14 Aug 2006 How to Reform Health Insurance

David Hogberg shares his thoughts about how to make health insurance better and more affordable:

As I noted in the first post of my “Medicare for All: No Thanks” series, I’d take the U.S. health care system “over the U.K.’s any day of the week and twice on Sunday.” And while I definitely would make that choice, as I noted in a later post, “it’s a bit like having to choose between generic coffee and Folgers. I’ll choose the Folgers, but lament the fact I can’t have Starbucks. So how do we get the Starbucks version of a health care system?”

If I could wave a magic wand and make any changes I wanted to the U.S. health insurance system, I’d first eliminate the tax-exemption employers receive for providing employees with health insurance, and I’d reduce Medicare and Medicaid to programs that only serve the truly needy. Since political reality makes those ideas largely academic, let’s move on to the next best thing.

Let’s restructure the tax exemption so that individuals pay more of their own money for health care. What we need are more innovations like health savings accounts (HSAs) that empower people to truly behave as health care consumers. The problem with the employer-based tax exemption is that it turns health insurance into a third-party payer system. Rather than employees paying for health insurance directly, much of the cost is paid by their employer. When employees go to the doctor or other health-care professional, the insurance company pays the tab. This leads employees to believe that a “third party” is paying the cost for their health care, causing them to overuse it. When employees pay more of the cost directly, as they do with HSAs, they begin to behave in ways that keep costs down: They are more careful about what care they actually need, they compare prices, they make decisions based on price and quality, etc. This, in turn, compels providers to innovate, to find new ways to provide better quality services for lower prices.

Indeed, HSAs are big step toward how health insurance should work: Consumers paying for routine medical care out of their own pockets while the insurance pays for catastrophic care. That is how insurance works elsewhere, be it car insurance or homeowners insurance. That’s also why those types of insurance don’t have anywhere near the problems the health insurance industry does. Presently, health insurance, because it covers routine expenditures, often isn’t insurance per se, but pre-paid health care.

Both Medicare and Medicaid should be reformed along those same lines. Give recipients a set amount of money each year and let them use part of it as an HSA for routine care and the other part to pay a premium for catastrophic care. Florida has reformed its Medicaid system using that approach. Other states should follow suit, and Congress should set up a voluntary experiment with Medicare (one without all the confounded restrictions of Medicare Part C!).

While the left often claims that the mess in the private health insurance market is proof that the market doesn’t work in health care, what said mess actually proves is how badly government has mismanaged health care. (Government mismanaging something – say it ain’t so!)

One of the first ways government messed up private health insurance was to exempt health insurance from taxes for employers but not for individuals. One way to solve this is to give individuals without employer-based health insurance a tax exemption for the purchase of health insurance. A further reform would let employers give tax-exempt money to their employees for the employees to purchase their own insurance.

In 1973, the federal government further messed up the health insurance market by passing the Employee Retirement Income Security Act (ERISA). This permitted companies that self-insure to be exempt from most state insurance regulations. Of course, only big businesses have enough resources to self-insure, so this left small businesses and individuals at the mercy of state governments. Once big businesses no longer had to worry about costly state regulations, they stopped putting pressure on state politicians to keep regulations to a minimum. After that, special interest groups, universal health care activists, social do-gooders and other altruistic-but-misguided persons moved in and persuaded state legislatures to adopt all manner of coverage mandates that add to the cost of insurance policies. To solve this problem, I’d 1) permit (pdf) individuals to purchase health insurance across state lines, so that they can purchase insurance in states with fewer mandates; and 2) permit people to form associations to purchase health insurance, much as the Enzi bill (pdf) would enable small businesses to do.

I have other ideas, such as repealing part or all of COBRA and HIPAA, but those are posts for another day. Ultimately, the solution to our health insurance woes is less government, not more. Get government out of the health insurance sector where possible, and where it’s not, like Medicare and Medicaid, institute market-based reforms. These actions would make health insurance affordable for many more people.