Sunday, October 19, 2008

Healthcare shouldn't be linked to employment

Healthcare shouldn't be linked to employment
By Jeff Jacoby

Great article that tells the history of why healthcare is linked to employment.

With more than 90 percent of private healthcare plans in the United States obtained through employers, it might seem unnatural to get health insurance any other way. But what's unnatural is the link between healthcare and employment. After all, we don't rely on employers for auto, homeowners, or life insurance. Those policies we buy in an open market, where numerous insurers and agents compete for our business. Health insurance is different only because of an idiosyncrasy in the tax code dating back 60 years - a good example, to quote Milton Friedman, of how one bad government policy leads to another.

During World War II, federal wage controls barred employers from raising their workers' salaries, but said nothing about fringe benefits. So firms competing for employees at government-restricted wages began offering medical insurance to sweeten employment offers. Even sweeter was that employers could deduct those benefits as business expenses, yet employees didn't have to report them as taxable income. For a while the IRS resisted that interpretation, but Congress eventually enshrined the tax-exempt status of employer-based medical insurance in law.

Milton Friedman used to speak of the tyranny of the status quo. Once something becomes ingrained in the American political landscape it can seem impossible to change. Many people think the thought of leaving the employer based system as dangerous.

I worked for a company once where the health plan required me to sign on to release my records for basically any way that the insurance company wanted with no recourse. I was concerned with the privacy of the records. When I ran a small company and got quotes for health care, the health care agent would tell you about the health problems of different employees. One person had a spouse with cancer, another required lots of expensive persriptions. As an employer and in managment, you get hold of a lot of information that many people would consider private information.

Some people can't get jobs because the cost to insure them would break a small business. My little league baseball coach was a Vietnam Vet with a purple heart. He told me he had open heart surgury because of his injuries. I was a kid, I don't remember the details. But I do remember him saying that he couldn't get a job because nobody wanted to take the cost of his health insurance. It is quite possible that some people could never make more than it costs to treat them because of bad luck with fate. It is a sin that we cast these people out of the workforce because Employers have to pick up the tab and hiring them would break the bank. The least that we can do is let them work and do what they can to contribute to society.

Jacoby supports the McCain plan as a way to unleash the power of the market in reforming health care:

Unconstrained by consumer cost-consciousness, healthcare spending has soared, even as overall inflation has remained fairly low. Nevertheless, Americans know almost nothing about the costs of their medical care. (Quick quiz: What does your local hospital charge for an MRI scan? To deliver a baby? To set a broken arm?) When patients think someone else is paying most of their healthcare costs, they feel little pressure to learn what those costs actually are - and providers feel little pressure to compete on price. So prices keep rising, which makes insurance more expensive, which makes Americans ever-more worried about losing their insurance - and ever-more dependent on the benefits provided by their employer.

De-linking medical insurance from employment is the key to reforming healthcare in the United States. McCain proposes to accomplish that by taking the tax deduction away from employers and giving it to employees. With a $5,000 refundable healthcare tax credit, Americans would have a strong inducement to buy their own, more affordable, insurance, rather than relying on their employer's plan. As millions of empowered consumers began focusing on price, price competition would flourish. And as employers' healthcare costs declined, most of the savings would return to employees as higher wages.

I can't stress the underlined part enough. People have no clue what the bill is, they only know their copayment.

Another problem is that when you are not paying the bill, they don't have to give you good service. Go to a modern hospital today and see if you can get good customer service if you are an average person with no connections. It is more like a widget factory. Doctors make the rounds early in the morning so they can avoid even having to talk to anyone. Trying to get questions answered is a pain in the ass, and they make you feel like you are wasting their time pestering them. There are exceptions, but the system is cold and impersonal. And why should they care about you? You aren't paying!

Gerg Mankiw's blog pointed me to the above article. Here is his take on the Obama plan: Taxing the Uninsured

Most economists agree on these two propositions about tax incidence (covered in Chapter 6 of my favorite textbook):

    1. It does not matter which side of a market you tax. A tax on buyers is the same as a tax on sellers. In particular, a tax on employers is equivalent to a tax on employees.

    1. Because labor demand tends to be more elastic than labor supply, a payroll tax falls largely on employees.

Now consider the Obama health plan. A major element of the plan is an extra payroll tax on firms that do not give their workers health insurance. By the basic theory of tax incidence, this is equivalent to a tax on workers without insurance

(Edit note: I messed up the bullet point numbering when I quoted him)

It turns out that Obama's own Economic Policy Director, Jason Furman is in favor of McCain's approach according to this paper released in February

Mankiw states that:

Obviously, there is a lot of common ground between Furman and McCain on this specific policy reform. My guess is that most health economists would endorse the Furman-McCain plan.

When it comes to healthcare it is time to get rid of some poor regulations that mess up the incentive structure and let the market in to better direct resources. Sphere: Related Content

1 comment:

Anonymous said...

Also interesting to check this out:

Doctors paid thousands not to send patients to hospital for treatment

Doctors in the UK are paid bonuses to NOT refer patients to the hospital. Sounds like a big bad HMO.