April 2, 2007
By Ari Armstrong
Doesn’t it strike you as odd that we purchase life insurance, car insurance, and home insurance as individuals or families, but many of us buy health insurance through our employers? Employer-paid health insurance is neither portable nor cost effective for the insured, and it’s a constant headache for business owners.
Milton Friedman summarizes the basic history of employer-paid health insurance in his foreword to David Gratzer’s book, The Cure. The federal government imposed wage controls in WWII. “In response, employers offered inducements such as ‘free’ medical care,” Friedman writes. Then “medical care provided by the employer was made tax-exempt,” while self-paid care “was not tax-exempt.” The employer-pay system has led to “exploding costs and bureaucratization.”
Tax distortions created employer-paid health insurance, where otherwise individual insurance would have been widespread. The same tax distortions also helped push health insurance into “health insulation,” to use Arnold Kling’s phrase from a Jan. 8 essay from the Cato Institute. While insurance covers unexpected, high-cost risks, “insulation reimburses even relatively low-cost services… [and] pays for treatment even if it is commonplace or discretionary,” Kling writes.
Many people use health insurance even for routine, low-cost expenses that should never have been insured. By comparison, imagine what would happen if the government made employer-paid home and car insurance tax-exempt while taxing self-paid expenses. (Brian Schwartz describes this scenario as applied to car insurance in a riotous article available at Wakalix.com.)
Not only would more people ask their employer to provide home and car insurance, but they would ask for insurance policies that covered many more services. After all, why pay taxes on an out-of-pocket expense when the insurance covers it tax-exempt? Perhaps car insurance would start covering oil changes, new tires, and even new cars to replace old ones. Home insurance might cover roof repairs, painting, and window washing.
What would you do if your insurance covered such things? Might you be tempted to be a little less careful with your tires, paint the house a little more often (perhaps even for a change of color), and sign up for frequent window washing? Cost insulation separates the cost of services from the person using the services. Is it any wonder that health insulation has driven up the costs of medical care and provoked rationing of services?
With all the talk of “reforming” health care, to which health insurance is a central issue, perhaps it would be helpful to remind ourselves of why people started buying insurance in the first place. It makes sense to insure ourselves against unexpected, high-cost risks such as premature death, a costly disease, the destruction of our home, or a serious car wreck.
The point of insurance is to get it before we know whether we’ll need to make a claim. People pool their premiums, then whoever suffers the harm gets the payout. If everybody has the same risk, then everybody will be willing to pay the same premium. But people at a lower risk won’t agree to subsidize somebody with a higher risk. For example, a safe and healthy 25-year-old won’t voluntarily pay the same amount for a comparable life-insurance policy as is paid by an older person who has cancer and enjoys drag racing.
Insurance costs money. Every claim must be processed and verified. That’s another reason why we should insure only against unexpected, high-cost risks.
Absent government meddling, then, most people would have the incentive to purchase long-term health insurance as individuals or families, before they develop health problems. People would pay for routine services out of pocket and rely on insurance only for unexpected, costly services such as cancer treatment and major surgery. Most medical care would involve only the doctor and patient, not insurance agents and government bureaucrats.
One step in the right direction is the creation of Health Savings Accounts (HSAs), intended for use with high-deductible, individual health insurance. The Department of the Treasury summarizes: “[HSAs] were created by the Medicare bill signed by President Bush on December 8, 2003 and are designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis.”
Unfortunately, various insurance mandates by the state and federal government undermine the market for individual health insurance (as I will discuss in a future article).
When government protects rather than violates the right to contract freely for health insurance, most people will find it in their interests to purchase individual policies to cover unexpected, high-cost medical problems. Such insurance is affordable and portable. It minimizes paperwork costs. And it preserves our liberty to pursue medical services free from bureaucratic controls.
Ari Armstrong is a senior fellow with the Independence Institute and edits FreeColorado.com. He and his wife are currently applying for high-deductible health insurance in conjunction with a Health Savings Account.