Sunday, September 9, 2012

A Logical Approach To The Healthcare Debate

There are a lot of things wrong with the recent Supreme Court decision to uphold Obama-care but, rather than speak to the political or legal aspects of the matter, I would like to take a more reasoned approach to resolving the issues in the healthcare industry. No, I don't believe it is a crisis but it does need fixing.

Do you like your health insurance provider? No? I doubt many people do, given how many people think the healthcare system needs a complete overhaul.

Should a corporate or government entity, such as a health insurance company or the health department, decide what care you get and how much you should pay for it?

I will answer this question with an analogy: should everyone be required to have auto insurance? The answer in our current American society is an emphatic "Yes!" but only if you drive a car. If you choose not to drive a car you are not required to purchase this service. Who enforces that law is another story (hint: it's NOT the federal government) but think about auto insurance in a different way: do you use your auto insurance to pay for periodic maintenance? Oil changes? Windshield wipers? How about gasoline? The idea is simply idiotic. It is almost always cheaper in the long run to pay out of pocket for most maintenance items for today's practical car. I use term "practical car" on purpose because if you have an expensive luxury or sports car the economics are much different. We have auto insurance as a hedge against the financial impact of being in an serious accident. In a two-party vehicle accident, where you are at fault, you end up paying for the following items for all people involved (drivers, passengers, and pedestrians)-
  1. Repairs to both vehicles
  2. Medical bills
  3. Salary for missed time at work
  4. Pain and suffering
To revisit the earlier question, let's try it with a different spin: should a corporate or government entity, such as a auto insurance company or your local department of motor vehicles (which we all love!), decide what auto maintenance you get, the price the mechanic will be paid, and what your portion of the bill will be? Does that not sound patently ridiculous? The auto-insurance industry is also heavily regulated but it allows for much greater competition and consumer choice.

Now it's time for a little history lesson. Health insurance came to popularity in the 1950s as a benefit from employers looking to attract top talent. During the post-WWII economic boom employers, desperate to hire the best talent from a very constricted pool of workers, looked for ways to increase the benefits package offered to employees while not increasing their taxable income, which would move them up the marginal tax bracket scale. Employers added all sorts of non-taxable benefits-
  1. Health insurance
  2. Dental insurance
  3. Club memberships (health, golf, diners, etc.)
  4. Expense accounts
  5. Company cars
  6. ...the list goes on and on...
Non-taxable benefits are important because the employee sees more benefit per dollar spent by the employer than they would by increasing their salary by the same amount.
In countries with very high tax rates this effect is amplified. As an example, Israel's tax burden (income tax and nation tax combined) ranges from 35-58% plus a 16% VAT on top of every purchase. In that country companies routinely give employees free on-site meals, gas/commute allowances, and many other employer provided benefits. I worked for an Israeli-based company in the late 1990s and was astounded at all the perks my Israeli counterparts were using and they were equally astonished at the higher salary levels and lack of company provided benefits in the US.

After 50+ years of employer-provided healthcare insurance in the US it is now so engrained in today's society that many people would be upset if they received a job offer that didn't have comprehensive health insurance in the benefits package.

The answer to the health care debate may be as simple as changing over to a system where we only need health insurance for the same reason we have auto insurance: as a hedge against catastrophic health issues. 

To follow the auto insurance analogy, do you pay your doctor directly for any of the following-

  • A simple check-up or annual/sports physical?
  • A quick cold/flu visit, typically to obtain a prescription cough medicine or antibiotic?
Have you ever looked at your medical bills paid by your insurance company? Do you even know how expensive it is to see your primary care physician? Would you go less or more if you had to pay cash every time you went? You pay your mechanic every time you get an oil change, why not pay your doctor when you get a physical? Most people do not know what their doctor charges for a "standard" office visit. If you had to write a check or pull out your credit card every time you visited your doctor, would you go less frequently?

Would you continue going to an auto mechanic if their prices were 30% more than the shop next door? What about the rates your doctor charges? This isn't even relevant in today's healthcare system because most of the healthcare prices you "pay" through your insurance company are pre-negotiated between your doctor's network and the health insurance company.

How do we get our healthcare system to the point where health insurance is "liability only," to coin a phrase from the auto-insurance industry? There are already healthcare plans that only cover severe or debilitating illnesses.

There has been a push recently toward a "single payer" healthcare system run by the federal government. In a way we are very close to that type of system in that we have a "a couple of payers" system. Those payers are the health insurance companies. The system itself would change greatly if that buying power were taken away from the heath insurers and placed in the hands of the consumers.

In order to do that we need to do something drastic, and this is the meat of my argument: eliminate employer-based healthcare coverage, the majority of all health insurance plans. What incentive would employers have to eliminate this valuable benefit? The answer is quite simple: repeal the federal income tax. To make up for it the federal government could switch to a flat tax or a consumption based model which would be less cumbersome and may even reduce the bureaucracy of the Department of the Treasury.

What would happen if the income tax were eliminated? Many employer perks would end. The pendulum would swing further toward cash-based compensation and employees would be free to spend their money on the healthcare program that was right for them. They could remain in a health-insurance plan that pays for everything or switch to a plan that covers those severe or debilitating illnesses that would otherwise lead to bankruptcy.

In the end this system would allow for a much more open marketplace where consumers and doctors are free to decide on their own treatment plans as well as competition in pricing and services.

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