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Consumer Choice: Everything but Health Care

Americans are far from stupid and they enjoy economic freedom (free choice) far greater than any other nation. In nearly all sectors of the market the consumer is king. The average American family makes thousands of economic decisions each year. Over the life of a family these decisions are valued in the hundreds of thousands of dollars. Consumers do this armed with several potent weapons. Prime among those is free choice. A consumer who feels cheated by Ford Motor Co. will find a variety of competitors who are willing to accept their money for the purchase of a new car. They will also not be reluctant to tell their friends about the poor quality or shoddy service of Ford products. A consumer who wants to reduce his grocery bill can find a variety of markets, coupons, price clubs and substitutes. The largest purchase most Americans make is their home. For this purchase consumers ally themselves with real estate professionals who are legally obligated to provide them with the best advice they can give. This multitude of choices faced by consumers is backed by a legal system which holds producers and suppliers accountable for deliberate fraud or negligent attention to quality and performance. Consumer choice works.

In each particular market where the consumer reigns supreme there is a close relationship between cost, quality and supply. Look around at your own neighborhood and you see the free market (and entrenpenuership) at work. Count the number of donut shops, florists or dry cleaners within 5 miles of your home. There is no government plan to provide access to donut shops. Individuals and companies perceive a need and fill that need by opening donut shops. Whether they succeed or fail will depend on their ability to meet the needs of donut consumers.

Look at the markets that are regulated by the state. In all cases prices are higher, service mediocre and failure uncommon. Everyone complains about the price of their cable bill and the quality of their service. But cable TV is a regulated monopoly. A company competes for a "franchise" to provide cable TV service in a particular area. The customers have only one choice, subscribe to the incumbent cable TV provider or do without cable. The prices are set in collusion with the cable company and the government that granted the franchise. To make matters worse, the government assesses a tax (sales or franchise) on your cable bill. If the rates on your bill go up, then their tax revenue goes up. While politicians might posture about poor service or high prices it is in their interest to ensure that cable companies don’t go out of business. The end result is rising costs to consumers with no guarantee that the cable company will feel the sting of market forces. They have no incentive to provide good customer service because the customers have no alternative. It is a monopoly created by and controlled by the government, accountable to no one but itself.

The system used to provide the financing for health care in the United States looks a lot like the cable TV business. Your employer (or the government) selects a health care company for you. The only choice you have is to accept the coverage or not. Employers are under no obligation to provide value to you. If your company is based in Dallas, but you work from a sales office in Kansas City you could very well wind up in an HMO with no presence in Kansas City. You will not get the low costs of the HMO enjoyed by other employees at home base and you will likely pay more, out of your own pocket, to get health care. Health plans are designed like any government program, they fit 80% of the population and make no provisions for special situations.

Why should a single employee be forced to accept a health plan with "good pre natal care" when what that the single employee might need is vision care? But one size fits all is the mantra of the efficiency expert or government rule maker. Under any scenario a healthy young single person would be far better off with a simple policy that covered major medical expenses for unexpected hospital stays. But these choices are not available. The fundamental problem is that neither an employer or the government can make the millions of discrete choices that consumers make every day. Consumers know what is in their best interests, what applies to their specific circumstances. The statist approach enriches some, impoverishes others and shifts responsibility from the consumer to a conglomeration of employee benefits managers, review boards, state insurance commissioners, federal health are regulators and ultimately to a government that is institutionally incapable of replicating the efficiency of the market place.

If you really want to fix the health care system the first step is to empower the consumers and change the incentives of the insurers, suppliers, providers and regulators.

  1. Eliminate the tax exemption for health care benefits. Every other benefit provided by employers is treated as taxable income. Profit sharing, taxable income. Free group life insurance, taxable income. Membership in a golf club, taxable income. Company car, taxable income. Removing the tax exemption would make the cost to the employee of this benefit explicit. Perhaps consumers would begin to question the real value of their health care policies if they had to shoulder the true cost, rather than some accounting construct created by their employers. First dollar coverage won’t look so attractive if it costs the consumer more than he benefits. "Free" prescription drugs might not look so attractive if they take a hit to after tax income.
  2. Require employers to provide a true range of health care choices. Most companies make a show of providing choices for their employees in terms of the deductible, but the programs are largely the same. Businesses act just like people, they want a simple, low cost and non controversial solution. They wish to avoid responsibility if an employee makes the "wrong" choice and while they give the appearance that they are providing something, they are not. Employers are the real purchaser of most health care are in the nation. That is why consumers have limited rights, they lack standing as the purchaser. The real end user must pursue legal remedies as an injured party rather than the owner of a health policy. Companies should act as facilitators not purchasers. The relationship with insurers should be strictly one of providing information to the employees.
  3. Permit taxpayers to deduct the cost of a basic health policy from their income tax. In cases where an employer does not provide health care coverage tax payers should be permitted to deduct the cost of a major medical policy from their income as an expense. Not a credit.
  4. Formalize and Expand Medical Savings Accounts. Every person should be permitted to establish a savings account to pay for uncovered medical expenses. Similar to an IRA the consumers could choose to bank a specific amount of money on an annual basis. This account would be after tax, not pre tax, dollars, but the interest and dividends would be tax free.

I think dealing with those who don’t have the means to buy health insurance is the easiest problem to solve but I’ll save that for another day.

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