In a recent post, I linked to a WSJ cloumn by John Cogan, Glenn Hubbard, and Daniel Kessler on market-based ways to reform healthcare. In this post, I want to point out an extension of the recommendation I wrote about yesterday: eeliminating the tax-preferred status of health care premiums paid by the employer.
The point of the previous post was that the employer-based insurance system used in the US today essentially health care expenditures off on third parties: Milton Friedman's notion of "other people." Since other people are paying the bulk of our health care consumption, we tend to use more of it than we otherwise would. This pushes up the demand for health care, increasing the overall costs on health care. Tom rightly noted in the comments that it's an example of the shared restaurant bill effect: if I'm dining at the local restaurant and I find out that the cost of my dinner will be shared by me and everyone else in the restaurant, I'm going for the awesome T-bone! Otherwise I might content myself with a sirloin steak.
Spencer critiqued that by making people pay their own way, that it would be more expensive. Not necessarily. The costs, as it now plays out, are mostly hidden from the health care consumer. But they are no less there, in the form of longer waits in emergency rooms and office visits and mistakes by overworked pharmacy staff for example.
Nevermind that much of what we use "insurance" for is stuff that really does not need to be insured against. When we insure ourselves against something, we are insuring against some sort of unforeseen casualty: a house fire, flood, or a car accident. These events are difficult to budget and plan for because, well, they are unforeseen, and having insurance helps us financially prepare for them.
But health insurance is quite another matter. Yes, we are insured against things like sports injuries and strokes. But insurance pays for many things that are not in any way, shape, or form unforeseen. I have heart disease in my family. My grandfather, father, and uncle have all died from heart disease (my father at the age of 44). I have been diagnosed with high cholesterol and high blood pressure. Both are thankfully under control with the medication my doctor has prescribed. The fact that I am going to have to go to Walgreens and get a prescription refilled is not an unforseen event. The fact that I have to go to the lab to have my blood tested is also not an unforeseen event. I know well and good that it's going to happen and I could surely plan financially for my visits to Walgreens and my doctor. But my insurance pays for the medication and my office visit, so it's really not insurance at all since it's not being used to pay for an unforeseen event.
But there is another thing that the employer based insurance system does that hurts the overall economy over and above the effect that it has on overall health care costs. It tends to make us more tied down to our jobs. How often have you heard people say that they don't want to leave their employer because they don't want to lose their health insurance?
One of the engines of economic growth is labor mobility. Frictional unemployment is that type of unemployment when people are between jobs. It's often thought of as a necessary type of unemployment because people never know if they will really like a particular job until they start the job. By leaving one job and searching for another, people can match themselves better with their employer. But while they are unemployed, they are said to be frictionally unemployed. This is one reason why an unemployment rate of zero is not thought of as something a government should target. It is better to give people the freedom to be able to leave their employers when they feel they have a better match elsewhere.
But with the tax-preferred status of health insurance, people become more tied down to their jobs than otherwise. They don't leave their jobs to find better jobs. Moreover, the law keeps some would-be entrepreneurs from taking risks and setting up new businesses. It's a shame if the only reason a person stays in a job is because of the insurance plan, but that's a shame we have to live with because of the tax-preferred status of health premiums.
Now I realize that it probably isn't practical to simply eliminate the tax bias on health premiums or to otherwise equalize the tax bias. I also realize that it is likely that any politician who stumped with this in his/her platform would probably be portrayed as someone who wanted to take away people's health benefits, even though that is an unfair portrayal. It's not something that is going to happen overnight, but it's something that needs to be considered.
In a more just world, that person should have the freedom to choose her own health insurance plan and one that fits her as well as possible. But the tax-preferred status of health insurance premiums actually robs people of this liberty. Where's the justice in that?