The_Orlonater
06-22-2009, 11:09 AM
Moral Health Care vs. “Universal Health Care”
Lin Zinser and Paul Hsieh
(Part 1) (I'm splitting the article up into parts)
Although American scientists, doctors, and businessmen have produced the most advanced medical technology in the world, American health care is in a state of crisis. Technologically, we are surrounded by medical marvels: New “clot buster” drugs enable patients to survive heart attacks that once would have been fatal; new forms of “keyhole surgery” enable patients with appendicitis to be treated and discharged within twenty-four hours, whereas previously they would have spent a week in the hospital; advances in cancer treatment enabled bicyclist Lance Armstrong to beat a testicular cancer, which, had he lived fifty years ago, would have killed him; and so on.
From an economic perspective, however, such medical treatments are increasingly out of reach to many Americans. Health care costs, as reported by the New York Times, are rising twice as fast as inflation.1 And health insurance, as reported by USA Today, “is becoming increasingly unaffordable for many employers and working people.”2 A decreasing percentage of employers are offering health insurance benefits to their workers, and many of those who are offering benefits are requiring their employees to pay a greater percentage of the costs.3 The U.S. Census Bureau reported in 2007 that nearly forty-seven million Americans had no health insurance, a sharp increase of ten million people from a mere fifteen years earlier.4 In short, there is a major disconnect between existing life-saving medical technology and the ability of Americans to afford it.
This discord is affecting doctors as well. The American Medical Association warns physicians that, due to the lack of affordable health insurance, “more patients will delay treatment and . . . doctors will likely see more uncompensated care.”5 Hence, each year doctors are working harder and harder but making less and less money, resulting in a “critical level” of stress and burnout. According to a recent survey of doctors, “30 to 40 percent of practicing physicians would not choose to enter the medical profession if they were deciding on a career again, and an even higher percentage would not encourage their children to pursue a medical career.”6
Total spending on health care in the United States amounts to nearly 17 percent of the entire economy, and this is expected to rise to 20 percent by 2015, “with annual spending consistently growing faster than the overall economy.”7 Because of skyrocketing health care costs, the U.S. federal Medicare trust fund is expected to go bankrupt in 2019, less than twelve years from now, potentially leaving millions of elderly Americans without health insurance coverage.8 American health care is in dire straits and will continue to worsen—unless Americans demand fundamental political change to reverse the trend. Unfortunately, the kinds of changes currently being proposed by politicians will only exacerbate the problem.
Politicians from across the political spectrum, including Democratic presidential candidate Hillary Clinton and Republican candidate Mitt Romney, have argued that the government should guarantee “universal coverage” to all Americans, making health care a “right.”9 And politicians are not alone; numerous businessmen, union leaders, and insurance executives are united in saying that this will solve our problems.10
It will not.
Contrary to claims that government-imposed “universal health care” would solve America’s health care problems, it would in fact destroy American medicine and countless lives along with it. The goal of “universal health care” (a euphemism for socialized medicine) is both immoral and impractical; it violates the rights of businessmen, doctors, and patients to act on their own judgment—which, in turn, throttles their ability to produce, administer, or purchase the goods and services in question. To show this, we will first examine the nature and history of government involvement in health insurance and medicine. Then we will consider attempts in other countries and various U.S. states to solve these problems through further government programs. Finally, we will show that the only viable long-term solution to the problems in question is to convert to a fully free market in health care and health insurance.
Government Involvement in Health Insurance
Although health care and health insurance are often conflated, there is a crucial difference between the two. Whereas health care consists of the actual goods and services necessary for medical care, health insurance is one means of affording such care. The two are closely related but distinct, as are the services of an auto-body repair shop and an automobile insurance company.
Unlike those in more openly socialist countries who obtain health insurance directly from the government, Americans typically purchase health insurance from increasingly government-controlled insurance corporations, giving health insurance in America the veneer of a free-market industry. Behind the veneer, however, the industry is subject to countless state and federal laws, regulations, and taxes—which do not apply to all insurance companies equally.
In addition to taxing insurance companies on the premiums they collect, states typically require them to set aside monetary “reserves” to cover future claims. But some companies have been exempted from these taxes and requirements. During the Great Depression, hospitals and doctors organized their own insurance companies, known respectively as Blue Cross and Blue Shield (or “the Blues”). The Blues lobbied and convinced the states to treat them as nonprofit charity corporations rather than “for-profit” insurance companies, on the grounds that they were organized by doctors and hospitals. The Blues also requested and received tax-exempt status from the federal government. In return for their nonprofit status, the Blues agreed to offer health insurance on the basis of “community rating,” which meant that every customer would pay the same premium, regardless of age, sex, health history, lifestyle choices, or regional demographics.11 (This was occasionally modified to reflect different premiums for age and location and was then called “modified community rating.”)
Commercial insurers—who were still required to pay taxes, establish reserves, and adhere to other state insurance regulations—had difficulty competing with the Blues, which, by the 1950s, together were the largest provider of health insurance in America.12
The primary goal of the Blues was to obtain steady income for their member doctors and hospitals by guaranteeing that they received payment for all the services they provided. Their strategy was to provide coverage for all expenses—even routine, ordinary, easily affordable medical services. In contrast to the original purpose of health insurance—which was to protect against rare, unforeseen, catastrophic expenses that could bankrupt a family—the Blues turned health insurance into a form of pre-paid medical care in which the insurance company (rather than patients) would pay doctors and hospitals for all medical services—catastrophic, routine, and everything in between—on a cost-plus basis. In an effort to compete with the Blues, more and more for-profit insurance companies offered similar plans, and the model of third-party insurance plans paying the providers directly with little or no input from the patient—and paying for routine care through insurance—became entrenched. This new model was a disaster in the making. In addition to minimizing incentives for insured customers to comparison shop for medical services, it also minimized incentives for doctors and hospitals to compete on price.13
The model created by the Blues and followed by commercial insurers was not the result of free-market thinking and competition. It was a direct result of government meddling and intervention, giving preferential treatment and economic advantages to one insurer (and its health plans) over others. This initial distortion of the health insurance market was exacerbated by the 1942 Stabilization Act, passed during World War II. This act froze wages nationwide but allowed employers to provide or increase employee benefits such as health insurance, since benefits were not considered wages under the Act. In 1943, in response to the Act, the IRS decreed that health insurance premiums paid by employers are not taxable income to employees and are therefore exempt from federal income tax. The IRS further decreed that health insurance premiums are a legitimate cost of doing business and can be deducted from the employer’s taxable income.14 These decrees were later codified into the Internal Revenue Code of 1954.
These income tax laws are largely responsible for the explosive growth in employer-purchased health insurance. In 1939, only 6 percent of the population had health insurance of any kind, and only a small fraction of those insured had employer-sponsored health insurance.15 By 1960, 18 percent of the population was insured under an employer group plan, and that percentage grew to almost 70 percent of the insured by 1980.16 The percentage has since declined, but even today about 60 percent of insured Americans obtain health insurance through their employer.17
This preferential government treatment of Blue Cross and Blue Shield over other insurance plans, combined with the tax breaks to recipients of employer-sponsored health insurance plans, has wreaked havoc in the American health insurance industry in myriad ways.
When employers pay for health insurance, employees tend to remain largely unaware of the costs involved. And even if they are aware of the costs, because the insurance is paid for with pretax dollars, employees cannot as easily compare its value to that of other benefits such as vacation time, personal days, or retirement savings. Further, because employer-paid health insurance premiums are not taxed as income, many employees come to think of them as a normal condition or an entitlement of employment and feel shortchanged when the employer tries to shift part of the cost to them.
Because employees do not own their plans, and because the employer is insuring a group without regard to any one individual’s condition, individuals with employer-purchased policies have little or no say about the policy under which they will be insured. As the Joint Economic Committee of the U.S. Senate reports, nearly four out of ten workers with employer coverage have no choice of health plans, and less than half have a choice of more than two plans.18
Having not been in charge of evaluating, comparing, or selecting their health insurance plans—having paid little or no attention to the various costs involved or the types of benefits offered—many employees, when given a choice, opt for “smaller” out-of-pocket costs and “greater” benefits, and grumble when the former increase or the latter decrease.
Whereas people generally keep the same auto or homeowners insurance for many years, employees rarely have the same health insurance for more than two or three years, even while remaining with the same employer, because the employer chooses and changes the plans at his discretion, usually with an eye toward minimizing premium costs. Unlike auto insurance policies, under which the insurers often give significant discounts to safe owner-drivers in order to retain them as long-term customers, under employer-sponsored health insurance, the employers, not the employees, are the customers, and there is little, if any, financial incentive for insurers to build long-term relationships with the employees.
Another drawback to employer-paid insurance policies is that they make it difficult for employees to keep sensitive health issues from employers. Many large employers are self-insured, which means that the employer sets aside money it would have paid as insurance premiums, and, instead, directly pays the claims of its employees (and their families). Generally, the employer buys a catastrophic policy or a reinsurance policy for losses in excess of a huge deductible. In those cases, the employer/insurer is very much aware of every dollar that is spent for any claims, and, because it is paying the bills, may even have access to all of an employee’s (or his family’s) medical information.
Additionally, the tax waiver for employer-paid health insurance has tied workers to their employers in a damaging way. Many workers with preexisting conditions or serious chronic illnesses—or who have spouses or children with such conditions and illnesses—stay in less than desirable jobs solely to avoid the risk of changing or losing their health insurance. Currently, one out of seven Americans says he needs to remain in his current job rather than take a new job in order to keep his health insurance benefits.19
Employer-paid insurance has also been hard on employers. As health insurance costs have risen faster than other costs, premium increases amount to an increase in wage costs disproportionate to revenue increases and independent of employee productivity. This is the reason that many employers are cutting back the amount of money they spend on health insurance, trimming benefit packages, increasing employee co-pays, and requiring employees to pay a larger portion of the actual insurance cost.
Further, as indicated earlier, employer-sponsored insurance treats a large minority of the population unfairly through unequal tax laws. Whereas employees with an employer-paid health plan get their benefits tax-free, individuals who purchase health insurance on their own do so with after-tax dollars. Consequently, a person buying an individual policy may pay up to 30 percent more (depending on his tax bracket) for the same policy benefits.
Given the existing tax burden on Americans and their justified efforts to legally shield their money from tax collectors, the tax-exempt nature of employee-paid health insurance further raises the costs of health insurance. To understand this, consider that homeowners generally pay for their own house maintenance such as lawn work, painting, and remodeling. Routine maintenance is not covered by homeowners insurance; only damages resulting from a tornado, fire, vandals, or some other catastrophic event are covered. But suppose the government suddenly decreed that it would exempt from income taxes any money spent on homeowners insurance. This would reduce taxes for insurance-paid repairs. Accordingly, people would seek insurance policies that cover routine home maintenance, such as painting, carpet replacement, and fence and deck maintenance—and insurers would provide them. Although these new policies would cost more, they would seem on the surface to be a bargain because homeowners would be spending untaxed dollars. Demand for home repairs would skyrocket. More money would be spent on home maintenance, and the cost of home insurance would quickly outpace that of other goods and services. To remain in business, home insurers would limit coverage for more expensive repairs. Simultaneously, to curry favor with their constituents, politicians would seek mandates to expand coverage, and, of course, they would demand further regulations to make sure that poor homeowners had “access” to homeowners insurance. This is precisely what has happened with health insurance.
Just as spending money in that way would make economic sense under that tax law, so using employer-sponsored health insurance to pay for small claims makes sense under the current tax laws. David Henderson, who served on President Reagan’s Council of Economic Advisers as a senior economist for health care policy, observes:
The employee is better off to charge a $50 doctor bill to the insurance company—even if the [insurance] company spends $20 to process it—and have the employer pay the extra $70 in a higher premium to cover the bill and the processing cost. The alternative—having the employer pay [the employee] an extra $70 in cash–yields the employee only about $42 [because of federal income, social security, and Medicare taxes] and costs the employer $75.36 ($70 + $5.36, the employer’s portion of the social security and Medicare tax on $70).20
The current system of employer-sponsored health insurance is a catastrophe, and it is a result of government intervention in the free market. Such intervention violates the rights of insurance companies, employers, and consumers by granting special government favors to certain insurance companies or plans, by forcibly eliminating options that would exist in a free market, and by forcibly seizing money from insurers and the insured. It artificially places employers and insurers between doctors and patients and leads to innumerable economic distortions. Employers and insurers dictate everything from which doctors and specialists employees will be permitted to visit under the plan, to the kinds of benefits that will and will not be provided, to the co-payments and deductibles that will be paid. Because third parties are paying for both insurance and health care, the employee-patient-customer has little choice in what kind of insurance or who provides the health care he receives—and plenty of incentive to visit a doctor anytime he has a runny nose. The fact that third parties pay for all health care increases the administrative costs for doctors as well as insurers, and those costs are passed on to consumers.
These problems were further exacerbated in the mid-1960s with the creation of two federal insurance programs: Medicare (for the aged) and Medicaid (for the poor). Both had major effects on the private insurance market. When Medicare was proposed, advocates claimed that it would not interfere with the doctor-patient relationship or patient choice—it would merely pay the bills. In fact, however, it has drastically changed the doctor-patient relationship and sharply limited patient choice. Medicare determines what procedures and treatments are “appropriate” and “medically necessary.” It also determines the monetary “value” of a diagnosis, treatment, or procedure. Both patient and doctor must abide by Medicare’s decision; and, despite low Medicare reimbursements, doctors cannot accept any money from a patient beyond what Medicare pays, even if the patient so desires.21
Doctors are paid so poorly by Medicare and burdened by so much paperwork that about 28 percent are turning away some or all new Medicare patients.22 Hence, newer Medicare patients often cannot find a doctor in their area who will treat them at all. Such “insurance” does these patients no good. Nor do they have any private insurance alternative. With the insignificant exception of Medigap policies, Medicare has eliminated the private insurance market for the elderly, and many elderly patients are left with no way to seek medical treatment except through hospital emergency rooms or charity. (A person who purchases a private policy prior to turning sixty-five may be able to retain it after turning sixty-five, but such a policy will then only supplement Medicare.)
Medicaid is a bigger problem. Medicaid reimbursement rates for doctors and other providers are generally even lower than they are for Medicare, and many doctors opt out of treating Medicaid patients. Only about 52 percent of doctors accept new Medicaid patients, whereas 99 percent will accept new private insurance patients.23 Moreover, many doctors who do take Medicaid patients limit the number of Medicaid patients they see each week so that they can control their income loss. It is not unusual for a Medicaid patient to have no family doctor because he cannot find a nearby doctor who will treat him, a problem that is especially severe in rural areas. As a result, for years Medicaid patients have used emergency rooms as their regular source of treatment: Emergency rooms charge no co-pay or deductible; they perform tests right away; they generally provide high-quality health care; and they cannot refuse patients. (We will elaborate on this last point later.)
In financial terms, Medicare and Medicaid are bankrupting our state and federal governments. These two federal insurance programs compose nearly 20 percent of the federal budget, and the percentage keeps rising. In addition, for most states Medicaid is the largest single budget item, averaging 22 percent of states’ spending. Medicaid is generally administered by the state, with matching federal tax dollars. As a result, states seek to expand Medicaid coverage and other medical programs such as SCHIP (State Children’s Health Insurance Program) in order to reap more of the matching federal dollars. Eligibility for these programs continues to expand, and, in some states, families with incomes as high as $55,000 are now eligible for Medicaid benefits. Federal, state, and local governments now pay 50 percent of every dollar spent on health care, even though government health insurance covers only 27 percent of the population.24
By tying health insurance to employment through the income tax law—by providing preferential legal status and tax treatment to nonprofit companies and their payment plans for routine services—and by establishing government health insurance for the aged and the poor in the form of Medicare and Medicaid, the government has created a system that violates individual rights and fosters an entitlement mentality. Consequently, while more and more of their rights are being violated, more and more Americans are coming to expect health insurance to cover everything—from routine care to catastrophic care to screening exams to diagnosis to treatment for chronic conditions to rehabilitation—for everyone, without any limitations, and at very little out-of-pocket cost to those “covered.” To grasp the absurdity of this, imagine the government applying the same kind and degree of force against producers of other life-or-death commodities, such as food, clothing, and shelter. Then again, no imagination is necessary, because that is precisely what the Soviet Union did.
Governments have further interfered with the free market by means of health care mandates—governmental decrees regarding how health care providers and patients can or must act. There are essentially four kinds of mandates, and they are applied to three different markets in health insurance: the large group market (generally more than fifty members), the small group market (generally one or two to fifty members), and individual market (single individuals or a family). Let us take a look at each of these mandates.
“Benefit mandates” dictate (1) the range of benefits—such as the kind of treatments and procedures and diagnostic tests—that insurance companies must provide, (2) the type of health care providers that may be included under a given policy, and (3) who must be covered under the policy. For example, some states mandate that all individual health insurance policies include alcohol rehabilitation benefits (a kind of treatment) or naturopathic benefits (a type of provider)—even for customers who do not want and will never use those benefits. Customers cannot contract for just the benefits they want, and insurers must price policies with the expectation that policyholders might use any covered service.
There are as many as 1,900 separate mandates across the country, and more than half the states have 35 or more mandates, with Idaho having the fewest at 14 and Maryland having the most at 62.25 These mandates violate the rights of insurers and customers to choose their own policies and coverage. They limit an insurance company’s ability to offer inexpensive and reduced benefit packages for the young and healthy, or to tailor policies to a person’s needs or wants, or to offer low-cost, high-deductible policies that cover only catastrophic events. They force unwanted coverage upon customers, raise the costs of each insurance policy involved, and retard innovation in the marketplace.
Benefit mandates also serve as a giant magnet for special interest groups. Groups of people who suffer from a particular condition have lobbied successfully to force insurers to cover their condition. For instance, in various states special interests have successfully campaigned for coverage of autism diagnosis and treatment, cervical cancer vaccine, mental health benefits, alcoholism treatments, and morbid obesity treatments. They have required insurance companies to provide coverage for “children” up to age thirty. Other special interests include vendors such as massage therapists, pastoral counselors, and athletic trainers who have lobbied successfully for their services to be covered by health insurance.
Although insurance companies should be free to offer such coverage, no one—including the government—has a right to force them to do so. This is the health care equivalent of the government requiring all homeowners insurance policies to cover theft of coin collections, even though most homeowners do not own coin collections.
Benefit mandates violate the rights of insurers and the insured, and they increase the cost of health insurance policies. But they are not the most onerous of the mandates.
“Mandatory guaranteed issue” requires that an insurance company in a given market grant a policy to anyone who applies. Federal law requires that small-group policies be guaranteed issue.26 In this market, it requires that an insurer accept any group that applies for insurance and everyone in that group, regardless of their health condition or lifestyle choice. For example, under guaranteed issue, a health insurer accepting an employer group must accept a motorcyclist employee who has had several serious injuries from multiple accidents due to reckless riding. Likewise, another employee who is fifty pounds overweight, smokes three packs of cigarettes a day, and has high blood pressure, diabetes, and a heart condition cannot be refused. Since insurers cannot exclude anyone who already suffers from serious health problems or who chooses to risk his health with poor lifestyle choices, they must price their policies accordingly.
When fully voluntary, guaranteed issue is not necessarily a bad option, and many health insurance companies offer such voluntary policies. But these plans limit coverage (e.g., a policy might limit hospital coverage to $1,000 per day) and charge higher premiums for the policies, because most people seeking them have serious health problems and are not economically insurable otherwise. But when government violates individual rights by requiring mandatory issue, insurance companies are forced to choose between two economically unacceptable alternatives: (1) raising everyone’s premiums, which will, in turn, cause the less affluent individuals or employers to forgo insurance; or (2) ceasing to do business in that market.
Several states, including Kentucky, Maine, and Washington, have introduced mandatory guaranteed issue into their individual insurance markets*. After Kentucky introduced the mandate, forty-five of fifty insurers withdrew from the market there, which, in turn, led to fewer options and higher costs for consumers. In 2000, Kentucky eliminated the mandate, hoping to recapture the competition and choice offered by its lost insurance market, and since then several of the insurers have returned. Maine is now down to two insurance companies, and rates have increased 124 percent in six years. The state of Washington has seen the number of insurers decline from thirty to seven while costs have increased.27
All of this follows logically from the nature of mandatory guaranteed issue. Forcing insurers to accept all applicants means that they must either increase their rates to pay for sicker customers who will certainly want the insurance and have many claims—or leave that state’s market and go where they can earn a profit.
The same logic applies to “guaranteed renewability mandates,” which require that an insurance company renew a policy automatically as long as the premiums are paid. Guaranteed renewability is part of the federal law on small-group policies, and many states apply it to individual policies as well. Again, when an insurance company cannot refuse high-risk consumers, it has to charge higher premiums or drop out of the market.
Another common government mandate is “guaranteed community rating.” This means that all persons in a given community must be charged the same premium. Recall that the Blues agreed to offer community rating in exchange for nonprofit charity status when the companies were first formed. Mandatory community rating prohibits insurance companies from considering a person’s health history or present condition, or even his height and weight as a factor in issuing the policy. One consequence is that the young and healthy—those eighteen to thirty-five years of age with no medical problems—will pay the exact same premium as a sixty-year-old person with several chronic health conditions. This prevents insurers from offering lower rates to those who act to preserve and protect their health.
Lin Zinser and Paul Hsieh
(Part 1) (I'm splitting the article up into parts)
Although American scientists, doctors, and businessmen have produced the most advanced medical technology in the world, American health care is in a state of crisis. Technologically, we are surrounded by medical marvels: New “clot buster” drugs enable patients to survive heart attacks that once would have been fatal; new forms of “keyhole surgery” enable patients with appendicitis to be treated and discharged within twenty-four hours, whereas previously they would have spent a week in the hospital; advances in cancer treatment enabled bicyclist Lance Armstrong to beat a testicular cancer, which, had he lived fifty years ago, would have killed him; and so on.
From an economic perspective, however, such medical treatments are increasingly out of reach to many Americans. Health care costs, as reported by the New York Times, are rising twice as fast as inflation.1 And health insurance, as reported by USA Today, “is becoming increasingly unaffordable for many employers and working people.”2 A decreasing percentage of employers are offering health insurance benefits to their workers, and many of those who are offering benefits are requiring their employees to pay a greater percentage of the costs.3 The U.S. Census Bureau reported in 2007 that nearly forty-seven million Americans had no health insurance, a sharp increase of ten million people from a mere fifteen years earlier.4 In short, there is a major disconnect between existing life-saving medical technology and the ability of Americans to afford it.
This discord is affecting doctors as well. The American Medical Association warns physicians that, due to the lack of affordable health insurance, “more patients will delay treatment and . . . doctors will likely see more uncompensated care.”5 Hence, each year doctors are working harder and harder but making less and less money, resulting in a “critical level” of stress and burnout. According to a recent survey of doctors, “30 to 40 percent of practicing physicians would not choose to enter the medical profession if they were deciding on a career again, and an even higher percentage would not encourage their children to pursue a medical career.”6
Total spending on health care in the United States amounts to nearly 17 percent of the entire economy, and this is expected to rise to 20 percent by 2015, “with annual spending consistently growing faster than the overall economy.”7 Because of skyrocketing health care costs, the U.S. federal Medicare trust fund is expected to go bankrupt in 2019, less than twelve years from now, potentially leaving millions of elderly Americans without health insurance coverage.8 American health care is in dire straits and will continue to worsen—unless Americans demand fundamental political change to reverse the trend. Unfortunately, the kinds of changes currently being proposed by politicians will only exacerbate the problem.
Politicians from across the political spectrum, including Democratic presidential candidate Hillary Clinton and Republican candidate Mitt Romney, have argued that the government should guarantee “universal coverage” to all Americans, making health care a “right.”9 And politicians are not alone; numerous businessmen, union leaders, and insurance executives are united in saying that this will solve our problems.10
It will not.
Contrary to claims that government-imposed “universal health care” would solve America’s health care problems, it would in fact destroy American medicine and countless lives along with it. The goal of “universal health care” (a euphemism for socialized medicine) is both immoral and impractical; it violates the rights of businessmen, doctors, and patients to act on their own judgment—which, in turn, throttles their ability to produce, administer, or purchase the goods and services in question. To show this, we will first examine the nature and history of government involvement in health insurance and medicine. Then we will consider attempts in other countries and various U.S. states to solve these problems through further government programs. Finally, we will show that the only viable long-term solution to the problems in question is to convert to a fully free market in health care and health insurance.
Government Involvement in Health Insurance
Although health care and health insurance are often conflated, there is a crucial difference between the two. Whereas health care consists of the actual goods and services necessary for medical care, health insurance is one means of affording such care. The two are closely related but distinct, as are the services of an auto-body repair shop and an automobile insurance company.
Unlike those in more openly socialist countries who obtain health insurance directly from the government, Americans typically purchase health insurance from increasingly government-controlled insurance corporations, giving health insurance in America the veneer of a free-market industry. Behind the veneer, however, the industry is subject to countless state and federal laws, regulations, and taxes—which do not apply to all insurance companies equally.
In addition to taxing insurance companies on the premiums they collect, states typically require them to set aside monetary “reserves” to cover future claims. But some companies have been exempted from these taxes and requirements. During the Great Depression, hospitals and doctors organized their own insurance companies, known respectively as Blue Cross and Blue Shield (or “the Blues”). The Blues lobbied and convinced the states to treat them as nonprofit charity corporations rather than “for-profit” insurance companies, on the grounds that they were organized by doctors and hospitals. The Blues also requested and received tax-exempt status from the federal government. In return for their nonprofit status, the Blues agreed to offer health insurance on the basis of “community rating,” which meant that every customer would pay the same premium, regardless of age, sex, health history, lifestyle choices, or regional demographics.11 (This was occasionally modified to reflect different premiums for age and location and was then called “modified community rating.”)
Commercial insurers—who were still required to pay taxes, establish reserves, and adhere to other state insurance regulations—had difficulty competing with the Blues, which, by the 1950s, together were the largest provider of health insurance in America.12
The primary goal of the Blues was to obtain steady income for their member doctors and hospitals by guaranteeing that they received payment for all the services they provided. Their strategy was to provide coverage for all expenses—even routine, ordinary, easily affordable medical services. In contrast to the original purpose of health insurance—which was to protect against rare, unforeseen, catastrophic expenses that could bankrupt a family—the Blues turned health insurance into a form of pre-paid medical care in which the insurance company (rather than patients) would pay doctors and hospitals for all medical services—catastrophic, routine, and everything in between—on a cost-plus basis. In an effort to compete with the Blues, more and more for-profit insurance companies offered similar plans, and the model of third-party insurance plans paying the providers directly with little or no input from the patient—and paying for routine care through insurance—became entrenched. This new model was a disaster in the making. In addition to minimizing incentives for insured customers to comparison shop for medical services, it also minimized incentives for doctors and hospitals to compete on price.13
The model created by the Blues and followed by commercial insurers was not the result of free-market thinking and competition. It was a direct result of government meddling and intervention, giving preferential treatment and economic advantages to one insurer (and its health plans) over others. This initial distortion of the health insurance market was exacerbated by the 1942 Stabilization Act, passed during World War II. This act froze wages nationwide but allowed employers to provide or increase employee benefits such as health insurance, since benefits were not considered wages under the Act. In 1943, in response to the Act, the IRS decreed that health insurance premiums paid by employers are not taxable income to employees and are therefore exempt from federal income tax. The IRS further decreed that health insurance premiums are a legitimate cost of doing business and can be deducted from the employer’s taxable income.14 These decrees were later codified into the Internal Revenue Code of 1954.
These income tax laws are largely responsible for the explosive growth in employer-purchased health insurance. In 1939, only 6 percent of the population had health insurance of any kind, and only a small fraction of those insured had employer-sponsored health insurance.15 By 1960, 18 percent of the population was insured under an employer group plan, and that percentage grew to almost 70 percent of the insured by 1980.16 The percentage has since declined, but even today about 60 percent of insured Americans obtain health insurance through their employer.17
This preferential government treatment of Blue Cross and Blue Shield over other insurance plans, combined with the tax breaks to recipients of employer-sponsored health insurance plans, has wreaked havoc in the American health insurance industry in myriad ways.
When employers pay for health insurance, employees tend to remain largely unaware of the costs involved. And even if they are aware of the costs, because the insurance is paid for with pretax dollars, employees cannot as easily compare its value to that of other benefits such as vacation time, personal days, or retirement savings. Further, because employer-paid health insurance premiums are not taxed as income, many employees come to think of them as a normal condition or an entitlement of employment and feel shortchanged when the employer tries to shift part of the cost to them.
Because employees do not own their plans, and because the employer is insuring a group without regard to any one individual’s condition, individuals with employer-purchased policies have little or no say about the policy under which they will be insured. As the Joint Economic Committee of the U.S. Senate reports, nearly four out of ten workers with employer coverage have no choice of health plans, and less than half have a choice of more than two plans.18
Having not been in charge of evaluating, comparing, or selecting their health insurance plans—having paid little or no attention to the various costs involved or the types of benefits offered—many employees, when given a choice, opt for “smaller” out-of-pocket costs and “greater” benefits, and grumble when the former increase or the latter decrease.
Whereas people generally keep the same auto or homeowners insurance for many years, employees rarely have the same health insurance for more than two or three years, even while remaining with the same employer, because the employer chooses and changes the plans at his discretion, usually with an eye toward minimizing premium costs. Unlike auto insurance policies, under which the insurers often give significant discounts to safe owner-drivers in order to retain them as long-term customers, under employer-sponsored health insurance, the employers, not the employees, are the customers, and there is little, if any, financial incentive for insurers to build long-term relationships with the employees.
Another drawback to employer-paid insurance policies is that they make it difficult for employees to keep sensitive health issues from employers. Many large employers are self-insured, which means that the employer sets aside money it would have paid as insurance premiums, and, instead, directly pays the claims of its employees (and their families). Generally, the employer buys a catastrophic policy or a reinsurance policy for losses in excess of a huge deductible. In those cases, the employer/insurer is very much aware of every dollar that is spent for any claims, and, because it is paying the bills, may even have access to all of an employee’s (or his family’s) medical information.
Additionally, the tax waiver for employer-paid health insurance has tied workers to their employers in a damaging way. Many workers with preexisting conditions or serious chronic illnesses—or who have spouses or children with such conditions and illnesses—stay in less than desirable jobs solely to avoid the risk of changing or losing their health insurance. Currently, one out of seven Americans says he needs to remain in his current job rather than take a new job in order to keep his health insurance benefits.19
Employer-paid insurance has also been hard on employers. As health insurance costs have risen faster than other costs, premium increases amount to an increase in wage costs disproportionate to revenue increases and independent of employee productivity. This is the reason that many employers are cutting back the amount of money they spend on health insurance, trimming benefit packages, increasing employee co-pays, and requiring employees to pay a larger portion of the actual insurance cost.
Further, as indicated earlier, employer-sponsored insurance treats a large minority of the population unfairly through unequal tax laws. Whereas employees with an employer-paid health plan get their benefits tax-free, individuals who purchase health insurance on their own do so with after-tax dollars. Consequently, a person buying an individual policy may pay up to 30 percent more (depending on his tax bracket) for the same policy benefits.
Given the existing tax burden on Americans and their justified efforts to legally shield their money from tax collectors, the tax-exempt nature of employee-paid health insurance further raises the costs of health insurance. To understand this, consider that homeowners generally pay for their own house maintenance such as lawn work, painting, and remodeling. Routine maintenance is not covered by homeowners insurance; only damages resulting from a tornado, fire, vandals, or some other catastrophic event are covered. But suppose the government suddenly decreed that it would exempt from income taxes any money spent on homeowners insurance. This would reduce taxes for insurance-paid repairs. Accordingly, people would seek insurance policies that cover routine home maintenance, such as painting, carpet replacement, and fence and deck maintenance—and insurers would provide them. Although these new policies would cost more, they would seem on the surface to be a bargain because homeowners would be spending untaxed dollars. Demand for home repairs would skyrocket. More money would be spent on home maintenance, and the cost of home insurance would quickly outpace that of other goods and services. To remain in business, home insurers would limit coverage for more expensive repairs. Simultaneously, to curry favor with their constituents, politicians would seek mandates to expand coverage, and, of course, they would demand further regulations to make sure that poor homeowners had “access” to homeowners insurance. This is precisely what has happened with health insurance.
Just as spending money in that way would make economic sense under that tax law, so using employer-sponsored health insurance to pay for small claims makes sense under the current tax laws. David Henderson, who served on President Reagan’s Council of Economic Advisers as a senior economist for health care policy, observes:
The employee is better off to charge a $50 doctor bill to the insurance company—even if the [insurance] company spends $20 to process it—and have the employer pay the extra $70 in a higher premium to cover the bill and the processing cost. The alternative—having the employer pay [the employee] an extra $70 in cash–yields the employee only about $42 [because of federal income, social security, and Medicare taxes] and costs the employer $75.36 ($70 + $5.36, the employer’s portion of the social security and Medicare tax on $70).20
The current system of employer-sponsored health insurance is a catastrophe, and it is a result of government intervention in the free market. Such intervention violates the rights of insurance companies, employers, and consumers by granting special government favors to certain insurance companies or plans, by forcibly eliminating options that would exist in a free market, and by forcibly seizing money from insurers and the insured. It artificially places employers and insurers between doctors and patients and leads to innumerable economic distortions. Employers and insurers dictate everything from which doctors and specialists employees will be permitted to visit under the plan, to the kinds of benefits that will and will not be provided, to the co-payments and deductibles that will be paid. Because third parties are paying for both insurance and health care, the employee-patient-customer has little choice in what kind of insurance or who provides the health care he receives—and plenty of incentive to visit a doctor anytime he has a runny nose. The fact that third parties pay for all health care increases the administrative costs for doctors as well as insurers, and those costs are passed on to consumers.
These problems were further exacerbated in the mid-1960s with the creation of two federal insurance programs: Medicare (for the aged) and Medicaid (for the poor). Both had major effects on the private insurance market. When Medicare was proposed, advocates claimed that it would not interfere with the doctor-patient relationship or patient choice—it would merely pay the bills. In fact, however, it has drastically changed the doctor-patient relationship and sharply limited patient choice. Medicare determines what procedures and treatments are “appropriate” and “medically necessary.” It also determines the monetary “value” of a diagnosis, treatment, or procedure. Both patient and doctor must abide by Medicare’s decision; and, despite low Medicare reimbursements, doctors cannot accept any money from a patient beyond what Medicare pays, even if the patient so desires.21
Doctors are paid so poorly by Medicare and burdened by so much paperwork that about 28 percent are turning away some or all new Medicare patients.22 Hence, newer Medicare patients often cannot find a doctor in their area who will treat them at all. Such “insurance” does these patients no good. Nor do they have any private insurance alternative. With the insignificant exception of Medigap policies, Medicare has eliminated the private insurance market for the elderly, and many elderly patients are left with no way to seek medical treatment except through hospital emergency rooms or charity. (A person who purchases a private policy prior to turning sixty-five may be able to retain it after turning sixty-five, but such a policy will then only supplement Medicare.)
Medicaid is a bigger problem. Medicaid reimbursement rates for doctors and other providers are generally even lower than they are for Medicare, and many doctors opt out of treating Medicaid patients. Only about 52 percent of doctors accept new Medicaid patients, whereas 99 percent will accept new private insurance patients.23 Moreover, many doctors who do take Medicaid patients limit the number of Medicaid patients they see each week so that they can control their income loss. It is not unusual for a Medicaid patient to have no family doctor because he cannot find a nearby doctor who will treat him, a problem that is especially severe in rural areas. As a result, for years Medicaid patients have used emergency rooms as their regular source of treatment: Emergency rooms charge no co-pay or deductible; they perform tests right away; they generally provide high-quality health care; and they cannot refuse patients. (We will elaborate on this last point later.)
In financial terms, Medicare and Medicaid are bankrupting our state and federal governments. These two federal insurance programs compose nearly 20 percent of the federal budget, and the percentage keeps rising. In addition, for most states Medicaid is the largest single budget item, averaging 22 percent of states’ spending. Medicaid is generally administered by the state, with matching federal tax dollars. As a result, states seek to expand Medicaid coverage and other medical programs such as SCHIP (State Children’s Health Insurance Program) in order to reap more of the matching federal dollars. Eligibility for these programs continues to expand, and, in some states, families with incomes as high as $55,000 are now eligible for Medicaid benefits. Federal, state, and local governments now pay 50 percent of every dollar spent on health care, even though government health insurance covers only 27 percent of the population.24
By tying health insurance to employment through the income tax law—by providing preferential legal status and tax treatment to nonprofit companies and their payment plans for routine services—and by establishing government health insurance for the aged and the poor in the form of Medicare and Medicaid, the government has created a system that violates individual rights and fosters an entitlement mentality. Consequently, while more and more of their rights are being violated, more and more Americans are coming to expect health insurance to cover everything—from routine care to catastrophic care to screening exams to diagnosis to treatment for chronic conditions to rehabilitation—for everyone, without any limitations, and at very little out-of-pocket cost to those “covered.” To grasp the absurdity of this, imagine the government applying the same kind and degree of force against producers of other life-or-death commodities, such as food, clothing, and shelter. Then again, no imagination is necessary, because that is precisely what the Soviet Union did.
Governments have further interfered with the free market by means of health care mandates—governmental decrees regarding how health care providers and patients can or must act. There are essentially four kinds of mandates, and they are applied to three different markets in health insurance: the large group market (generally more than fifty members), the small group market (generally one or two to fifty members), and individual market (single individuals or a family). Let us take a look at each of these mandates.
“Benefit mandates” dictate (1) the range of benefits—such as the kind of treatments and procedures and diagnostic tests—that insurance companies must provide, (2) the type of health care providers that may be included under a given policy, and (3) who must be covered under the policy. For example, some states mandate that all individual health insurance policies include alcohol rehabilitation benefits (a kind of treatment) or naturopathic benefits (a type of provider)—even for customers who do not want and will never use those benefits. Customers cannot contract for just the benefits they want, and insurers must price policies with the expectation that policyholders might use any covered service.
There are as many as 1,900 separate mandates across the country, and more than half the states have 35 or more mandates, with Idaho having the fewest at 14 and Maryland having the most at 62.25 These mandates violate the rights of insurers and customers to choose their own policies and coverage. They limit an insurance company’s ability to offer inexpensive and reduced benefit packages for the young and healthy, or to tailor policies to a person’s needs or wants, or to offer low-cost, high-deductible policies that cover only catastrophic events. They force unwanted coverage upon customers, raise the costs of each insurance policy involved, and retard innovation in the marketplace.
Benefit mandates also serve as a giant magnet for special interest groups. Groups of people who suffer from a particular condition have lobbied successfully to force insurers to cover their condition. For instance, in various states special interests have successfully campaigned for coverage of autism diagnosis and treatment, cervical cancer vaccine, mental health benefits, alcoholism treatments, and morbid obesity treatments. They have required insurance companies to provide coverage for “children” up to age thirty. Other special interests include vendors such as massage therapists, pastoral counselors, and athletic trainers who have lobbied successfully for their services to be covered by health insurance.
Although insurance companies should be free to offer such coverage, no one—including the government—has a right to force them to do so. This is the health care equivalent of the government requiring all homeowners insurance policies to cover theft of coin collections, even though most homeowners do not own coin collections.
Benefit mandates violate the rights of insurers and the insured, and they increase the cost of health insurance policies. But they are not the most onerous of the mandates.
“Mandatory guaranteed issue” requires that an insurance company in a given market grant a policy to anyone who applies. Federal law requires that small-group policies be guaranteed issue.26 In this market, it requires that an insurer accept any group that applies for insurance and everyone in that group, regardless of their health condition or lifestyle choice. For example, under guaranteed issue, a health insurer accepting an employer group must accept a motorcyclist employee who has had several serious injuries from multiple accidents due to reckless riding. Likewise, another employee who is fifty pounds overweight, smokes three packs of cigarettes a day, and has high blood pressure, diabetes, and a heart condition cannot be refused. Since insurers cannot exclude anyone who already suffers from serious health problems or who chooses to risk his health with poor lifestyle choices, they must price their policies accordingly.
When fully voluntary, guaranteed issue is not necessarily a bad option, and many health insurance companies offer such voluntary policies. But these plans limit coverage (e.g., a policy might limit hospital coverage to $1,000 per day) and charge higher premiums for the policies, because most people seeking them have serious health problems and are not economically insurable otherwise. But when government violates individual rights by requiring mandatory issue, insurance companies are forced to choose between two economically unacceptable alternatives: (1) raising everyone’s premiums, which will, in turn, cause the less affluent individuals or employers to forgo insurance; or (2) ceasing to do business in that market.
Several states, including Kentucky, Maine, and Washington, have introduced mandatory guaranteed issue into their individual insurance markets*. After Kentucky introduced the mandate, forty-five of fifty insurers withdrew from the market there, which, in turn, led to fewer options and higher costs for consumers. In 2000, Kentucky eliminated the mandate, hoping to recapture the competition and choice offered by its lost insurance market, and since then several of the insurers have returned. Maine is now down to two insurance companies, and rates have increased 124 percent in six years. The state of Washington has seen the number of insurers decline from thirty to seven while costs have increased.27
All of this follows logically from the nature of mandatory guaranteed issue. Forcing insurers to accept all applicants means that they must either increase their rates to pay for sicker customers who will certainly want the insurance and have many claims—or leave that state’s market and go where they can earn a profit.
The same logic applies to “guaranteed renewability mandates,” which require that an insurance company renew a policy automatically as long as the premiums are paid. Guaranteed renewability is part of the federal law on small-group policies, and many states apply it to individual policies as well. Again, when an insurance company cannot refuse high-risk consumers, it has to charge higher premiums or drop out of the market.
Another common government mandate is “guaranteed community rating.” This means that all persons in a given community must be charged the same premium. Recall that the Blues agreed to offer community rating in exchange for nonprofit charity status when the companies were first formed. Mandatory community rating prohibits insurance companies from considering a person’s health history or present condition, or even his height and weight as a factor in issuing the policy. One consequence is that the young and healthy—those eighteen to thirty-five years of age with no medical problems—will pay the exact same premium as a sixty-year-old person with several chronic health conditions. This prevents insurers from offering lower rates to those who act to preserve and protect their health.