Health care financing is the policy issue that just won’t go away.
Democratic presidential candidate Bill Bradley is making it a centerpiece of his campaign, and Congress just passed compromise “Patients Bill of Rights” legislation specifying what patients can and can’t do in relation to their health insurer or health maintenance organization.
Let me interject a suggestion of my own: End the tax exemption for all employer-provided benefits such as health coverage.
It would improve both the efficiency and fairness of the U.S. economy. And it could be done without increasing the effective tax burden on households.
A little history lesson helps understand the inane character of the current system.
Few companies provided benefits before World War II. During that war, the government imposed wage and price controls. Labor markets were extremely tight, and companies with their books full of war production contracts could not bid up wages to get needed workers. So they offered noncash fringe benefits was a way to evade the government’s wage controls.
The government cooperated by not treating the value of the benefits as taxable income.
Today, many people think employer-provided noncash benefits come out of corporate profits rather than holding down wages. But economic theory and studies show that noncash fringe benefits largely do reduce wages, not profits.
But the tax-exempt status of such benefits still provides an incentive for compensating employees in this form rather than in cash. The government effectively picks up a third of the cost of health and dental care for middle-class wage and salaried employees.
This unfortunately inserts a wedge between the health care provider/insurer and the ultimate consumer.
Positioning employers as intermediaries leads to inefficiency and dissatisfied consumers. Many people can’t choose the level of coverage and the provider they would prefer; they have to take what their employer offers. Some can choose from a menu of two or three providers, but such options are becoming rarer. If someone is dissatisfied with her car insurance, she can buy it from another company. But if she does not like her health coverage, she often has little choice unless she seeks another job.
Placing the employer between consumer and provider reduces the flow of information to the provider about how satisfied users are. It reduces effective competition for business and thus hurts the efficiency of resource use.
The system also discriminates against the poorer third of workers. Managing employer-provided health care is administratively more difficult and expensive for small firms, so they tend not to offer it. People who work for the large organizations that offer employer-provided health benefits tend to have higher incomes than those who work for smaller firms. So the bulk of the government subsidy through the tax exemption largely goes to the wealthier half of society rather than the poorer one.
Democrats should oppose this income transfer from poorer to richer on principle, and if Republicans are really against the whole idea of government transferring income, they should, too. That tax-free status continues is testimony to the fact that it is most beneficial to middle-class voters.
Removing the tax-exempt status of employer-provided benefits would not solve all the problems in U.S. health care financing, but it would be a useful first step.
Taxpayers might object to losing a break, but there are many ways the tax code could be changed to make up the difference.
Many people would welcome the ability to choose their own provider and level of coverage.
Look at household satisfaction with Lutheran Brotherhood, Teachers Insurance and Annuity Association (TIAA) or the Uniformed Services Automobile Association (USAA).
There are many other issues, such as ensuring universal coverage, dealing with free riders, uniform rules regarding pre-existing conditions, and so forth. But both efficiency and fairness would increase if households purchased health care coverage the same way they purchase other important goods and services: by going out in the marketplace and dealing directly with those selling such services.
Taking employers out of the middle would benefit everyone. Removing the tax exemption for noncash employee benefits would be the best way to start that process.
© 1999 Edward Lotterman
Chanarambie Consulting, Inc.