Arnold Kling  

Employer-Provided Health Insurance

Personality and Econometrics... In Defense of Low Correlations...

I write,

We should aim to phase out employer-provided health insurance. However, instead of trying to create a household insurance market that reconstitutes the unsustainable features of employer-provided health insurance, we need to allow for radical innovation in the very concept of health insurance.

On health care, we live in an Orwellian world. What is called "reform" is really an attempt to entrench the existing, unsustainable system of third-party fee-for-service reimbursement for service providers. This third-party reimbursement in turn is know as "insurance," even though it does not serve that function.

The Obama Administration supports employer-provided health insurance. They probably would support legislation that mandates more employers to provide coverage. On the other hand, the issue of taxing employer-provided health benefits is getting attention. The economic arguments tend to favor taxing benefits. The political arguments tend to go the other way. My guess is that the initial version of the health care bill will include taxation of health care benefits, but if the bill gets into trouble then the tax provision will be dropped in order to gain passage.

UPDATE: See also John Goodman.

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COMMENTS (6 to date)
Arthur_500 writes:

The taxing of healthcare benefits will probably be the final death blow to employer provided benefits and the start of socialized medicine and retirement.
Social Security was designed as a feel-good measure to provide benefits after most people had died. Today we live in the continueation of efforts to expand SS to become the retirement program for everyone.
Much the same with healthcare. As we continue to create accounting barriers to employee programs those programs have disappeared. To tax those programs will cause them to cease altogether as employees don't want to taxes on imputed income of an additional 12,000 per year and employers don't want to deal with unnecessary accounting.
At the end of the day there will be fewer people with any insurance.
Insurance is supposed to help people pay their bills and the more we get rid of it we will encourage socialism. Whenecver you rob Peter to pay Paul Paul will always support you.

SWH writes:


Do you believe that any change in our concept of "health insurance" will result in any progress if we dont also have radical innovation in the very concept of health CARE?

No matter how we pay for it, we cant afford doctors and hospitals that presume that all possible procedures are available to all patients.

Mr. Econotarian writes:

We seem to be very concerned about the per capita spending on health care in the US compared with other countries.

We know that the best way to reduce demand is to tax something.

So perhaps we should simply put a 20% tax on all health care, then we'd see demand and (pre-tax) prices decline.

Think of it as the "Medical Pigou Club"...

Dr. T writes:

To AK: The major reason for skyrocketing health care costs was the separation between patient care and patient payments. In the 1960s, routine doctor visits were much less expensive than today, because patients paid out-of-pocket. More expensive items (lab tests, x-rays, surgery) had negotiable prices. (I remember my Dad hunting down a doctor who wouldn't charge a lot for stitching my lip on a Sunday afternoon.) Health insurance back then was catastrophic coverage: no payment except when medical bills exceeded a large amount (typically equivalent to around $10,000 today).

After routine health care costs were covered by insurance, doctors became unrestricted on their charges. Patients also asked for more and "better" care, more tests, more scans, the newest drugs, etc. The co-pays were small, so why not?

The only force that keeps medical charges down today is the Medicare fee schedule. This spells out reimbursement for all medical care: office, hospital, and nursing home. Most private insurance companies use a customized version of the Medicare fee schedule. Despite keeping charges down, costs still rise. That's because doctors and hospitals know how to "game" the system and get more money. A simple example: a patient has a problem that doctor diagnoses. A follow-up visit is needed to assess the treatment, but the doctor schedules two follow-up visits (one to assess drug side-effects and the second to assess the treatment).

Switching to Obaminsurance will not reduce costs except during the break-in period (because it'll take a while for patients, doctors, and hospitals to figure out how to game a new system). Cost reduction requires that patients feel the financial pain that accompanies their choice of medical care. If too few people will pay $100 for a routine office visit, then the doctor must charge less, switch to a different business model, or go out of business.

An alternative approach to controlling costs is fully socialized medicine with salaried health care professionals. The Veterans Health Administration mostly is structured that way. As a former VA physician, I can attest that it doesn't work well.

mulp writes:

The taxing of healthcare benefits will probably be the final death blow to employer provided benefits and the start of socialized medicine and retirement.

You mean like taxing wages turned the US into a communist society where everyone works for the government? Or taxing property has resulted in the end of private property?

mulp writes:

On health care, we live in an Orwellian world. What is called "reform" is really an attempt to entrench the existing, unsustainable system of third-party fee-for-service reimbursement for service providers.

Insurance today is only third party because it was deemed better to turn insurance into for profit corporations rather than retain the mutual company structure that Ben Franklin advocated as an adjunct to mutual assistance to prevent and fight fires.

Mutual health insurance most notably the classic Blues and the real HMOs were partnerships between the doctors and hospitals and the insured. Together they shared the risks and worked together to reduce costs.

As with old Ben who campaigned for prevention of fires as much as fighting fires and compensating fire losses, the HMOs sought to reduce the risk of serious loss.

While you can theorize that individuals are much better at this than a "third party" (which in a mutual association includes the customer/client/patient/doctor, so the 3rd party is also the 1st party and the 2nd party), the evidence when it comes to health to the contrary.

If the presence of health insurance promotes bad lifestyle and thus poor health, then the uninsured who are forced by economic circumstance to to be uninsured, should be healthier as a group. And the measure of healtier isn't that their medical costs are less, but that they have better health outcomes.

And the poor should be highly motivated to save money by eating the lower cost vegetarian beans and rice, poke salad, in season local foods, baking their own basic breads, and so on, staying away from the expensive highly processed food laced with salt, sugar, and fat.

In other words, they would adopt the diets of the Asian and latin peasants which have been show to promote better health when immigrants are studied over three generations: the immigrant has better health than the established American community, the childred are less healthy, and the grandchildren have health that is the same as the community as they eat like an American instead of as an immigrant.

Of course, the simplest case against your argument that 3rd party payment is responsible for the high spending is to look at the other OECD nations and their health care systems and spending. With several dozen having mandated 3rd party health benefits that pays for most health care, we see better health outcomes for significantly less total cost.

While the argument made for the high cost of health care in the last months of life is placed on the 3rd party payments of Medicare/Medicaid, Canada, France, Germany, Japan, Switzerland, et al don't have those high cost end of life expenses yet they are all paid by 3rd parties.

Genetics hardly seem likely explanations they are for the most part the people who make up the US genetic stock. And climate and environment hardly seems likely given the cost of health care in Canada paid by taxpayers is less per capita than than the tax dollars paid per capita in the US, while the private payments in the US are about five times higher, yet Canadians have slightly better life expectancy and infant mortality rates.

(I know much is made of Canadians coming to the US for health care, but why would Canada have a little used neonatal unit that statistically is going to perform worse than a highly utilized US unit where the volume of infant patients hones the skills of the staff. Maybe the question is why does the US need so many neonatal units - is it a lack of prenatal care because such care is considered overuse of the health care system in the US, but preventative care in Canada?)

As a physicist, I learned that you started with a hypothesis and then moved to theory after the evidence show the hypothesis reflects reality. While physicists do lab experiements, most of the great theories have been accepted only by passive observation.

Perhaps you intend to say that our current insure some and don't insure other system is unsustainable and that reform won't insure everyone. But you can't say that a hodgepodge system can't perform much better because one merely needs to look at Switzerland, France, Japan, which all have systems similar to reform proposals, to find much lower costs and much lower growth in costs and better health outcomes.

But perhaps you can point to a nation without 3rd party payments for health care that would convince the typical American that this is a much better model. All the references to Canada point out how much better its health care system is when the arguments are fully examined.

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