American health care is ailing. Health insurance premiums are skyrocketing, and prospects for the uninsured are even grimmer. Every politician has a plan; some have more than one. The fundamental question is: why does the cost of health care keep rising, and what can we do about it? The answer, surprisingly, starts with war.
In 1942 President Franklin Roosevelt created the National War Labor Board (NWLB) to keep labor and management cooperating in the industrial war effort. This board had the authority to mediate labor disputes and, more importantly, to control wages. Consequently, firms lost their most powerful tool for attracting new employees. In order to make jobs more appealing, employers started to offer fringe benefits not controlled by the NWLB. Foremost among these benefits was health insurance. While the wage controls were eventually lifted, in 1949 the Supreme Court ruled in W. W. Cross and Co. v. NLRB that labor unions had the right to collectively bargain not only for wages, but for health benefits as well. This ruling fed the growing expectation among workers that health benefits should come standard in any benefits package.
The problem with employer-provided health insurance lies in its incentives. Involving an intermediary diminishes economic communication between consumer and producer. When the user of health care (that is, the employee) does not purchase health care himself, traditional market pressures on the cost and the quality of services are undermined. Since the consumer does not pay for health care, employer-provided health insurance eliminates the most powerful voice in favor of cost reductions; the consumer has no particular reason to complain about the costs of health care. In fact, the consumer is likely to over-consume health care. By the same token, that consumer may voice his complaints about the quality of the service he’s getting, but the producer is only going to listen to the concerns of the people who pay him. The motive force behind economic growth stems from the fact that typical consumers and producers benefit most when they listen to each other. Sadly, the healthcare industry has been made anything but typical. If there were this much third-party involvement in the computing industry, UNIVAC would still be state-of-the-art. What is most deceptive about employer- provided health insurance is the claim that employers pay for it out of pocket. When it is mandated that employers provide health benefits for their employees, as it is for most employers in most states, the mandate has the effect of raising the costs of doing business. When a firm’s per-employee costs rise, the firm must adjust its employment in order to continue to make optimal profits (which, incidentally, are of necessity lower now that costs are higher). The firm might employ fewer people, it might cut wages, or it might simply give smaller raises than anticipated. Whatever it does, workers will suffer, and suffer no less than if they had to buy health insurance themselves. All that insurance mandates do is create costs that inevitably get shifted to workers. In a free labor market, workers get to choose with their own money what benefits, amenities, and perks they would like, instead of having wages withheld to pay forservices that may or may not fit their individual needs.
A common rejoinder to the cost problem is that by purchasing on behalf of its employees, a business can negotiate some sort of bulk rate for its health benefits. While this phenomenon does indeed garner lower relative prices for the business in question, it does nothing to lower the absolute costs of these benefits. In order to continue to make the most profit, insurance companies will raise their rates for those not in on the deal. If every American was employed at one of a few corporations, those businesses would each have zero bargaining power, no matter how large each was, unless one was able to cut a deal for low premiums before the others did, in which case the insurers would raise their rates on whichever companies did not bargain in time. Labor unions are in the same position, understanding that every slice of the pie taken by a union means that much less pie for non-union workers. Collective bargaining takes advantage of economies of scale. Everyone, employed with built-in benefits or without, is a participant in the biggest pie there is—the economy itself. Exactly what “collective bargaining” was necessary in order to get companies to produce computer-based mobile phones that fit in pockets and not warehouses?
A related myth is that of “collective affordability,” where the whole of a group of consumers is somehow more able to afford a product than is the sum of that group’s parts. A collective payment is still comprised of individual payments, no matter how much accounting chicanery is used to hide that fact, and if those individual payments do not individually cover their share, then the collective payment cannot possibly cover the collective share. As economist Arnold Kling puts it, suppose that “a group of friends is getting ready to go out for dinner. At first, they consider a fancy restaurant, but then it is pointed out that the price of a meal there is higher than anyone in the group can afford. Somebody pipes up and says, ‘That’s okay. We can just split the check.’ Does that make sense?” Given that employees already pay for their health insurance through forgone wages, there is no way that their collective employer can somehow afford what they individually cannot.
All of the problems that plague employer-provided health benefits have and will plague any government-provided benefits as well. In the business of providing health insurance, government, just like business, acts as a buffer between the consumer and the producer of health care. Having healthcare costs completely dispersed among everyone similarly insured means that the cost any one person pays has little to do with the cost of that persons care. The result? Traditional downward pressures on costs are severely weakened as are traditional upward pressures on quality. At best, the industry stagnates, but more frequently it goes into recession. And of course, collective bargaining and collective affordability are still myths. Every individual still pays for his health insurance, whether it’s through forgone wages or through taxes. A single payer would not be any better at affording health care than would all the individual taxpayers that fund it, except that it would be worse at tailoring service and costs to individual situations. Until there is a single user of health care, a single payer makes no sense.
Without national health insurance, what will be done about the uninsured? Arguments in favor of further socializing health insurance point out that in 2002, 43.6 million Americans, or 15.2 percent, lacked insurance at some point in the year. That figure was up from the previous year’s by 2.4 million. Despite the frequency with which these statistics are used, they are highly misleading. Many of the “uninsured” are around college age, and if not covered by their parents’ insurance, they tend to not buy insurance for themselves. Twelve million of the uninsured lack insurance for only part of the year. Many of the uninsured seem to have good access to medical care, even without insurance— the Heartland Institute reports that 15 million of the uninsured have incomes of over $50,000, and another 14 million are eligible for Medicaid or the State Children’s Health Insurance Plan but are not enrolled.
The problem of the uninsured is not nearly as great as most politicians make it out to be. Were the free market allowed to take effect in the area of health benefits, they would quickly become more affordable for most people who lack them. The problem with health insurance right now is that it doesn’t play upon normal market incentives. It pays for things that we affirmatively seek out, like preventative care. Examples like car and life insurance, on the other hand, cover only catastrophes, which people try to avoid. An equivalent to today’s health benefits is car insurance that covers gasoline or “preventative” measures like oil changes or tire rotations. If a consumer doesn’t directly pay for the gas he uses, he’s going to consume an inefficient amount.
If the government should not step in and nationalize health insurance, then what should it do? It should mandate that all adults buy catastrophic health insurance (with at least a $10,000 deductible, and no higher), much as catastrophic automobile insurance is required. Such a mandate is non-invasive, costs families little, keeps people from becoming an uninsured burden on the healthcare system, and keeps economic distortions to a minimum. Mr. Kling suggests that the government provide catastrophic “re-insurance” at a $50,000 deductible, to create a safety net that no one would ever use as a hammock. Socializing health insurance can only further distort economic incentives. Privatization, girded by a minimum of state mandates, would allow health care to enter the free market for the first time in over half a century.