What ails health care

Public Interest, Spring, 2005 by David Gratzer

NOW are we ready to talk about health care?" asked Senator Hillary Clinton in the title of her New York Times op-ed last year. In fact, have we ever stopped talking about it? Medicare reform, prescription drug costs, the uninsured--these issues are much discussed. No wonder. A decade after Senate Majority Leader George Mitchell declared HillaryCare dead, polls suggest that Americans are more worried than ever about their health insurance. In a Market Strategies poll, 86 percent of people expressed deep concerns about rising costs and six out of ten regarded the likelihood of bankruptcy due to major illness as a serious problem.

That health care remains a major issue, though, is not due to a lack of effort on the part of American politicians, with bold efforts made to reform health care at the state and national levels. Washington expanded Medicare's scope and Medicaid's reach. The statehouses have worked furiously to help the insured and uninsured alike. And the health-care industry itself has gone though a massive reorganization, embracing managed care as a panacea and then rejecting it as a poison.

And, at the end of the day, we seem no further ahead than when Americans elected Governor Bill Clinton to the White House with a promise of health-care reform. Many of the problems remain the same: middle class angst, millions without insurance, double-digit spending increases. In fact, the situation has worsened: Health spending is at a historic high, consuming 15 percent of GDP. More Americans are without insurance. And those with insurance carry a greater burden--the typical worker now pays $750 more per year for insurance than just three years ago.

If the problems are familiar, so are the solutions proposed. While the grand design of the Clinton White House went unrealized, some type of national effort appears increasingly inviting. Just this summer, the National Coalition on Health Care, a bipartisan organization chaired by former Presidents Bush and Ford, announced support for a universal coverage scheme that would centralize key health decisions to a government committee. It's not that the coalition, comprised of big businesses like General Electric and AT&T, as well as union interests, holds a big-government bias. Rather, it's that the status quo appears untenable. So we're returning to the debates of the last decade: HillaryCare.

Perhaps that's not surprising. While the American healthcare system has gone through much "reform," relatively little of its overall economics has changed. Reform, thus, has largely been an exercise in shifting costs from payer to patient, from insurance plan to hospital, from hospital to physician, from uninsured to insured. Since the 1970s, much has been made of the idea of managing care--but really, these have been exercises in managing cost. For most Americans, the end result has been less control over basic health-care decisions, a prescription for universal dissatisfaction.

If we really want to address the system's shortcomings--to tame health inflation and broaden coverage--a new approach is needed. We must recognize that the structure of American health care is flawed, and we must seek to address this by giving people more control over their own health care.

Third-party payership

In other sectors of the economy, costs fall with time. Think of agriculture or transportation--areas that, like health care, have been transformed by technology and innovation. But the advancement of medical science has, curiously, not followed the trend. Indeed, progress means greater expense. Year after year, health spending rises--from 5 percent of GDP in 1960 to triple that today. So accepted is this phenomenon that few pause to ask why health care has grown so much more expensive over the years.

The central problem is the way Americans pay for their care. Rather than paying directly, most people get their health insurance from their employers. Someone else foots the bill. Our employers don't pay directly for other basic needs, like food, clothing, or shelter. So how did this odd financing arrangement develop for health care, and why does it remain? The answer can be found in the tax code.

Tax and health policies are intimately linked. Consider that the biggest event to shape American health insurance occurred on October 26, 1943. Given the importance of that date, some may think that Congress passed a major piece of legislation, or that the Supreme Court decided a landmark case. Actually, the date marks a special ruling on health benefits by the Internal Revenue Service, declaring that employees would not be taxed on premiums paid on their behalf by their employers. Simply put, the IRS ruled that health benefits are tax free.

The IRS didn't make this ruling out of the blue. Two years earlier, in 1941, the FDR administration had imposed wage and price controls as part of the war effort. The effects of price controls are well remembered--for instance, a black market for gasoline quickly developed. Wage controls also produced unintended consequences as employers sought ways to provide workers with competitive salaries without violating the law. Across America, employers found their answer in health benefits. The IRS ruling legitimized the practice.