To understand what lies at the heart of the failure of our current health care financing system, imagine, if you can, what the world would be like if we tried to buy food the same way we buy health care services.
You could go to work tomorrow morning and hear your boss tell you the following: The company has decided to offer a new benefit: hunger insurance. The company will purchase a hunger insurance policy for you that covers about 95 percent of your food costs whenever you enter a grocery store or restaurant, and a smaller share of the miscellaneous snacks and condiments you purchase from street vendors and the corner drugstore. To pay for the new benefit, the company will withhold some of your pay–about $100 a week or so.
Effect on Consumers
What effect would hunger insurance have on you, a consumer of food? If you’re like me, you will probably start to eat more … and eat better, more expensive foods. Why eat hamburger when you can have tenderloin? Why settle for beer when the finest wines cost you just as little? Why eat at McDonald’s when you can eat, for nearly the same price, at Chez Paul?
If there were such a thing as hunger insurance, some of us would stop checking prices before we ordered food, just as we don’t check prices when we ask for medical treatment. Some of us would order fancy and expensive foods that we wouldn’t order if we really had to balance the price against the improved taste … just as we order unnecessary and expensive tests to get just a little more peace of mind.
And if there were hunger insurance, some of us would overeat until we were so round and fat that our health was endangered, just as we see millions of people in America asking for and receiving unnecessary surgery and medication that actually endangers their health.
Effect on Providers
What effect would hunger insurance have on the providers of food? Put yourself in the shoes of a grocery store manager. You would start stocking more caviar and less Cheez Whiz®, wouldn’t you? Rather than lose customers to fancier (and more expensive) establishments, you would carpet your aisles, hang chandeliers in the lobbies, and have distinguished-looking fellows with white gloves push people’s carts down the aisles!
Every grocery store would offer an impressive array of products, from the very finest meat department to the best-stocked liquor counter (providing state law allowed it). That the store next door has the same expensive freezers and wine cellar matters not at all: Cost, you understand, is no object. “Over-investing in new technology,” you ask? Hey, the insurance company pays for it all! And if we don’t offer it, customers will cross the street and shop there. You know you would.
What if you were a lousy grocery store manager who just couldn’t keep costs down and quality up? Before hunger insurance came along, you would be forced out of the market by stores managed by sharper people able to cut costs without sacrificing quality. Customers wouldn’t patronize your establishment, and you’d be out of business.
But with hunger insurance, you can pass along your higher costs to the insurer, so the customer never knows how inefficient you are! So you get to stay in business despite your inefficiencies. Out of gratitude, you may even spend a little money lobbying to make sure hunger insurance is always available!
If there were such a thing as hunger insurance, the price of food would begin to soar, just as the price of health services has steadily risen faster than the price of other goods and services. Financed by hunger insurance companies, grocers and restaurateurs would sell more food and of a fancier variety than if they faced customers who paid with their own money, just as health care practitioners today are free to over-treat and over-prescribe. Food sellers would over-invest in expensive and under-utilized equipment and pass the cost along to the insurers, just as hospital administrators today buy too many MRIs and CAT scanners and pass along the expense to health insurers. And inefficient, low-quality providers of food would stay in business rather than be forced out by better competitors, just as high-cost providers of health care are tolerated in today’s health care marketplace.
Effect on Insurers
What would happen to insurers if hunger insurance were provided? The premiums they charged at first were based on past levels of food consumption and prices. As consumption expands and prices rise, insurers have to raise their premiums again and again. The exploding number of insurance claims buries them in paperwork.
The businesses that pay the insurance premiums will, of course, be outraged by all this. “Find a way to control these rising costs!” they will demand. “The rising cost of hunger insurance is making us less competitive with businesses in other countries!”
The insurers will hire an army of “managed-eating” experts who will search the grocery bags of the insured for signs of unnecessary products, just as today’s health insurers have hired experts in “managed care” to review health services utilization. People will resent this intrusion into their personal dietary habits, just as they resent the managed care experts second-guessing their health concerns. People with hunger insurance will find ingenious ways to avoid the managed-eating experts, and the eventual results will be higher, not lower spending … just as businesses with managed-care programs today are discovering.
Effect on the Uninsured
Some people in our imaginary world will be uninsured: They won’t have hunger insurance because their employers are too small to afford to offer this new benefit, or because they are self-employed or unemployed. Or, in their effort to control costs and make money, some hunger insurers will refuse to cover people who are high food-risks–the hoarders, the people with exceptionally delicate palates, and the bulimics. They will offer cheaper rates to others: beer-drinking football fans, people who can’t smell, and anorexics.
The uninsured will be hurt the most by hunger insurance because they will see the price of food bid up and out of reach by those lucky enough to have hunger insurance. The foods that were once plentiful and inexpensive will now be unavailable or high-priced, just as health insurance has replaced inexpensive general practitioners with expensive specialists, and inexpensive but slow-working therapies with expensive but quick surgical procedures.
Those who lack hunger insurance will be seen standing with their noses pressed to the windows of our beautifully carpeted and chandelier-lit grocery stores and restaurants, just as millions of Americans today crowd the emergency rooms of state-of-the-art hospitals whose beds are between one-third and one-quarter empty.
Effect on Elected Officials
What would happen to our elected officials if hunger insurance existed? Civil rights activists and well-meaning people without much understanding of economics would campaign against for-profit hunger insurers, denouncing them for being heartless in their discrimination against people with eating disorders. They would condemn them for profiting from the provision of something so fundamental to human life as food. “Food is a right, not a privilege, ” they would say. “The high administrative costs of the hunger insurers are to blame for the problem. We should abolish private hunger insurance companies and replace them with a single provider of food.”
And since experience will have so convincingly shown that the current hunger insurance system is inefficient and unjust, our enlightened elected officials would eventually yield to the public’s demands and pass “play or pay,” forcing businesses to buy hunger insurance for all their employees, or “national hunger insurance,” where government acts as the single payer of all hunger insurance claims.
The nation will face a difficult choice: Either abandon the idea that all food should be paid for by hunger insurance, or impose draconian rationing measures, price controls, and restrictions on new investments in food processing and delivery technologies. If we can judge by what is happening today in the health care arena, the advocates of rationing will dominate the debate.
Commissions will spring up everywhere to determine whether a carrot is more valuable to the community’s welfare than a grape, and a grape more valuable than a banana; just as commissions are being created at this very moment to decide whether capping 1,000 teeth is “worth more” than extending a person’s life for one week by kidney dialysis. The issue will be addressed as if justice and virtue, rather than economics and incentives, were at the heart of the issue.
What if there were such a thing as hunger insurance? This little exercise in imagination teaches us quite a bit about why we spend too much on health care. In its simplest form, the lesson is that we rely too much on insurance to pay for our health care expenses. This reliance makes us poor consumers, encourages health care providers to provide too much, and allows and even encourages inefficiency and waste.
Sometimes things that should be obvious just aren’t. Ninety-five percent of all hospital bills, for example, are paid for by private or government insurance. Can the same be said of any other industry? Is it merely coincidence that costs are rising so much more rapidly in health care than in other industries?
The solution to the nation’s health care crisis is not, of course, to abolish health insurance. Health expenses are an insurable risk, and because they can be substantial it certainly makes sense for people to buy insurance. But insurance should not be simply pre-payment for routine medical expenses. When insurance is used for this purpose, it leads to overuse and all the problems we saw with hunger insurance.
Insurance, instead, should be limited to protecting us from what are now called catastrophic risks. We should self-insure against small and routine health expenses, and ask our insurance coverage to “kick in” only for large and unpredicted expenses. These are the kinds of expenses true insurance is designed to cover. And because such expenses are only seldom incurred, the administrative costs and paperwork involved with “real” insurance are far less than that involved with insurance as prepayment.
The policy questions, then, are these: How can we wean our nation off its “addiction” to health insurance? And how can we replace insurance provided by an insurance company with self-insurance from our own savings? The answers lie in changing a public policy responsible for creating our addiction in the first place.
Medical Savings Accounts
We rely so heavily on insurance to pay our medical bills because the tax code rewards employer-paid insurance and penalizes self-insurance. Employer-paid health insurance premiums are tax-deductible business expenses for our employers, so they don’t count as taxable income at the end of the year. Money spent paying medical bills directly, by contrast, is not tax-deductible. We must pay out-of-pocket medical expenses with what is left of our paychecks after Uncle Sam has taken his tax share.
The tax code has a dramatic effect on our decision to buy health insurance, and on the deductibles and co-payments our insurance policies contain. Employer and employee Social Security taxes, federal income taxes, and state and local income taxes can reduce one dollar of pre-tax income to 43 cents or less of post-tax income. Paying for health care with post-tax dollars, then, requires earning one dollar to buy 43 cents’ worth of service. Having an employer purchase a health insurance policy, on the other hand, means a dollar’s worth of earnings buys an entire dollar’s worth of insurance.
The way to correct this situation is to follow the path blazed by Individual Retirement Accounts, or IRAs. IRAs encourage us to put away money for retirement by allowing us to deduct the amount of our contributions from our income when calculating our income taxes. Medical Savings Accounts, or MSAs, would operate the same way, but money deposited into the accounts could be withdrawn only for medical expenses.
By giving the same favorable tax treatment to self-insurance as is now given to employer-paid health insurance, we can begin to break our national addiction to health insurance. Many of us would choose to purchase insurance policies with much higher deductibles–perhaps as high as $4,000 a year–if the premium savings achieved by switching policies were routed into our personal savings account and allowed to accumulate over time.
Enabling people to self-insure against small and routine medical expenses may not sound as exciting and promising as “national health insurance” or “play or pay.” But MSAs offer the best way to control spending without life-threatening rationing, ineffectual price controls, and all the other non-solutions being discussed by politicians today.
Our fictitious world with hunger insurance reveals how over-reliance on health insurance is at the very root of our nation’s health care problems. The solution to these problems is not to pass price controls or impose more regulation on health care providers. All that is required is a change in the tax code encouraging people to pay for their own health care out of personal savings.
Isn’t it nice to know that, sometimes, complicated problems really do have simple solutions?
Joseph L. Bast ([email protected]) is president of The Heartland Institute. This essay first appeared in the November 1993 issue of The Freeman, published by the Foundation for Economic Education.