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.
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