Let Employees Get Their Own Medical Insurance
In the USA, most workers get their health insurance from their employer as a benefit. Employment-based health insurance covered 155 million Americans in 1998, compared to only 15.5 million who purchase their own policies. In some cases, the full amount is paid by the employer, while in other cases, the employer pays a portion, depending on the size of the family. Typically, the employee has a choice among a few plans.
by Fred E. Foldvary, Senior Editor
The problem with this arrangement is that by making the employer the provider of the insurance, the market relationship between buyer and seller is weakened. Consumers of medical care have fewer choices, and the customer often does not have the incentive to economize on the service.
Why is it that Americans typically get their car, life, and house insurance themselves, but get their health insurance from their employer? This goes back to World War II, when companies began to provide health benefits as a way to get around wage controls. The company may deduct medical benefits as an expense, but the employee may not deduct the insurance costs from his income taxes.
This unequal tax treatment preserves the incentives to keep medical insurance an employee benefit, in effect an untaxed wage. The total tax benefit from employer-based health insurance is currently about $141 billion. (See Myths about Employer-Sponsored Health Insurance.)
If the income tax were abolished, the tax advantage to employer- based medical insurance would disappear, and the incentive would be to pay workers their wage in money rather than benefits, and then let the workers and their families allocate their income according to their preferences. Workers would have wider choices, creating more competition among the various types of providers, whether insurance companies, HMOs, community clinics, or self-insurance.
So long as the income tax is in force, reform could consist of making all medical costs tax-deductible. That would include direct doctor and hospital costs, insurance, and medically-related supplies. Also, the cost of exercise equipment, athletic and health clubs, and nutritional supplements should be deductible as preventative medical care.
Suppose the worker got $100 per month in money instead of as health insurance. If he paid $100 for medical insurance, his taxable wage would remain the same. There would now be a direct link between the worker and his medical plan. If the insurance or HMO did not provide good service, the customer could switch to another company. In contrast, today employers typically provide a switching time only once during a year, the employee is stuck otherwise.
With people directly buying insurance, there would be more incentive to reduce costs both by the customers and the companies. For example, there would be greater discounts for healthy lifestyles such as non-smoking. There would be more emphasis on preventative care. More non-traditional policies would arise, such as a holistic plan that included good diets, preventative care, and healthy lifestyles.
A holistic medical provider would also offer nutritional services, an exercise facility, and alternative as well as conventional treatments. By promoting a complete package that promoted a healthy lifestyle and diet, the long-term medical costs would be greatly diminished. Such health entrepreneurship is stifled by employee-based coverage geared to conventional practices.
Ultimately, employer-based medical coverage is government-based coverage, with government indirectly creating the incentives and constraints. The USA thus already has in effect a hidden national medical system. And it's a very costly system, not just in money but also in the commonality of diseases that could be prevented.
We can improve medical care and reduce cost by shifting control back to families and voluntary associations. Let's make medical care tax-neutral by making medical expenses tax deductible.
-- Fred Foldvary
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Copyright 2000 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.