Unshackling Health Care: Change the Tax Code

With the negativity surrounding the current health care “reform” legislation, we haven’t heard enough about positive, freedom-oriented steps that can be taken to unshackle health care.

Any reform must start by first identifying the problem. In the case of health care, there are two problems commonly identified. The first, that health care costs are basically out of control, is mostly agreed upon by the Right, Left, and Center. The second, that everyone in the country must be covered by health insurance, is far from agreed upon. In this post, we’ll focus only on the issue of health care costs: Lowering costs and allowing for different health care delivery models can reduce the need by some for insurance.

The fundamental problem with health care is that we have created a third-party payer system. Currently, most health care situations have multiple parties involved, including the patient, the doctor/provider, the insurance company, and the payee (a business or government entity). Usually, the patient visits the doctor. The doctor then prescribes diagnostics, drugs, or other care. During the visit, the patient and doctor rarely discuss the price of the care. Instead, the patient pursues the given care and the provider bills the patient’s insurance company. The insurance company negotiates the price with the provider and pays the bill. A year or two down the road, the insurance company’s costs have risen because patients inadvertently increase their health care demands since they are not directly paying for most of it. Having to recoup those costs, the health insurance company demands a higher premium from the employer (private or public) who then passes it on to his employees. 

And, if you think single-payer is much different than third-party payer, you’re sadly mistaken. The only difference is that the government, rather than a private employer or insurance company, is the payer. The individual will continue to not care about costs, which inevitably results in increasing health care burdens, forcing the government to respond by rationing health care.

Put more simply, most patients in a third-party payer or single-payer system are akin to students with daddy’s credit card. It’s true for most of us: If I don’t pay the bill, I don’t care how much something costs.

So how did we get here?

Peter Nelson at Center of the American Experiment, a Minnesota-based think tank, wrote an excellent answer to the question in A Primer on How Employment-Based Health Benefits (and the Tax Code) Distort the Health Care Market. Basically, our health care woes are the result of a tax code issue dating back to President Franklin D. Roosevelt’s wage controls during the 1940s, when companies, without a legal opportunity to attract workers through higher wages, began to offer health care benefits to remain competitive. Government, rather than fix clearly failing wage controls, simply gave a wink and a nod to business by allowing the deduction of health care expenses from corporate taxes. Government has further entrenched the third-party payer system in the decades since.

Nelson’s first step solution is to make sure that the individual is in control of health care costs by fixing the tax code:

To begin moving in the direction of individual based plans, tax advantages need to be de-linked from employer-paid health care. A uniform tax deduction for individuals, as proposed by President Bush in his 2007 State of the Union address, would be one way. Another would be a refundable tax credit—a tax credit advanced at the beginning of the year for health expenses, where the full value of the credit would be available to taxpayers even if they owe a lesser amount in taxes. Either would be a terrific first step toward transitioning America from employment-based coverage toward individual based coverage.

Setting aside issues with the current taxation model in the U.S., Mr. Nelson’s pragmatic recommendations are ideas worth pursuing. The first move forward for federal health care reform is to unshackle health care from an employer-based system thereby putting individuals in charge of their health care costs. By doing so, individuals have a reason to drive down health care costs (we've seen this for Lasik and other more market-based health care options) and, for the most part, would gain the freedom to move from job to job without worrying about changing health insurance or losing favorite physicians.