News and Tribune

July 5, 2009

SCHANSBERG: Comparing apples and rocks in health care


We’re often told that the United States compares poorly to other countries in terms of infant mortality — especially since we’re a developed country that devotes so many resources to health care.

This is the first myth of health-care reform. Those statistics are skewed by differences in how countries deal with “premature births.” It may be politically useful but it’s not intellectually honest to compare apples and rocks.

We also hear assertions that various forms of government involvement in health care are likely to be effective in the U.S. because they work well in other countries. Aside from whether this is true, it should be noted that these other countries have lower populations and, typically, far less diversity in their populations. So these comparisons are somewhere between somewhat helpful and useless. One of the ironies of the health-care debate is that such comparisons should encourage us to consider state-based reforms (instead of a single, grand federal experiment), since the population and diversity of our states is similar to other countries.

A second myth is far more important: We’re often told that our current health-care system is “free-market.” This is akin to blaming the Great Depression on markets — while ignoring the four tax increases of Hoover and FDR, massive trade protectionism, restrictive monetary policy, laws that artificially increased prices and wages and so on. In both cases, the extent to which we should blame the government is an open question. But ignoring its role in either mess is neither legitimate nor useful.

With health care, there is already massive government intervention. The most obvious example is the double debut of Medicare and Medicaid in the 1960s. In addition, there is a wide array of relatively minor but still significant issues: various labor market restrictions (e.g., you and I are not allowed to receive medical services from professionals who provide the same services to our armed forces), mandated insurance benefits (for everything from in-vitro fertilization to hair transplants), the explosion of medical malpractice awards (and thus, malpractice insurance rates) and so on.

But the most important public policy in this realm? The subsidy of health insurance acquired by workers through the firm. It is a subsidy because wages are taxed and fringe benefits are not. Thus, fringe benefits are a subsidized form of compensation.

Subsidies encourage the subsidized behavior and provide an incentive for people to do “too much” of that behavior. Here, the subsidy encourages workers in firms to have “too much” insurance — low deductibles, low co-pays and expansive coverage. This, in turn, drives up costs. The subsidy also links our health insurance to our jobs, creating problems with “portability” and trying to get new insurance when I have a pre-existing condition and want to change jobs.

Think about how insurance typically operates. It covers rare, catastrophic events such as car accidents and house fires. In contrast, health-care insurance covers everything from allergy shots to cancer treatments. By way of analogy, car insurance of this type would cover everything from door dings and oil changes to severe car accidents. What would happen to the cost of oil changes, the paperwork associated with oil changes, etc.? In a nutshell, the market for car maintenance and repair would be as messed up as our market for health care.

What to do? On its own, through increasingly painful health-insurance premiums, the market is moving us back toward catastrophic health care coverage.

Or we could remove the subsidy and the crux of the problem. Interestingly, the proposals by McCain and now Obama — to tax health-insurance benefits — address this issue. But it is unlikely that this proposal will be politically popular, even if it is offset by a revenue-neutral tax decrease on wages.

More likely, we’ll no nothing — or we’ll embrace some sort of band-aid or magic potion that will likely do more harm than good. We’ll take a look at those band-aids and potions in the next part.

(Coming soon: The pros and cons of the various proposals for reform.)

D. Eric Schansberg, an adjunct scholar of the Indiana Policy Review Foundation, is professor of economics at Indiana University Southeast in New Albany. He is the author of "Turn Neither to the Right nor to the Left: A Thinking Christian’s Guide to Politics and Public Policy" and the editor of SchansBlog.