Let Consumers Pull the Health-Care Purse Strings | Wall Street Journal | 09.26.89

Some issues get rolling and there’s no stopping them. A case in point is national health insurance, growing in popularity in policy circles even as the nation’s elderly cry for relief from the catastrophic burden of federal catastrophic care insurance.

Now, in New York, the Cuomo team has barged into the act. David Axelrod, the governor’s chief health official, has proposed a program requiring businesses to buy health insurance for their employees or contribute to a state fund for the uninsured. The state would pay all medical bills — hospitals, doctors, everything — and in turn bill the patient’s private insurer or the state fund.

The idea is to extend coverage to the 2.5 million uninsured New Yorkers while giving state government the monopoly buying power to force costs down. The problem is that the proposal takes to the logical extreme all the trends that have made for trouble in our health-care system: more central funding, more central control.

Until recently, conservatives didn’t figure in the health-care finance debate, except as no-men. But over the summer a flagship think tank of the right, the Heritage Foundation, startled the nation’s capital by putting forward its own plan for reform of our national health system.

Heritage noted that the tax code has virtually shut market forces out of U.S. health care. More than anything else, its study observed, this is why the system is in trouble. Here’s how it works:

Most of us consider company-paid health-insurance premiums as extra income, yet they don’t count as income for taxes. In essence, we receive tax credits if our employers foot the bill. But if we pay for a policy or for a health service directly, there’s no tax break. We pay in after-tax dollars. Not surprisingly, employers provide comprehensive health insurance for nearly two-thirds of the nation.

As a result, the health-care system has turned into a one-industry example of national industrial policy. It is run by a consortium of business, labor and government with the consumer out of the picture.

In a market economy, the consumer balances what he pays with what he gets. But this run-from-above health-care economy is more like a command economy. And as in command economies, the cost of service is virtually invisible to the consumer. Freed from consumer supervision, the incentives for producers all point to more production at greater expense. The bumbling giants of business, labor and government cannot substitute for the supple marketplace. As with command economies around the world, the balance between cost and service has been lost.

Stuart Butler and Edmund Haislmaier, the editors of the Heritage study, believe that the U.S. health-care system must either come under more centralized control or adopt real market controls. At the moment, Washington is toying with a rigid system of fees for specialties and procedures. Dr. Axelrod’s proposal would let New York state impose its own system. Mr. Butler notes that this “relative value system,” as it is called in Washington, is just the labor theory of value — anchor of the economics in collapse most places east of the Iron Curtain but apparently resurgent on this side of the Atlantic.

The Heritage answer? Reverse the tax incentives. Give us tax credits when we purchase health insurance and health services ourselves; count as taxable income any purchase through our companies. As employers shifted dollars out of premium payments and into paychecks, our real after-tax incomes wouldn’t change. But we, not our companies, would soon be in control of our health purchases. Messrs. Butler and Haislmaier would require us to buy catastrophic coverage. (If we are poor, they would extend government-provided coverage to us.) How we pay for other services — directly or through insurance — would be our choice.

As Rand Corp. found in studies certain to figure prominently in the debate, when people pay a fee for health services (emergency rooms were Rand’s focus), use becomes wiser and more sparing. Health improves even as visits to the hospital drop off. Messrs. Butler and Haislmaier believe that this is just what will happen when ordinary people take a long, hard look at insurance premiums and other health costs and ask, “Am I getting my money’s worth?” A true market in health services will spring to life, putting a brake on health-care inflation and creating an environment in which it will be easier for government and business to insure those not now insured.

The Heritage team is not alone in its general conclusions. Harvard Business School Prof. Regina Herzlinger, for example, has developed a similar plan, calling for tax deductions rather than credits. She would have the money raised through taxing the newly counted income go to pay for health coverage for the poor.

Whatever the details, outside of Washington and New York, who can doubt any more that market economics is superior to command economics? And who wouldn’t agree that our health-care system doesn’t need another dose of the potion that has already put it under the weather? It needs real medicine for a real cure.

This entry was posted in Economic Policy: Health Care and tagged . Bookmark the permalink. Both comments and trackbacks are currently closed.