Harvard professor Martin Fedlstein had an Op Ed in Thursday's Washington Post proposing a variation on the idea presented in a recent article at TheStreet.com and by Seeking Alpha contributor Charles Hugh Smith. The essence of these ideas center on the need to put cost control decisions in the hands of patients and their doctors, while providing protection from bankruptcy from occasionally very large medical expenses.
Feldstein's proposal centers on changing health insurance from a system that encourages unquestioned consumption of medical services of questionable value to a system that has medical procedures subjected to a cost/benefit analysis by the consumer (patient). Note: The preceding words are mine and are not directly stated by Feldstein.
Let Feldstein's words speak for themselves:
Private health insurance today fails to achieve these goals. It is also the primary cause of the rapid rise of health-care costs. Because employer payments for health insurance are tax-deductible for employers but not taxed to the employee, current tax rules encourage most employees to want their compensation to include the very comprehensive "first dollar" insurance that pushes up health-care spending.
A good system should not try to pay all health-care bills. That would lead to excessive demand, wasteful use of expensive technology and, inevitably, rationing in which health-care decisions are taken away from patients and their physicians. Countries that provide health care to all are forced to deny some treatments and diagnostic tests that most Americans have come to expect.
Here's a better alternative. Let's scrap the $220 billion annual health insurance tax subsidy, which is often used to buy the wrong kind of insurance, and use those budget dollars to provide insurance that protects American families from health costs that exceed 15 percent of their income.
I can hear those who have these tax-supported medical plans through their employers complaining about this. They will object to this proposal based on Obama's oft-repeated promise that "if you like your current plan you can keep it." I don't think I ever heard that you can keep your current plan and not pay for it.
Before you jump my bones as an outsider, I will disclose that for the past 40+ years I have personally benefited from having tax-favored, employer-provided, low-deductible and co-pay health insurance. I have such coverage in place today. I am not an outsider. I am an insider who realizes there is, in the final analysis, no free lunch. This arrangement is not on an equal footing with others in society. To the extent it is a free lunch, it is actually somebody elses lunch; somebody who in one way or another is paying while I enjoy the meal. Ultimately, I would argue that I also am paying for my free lunch indirectly in the long run.
The other aspect I would emphasize is this: the corporate benefit is coming out of a fixed bucket. Corporations are apportioning the compensation paid to employees to salary and benefits. For all extent and purposes, this bucket is fixed. The $220 billion tax savings for corporate health insurance plans could be retained if the health care benefit cost were paid directly to the employee. Salaries and wages are still tax deductible.
Here are some advantages:
- Tax payments by the corporation are unchanged.
- Personal income is increased. Individuals can use the increased income for health care and insurance.
- Tax policy can be implemented that will offer tax deductibility for health care expenses in a way that will encourage prudent consumption of health care services. (Compare this to the current system that offers tax breaks for wasteful consumption of health services.)
- This clears the way for implementation of a catastrophic expense insurance system that could dramatically reduce personal bankruptcies from medical expenses.
- Employee mobility is improved. The situation common today of people remaining in a position they would otherwise leave, simply to retain continuity of health care coverage, would cease to exist.
- The exposure of rapidly rising health costs will be removed from the corporate cost structure.
There is one significant disadvantage for employers who presently have health plans: the golden handcuffs of health insurance for retaining employees will be gone. The exposure to more competitive wage and salary action to fill positions will occur as all businesses will compete for talent on a more level playing field.
Feldstein goes on in his article to discuss a number of possible steps that could be taken to provide low-income vouchers to supplement insurance premium payments. He also proposes making purchased insurance or self-insurance optional for medical expenses up to 15% of AGI. I had suggested 10% in my article at TheStreet.com. The exact amount is not important. What is important is that health care costs will not be brought under control until the consumer/patient has a central role in the cost/benefit analysis.
In our current system, too many people see the system as all benefit. And, of course, there are some who have no benefit and see no way to participate. The first group imposes wasteful expense upon the system. The second group imposes a significant cost on the health care system without making any significant payment at all.
Of course, there are a number of health care cost issues that have not even been mentioned here. Among these are health care provider compensation based on outcomes rather than procedure, increased preventive health care (more inexpensive prevention equals less high expense treatment) and unhealthy lifestyle issues.
There is still a long way to go in getting costs under control for health care. Further discussions along the lines of the ideas discussed here may eventually lead to some progress in cost control. Ultimately, we will not get there until everyone is paying for his own lunch.
