The history of government activity regarding health care and health insurance in the USA, if regarded from our 21st century perspective, can be summarized as law-problem-edict-problem-reform-problem-regulation-problem-fix-problem, going back decades. Yet the decades of laws, edicts, reforms, regulations and fixes haven’t produced a system that works, one that reasonably satisfies the needs and wants of consumers, providers and intermediaries in a lasting and sustainable fashion. Even the latest and most comprehensive attempt, the Affordable Care Act aka ObamaCare, is yielding a bumper crop of problems of its own, and is increasingly being viewed as an unfixable mess.
Given how important health care is to our standards of living, one would wonder why it’s turned out to be so difficult to “get it right” in the USA. While it is certainly true that America has been the source of enormous innovation in medicine, and that many of the best doctors and hospitals are here, and that the medicine aspect of health care and health insurance works extremely well here, it is also true that the way health care is provided and paid for is a ghastly, convoluted, illogical and frustrating mess. This isn’t news, certainly, as a long list of government efforts, big and small, will attest.
But to truly fix a problem, one needs to figure out the root causes of the problem. One of the fundamental causes for so many of the issues with health insurance and health care, a problem that has existed for 70 years, remains unaddressed. This problem is the preferential tax treatment that employer-provided health insurance receives.
A bit of history: Back during World War II (April 8, 1943), Roosevelt imposed a wage and price freeze via Executive Order 9328, in an attempt to control war-time inflation (the President was granted or took enormous leeway during the war to do such things). Employers, who were trying to meet war-time demand, were thus unable to attract workers by offering higher wages. While there had been some history prior to this of employers offering some form of health insurance or health care compensation as employee benefits, the wage freeze greatly incentivized employers to offer health insurance in order to attract workers. The National War Labor Board decided that fringe benefits, including health insurance, didn’t fall under the wage freeze rules.
Thus, employer-provided health insurance became an increasingly common part of employee compensation. And, under the Revenue Act of 1939, this employer-provided health insurance was/is not considered taxable income. This disparate tax treatment is the root cause of many of the problems that subsequent government interventions have sought to address over the decades, as well as many other distortions, yet it remains in effect.
Consider health insurance one might seek to purchase on the open, individual market. There are some provisions in the tax code for deducting medical expenses that exceed a certain amount, but by and large someone who buys health insurance out of pocket does so with after-tax dollars. Employer-provided health insurance thus enjoys a massive tax advantage over open-market insurance, and if someone wanted to ask his employer for cash in lieu of employer-provided health insurance so that he could purchase his own (assuming an employer was even willing to offer that), he’d be taking a tax hit on that cash. Therein lies a huge market distortion, one that directly led to the current state of affairs where employer-provided health insurance dominates the landscape, where asking for cash in lieu doesn’t even enter into the conversation, and where many people hold onto their jobs simply because they provide insurance.
For most of us, the particulars of our insurance plans are not under our control, apart from some relatively insignificant details. The who, what, when, where of coverage are detached from the consumer, and while they are addressed by the employers in their negotiations with the insurers (and the quality of insurance offered can be a relevant factor in people’s decisions to take particular jobs), the normal market forces imposed by consumer demand are muted. Since nature abhors a vacuum, other influences become significant. Politicians chose and choose to interject themselves, mandating and regulating that who, what, when and where. Where there are politicians, there are of course lobbyists, and lobbyists for all sorts of medical disciplines and specialties work hard to get politicians to mandate that their disciplines and specialties be covered by insurance, no matter what the insured actually want or need. Thus, even if you don’t want your insurance to cover, say, acupuncture, the state in which you live can decree, perhaps thanks to a healthy contribution from the acupuncture lobby, that it’s to be covered (and that, of course, the premiums paid must account for). And, since there are 50 states, there can be (and are) 50 different sets of rules and mandates regarding the who, what, when, where. So, even if you’re young, healthy and want a catastrophic-care-only policy with a big deductible and a small premium to hedge against major illness, it might not be available to you.
Other consequences of the coupling of employment and health insurance include loss of coverage when you lose your job (addressed in part by subsequent legislation) and the subsequent susceptibility to pre-existing condition pitfalls, the changing of coverage (and possibly your doctors) if you change jobs, and a near-total disconnect of consumers from the actual costs of health care. What is paid for what gets negotiated by doctors, hospitals and insurers, with a healthy dose of government regulation, and if a hospital charges an insurer $50 for giving you a couple Tylenol, you’re often none the wiser. The list of unintended consequences goes on and on.
But, imagine a world where your health insurance premiums were taxed the way your regular income is, and where the regulatory monster that arose subsequent to 1943 didn’t exist. Suppose you didn’t like the plan your employer offered, and instead wanted to buy your own insurance, insurance that suited your needs and was tailored to your circumstances and wants. You might choose to ask your employer for cash in lieu of the fringe benefit. You could carry your insurance job-to-job, you could adjust it as you saw fit, you wouldn’t have to worry about staying in a lousy job just to stay insured, you could take a job that you liked but that didn’t offer insurance, you could more easily start your own business or freelance, and you’d have a lot more input over how your insurance worked. You could buy real insurance (i.e. protection against the catastrophic) rather than the “service plan” that modern health insurance actually is, and pay for routine checkups and tests out of pocket. You’d have greater connection to how your money was handled and spent. You could compare doctors’ prices for routine checkups and procedures, shop your blood tests around to different labs, price-compare medicines from pharmacy to pharmacy. In short, health care would work the way most of the other things in our lives do, where market forces and competitive pressures drive quality and efficiency, where we’d have real choices, and where individuals rather than government bureaucrats would have a strong say in their health care.
This would be a rather alien world, and after 70 years of government interference, it’s not one that could be created overnight. Nor should we expect that this government-free state could be achieved, given the entrenched interests that would fight tooth-and-nail to preserve their gravy trains. And, of course, there would be screams of outrage from many corners if employer-provided health insurance was suddenly considered taxable income (as there were when McCain dared mention this problem).
The practical alternative, given the current state of things, is to level the tax playing field the other direction i.e. extend equivalent tax breaks to individual insurance. While by itself this wouldn’t undo the 70+ years worth of damage that resulted from the 1943 executive order, the 1939 revenue act, and decades of subsequent legislation and regulation, healing a wound first requires removing the cause of that wound. Correct the root cause, and subsequent corrections have a chance of working. What the nation has been doing over the past 3/4 of a century is the equivalent to bandaging around a knife stuck in someone’s chest. Until the knife comes out, the wound cannot be repaired.
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