Health Care

In my opinion, we should decrease the involvement of the federal government in health care, rather than, as President Obama advocates, increasing that role.

Expressing opinions on the issues of the day is not the main purpose of this blog. But I consider this to be an important issue, on which the president and Congress appear to be heading in the wrong direction, so I will make an exception, and offer up my opinion.

Obama and his allies argue on the basis of what I consider to be a false assumption. That assumption is that, up to now, the health care industry has been controlled by the private sector, and that greater public-sector control is needed. I will argue that that analysis has it backwards. The federal government has been calling the shots for years, and the answer is to decrease that involvement.

During World War II, two forces that cannot easily coexist, were present in the U.S. economy: 1) government-imposed wage ceilings, and 2) a labor shortage. After many years of high unemployment, the combination of the military draft, and the war-related growth of manufacturing, all of a sudden left employers scrambling to hire workers.

How would a free labor market respond to such a situation? Wage levels would rise, to induce into the labor force those who are less inclined to take a job. The wage controls prevented that remedy from working. But markets are persistent things, and they usually find a way around government controls.

It was at that time that employers first started providing, on a large scale, compensation in kind for such services as health care for employees and their families. Some of us are old enough to remember when those were called "fringe benefits". In the meantime, those benefits have moved in from the fringe, and taken center stage.

That method of increasing compensation, without increasing cash compensation, kept both the government and market forces happy.

Wage controls have been imposed only sporadically since 1945. But the concept of non-cash compensation is perpetuated via the tax laws. If an employer pays cash compensation to an employee, and that employee uses it to pay for health care, that compensation is subject to personal income tax. But, if the employer provides compensation in the form of health care coverage, in a manner that is in line with the tax laws, that compensation is not taxable to the employee.

That is the sense in which I say that the federal government has been controlling health care for many decades. Those tax incentives have caused employers to provide health care coverage in that manner, even though their doing so makes no economic sense.

For one thing, it brings about an overuse of the insurance mechanism. One of the fundamental tenets of insurance theory is that insurance is not an efficient mechanism for financing routine expenses. Making an analogy to auto insurance, it makes sense to buy an auto policy, in case a tree falls on your car tomorrow. If the car is totalled, the owner doesn't want to have to unexpectedly come up with several thousands of dollars, in order to replace it.

But no one buys insurance to pay for oil changes. If you know that an expense is coming up two or three times, or whatever, during the year, you can budget for it. If a car owner paid for routine oil changes via insurance, it would cost more than it does when he pays for them out of his own pocket. Insurance premiums need to be large enough, on average, in the long run, to pay for claims, plus the expenses of insurers, agents, government regulators, etc., who implement the insurance policy. If an oil change costs $75, for example, it would probably cost about $100 or so to cover it with insurance. Obviously makes no sense.

Yet, we use insurance to pay for the health-care equivalent of those oil changes. Health care plans often cover routine physical exams. If you know you're going to get a physical once a year, you're overpaying for it, if insurance covers it, rather than the patient paying out of his or her own pocket. The tax incentives cause that to make financial sense to employee and employer, even though it makes no economic sense for the country as a whole.

Therefore, Congress and the president should equalize the tax treatment of employer-paid and employee-paid health care. But Obama wants to go in the other direction, and increase the prevalence of employer-paid care. In his recent address to Congress, the president advocated that "businesses ... be required to either offer their workers health care, or chip in to help cover the cost of their workers."

It would be difficult for the politicians to implement my proposal. Currently, covered employees have the illusion of getting something for nothing. Even though they pay a small percentage of the premium, if that, the remaining cost is not really free. As the late Uncle Miltie (Friedman, not Berle) would say, if he were still around: There's no free lunch.

To the employee, it would seem as though they're now required to pay thousands of dollars a year, for something that previously had been "free". In an ideal world, the politicians would explain to the voters the economic realities of the situation. They would discuss the concept that, if labor markets are able to operate freely, in the long run, those employees' compensation will reflect, in cash, the same total compensation they had previously received between cash and benefits.

But politicians generally seem unwilling and/or unable to do that. Therefore, we go on with policies that superficially appear to help people, but actually prove to be harmful, if rigorously analyzed. That's why we have minimum wage laws and other forms of price control, with their attendant gluts and shortages; tax disincentives for saving; and employer-paid health care.

OK, but what about soaring costs? People who can't afford health care? Stay tuned.