out of the scope of this local blog.  I have a few things for us to ponder.  Lets start with our official current position on Healthcare:

The health-care system in the United States is very complicated.  This is an issue that effects everyone and understandably evokes strong emotions on all sides. There are no easy answers.  As Libertarians we would like rational debate keeping in mind that government involvement typically increases inefficiency and cost. Remember government subsidies, in the form of employer tax credits, is what got us into the position in the first place.

Do you get your car insurance through your employer?  How about your home insurance?  The answer is most likely no.  So I think a little bit of history here is important.  Our current system was not born out of any logical or reasoned thinking, in fact it was really just "accidental":

During World War II, price controls were used in an attempt to control wartime inflation. The Franklin Roosevelt Administration instituted the OPA (Office of Price Administration). That agency was rather unpopular with business interests and was phased out as quickly as possible after peace had been restored.

While the Great Depression was already stoking the success of a little company called Blue Cross, the OPA's wage freeze during WWII was truly the catalyst that made employer-based health insurance a success. The labor market was understandably tight with so many Americans fighting overseas.  Employers needed an extra perk to lure prospective employees to work in lieu of higher pay; hence the fringe benefit was born.  One of those benefits was Blue Cross health insurance. 

In 1943 the IRS ruled that employer-based health insurance should be tax free.  In 1954 it was again made even more attractive to employers.  In 1940 9 percent of the population had employer provided health insurance, by 1953 it was 63 percent, by the 60's 70 percent of the population had employer based health insurance.

Prima facie, it seems like a decent enough system.  You have a job, you have coverage.  However, lets look at a few reasons why this is not good for a competitive market, or people in general.

If we look back to car insurance, we can all recall the myriad of advertisements we see every week, extolling us to shop around and save money.  The car insurance market is highly competitive.  Insurance companies strive to meet a magical number called the "combined ratio".  This number is calculated by taking the amount of premium collected and dividing it by the cost of paying claims, advertising, and administrating.  The ideal combined ratio is 98, meaning for every $1.00 paid in premiums, only 98 cents is spent, with 2 cents in profit.  Insurers, while trying to maintain this ratio, also must grow there business through attracting clients through better rates, better services, or both.  The consumer keeps them honest by giving their money to the company that offers the best balance between these qualities.  If the insurer is too inefficient because of, say high administration costs, you can bet that the company will address this.  This keeps costs relatively low, and the market competitive.

Now, what if you did not have to shop for car insurance?  What if your employer provided it for you on a group basis, and just took it out of your paycheck.  Do you think that the market would be this competitive?  Would you use your car insurance more if you knew it would not immediately, personally effect your rate? Maybe you would put in a claim for that little scratch that you could afford to pay out of pocket, but why would you when your rate would not go up?  Just make a claim, "they" will pay for it.  This illustrates the other half of the insurance equation; cost not only influences insurer behavior, but also influences consumer behavior.  The reason why insurance was dreamed up in the first place was to voluntarily, through mutual interest, cover the large losses of a few, by pooling the money of many.  Part of the rules for this system, that make it work, is that one should only draw from that pool for a large loss that one cannot pay for out of pocket, not so much for thiings like a broken headlight, or a doctor's check up. If you did not directly pay for that headlight, do you think the cost of headlights would go up or go down?  Guess what, the same thing happens with medical services.

I hope you are seeing what I am getting at here.  Competition keeps prices down. Not paying for things directly makes you less likely to care about their cost.  With no competitive pressure the cost of goods and services goes up, because, obviously, the vendors of such things will charge as much as they can.  You are more likely to draw more from a pool of money if doing so has no direct, immediate effect on how much you must pay in.

The government encourages this lack of competition through tax incentives for companies who provide health insurance as a "benefit" to employees, which is the long run is not beneficial to the economy at all.  Now, if that tax incentive were to be removed, then companies could still provide this benefit if they choose, or they could pay their employees more, and spend less.  Tied in with this solution would be more tax free health savings accounts and a tax incentive for individuals to purchase their own insurance and make the market more competitive.  One obvious side benefit is that this would be a great leveler to small businesses and the self-employed, lowering their health insurance costs as insurers compete for your individual business.  Health insurers would be forced to reign in inefficiencies in administration.  Non-profit health insurance groups should also get a fair shot at the game.  If the market were truly competitive, we would not be in the mess we are today. 

I have only addressed the issue of employer-based health insurance in this essay.  I realize, that although, the reforms proposed here would go a long way to get toward the goal of affordable healthcare, there are other things we have yet to explore.  There are the old, the sick and those too poor to afford food, much less health insurance, and I will try to tackle this in the next installment. Until then, I hope you have a few things to think about.  We do not have all the answers, nor does anyone, but I believe we have a good framework from which to move forward.