In my first article “America’s Sick – Part I” I wrote about the health care reform bill being proposed by Barack Obama. Through that writing I touched on the problems facing the United States health care system. I also discussed the government’s proposed solutions to those problems. In Part II of this article I will layout the solutions that would actually fix our issues and will discuss a more prudent way to move US health care forward.
Employer Health care Benefits
In America it is not uncommon to hear someone speak of a government job as having “great benefits.” This statement certainly refers to financial incentives like a pension or matching 401k, but also includes generous state funded insurance programs. This type of discussion also takes place around private sector jobs when “benefits packages” are discussed among friends and co-workers. The problem here is that these conversations seem to imply that having insurance with employment is a right. Unfortunately though, insurance is a form of compensation and not a right; thus it should not be treated like one.
The US populace needs to stop thinking that insurance benefits are something they deserve as a result of employment. What is not realized by the majority of people is that the inclusion of insurance actually reduces their salary. Is it not true that insurance costs are costs incurred by a company on behalf of specific employees? Is it not money spent which could be used to increase pay rather than purchase benefits? The answer here is a resounding yes. What then, is the driving force behind companies and employees wanting corporately managed benefit plans? The answer is simple – Taxation.
In the US employers that offer health care packages to employees are eligible for tax benefits. Specifically, these companies are able to deduct a portion of the amount they spend on employee insurance from their corporate taxes. Likewise, if you are an employee in a corporate setting, the amount you must pay your employer to “assist” in the purchase of your particular insurance program comes out of your check pretax. In addition to this, as an employee, there are also defined benefit programs which allow pretax withholdings to be stock piled for medical expenses. This stock piling occurs in a deferred income account that exists to pay medical costs which may be incurred throughout the year. This seems like a good thing on its face; however it is incredibly problematic and must be addressed immediately.
The reason this practice is problematic is that these same tax benefits are not extended to people who are self employed or hold private insurance. Of the approximate 260 million people with insurance in the US, 60% of them participate on a tax free basis. The remaining 40% of insured peoples (about 100 million) are forced to pay for insurance with post tax dollars. Due to this fact insurance companies compete for large corporate policy packages and give discounted rates based on how many people are in a particular plan. Of course these discounts come at the expense of increased premiums for private insurance purchasers.
To support this tax subsidy to the corporately insured, the privately insured end up carrying a higher overall tax burden as well. This occurs because everyone must pay for Medicare and Medicaid, but corporately insured persons pay for their insurance pretax while privately insured pay post tax. Thus the percentage of taxed income is substantially higher for those needing private insurance.
In addition to taxation issues, insurance benefit plans at the corporate level reduce overall business efficiency. Specifically, companies offering group policies often host routine health contests and health related corporate activities. Employee efficiency is then decreased due to encouraged participation in wellness programs, attendance at meetings explaining the programs as well as good health habits, and through everyday office discussions regarding the progress of the programs. Like all inefficiencies, this drives up the cost of labor, lowers margin, and ultimately adds to price increases, which decrease a company’s overall competitiveness.
Although this may sound far-fetched, I assure you it is not when the efficiency losses are spread across the entire corporate populace. These activities are promoted by employers to reduce insurance premiums which often are tied to the overall wellness of employees as determined by health screenings. These programs may indeed help to reduce corporate insurance premiums; however they do so at the cost of worker efficiency.
The tax code must be adjusted to address each of these problems as subsidies in this area are unsustainable. Individuals should not be penalized for working in a non corporate setting or choosing to maintain private health insurance. Our tax code needs to be reversed and the money spent by employers on health care benefits should be distributed elsewhere.
Under this scenario wages would likely increase as companies would still want to take the expense of paying employees against their taxable income. Then insurance costs would also drop as individuals would have to choose the best plan for them, rather than purchase group insurance. Unfair tax burdens would also be lifted from the self employed and our health care system would be one step closer to becoming a two party system which is the ultimate solution.
A Three Party Health Care System Increases Costs
In the US health care decisions are not made by just a person and their physician. Rather, in the United States choices are made by that individual, their doctor, and their insurance provider or three parties. In our system an insurance provider may be recognized as a standard insurance company, employer, or the US government. This is problematic as it creates a tremendous amount of waste as (generally) only one of the parties involved in the choice has financial skin in the game. Typically the doctor is looking to make money on the services being provided while the patient is looking to get better at any cost and as quickly as possible; this is not good for frugality. It is also not good for morality as the financially vested party has an incentive to become more concerned with dollars than a person’s well being.
80% of American’s have insurance and of that group, 60% have subsidized insurance. That portion of the population typically pays a minor co-pay amount on any medical works to be performed. Under co-payment insurance, most of the time, the co-payment amount is immaterial to the total cost of the procedures to be performed. Even worse yet, that amount is often a flat fee with respect to the overall cost; this is payment based on “type” not “expense”. This problem must be addressed and needs to be eliminated in order for individuals to become more cost sensitive.
In order to fix this problem a cost must be imposed on the patient for the services he or she selects. This cost must be incremental enough that at least some thought goes into the decisions that are being made. As a country we should be asking our doctors what is required, what is necessary, and what is most efficient for getting well. We should not be asking “Does my insurance cover that?” and knowing deep down that a “no” response means you won’t take the service while a “yes” means you will.
This issue can be addressed very simply by changing the tax code in the manner detailed above. Under that proposed solution this problem is eliminated almost entirely as individuals will be responsible for their own health care options. By virtue of taking employer provided health plans out of the equation individuals will be forced to make the best insurance choice possible. In doing so we will care more about the costs of procedures, reduce our use of unnecessary services, and ultimately help to reduce overall health care costs to the benefit of all.
Costs Must Be Available Ahead of Time
If the US is to embrace the move away from preferential tax treatment on corporate health benefits, and work towards a two party system, individuals will have to be more involved in the choices made about their well being. As a result of this they will need to know the costs associated with any procedure or time spent at the doctor’s office. If price is not known, then there is no way for the free market to push costs lower and quality higher. Think about it, what other industry is there in which pricing is so ambiguous? Simply put, within the health care industry pricing is almost always a total mystery to the patient.
Try for a moment to think of another service where people are more in the dark about the costs of the work to be performed ahead of its performance? Let’s say someone is mowing lawns; they don’t just show up to homes with knee deep grass, ask the owner if they want the problem fixed, then cut the grass without discussing costs. An estimate is given whether by the job or by the hour and the homeowner at least has some idea of what the cost of getting the grass cut is. It wouldn’t make sense to allow a lawn mowing service to charge as they please after completing the job. Certainly the practices within the medical field are much more technical than mowing a lawn; however that does not take away from the underlying point of this example. Clearly, pricing a service without offering an estimate of costs does not make sense. The fact that it is illegal in some industries for services to be performed without the total costs being presented ahead of time in a written estimate should be evidence of this fact alone. So what’s the reason this practice is allowed to stand in health care? This veil of secrecy must be lifted.
The solution to this one is really quite simple; when going to the doctor it must be required that the estimated costs be known ahead of any care being given. Certainly there will be medical emergencies in which a person cannot determine the cost-to-benefit of having care provided. That however does not take away from needing standardized pricing. In moving towards a two party system doctors should be allowed to determine how they price procedures. This is necessary for free market competition since doctors will ultimately be competing for an individual’s business on quality of service against overall price. Since doctors would then be competing, if they wanted to quote by the job that would be great; if by the hour that would be fine too. Under this scenario, when a person needed emergency care the costs would then readily be figured objectively after the procedure using a pre-established metric. Once again this policy would drive health care costs down and service quality up.
Discrimination Must End
Some may say to my proposals “Well how about pre-existing conditions? What about discrimination based on prior problems?” to this I say end discrimination to the extent possible. In the US, in order to provide health care insurance we must require that those with a pre-existing condition have insurance available to them at rates which are comparable to their peers. How can this be possible?
After implementing the steps above our health care will begin to look more and more like a two party system in which doctors and patients alone make choices about individual health care. Once at that level, doctors will be able to treat patients based on need and patients will be able to select doctors according to costs and quality of service. This will also allow for a more proper evaluation of the types of services needed by differing groups of people. Who are these differing groups of people and what is appropriate discrimination then you might ask? These groups are men and women, age defined, and based on geographic location; not those with pre-existing conditions.
Men and women have different health care needs due to their basic physiological differences. Spelling it out, men do not have to worry about the costs associated with pregnancy and having children which are astronomical. Under this scenario insurance rates could be adjusted up or down based on a person’s sex and the type of care they may need; this is where age comes in as the second discrimination factor.
Insurance rates must be allowed to be adjusted based on a person’s age for several various reasons. The first and most obvious is that as a person ages they will inherently have more health problems and thus will require more health resources. The second less obvious reason is that by age (or sometimes personal choice) certain aspects of health insurance either exist or do not exist. For example requiring a woman to pay for abortion coverage, pregnancy coverage, or any type of birth related insurance at age 55 (generally) does not make sense. In similar fashion, requiring a man to pay the costs on coverage for prostate examinations before they are of an appropriate age also does not make sense.
Lastly prices may be discriminated upon by geographic region due to the pricing differences that exist by market size. To ensure that this type of geographical discrimination does not get too out of hand, it must be required that rates be adjusted by a region no smaller than an individual state. By doing this, regionalized providers will not be squeezed out of their markets, prices can be adjusted for states with higher cost structures, and regional health issues can be addressed more specifically.
Through the implementation of the changes above the insurance industry will be able to discriminate appropriately and not on the merit of pre-existing condition. Our system will move towards a two party system and choices for care will ultimately be driven by the patient and his or her doctor. In this scenario pre existing conditions will not be a factor as the cost of any time spent or procedure required will already be known via estimates for a person with a pre-existing ailment. The cost of this type of health problem will be easy to forecast and thus budget for among the entire paying populace. Certainly everyone would rather not pay for subsidizing another’s insurance cost; however in a moral society when it comes to health care, we can’t leave our sick dying in the streets. This same type of coverage must also be available to those with no ACCESS to health care, not the UNINSURED.
Through the implementation of the proposed plans outlined above the United States health care system can be reformed. Removing preconceived ideas of how health care must work, undoing tax regulations which favor companies and not the individuals who need health care, while eliminating vague pricing, and implementing free market policies into the medical field can solve our problems. No matter what the government tells you “Hope” is not a solution; it is a mere illusion that something or someone greater will remove all unfortunate circumstances without any assistance from oneself. Raising taxes to unheard of levels (45% or higher) will not move us forward. Spending obscene amounts of money on plans that do not address the root of our problems is not acceptable. Most importantly though, requiring every business in America big or small and every person rich or poor to have health care will destroy business, discourage medical advancements, and move us in the wrong direction. Insurance companies, pharmaceutical companies, doctors, small businesses, and those with the money to innovate will be crushed by the current Obama plan. Has anyone thought about what will keep them operating and living within the US and paying taxes to support a bill that will destroy them?
America is sick ladies and gentlemen, yet we have the right medicine to make us better. The ingredients for our drug are also clearly detailed above for everyone to see and critique. Sure there will be some tough choices to be made and some details to iron out, but this is how a free market democracy properly and fairly helps its people. Unfortunately, for the American public, if we decide to swallow the proposed Obama pill our nation won’t know how much this medicine will really cost or what will be in it. Even worse, because we as a nation have a pre-existing condition, I fear no one in our government will be willing to give us the coverage we need to get well again.
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James Bibbings is an associate editor at Commodity News Center ("CNC"), a website which focuses on providing the latest commodity news and analysis. In addition to this Bibbings is also the president of Hugo James Consulting; a firm which specializes in offering compliance solutions to the brokerage industry. Prior to joining CNC, James worked for the regulatory agency that monitors futures and OTC currency trading in the United States. From there he worked on an electronic currency dealing desk at the Chicago Board of Trade, and eventually helped to create a commodities brokerage in late 2008. Mr. Bibbings writes daily as the "Economic Bibb" for Commodity News Center and through his writings strives to provide a unique outlook on the economy, the financial markets, and the global political landscape.