How 'It's Covered by Insurance' Wrecks Health Care

A 58-year-old patient came to see me one Monday morning not long ago.  He was like so many in his age group — he had spent the weekend getting in a week's worth of exercise.  His left knee was sore, and he wanted an MRI.  He was not a professional athlete with a huge stake in his physical well-being, and he had not fallen on it or twisted it; it was simply sore from his three-mile jog on Sunday morning. 

"It's covered by insurance," he told me.  Never mind that there was no medical indication to qualify this particular hurt for an MRI.  Never mind, too, that he has a $5,000.00 deductible on that policy.  Never mind, also, that his knee would very likely heal quickly with the simple intervention of rest, ice, and maybe some physical therapy. 

"In 1970, Republican President Richard Nixon signed the Economic Stabilization Act that authorized the President to stabilize prices, rents, wages, salaries, interest rates, dividends and similar transfers as part of a general program of price controls within the American domestic goods and labour markets."  This occurred in the context of a recession during the Vietnam War and an energy crisis.  As a result, companies found themselves unable to compete for key personnel via salaries and wages offered because they were artificially capped; instead, they were forced to compete on the basis of benefits each applicant would receive.  In many cases, the benefits offered a rich package of health insurance goodies.

So began the escalation of tax-deductible health benefits provided to employees.  Unlike wages, the benefit was tax-free to the employee.  It was the beginning of a dramatic distortion in the application of free-market principles in the health insurance field.  The perfect storm for corporations to keep control of their wealth via the tax code.  If you were an independent contractor or self-employed in a small business, you had to purchase health insurance for yourself and your family with after-tax dollars. 

This new tax fee and escalating employee benefit was not simply for protection against financial ruin in the event of an unforeseen medical problem.  Now health care encompassed insurance for every conceivable need: a routine office visit, a cut finger, a sprained ankle, and even routine medication.  This was no longer insurance in the traditional sense to protect against a financial risk; rather, it became a form of pre-paid health care.  Soon organized labor wanted the same health care benefits the bosses were receiving locked into the contracts they were negotiating for their members.

As a result of medical insurance morphing into fully paid medical care, the cost was spinning out of control.  Perhaps it is human nature, perhaps one of the laws of economics, but if someone else is paying for a service or product that will benefit you, you will tend to overuse it.  No one ever undereats once he sees what is on offer in the buffet line. 

Milton Friedman famously described the four ways you can spend money.

  1. You can spend your own money on yourself (the most effective).
  2. You can spend your own money on someone else.
  3. You can spend somebody else's money on yourself.
  4. You can spend somebody else's money on somebody else (the least effective — think government welfare).

Employer-based health insurance would fall within Friedman's third category.  He described it this way: "[When you are spending someone else's money on yourself], you're careful to get good things for the money.  But you're not very worried about getting the best bang for your buck.  You're happier to spend more of somebody else's money within reason."  That is to say — it is covered by insurance, so I want an MRI.

What is the solution?  The first step, I believe, is to equalize the tax treatment of employees, the self-employed, and independent contractors.  We either need to eliminate the tax-free income benefit and the corporate deduction (both you and I know that that is never going to happen) or allow anyone to purchase health insurance with pre-tax dollars.

Next, we need to promote the purchase of major medical–only health insurance policies.  Under Obamacare, there are a ton of requirements.  For example, qualifying insurance policies must cover mental health care, substance abuse recovery, pregnancy, and pediatric dental care.  A health insurance company is not allowed to sell a product that does not include these provisions and many others.  Imagine a restaurant selling hamburgers being required to provide free French fries with every order because the potato-growers "own" a sufficient number of legislators.  That may sound good, but it will raise the cost of the burger, add to the nation's waistline, and harm farmers producing products that go into a salad — crony capitalism to be sure. 

We must allow health insurance companies the freedom to provide coverage that consumers want with little in the way of restrictions.  These changes would be a good start to lower the cost of health care vis-à-vis health insurance and lean it in the direction of a free-market solution. 

In order to make sure that no one and no company has a tax code advantage, we must stop using the tax code to promote economic or social ends.  Rather, use it to raise money only.  If the government wants to promote or discourage something, do it as freestanding legislation (much harder to do) and get it out of the realm of the tax code.  This is not easy to do because the bureaucrats control the wording that gets the IRS interpretation that allows for all the fun and games.  Just ask President Donald Trump — he made a dent in the system, but there is still much work to do.

Image via Pxfuel.

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