Saturday, August 22, 2009

How Did We Actually Get Into the Current Healthcare Mess?

The answer: Government laws, rules and regulations---everything from price controls on wages to tax rules had a role. If these government actions were never taken, the entire concept of health insurance would be different, and like life insurance, car insurance and insurance for your house, you would be buying it on your own. Your employer wouldn't be involved and neither would the government.

It all started during World War II. The government froze wages below market rates. In order for employers to compete, they had to offer workers other incentives. Health insurance became one such incentive. Some employers paid for health insurance, to make up for the shortfall in wages that the employer was prohibited by the wage freeze from paying.

Still, the number of employees receiving employer paid for healthcare was small. Indeed, the number that actually had health insurance overall was small. Like a payment to fix your car, most just paid for healthcare as they needed it.

David Goldhill explains what took place nexts:

.,,,as late as 1954, only a minority of Americans had health insurance. That’s when Congress passed a law making employer contributions to employee health plans tax-deductible without making the resulting benefits taxable to employees. This seemingly minor tax benefit not only encouraged the spread of catastrophic insurance, but had the accidental effect of making employer-funded health insurance the most affordable option (after taxes) for financing pretty much any type of health care. There was nothing natural or inevitable about the way our system developed: employer-based, comprehensive insurance crowded out alternative methods of paying for health-care expenses only because of a poorly considered tax benefit passed half a century ago.
Got it? It was tax deductible for employers paying the healthcare insurance premiums and the payments were non-taxable to employees. Thus, the tax law created a situation where, for an employee, it was best for the employer to pay for insurance directly. Since if the employee received the amount in cash, it would be taxed before insurance could be purchased.

This is the key link between healthcare and employee sponsorship of health insurance programs. If it wasn't for a government wage freeze during World War II, followed by distortions in the tax wage structure that created incentives for employees to seek out health insurance from their employers, the health insurance industry and employers link would have been as likely to have developed as an employer sponsored underwear purchase program.

But it gets worse. Because there is no tax for the employee, he wants everything possible thrown into this "insurance." Since, if he had to do it direct, he would have to pay tax on the cash received first.

In a non-distorted market, a person would want only catastrophic health insurance. Under the current distorted system, the employee wants everything thrown in. Think of it in terms of auto insurance. Currently, automobile owners buy insurance against theft and accidents, i.e. catastrophic events. BUT, if the government created a situation where the employer payment for auto insurance was tax deductible for the employer and non-taxable for the employee, then the employee would want everything from new tires to a fill up of the gasoline tank to be covered under "insurance", and paid for by the employer.

Thus, the problem has been expanded in healthcare to where even minor procedures and doctor visits are covered under current day healthcare that wouldn't be covered if there wasn't perverse tax incentives.

With these perverse incentives creating a bizarre healthcare structure, Congress then created Medicare and Medicaid based along the lines of, guess what? The bizarre healthcare structure.

This mad maneuver has led to the spiraling healthcare prices. Goldhill explains:
In designing Medicare and Medicaid in 1965, the government essentially adopted this comprehensive-insurance model for its own spending, and by the next year had enrolled nearly 12% of the population. And it is no coinci­dence that the great inflation in health-care costs began soon after. We all believe we need comprehensive health insurance because the cost of care—even routine care—appears too high to bear on our own. But the use of insurance to fund virtually all care is itself a major cause of health care’s high expense.
So it is with this as background that we now find an out of control healthcare system caused by a variety of government rules, regulations and legislative moves.

The President's solution to the problem? More government rules, regulations and legislation.

He wants to set up a healthcare board that will rule on maximum prices. This will result in shortages, as any student of Econ 101 should be able to understand. It will also reduce incentives to create new treatments. Who wants to spend the time and effort, when a bureaucrat will determine what price you can sell your new product at?

Of course, with everyone covered for all kinds of services, demand for medical services will go through the roof. Increased demand on one side and supply shortages on the other is not a pretty picture. Healthcare will have to be rationed in a non-price fashion, and those surrounding Obama will be the deciders as to who gets treatment and who doesn't.

It is important to note that on the free market, prices have a tendency to go down and the quality of service goes up. From personal computers to cell phones, prices have collapsed and quality has skyrocketed. This won't happen in the healthcare sector under the price controls, rationing and the overall regulation of Obamacare. In fact, the opposite will happen. There will be less service, less incentive and less investment in the sector.

5 comments:

  1. I like the way "new technology" is blamed for all rising health care costs.

    Yet in much of the rest of the economy technical advance is combined with lower costs.

    People forget that the institutional structure filters and skews the technical development.

    If governments had a monopoly of the food supply and food serving business, suppliers of microwave ovens would have zero incentive to reduce the price. They would thus persist in supplying and selling big elaborate high tech boondoggles to the Department of Food Services to install in it's numerous regional Food Distribution Centers. Rising costs to taxpayers would thus be attributed to the growing need for more advanced food processing technologies like microwaves, dishwashers and toasters.

    The only other sector where cost increases are similarly attributed to technology is the high tech playground of the military- industrial congressional complex. Billions are spent on stealth fighters and nuclear submarines whilst troops get killed in humvees.

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  2. Price controls and shortages from ECON 101 - since when did econ 101 deal with the problem of the assumption of perfect information between buyer and seller (in health this assumption does not hold cos if you had the info you would diagnose and stay at home) - subprime economics deluxe methinks!

    And I love how the argument is made for deregulation when in the free market Americans pay much more for patented medicines - Factor Price Equalisation - oh yes even Paul Samuelson has debunked his Nobel winning theory.

    Yes this pricing too is to be blamed on government regulation (but is not surprise surprise) - absolute hegemony by patent holders on price fixing. Free marketeers who support patent monopolies - only in America is this regarded as intellectually reasoned and coherent. In other places this is called 'singing for your supper'... and now please sir, may I have some more...

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  3. Just wait for Obamacare to kick in.You will get a lot more of what you are looking for.

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  4. "Adverse selection" has been a major reason for heathcare to be provided through employer groups. If you approach an insurance company individually and ask for insurance against a broken leg, the company will assume you are likely to do something that risks breaking it and charge as though you likely will.

    The problem has at its root asymmetric information, in which the insurance company knows that it does not know the health risks facing you as well as you yourself know those risks. So it charges relatively a lot on individual policies, if it even offers them at all.

    Employers, on the other hand, hire people because of the productivity they expect, not because they expect medical problems. Insurers know this and so offer lower employee group rates than individual rates or rates for businesses that are so small they might act like individuals.

    Getting past the adverse selection problem is the only valid argument I can think of supporting national health insurance. Yet the market does handle this information problem through employee group plans. If the market response is not good enough, address policy to just where it fails rather than throwing out the market solution altogether. Free choice and competition have a lot of advantages over command-and-control bureaucracy.

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  5. Robert Wenzel your either a zealot, a shill, an idiot or all three. You come off the rails in your crazy train mighty fast here. You must be one of those Ayn Rand, Alan Greenspan groupie with tunnel vision, when all your theories come crashing down, like Greenspans theories in 2008, your answer will be the same as his, "you fucked up, you trusted me!"

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