Health reform is all the rage now, Obama has done one thing effectively and that is to get people talking about health care reform. Unfortunately for Americans Obama's bad medicine proposal is a function of a gross mis-diagnosis. In this multi-part series we will explore what is truly ailing our health industry and hopefully provide an understanding why Obama's proposals are the opposite of what we truly need. Health reform is badly needed, but until we truly appreciate the source of our problems we will be powerless in fixing it.
Americans receive a majority of their coverage from employers, roughly 60% varying on national employment. This of course was not always the case, employers used to provide health coverage as a perk and an incentive out of their own volition, but now do so because of significant federal tax subsidies. An effect of this subsidy is an illusion to those employed that health coverage is much cheaper than it really is. Unfortunately the negative effect of federal tax matches resulted in health insurance covering more and more procedures. What once began as insurance has developed into something much bigger and more encompassing. In fact, most would agree that health insurance hardly acts as insurance. For example car insurance covers us when we get into an accident, not when we go get our oil changed or replace our break pads. However with employers encouraged to buy more and more "coverage", regular procedures like a routine physicals are covered by "insurance". Worse yet due to these tax incentives employers buy expensive insurance plans with tiny deductibles and minuscule co-payments. Good for the employed, but devastating to everyone else
As Milton Friedman once accurately pointed out, there are four ways by which money can be spent and they are ranked by efficiency.
- 1) Spending your own money on yourself. Example: Buying groceries
- 2) Spending your money on someone else. Example: Buying someone a present
- 3) You spending someone else's money. Example: Lunch on a corporate credit card.
- 4) You spending other's money on someone else. Example: Welfare or lunch for a friend using a corporate credit card.
As you progress the amount of waste is magnified because it is either not for you or not your money. We can certainly agree that if it's your money then you will take the out most care in spending it. Similarly when government employees spend YOUR money on SOMEONE else, there is no care taken and why would there be? Therefore, buying medical coverage on someone else's money falls into the the third category and imposes quite a bit of waste in the form of over-consumption. After all, it's just a federal tax subsidy - who cares? Let me explain why you need to care and why over-consumption of unnecessary health services effects everyone negatively.
Insurance premiums have gone up double digits since 2000 and put pressure on wages, employment, job mobility and discouraged savings. Similarly it has driven costs of insurance plans thus making the plans unaffordable while leaving more and more uninsured! But it gets worse, in order to curtail out of control costs employers have turned to managed care plans like HMOs and PPOs. In the 1980s, only a quarter of Americans were enrolled in managed care plans, right now a vast majority have some kind of managed care plan. This in turn introduces bureaucratic nightmares that many of us have experienced when attempting to extract payment from our health insurance and can't shake that nagging feeling that they are not interested in paying for us. Out of the major HMOs offered in my industry here in Boston, I have yet to meet anyone satisfied or content with a health insurance provider. CIGNA, Blue Cross Blue Shied or Harvard Pilgrim - the only conclusion most can agree on; don't get sick, because these providers are out to save money.
Further still, insurance among companies has dwindled with most employers offering only a few providers. Those attempting to purchase a plan individually face skyrocketing premiums and limited choices as competition is artificially stifled by employer federal subsidies. Worse yet, there appears to be a direct correlation between stagnant wage increases and an over abundance of health coverage. Instead of receiving higher salaries and choosing what to do with our money, we are instead paying for premium health benefits that many people do not want or need. In fact this article examines industries with varying amount of health coverage and concluded the following: Those industries with MORE coverage resulted in 1) Shrinking workforce 2) Billions in lost revenues.
Lastly, by linking employment and health coverage together many people find themselves immobilized and stuck in a place of employment for all the wrong reasons. Because Americans are spending someone else's money on health coverage, negative behavior is encouraged like poor diet, smoking and lack of exercise. Much more importantly, as Chris Conover suggests, the amount of waste created by mis-allocated federal tax subsides and over-consumption could be costing us over 170 billion a year! That is a lot of money that can be used else where.
Still, most reading would be rather miffed to discover their employer discontinued providing health benefits. This is an example of attempting to undo federal intrusion and the hardships that go along with ingrained practices. Just like reforming Social Security becomes difficult to reform due to generational dependence, so too have decades of skyrocketing insurance premiums and reduction in competition. CATO institute has proposed an alternative called Health Savings Account whereby we transition from employer programs to private insurance governed by choice! They work like retirement accounts, but instead allow us to pay for medical expenses pretax. In 2003 with the Medicare Modernization act, HSAs made their appearances and although their effectiveness is limited it is at a least a step in the right direction.
The answer appears to be less government involvement, not more!
Next article will cover: Medicare