Paul Hsieh, Contributor, Forbes
NOVEMBER 18, 2013 – The President has proposed a one-year “fix” to deal with the political fallout from his broken promise (or lie), “If you like your insurance plan, you will keep it.” Now it’s, “If you like your plan, you can keep it until after the 2014 mid-term elections. Maybe.” But the problems with ObamaCare go much deeper than cancelled insurance. As surprising as it sounds, most Americans never had real health insurance to begin with — and were not allowed to by law. And the only cure for our current health insurance mess is to legalize real health insurance.
What most people consider health “insurance” is actually genuine insurance combined with inefficient pre-paid medical care. Contrast that with standard car or homeowners insurance policies. Those plans protect us against unlikely but expensive events, such as a bad car accident or a house fire. But we don’t use car insurance to cover routine predictable expenses such as oil changes.
The current system of employer-based health “insurance” is an artifact of federal tax rules from World War II. When the U.S. government imposed wartime wage and price controls, employers could no longer compete for workers by offering higher salaries. Instead, they competed by offering more generous fringe benefits such as health insurance. In 1943, the IRS ruled that employees did not have to pay taxes on health insurance paid for by employers; in 1954, the IRS made this rule permanent.
This law permanently distorted the health insurance market in favor of employer-based plans. If an employer pays $100 for health insurance with pre-tax dollars, the employee enjoys the full benefit. But if the employer pays that $100 as salary, the worker will only be able to purchase $50-70 of insurance after taxes. The law also created perverse incentives for insurers to shift as many services as possible into pre-tax plans. Gradually, they started covering not just major expenses but minor routine expenses such as immunizations and well-baby checks. (Think of what would happen to the market for car oil changes if they were offered as a tax-free benefit through your workplace.)
Over time, this tax disparity helped employer-based health insurance dominate the private insurance market. Hence, most workers don’t own their own health insurance in the same way that they own their auto or homeowners insurance. When workers change jobs, they almost always must also change health plans.
Adding to this problem have been the many state and federal regulations mandating specific insurance benefits. At the federal level, ObamaCare requires all plans include a laundry list of “essential health benefits” such as maternity coverage, pediatric dental services, “free” HIV and syphilis testing, and obesity counseling. The states require an additional 2,271 mandatory benefits including acupuncture (CA), in vitro fertilization (MA), and hair prostheses (CT). These mandates inevitably drive up insurance costs.
Over time, this government-spawned “3rd party payor” system created tremendous inefficiency. Patients did much less shopping around, because they were only responsible for their artificially low co-payments. Insurance companies, in turn, imposed increasingly-onerous paperwork burdens on doctors and hospitals in an attempt to control skyrocketing costs.
Suppose someone today wished to buy an insurance plan that covered only serious illnesses and accidents (and otherwise pay for routine health expenses with his Health Savings Account.) For many people, that would be an excellent combination. Yet he would not allowed to by law. Because of legal mandates, insurers may not sell such plans, and individuals may not purchase them.
ObamaCare did not create these problems, but does doubles down on them. Hence, to fix those problems, we’ll not only need to repeal ObamaCare but also prior bad laws.
Three concrete steps that would allow Americans to buy real health insurance:
- Eliminate the tax disparity between employer-provided health insurance and individually-purchased health insurance. This would uncouple health insurance from employment and restore a level playing field to the individual insurance market. Individuals could then purchase policies that they kept even when they changed jobs (just as they already do with their car and homeowners insurance).
- Eliminate all mandated benefits. Insurers should be free to offer to willing consumers inexpensive policies covering only catastrophic accidents and illnesses. Insurers would remain free to offer richer policies that covered varying levels of elective procedures (but cost correspondingly more). Customers could purchase whatever levels of coverage they wished from willing insurers based on their own individual needs and circumstances.
- Allow insurers to sell policies across state lines. State mandates create 50 separate state markets rather than a single national market. A family insurance plan costing $3,000 in Wisconsin might cost $10,000 in New Jersey because of state regulatory barriers. Allowing interstate competition would quickly drive down prices and help many working families on a tight budget.
Free-market reforms would also help handle the currently-thorny problems of pre-existing conditions. For example, University of Chicago professor John Cochrane has proposed the innovative concept of “health status insurance.” This is basically meta-insurance, where customers pay an additional small premium to protect against major changes in their health. If their health status changes significantly for the worse, this additional policy allows them to either keep the current health plan without additional penalty or gives them sufficient money to cover the increased lifetime costs of a more expensive new policy.
In 2008, United Health began offering (where permitted by law) a “future insurability” option to customers purchasing individual insurance plans. This would allow them to retain their United plan regardless of subsequent medical problems. A free market would make such innovative options more widely available as other insurers competed to provide willing customers with comparable alternatives. (As Alan Nitikman has observed, think of how many times you’ve been sent unsolicited mail from people eager to sell you an extension on your soon-to-expire warranty for your car or refrigerator.)
Such free-market reforms would enable Americans to purchase real health insurance policies that they kept and owned.
In addition to specific policy proposals, we need a broader national conversation on the proper functions (and limits) of government. Hence, I was encouraged by this recent Chicago Tribune editorial that observed:
Accept that government doesn’t know what’s best for everyone. That people can decide what coverage they need and can afford. A strong marketplace offers choices for every wallet. Obamacare’s rules curtail those choices.
Such discussion is a good step in the right direction. Instead of debating which new government entitlements to create, we should be vigorously debating which freedoms to restore.
The president’s proposed “fix” won’t work. The only lasting “fix” is freedom. Legalizing real health insurance would be a damned good place to start.