How the Tax Code Broke Healthcare
It was one year ago this month that the then Democrat controlled US House of Representatives passed the Obamacare legislation by a narrow 219 to 212 vote. As the newly elected Republican majority works to repeal (or at least remove funding for) this disastrous program, many state legislatures are joining the effort by passing their own bills aimed at nullification. It is imperative that these efforts are successful.
Make no mistake though, the financial model for healthcare in America was broken long before Obamacare. Repealing it is one step in the right direction, but some understanding of what broke healthcare to begin with is important as we move forward to truly fix the system.
The single worst political decision in our nation’s history as it relates to healthcare occurred during World War II when wage and price controls were implemented. The goal was to curb inflation and provide some stability in the wartime economy. Like most big ideas by government, however, there were unintended consequences.
With competition for labor intense due to the deployment of so many in our military, companies had to discover new ways to keep and attract qualified workers. While they were forbidden to offer increased salaries, they discovered that offering benefits, such as health insurance, would suffice as a work around of the new rules.
This impacted health insurance in a dramatic way. The link between the expense and the pain of paying was disconnected, thus inducing folks not to shop around, negotiate, or even look at the bills. It also had a negative impact on the future job markets as people became more and more hesitant to switch jobs and risk losing their coverage.
Fast forward to today.
What is the benefit of corporate sponsored health care insurance? Two words. Tax deductibility. When you receive a policy from your employer, you as the individual do not pay taxes on this benefit. It is not part of your income. Furthermore, the company enjoys the benefit of a tax deduction for the expense.
Let’s imagine an example of a $12,000 policy provided to you by your employer. What if instead the company offered to simply pay you an additional $12,000 in wages and allow you to purchase an insurance plan directly? Sounds great right? But look what happens. You now are going to be taxed at your personal income tax rate for the additional $12,000 in income. Your payroll taxes will likewise be raised. Since the company will have to match your increased payroll taxes as well, they also end up losing out.
There is simply no incentive to remove the responsibility of health insurance from the employer under current rules. What would happen though if the tax code were changed to remove the tax liability of health insurance from both parties?
Using the same $12,000 dollar example, you and millions of other people would now have the resources to enter the marketplace and shop around for an insurance policy that fit your needs and lifestyle. Would you choose to spend the entire $12,000 on the exact plan that you previously had? Perhaps. More likely, you will look for a plan that only covers your truly catastrophic emergency needs.
A plan such as this may only cost $6,000 because it doesn’t cover routine doctors visits, or even non-emergency surgeries. Since you’ll now have $6,000 extra in the bank, those routine visits won’t be out of reach financially, and you’ll get to choose whether or not to spend the money on them. If there is no need to, those dollars can be used for other purposes. After all, how often do you need to have your tonsels removed?
Furthermore, when the burden of paying for elective procedures is placed on the final customer, that customer is more likely to pay attention to the cost and demand quality service at a low rate. This has already proven successful in the field of laser eye surgery. Since most insurance plans don’t pay for that procedure, the result has been serious competion between providers. Unlike most medical procedures, the cost of the surgery has come down and the quality has continued to improve. This can and should be replicated across the board.
The idea that people will pay for less “all inclusive” insurance and bear the burden of normal costs when they arrive isn’t dramatic. It happens all the time. Your car insurance doesn’t pay for oil changes or tire rotations. If your plan did, the cost would go up by necessity. Your homeowners insurance is the same way. More likely than not, your lawn mowings and house paintings are not covered by insurance.
The purpose of insurance, afterall, is to provide a safety net for when unlikly events strike that would be impossible to bear the expense of. The more an insurance plan covers, and the more routinely it must pay out, the more expensive it will grow. Multiply this by removing competion between competing health plans and removing the final customers’ responsibility to bear the cost, and we arrive at the broken system we currently have.
The idea that government can somehow manipulate the price of healthcare lower by even more dramatically limiting choices and simply setting rates is inane. As we discovered with wage and price controls, there are unintended consequences. By increasing the demand for a good while decreasing supply, shortages will become the norm.
As we work toward repealing Obamacare, we must offer real and working alternatives.
The only way to fix our system and get a handle on our costs is to change the tax code to benefit the creation of an individual marketplace for insurance and to change the mindset that insurance is a responsibility of employers.
The free market can fix healthcare, if only it was allowed to work it’s magic.
Excellent column, Christian. We can’t hope to begin to fix this problem until we understand where and how it started. The first step is restoring the price relationship between customers (patients) and service providers (doctors). Until that relationship is repaired, NOTHING will fix our healthcare system in the U.S.
Thanks Adam. After attending my second of Loren Spivack’s economic seminars last week, I wanted to be sure to write down some of his knowledge while it was still fresh in my mind!
The third party payer system(Medicare/Medicaid) actually created the greatest increase in cost to the individual. The medical field started charging more for procedures to make up for the loss of income from third party payers. History and statistics indicate this clearly. Also if most people had an additional $6,000, I really doubt it would go in the bank. Finally, it’s hard to compare elective surgery with life saving medical needs with cost savings from competition.
Christian,
Outstanding article. If this were a test I would say you passed the essay question with flying colors! Loren was great, wasn’t he? I have pages of notes. I hope I can remember it.
Thank you Sharon. I actually wouldn’t mind getting copies of your notes. I already received Jay’s. Might be cool to compile everyone’s and get a full recount of the lessons.
Jim, totally agree that the third party payer system is a disastor. You correctly point to Medicare/Medicaid as the “third party”, but I would include employers in that category as well.
The beauty of capitalism is that people are free to make their own decisions, even bad ones. People would certainly be free to squander their increased take home pay however they choose, but they would have to live with the consequences of poor decision making.
Of course, circumstances dictate the type of competition available for any particular ailment. I always laughed when asked by job applications which hospital to be brought to in case of emergency. I always said “the closest”!
But seriously, in today’s over insured marketplace, the insurance companies have already negotiated rates with hospitals for various classifications of service. Insurance companies negotiate a maximum rate, as does medicare and medicaid. The hospital extracts the maximum from each patient without any individual circumstances coming into play.
Remove this automatically assumed maximum rate paid for by third parties, and yes, even emergency heart surgery will come down.
A friend of mine had his tonsels removed in 1969 for $50. Adjusted for inflation, that is $288. What do you think it costs today? Not $288, I can tell you that. Unlike most all markets in the private sector, healthcare, and education for that matter, have increased dramatically in price through the years. The reason is simply too much government, too much insurance, and not enough individual decisions being made.
Empower individuals, fix the country.
Chris – great article!! In the past, as a financial advisor, I’ve encouraged my business clients to take advantage of this “loophole” and “pay in benefits” – BUT, where does it stop – employer providing a car ? … how about your house? Oh, wait a minute now they are gaining total control on my life and then what ….
Thanks Jack, I appreciate it.
Indeed, let’s develop a system where our employers just pay our bills. Our only “income” would be a stipend for personal savings. Little income, few taxes…everyone wins right? 🙂
If we passed the FairTax Act (HR-25/S-13), the tax code could never again be used to finance social policy. It would also effectively defund Obamacare.
Thanks John. It’s where I was going without saying it. 🙂
If it was only this simple. Companies have to attract good labor and the non taxed healthcare benifit has helped to create the middle class. With the lack of ethics in business today, I have no faith that prices will come down. Private and company insurance pays too much to make up for Medicare/Medicaid low payments. Human needs are different from corporate needs. Market forces are directly influenced by low balling Fedreal/State (Big Bully) money. Middle class Americans will never willingly give up company paid healthcare. Call me cynical, but I believe this is just another attempt by the wealthy class to further diminish the economic status of the middle class with divide and conquer tactics. One need only look at the shrinking share of income of the middle class since 1972 and the huge increase in wealth of the wealthy class. While your ideas may have worked sometime in the 1960’s prior to the mushrooming costs of medical care, but I feel it will only hurt Americans today. Keep up the good fight Christian but remember to follow the money.
Kay:Yours is a ctollemepy unreasonable attack on a well reasoned response. You have no facts and offer just a personal attack on Cheryl. That she actually worked with Bill Randall would give her the perfect vantage point to see the man as he is or, at least how she perceives him- first hand experience. You offer nothing. You are a mindless, self-centered and egotistical know-nothing as shown by your post. You posted here for your own personal 'glory' as you have added nothing to the debate with your hurtful spew (I would bet you view yourself as a christian, which charge against you could be thrown out of court based on this post alone). Try again, honey. Maybe someone will care about your baseless 'opinion'.
FairTax would help create a free-market healthcare system that puts the consumer in charge and removes the one-size-fits-all employer-based health insurance system! Elect members of Congress who support FairTax!