Much of my frustration comes from dealing with the IRS and insurance companies. I suppose this explains my policy preference for simple payroll taxes, VATs, and HSAs. Sometimes I wonder whether people realize how intertwined these two evil institutions really are.
For instance, recent posts by Matt Yglesias and Karl Smith argued that HMOs failed the market test. Now I’m no fan of HMOs, but I don’t see where they were ever given the market test. Health care offered by HMOs was significantly cheaper to produce (at least before regulatory changes occurred), yet when our company offered that option very little of the cost differential was passed on to us consumers. Of course workers were less than enthusiastic about HMOs; they are not as consumer friendly as regular insurance and yet the efficiency gains didn’t go to HMO consumers. You might ask why I didn’t sign up on my own. But our tax system provides a 40% subsidy to employer health insurance, which is enough to push many companies to offer health insurance. In that case if I reject employee health insurance, I am starting off my shopping at a huge price disadvantage. (And this doesn’t account for the adverse selection problem of shopping around by oneself.)
Here are some examples of how our tax and insurance systems are intertwined:
1. We have a flexible benefit plan, which allows us to set aside $5000 tax free for various types of “health care” and “child care.” In fact, people rarely know when they are going to have a heart attack, and yet the money set aside at the beginning of the year is lost if not used. So it ends up being used for predictable expenses, i.e. pseudo-health care expenses. Ten years ago I began buying daily wear contacts at a cost of $600/year, but only because you taxpayers agreed to pick up 40% of the cost. The convenience of the lens wasn’t worth $600, but was worth $360. Much of the tax saving was a deadweight loss.
2. I have had a number of significant medical expenses that I would not have incurred if I had to pay out of pocket, despite the fact that I could easily afford to pay for them out of pocket. More deadweight loss.
3. Our employers even offers dental “insurance.” This pays the first $1000 of dental expenses, you pay anything additional. Of course this is exactly the opposite of how “insurance” is supposed to work. It’s a scam to avoid taxes, nothing more. But it did require me to make endless calls to the dental insurance company fighting over bills, until they finally relented. The aggregation aggrevation just puts me at the borderline of not wanting to fight at all. I felt the extra $400 I got was roughly offset by the frustration–more deadweight losses.
4. Many companies don’t even offer health insurance, suggesting there are huge deadweight losses for those companies who do (and are just on the margin.)
5. Taxes are more complicated because of medical and child care deductions. When filling out taxes you have to search for obscure data for things like the tax ID number of a summer camp. Yes, summer camp is considered “childcare”—I kid you not. Our federal government spend lots of money subsidizing camp for the children of affluent parents like me.
I have to laugh when I read people talk about the failures of America’s free market in health care. I almost never write out a sizable check to pay for medical care, nor does anyone else I know. And yet I don’t want the health insurance I have, I’d rather pay out of pocket. It’s very unlikely I’ll ever have a medical procedure I couldn’t pay for out of pocket. Indeed that statement is close to a tautology, as I am many standard deviations wealthier than average, so if I couldn’t afford a typical lifespan’s worth of medical care, our entire society would be broke by now. Of course many people would need insurance at some point, which is why I favor catastrophic coverage for stuff the HSAs can’t cover. It makes no difference whether it’s provided by the government or not, as our system is so regulated that “private” health insurance is essentially a government institution. Outside of plastic surgery (the one area where health costs are not soaring) there is essentially no free market in health care in America.