December 28, 2004

Government Meddling Creates Marketplace Distortions, Increasing Long-Term Costs

Two big issues frustrate and anger all of us about health insurance:

First, our personal insurance is not portable. In other words, the insurance is “owned” by our employer and we, the covered individuals, lose our coverage when we leave our jobs.

Second, the spiraling costs of health care products and services.

We can all thank the government for both outcomes. They meddled in the marketplace and all we got for it was less personal freedom and higher costs.

In the aftermath of World War II, the government meddled in the marketplace when they implemented wage-and-price controls. There have been many unfortunate consequences since then. Subsequently, because it was impossible to give salary increases when labor contracts were being re-negotiated, the companies instead offered health insurance as a separate benefit or form of compensation. This created the unnecessary marketplace distortion that tied our health insurance to our employer. The government then meddled further in the marketplace when the IRS deemed such benefits to be non-taxable income. This created yet another unnecessary marketplace distortion where the consumer is sheltered from the true costs of health care services, which are paid for by third party payors.

The list of further costly marketplace distortions created by government meddling has only continued to grow, with potentially ominous long-term consequences. A 4-part series (I, II, III, IV) of postings by the blog site, Houston’s Clear Thinkers, mixes some of their own commentary with highlights from articles by Holman W. Jenkins, Jr. of the Wall Street Journal:

Politicians, being adaptable sorts, have come to embrace the third party payor system as a means for political handouts and cost shifting…To take an example…Connecticut legislators recently voted to mandate that health insurers cover at least $350 a year in wigs for chemotherapy patients. Who wouldn't want chemotherapy patients to have wigs? But now everybody in Connecticut who wants health insurance has to pay for wig coverage.

No serious person doubts that our overreliance on third-party payment is the problem that will be solved -- or will lead to a government-run, single-payer system that controls costs by denying care. In our information-rich economy, the medical industry doesn't even publish price lists. Is this not downright weird and a sign change is desperately needed?

Duke University's Clark Havighurst…has noted that "the systematic hiding of health-care costs from those who pay them" gives rise to the ultimate "moral hazard," allowing politicians to spend the public's money on health care in ways the public would never choose for itself either in the marketplace or the voting booth.

He also notes the seldom-emphasized regressive nature of the transfer: "The United States has structured things so that lower and middle-income premium payers bear heavy burdens so that the elite classes can continue to enjoy the style of health care to which they are accustomed." [This occurs when the higher-paid worker, because of their higher marginal tax bracket, can shelter more of their health care costs than the lower-paid worker.]

Treating cost as a factor in medical choices is considered somehow illiberal, though it's the poor who've been priced out of the health-insurance market. But, say it again, in the final analysis there's nobody to "shift" costs to. The health-care bill always comes home to working Americans in the form of higher taxes, lower take-home pay or unaffordable health care.

[The standard answer is to] throw yet more tax money at health spending while avowing disingenuously that "the rich" will pay for it. But our indictment here is of the conditioned cowardice of the health-care policy community at large. How can you expect better…when the arbiters of good policy…judge candidate health plans by a single criterion: Which would commit the most resources to health care?

There not being unlimited funds to spend on health care, [these] plan[s] would only speed the day when politicians, no longer able to write blank checks with the private sector's money, would face directly the choice of whether to curb consumption or raise taxes to pay for it. That's the job description of Europe's national health systems, which are not exercises in beautiful egalitarianism but exercises in rationing for those not rich enough to jet off to a private clinic and get the treatment they seek.

A study by the National Center for Policy Analysis looks at some of the macro trends that have resulted from all these distortions created by government meddling:

[I]n 1960, out of total health care spending…55.5% was paid out of pocket,…22.9% by private third-party payers,…12.7% by state and local government, and only…8.9% by the federal government…

This changed dramatically after the creation of Medicare and Medicaid. By 1980,…only 27.8% [was paid] out-of-pocket. Private third party payers picked up 32.1% and the federal government paid 29.2%...

In 1998,…the federal government was paying for…33.7%...Out-of-pocket spending diminished to 19.6% of the total, and third party payments grew to 36.8%...

Not surprisingly, the flood of new federal money and the decrease in out-of-pocket spending resulted in health care inflation and an increasing share of national income going to health care after 1965…[5.2% in 1960, 7.2% in 1970, 9.1% in 1980, 12.7% in 1990, and over 14% in last 5 years, per another study.]

In response to this alarming growth, the federal government imposed a series of new laws and regulations intended to slow health care inflation…

Despite all these efforts, health care costs continued to rise. Every year from 1965 through 1982, the nation endured increases in health care spending in excess of 10%...

Employers instituted a number of cost-containing efforts, including benefit redesign emphasizing outpatient care over inpatient treatment and programs such as second surgical opinions and preadmission certification…These programs had remarkable, if temporary, success…

But soon enough, health care inflation was back…Employers had succeeded in holding down costs for a time, but now they needed another strategy. They switched to managed care in massive numbers. From 1984 to 1990, HMOs and PPOs increased their share of the private benefits market from 7% to 34%, and they continued to grow through the 1990s, capturing 65% of the market in 1995. More recent estimates place managed care's market share at 85%.

The hope for managed care was that it would provide first-rate health care while restraining utilization and cost. Managed care was supposed to provide incentives to keep people healthy so they would consume fewer health care services. It was supposed to help patients bond with their primary care provider who would direct them to the most cost-effective services. It was supposed to educate patients to take better care of themselves and avoid expensive professional care for ordinary ailments. It was supposed to bring a new businesslike attitude to health care services.

...managed care organizations...had [some] success in holding down cost increases, but at a high price in employee morale and community relations…

All of us will continue to pay quite a price as long as the government meddles in the marketplace and creates costly distortion after distortion.

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Two major areas of health care cost are litigation and drugs. Both have been helped by the government at the urging of lobbyists from the respective industries benefitting from them. Everybody knows about the absurd "pain and suffering" awards by juries, but few recognize that the government encouraged the drug advertising that adds an estimated 1/3 to the costs. Free market forces have had little dampening effect so far.

Posted by: Gary Boden at December 29, 2004 9:32 AM